This article documents the risk analysis carried out for a randomized, placebo-controlled study in acute severe asthma in children. The target population to be sampled in this research is identified as children aged between 2 years to 15 years who are brought to the hospital emergency departments and acute pediatric inpatient units suffering from severe acute asthma attacks. The study is to be conducted across 20-25 research sites throughout the United Kingdom. Overall investigation duration for each patient is decided to be 240 minutes along with a follow-up appraisal after one month of the treatment.
The research will be carefully phased. The patient or the subject will firstly be screened when brought to the research site. They will then be provided with information related to the trial treatment if they are found to meet the inclusion criteria and following that the treatment would be commenced as per the BTS guidelines. After twenty minutes of initial treatment as per standard practice, a trial screening evaluation will be carried out and an on paper informed approval will be acquired from the appropriate subjects. Trial assessments reveal the normal course of treatment conducted for this particular patient population and will be concluded at randomization, before conducting randomized therapy, and at 20, 40, 60, 120, 180, and 240 minutes after randomization. Follow-up feedback forms will be posted to the patients’ residences to be filled up and returned one-month post-treatment.
All cases enlisted into the research will be subject to customary treatment procedures according to standard guidelines, in addition to either asthmadrug1 or placebo. Children aged between 2 to 5 years will be slated to be dosed with 2.5 mg of nebulized salbutamol and 0.25 mg of ipratropium bromide combined with either asthmadrug1 or placebo at three instances with a twenty-minute interval between each dosage. Children above the age of 6 years will be slated to be dosed with 5 mg of nebulized salbutamol and 0.25 mg of ipratropium bromide combined with asthmadrug1 or placebo at three instances with a time interval of twenty minutes each.
The primary objective of this study is to find out the effect of asthmadrug1 when used as an add-on to nebulized salbutamol and ipratropium bromide for one hour in the children population suffering from acute severe asthma and whether its clinically beneficial as determined by the Asthma Severity Score (ASS) as evaluated against nebulized salbutamol, ipratropium bromide and placebo. In addition, the research also aims to find out whether asthmadrug1 employed as an appendage to nebulized salbutamol and ipratropium bromide for one hour in the children population suffering from acute severe asthma, as evaluated against nebulized salbutamol, ipratropium bromide mixed with placebo, influence the following issues:
Clinical consequences about added treatment/management when in the clinic/hospital and the duration of stay there;
Patient upshots relating to the quality of life, time away from educational facilities due to asthma attacks and healthcare resource ut,utilization throughout the subsequent month
Parent effects pertaining to time away from work over the next month
Overall expenditure to the NHS and society
Patients, particularly those belonging to the children population and suffering from acute severe asthma are usually admitted to hospitals for no less than 24 hours duration and thus have a substantial effect on healthcare resources in addition to resulting in time away from school and time away from work in case of the parents. This trial aims to inspect whether the stipulation of asthmadrug1 as an early intervention medication, in combination with normal courses of treatment, provides clinical progress as compared to standard therapy in isolation.
Hazard Identification
Acute asthma aggravation is one of the major reasons for patients coming to emergency departments of clinics and hospitals. Particularly with the mounting frequency of the children population who demonstrate symptoms of asthma and the comparatively high fraction of them being poorly monitored due to improper treatment facilities is a major issue or worry. Thus, this study looks at the perspective of using astmadrug1 as an adjunct to the normal course of treatment and its effectiveness as an asthma control drug. However, as with any other venture, there are issues, which are subject to risks and thus must be properly identified and tackled accordingly.
The first phase of the study involves screening and enrolment. In this case, it should be kept in mind that due to procedural constraints there may be some delay in providing treatment to the patient. However, this should not be the case, and considering the need for immediate attention, the patient should be instantaneously transferred to the medication unit where he/she can receive standard medications for the time being. In this scenario, the patient information and other approval forms must be provided to the accompanying parent or legally acceptable patient representative. After the screening phase in which depending upon the eligibility criteria and consent approval, the patient is enrolled or excluded from the study. The trial treatment for the participating patient starts immediately after the initial treatment as per existing standards and practices. In this case, there is a risk of delay in commencement of trial treatment, which might affect the patient’s health. This may be due to the unavailability of treatment kits and trial medications. Thus, clinicians should be responsible enough to ensure the ease of accessibility of treatment kits and trial medication at all times so that the patient does not suffer due to delay of commencement of treatment.
Dosage modifications, as per the guidelines provided by the study outline, are not permissible even if the condition of the patient deteriorates. This may jeopardize the wellbeing of the patient. However, adverse may set in and provisions should be kept for extreme cases. Thus, dosage may be altered or totally withdrawn in case the clinician authenticates cessation therapy or if the consent of the patient/patient representative is withdrawn during that phase.
Asthmadrug1 is an unlicensed medication product. Thus, its use is strictly restricted to the patients participating in this study. Hence, any further use of the issue is considered illegal and this may produce serious adverse effects. Thus monitoring the logistical operations involving the treatment kits is extremely important. Thus, conductors of the research must first estimate the requirements of each site of study to counter the risk of unavailability of su p,plies and site pharmacies should be provided with sufficient supplies accordingly. Site pharmacies must also authenticate the receipt of the supplies and all information must be recorded at the Data Coordination Center. If the supplies are preserved it should be done under proper temperature regulations as per site procedure. To prevent the further use of medication supplies the site trial manager must oversee that all unused treatment kits are returned to the pharmacy and are destroyed.
Confidentiality of the participant’s information is a major concern and the risk of leakage of information into the wrong hands should be prevented. It must be ensured that the information of the patient does not go into the hands of any third party. Howe that medical personnel new associated with the wellbeing of the patient should be provided with proper medical information and further, demographic information must be provided to the DCC, as they are responsible for sending and contacting the patient for post treatment follow-up.
The validity of the results may be affected if there is incomplete or insufficient data collection. Thus during screening, randomization treatment all relevant procedures must be recorded thoroughly on the CRF. As a ffollow-up up address, change cards must be provided if the family of the participant relocates within one month of the treatment. Further, in case the participant forgets to respond to the questionnaires all essential efforts must be made in order to remind a non-responding participant and the questionnaires must be resent if necessary.
Research inexperience of site medical teams may prove to be a significant hindrance in proper evaluations and assessment. Site trial managers and research coordination team must look into the issue properly and provide all necessary support to the site medical teams and all relevant parties to ensure that a proper assessment is carried out.
Dose-Response Analysis
Asthmadrug1 is an unlicensed medical product and is normally used to treat other symptoms. It is not a common practice to use it for providing medical attention to those suffering from acute severe asthma. When drawn on, it is usually injected intravenously, and it is advised that it should preferably not be used on children, as obtaining venous access is intricate and a horrible experience for children. In case of this trial, asthmadrug1 a milder dose is to be used than the dosage that is used when injected intravenously. This will be given by using a nebuliser for inhalation instead of injecting it. This will provide for canalizing the medication straight to the air-tracts and diminish any potential impacts of total administration. Data relating to the application of asthmadrug1 delivered through nebulisers is highly insubstantial. On the other hand, the adverse consequences outline when delivered intravenously is well substantiated. Documented unfavorable effects include increases in heart rate and dizziness. However, such effects are infrequent, mild, and patients recover quickly subsequent to termination of treatment. It is anticipated that patients treated with asthmadrug1 may undergo these low-level momentary experiences.
Exposure Quantification
Children aged between 2 to 5 years will be slated to be dosed with 2.5 mg of nebulised salbutamol and 0.25 mg of ipratropium bromide combined with either asthmadrug1 or placebo at three instances with a twenty minute interval between each dosage. Children above the age of 6 years will be slated to be dosed with 5 mg of nebulised salbutamol and 0.25 mg of ipratropium bromide combined with asthmadrug1 or placebo at three instances with a time interval of twenty minutes each.
To ensure the safety of the patient, his/her status should be medically observed for at least four hours. Oxygen saturation, respiratory rate and blood pressure should be documented after each 20-minute interval throughout the treatment duration. Follow up tests should be carried out at 2, 3 and 4 hours subsequent to the concluding study treatment. Other routine checks may also be carried out as a part of standard medical practices.
Conclusion
After identifying and evaluating the aforementioned risks involved and the procedures and practices, which can be, put in place to counter them, this trial can be deemed as a slightly moderate risk clinical trial with a risk assessment score of 37.0%.
Endometriosis is a debilitating condition whose pathophysiology includes hormonal, genetic, anatomic, and immune factors. The disease’s risk factors alter the frequency and duration of retrograde menstruation, and enhance the growth of endometrial tissue. Risk factors include environment, genetics, history of pelvic infection, uterine abnormalities, family history, medical conditions that thwart the normal passage of menstrual flow, age, nullipara, and diet. Few modifiable risk factors have been identified even though strategies to manage the disease are numerous.
Introduction
Endometriosis is a chronic disorder that involves the growth of the endometrium outside the uterus and affects various areas in the body including the bowel, ovaries, fallopian tubes, and the pelvic region (Price & Thomas, 2015). The disease affects more than 6 million females in the United States alone. The misplaced tissue develops, grows, breaks down and sheds every month in a manner similar to the menstrual cycle (Juarez & Tomas, 2013). Symptoms of the disorder include infertility, pelvic pain, fatigue, dysmenorrhea, dyspareunia, dyschezia, dysuria, and gastrointestinal upsets such as diarrhea and nausea (Juarez & Tomas, 2013). The precise etiology of endometriosis remains unknown. However, scientists have developed some theories to explain its development. For example, the retrograde menstruation theory suggests that the disease results from the growth of menstrual tissue that backs up during menstruation, moves to the abdomen, and grows (Juarez & Tomas, 2013
Risk factors
There are several risk factors that predispose women and girls to the development of endometriosis. They include environment, genetics, menstrual history, family history, age, nullipara, lifestyle, and diet (Juarez & Tomas, 2013). These risk factors can be grouped into modifiable and non-modifiable factors. Modifiable risk factors include environment, lifestyle, and diet. Non-modifiable factors include genetics, family history, not having children, and menstrual history.
Environment
In the medical field, several theories have been postulated to explain the probable cause or factors that could put women at risk of developing the disease. One theory suggests that endometriosis is an environmental disease while the other suggests that it is a genetic disease (Juarez & Tomas, 2013). The major risk factors for endometriosis are environment and genetics. The theory on environment as a risk factor was developed based on the findings of a 1993 seminal study. The results of the study established a relationship between endometriosis and environmental toxins. The study found out that dioxins and polychlorinated biphenyls (PCBs) contribute to the development of the disease (Juarez & Tomas, 2013). The toxins weaken the body’s immune system rendering it unable to resist the growth of wayward endometrial tissue. These toxins are classified under substances referred to as xeno-oestrogens that mimic the function of estrogen in the body. Studies have suggested that women who are exposed to these toxins are subjected to increased risk of developing endometriosis. This risk factor is modifiable because exposure can be reduced through proper incineration of contaminated material and strict control of industrial processes that release the toxins.
Genetics
The other theory involving genetics suggests that women who posses certain genes are at risk of developing endometriosis. A large portion of current research regarding the disease is directed toward establishing the relationship between the disease and genes. One such study is the Oxford Endometriosis Gene Study (OXEGENE) (Juarez & Tomas, 2013). The main goal of the study is to isolate specific genes that predispose women to endometriosis. Endometriosis is associated with genomic changes on chromosomes 1, 2, 6, 7, 9, 10, and 12. In addition, changes in the fibronectin gene have been linked to the disease. It is impossible to modify genetics in order to protect women against endometriosis because it is very difficult to alter the process of DNA replication.
Age
Endometriosis affects women of all ages. However, it is more common among women between the ages of 25 and 40. In older women, it occurs due to prolonged exposure to menstruation. In younger women, it mainly occurs because of nullipara. This risk factor in non-modifiable.
Culture
Some studies have established that endometriosis is more common among Asian women that women from other racial or ethnic origins (Price & Thomas, 2015). This risk factor is non-modifiable.
Nullipara
Nulliparous women are at a higher risk of endometriosis than parous women. Certain studies have shown that early pregnancy lowers the risk of developing the disease because of the absence of retrograde menstruation. During pregnancy, the distension of the cervix prevents the backward movement of menses and as such, lowers the risk of endometriosis. This risk factor is non-modifiable. Studies conducted have not found any protection against endometriosis with pregnancy.
Family history
A woman belonging to a family with a history of endometriosis is more likely to develop the disease than a woman from a family without such a history. For example, a woman with a mother or sister with the disease is at a high risk of developing it. Studies have suggested that the risk of the disease is six times higher in first-degree relatives of women win endometriosis (Schrager, Falleroni, & Edgoose, 2013). This suggestion was invalidated by a study that found no relationship between family history and the incidence of endometriosis. This risk factor is non-modifiable.
Menstrual history
The risk of developing endometriosis increases depending on a woman’s menstrual history. Menstruation problems such as heavier periods, longer periods, and irregular menstrual cycles are associated with the disease (Price & Thomas, 2015). Women who start menstruating at younger ages than the average are also at risk (Schrager et al., 2013). Irregular periods increase the risk for retrograde menstruation that is associated with the initial development of endometriosis. This risk factor is non-modifiable.
Dietary factors and lifestyle
Certain studies have shown that women who eat red meat and trans fats subject themselves to high risk of endometriosis (Parazzini, Vigano, Candiani, & Fedele, 2013). In contrast, women who consume lots of fruits, vegetables, and healthy fatty acids lower the risk of developing the disease. The role of diet in the development of endometriosis is modifiable and women can lower the risk of developing endometriosis by eating healthy foods (Parazzini et al., 2013). For example, consumption of fish is a great source of omega-3 fatty acids. It is also important for women to modify their lifestyles to include physical activity. This is because diet and physical exercise affect estrogen-dependent conditions that have a great role to play in the development of endometriosis. Examples of these conditions include menstruation, menopausal symptoms, and fibroids (Parazzini et al., 2013). A study that involved 1008 women (504 healthy and 504 with endometriosis) found out that women who included beef in their daily meals were twice as likely to develop the disease. In contrast, women who included seven servings of fruits or vegetables in their daily diets lowered the risk of developing the disease by about 40% (Parazzini et al., 2013).
Use of risk factor information
Professionals can sue the information derived from the foregoing risk assessment to communicate risks to women and how they can modify certain risk factors to lower the risk of the disease’s development. In addition, they can use the information to educate women about endometriosis in order to promote good health. The information can be used to develop individualized and preventative approaches to endometriosis (Schrager et al., 2013). For example, healthcare professionals can teach women about the importance of avoiding environments that are polluted by toxins associated with the development of endometriosis. The information can also be used by to develop programs that sensitize communities about the significance of implementing preventative strategies, as well as the various measures that can be taken to avoid endometriosis. Finally, the information can be used to identify areas that need extensive research. There is little information regarding the risk factors for endometriosis because many of the studies that have been conducted gave conflicting results. Professional understanding of the pathophysiologic process of endometriosis is necessary for the development of effective diagnostic and treatment remedies for the disease (Schrager et al., 2013). The disease affects more than 6 million women in the United States. Therefore, developing effective treatment approaches is necessary.
Conclusion
Endometriosis is a debilitating condition that affects more than 6 million women in the United States. Its risk factors include age, environment, genetics, diet, family history, not having babies, menstrual history, and lifestyle. The most studied factors are environment and genetics. Scientists have not yet agreed on the main cause of endometriosis. Modifiable risk factors include environment, diet and lifestyle. Non-modifiable factors include genetics, family history, menstrual history, and not having babies. Nurses and health care professionals can use the risk assessment information to develop efficacious treatment and diagnostic approaches, and educate women regarding the various strategies that they can use to lower the risk of endometriosis.
References
Juarez, M., & Tomas, L. (2013). Endometriosis: Risk Factors, Symptoms and Management. New York, NY: Nova Science Publishers, Incorporated.
Parazzini, F., Vigano, P., Candiani, M., & Fedele, L. (2013). Diet Endometriosis Risk: A Literature Review. Reproductive Biomedicine Online, 26(4), 323-336. Web.
Price, D. L., & Thomas, V. (2015). The Pathogenesis of Endometriosis: Still Searching for Answers. Obstetrics and Gynecology Forum 25(4), 31-38.
Schrager, S., Falleroni, J., & Edgoose, J. (2013). Evaluation and Treatment of Endometriosis. American Family Physician, 87(2), 107-113.
Investigation of the main hazards that pose a threat to the security of a certain community and its well-being is an important process that should be given great attention. In case a natural disaster is not predicted, and the population is not prepared, numerous devastations and disasters are possible. In this regard, THIRA analysis becomes a powerful tool that is used to identify the most important and most probable hazards that are peculiar to the local community.
Analysis
The application of THIRA’s basic principles to the situation in Pennsylvania helps to obtain important information. Besides, there is a great threat of snow and ice storms in the region (Sosnowski par. 4). The given natural phenomena might be very dangerous as it results in traffic collapse and power losses (Homeland Security 4). Considering low temperatures and short light days, it could be considered a great challenge to all members of the community. The ice storm of 2014 pieces of evidence that these problems are peculiar to the state as it experienced numerous problems of this sort (Bacon par. 4).
The potential risks obviously become greater in winter periods as the weather conditions contribute to the appearance of snowfalls and ice storms (Union of Concerned Scientists 5). The community becomes extremely vulnerable at these seasons. Great territories might be endangered as the snowfall area is rather big. Previous experience shows that about 1 million people were affected by this natural disaster (“It’s official: Ice storm breaks Peco record for winter outages” par. 4).
For this reason, the potential harm remains significant, and there is a great need for preventive actions that could mitigate the negative impact of this phenomenon. THIRA analysis could help to obtain the needed information.
As stated above, snowfalls and ice storms might result in numerous problems. First, huge masses of snow could paralyze the traffic system and introduce significant problems with supply. Being deprived of an opportunity to satisfy their needs for food and goods, people might suffer from numerous hardships. Additionally, power losses are also dangerous. The modern community depends on electricity and energy greatly, and the collapse of the given system might result in the appearance of crucial aftermaths. Heating and other crucial services will not function and provide people with the needed conditions.
For these reasons, mitigation of the negative effects of a winter storm is the primary task for the local authorities. Knowledge of the main peculiarities of this natural disaster, areas affected by it, its duration, and severity will condition the creation of a certain strategic plan (Pydynowski par. 3). First, it is vital to prepare snow clearing equipment to guarantee the efficient functioning of the road system. Machines should be placed at the most important road junctions as their stable work is a key to the preservation and protection of the communitys aligned functioning. Moreover, considering the great probability of energy losses, people should be provided with power generators to fulfill their need for energy.
Additionally, the equipment needed for the organization of special warming centers for homeless people should be stored up. These centers should provide access to food, goods, warm clothes, and other products needed for survival. This plan should be accepted in the shortest terms after the threat of a snowstorm has been discovered.
Conclusion
That is why local authorities will increase the number of snow clearing equipment to be ready to guarantee efficient movement. Moreover, the necessity of the increased manpower is also obvious as many workers will be needed to use this equipment, work in warming centers, and help disabled people.
People’s lives are always connected with potential risks that can cause serious problems. Thus, decently maintained risk assessment is important because it ensures that those problems that may have a negative impact on the health and environment can be predicted and taken under control. With its help, professionals receive an opportunity to make appropriate decisions for air and water protection. Moreover, it allows ensuring the safety of products people use every day so that no issues will occur because of a chemical substance.
The process of assessment follows a particular plan that is established by the U.S. Environmental Protection Agency, and even though some progress in this process was made, the assessment of particular chemicals requires a lot of time, which postpones interventions. The thing is that the process of risk assessment is often criticized and questioned in the framework of its value and credibility. Very often the resources (both monetary and human) available for the assessment are not enough. Due to the rapid development in the scientific spheres, it also turned into a rather complex procedure with an increased number of problems. Still, professionals considered several approached that can be used to improve the process of environmental risk assessment.
Recommendations from the Articles
The article prepared by the Committee on Improving Risk Analysis Approaches Used by the U.S. Environmental Protection Agency offers several recommendations that are expected to make risk assessment more credible and helpful (4). First of all, they encourage to pay attention to the plan of assessment so that it aligns with decision-making needs.
It is recommended to create and use guidance to define the required level of detail. The dose-response assessments should be systematic and include background information on a disease, populations, and treatment actions. Defaults should be revised and then be generally used, and cumulative risk assessments implemented. Stakeholder involvement should be increased, and a formal process for it established. Finally, it is important to make sure that the agency will be able to implement the required changes.
While the first work is mainly focused on the recommendations regarding the credibility of assessment procedures, the one prepared by the Science Communication Unit discusses various methods and techniques that can be used (4). Thus, it recommends using interdisciplinary science when dealing with general problems. Still, standardization is still addressed in this framework.
New real-time assessment is needed to avoid the usage of outdated, inappropriate data. This article also emphasized greater stakeholder involvement, as it can help with social and political obstacles. The Science Communication Unit encourages to combine existing assessment models to overcome their drawbacks and use new methodology when analyzing chemicals (5). They recommend using geodiversity information to consider how to adapt the ecosystem to changes.
Recommendations and Conclusions
Thus, it can be concluded that the environmental risk assessment is important for the human beings process that is aimed at ensuring safety from chemical substances. Unfortunately, it is often questioned today and fails to meet professionals’ expectations. To improve the situation, they offer various interventions. On their basis, I recommend to pay more attention to the assessment procedure and resources needed for it.
All stakeholders should participate in the search of funding and efficient human resources. The commonly used plan of actions and defaults should be revised. The data used for assessments should always be current and authoritative. Finally, the readiness of the agency to implement these changes should be ensured. The attention should be paid to the leadership, training, and interactions between the teams.
Works Cited
Committee on Improving Risk Analysis Approaches Used by the U.S. Environmental Protection Agency. Advancing Risk Assessment. 2008. PDF file.
The twelve member- countries that make up the European Union (EU) formed in the year 2002 have for a long time now been using the euro as their common currency.
The use of this currency was implemented at Maastricht with an aim of strengthening the European Union as a key player in the world economy as well as to decrease the distortions and uncertainties that have been attached to the many currencies that have been used in the market1.
The 1997 adoption of the euro zone took place with an aim of ensuring that budgetary discipline was maintained within the EU. Germany was during this time the greatest influence towards the implementation of the agreement (Williamson, 600).
As a way of ensuring that the European Monetary Union (EMU) effectively performed its role, the 12 member countries came to an agreement referred to as the rule or the special international institution also referred to as the Stability and Growth Pact (SGP).
The role of this rule was to enhance as well as ensure that there was economic homogeneity among all country members of the EMU before they introduced the use of the Euro as a common currency as well as internal stabilization of the Euro zone2. The use of the Euro by the member states was a way of agreeing that all money spent and borrowed is kept under control as a way of enhancing the stabilization.
By maintaining budget discipline among the member countries, the pact seeks to ensure that it prevents excessive deficits and debts thus promoting monetary stability. Here, economic policies within the member countries are coordinated at the European level.
The pact has more often been discussed during the past as well as the current times with debates ranging on whether it has been a success or not. Some countries such as Germany, France and Portugal have continuously been found to fall short of the criteria set by this pact and have instead used their strong political power over other countries to reduce the strength of the pact.
It is the poor and unequal performance of the Euro among these member states led to the reformation of the SGP in 2005 as a way of seeking more flexibilities within these states3.
This paper explores on the implementation of the Stability and Growth Pact with focus being on its various functions and importance to the members of the European Union as well as to the global economy.
The Stability and Growth Pact (SGP) of the European Union (EU)
History
The history of the European Union dates back to the early years of 1969 when governments and presidents made a decision to create a monetary and economic union and make it an official European integration goal4.
This was followed by the Werner Plan of 1970 which saw to the proposition to have coordination of the economic policy among the six member states as well as the development of a system where there were fixed parties and use of one common currency.
This plan was however hindered by the collapse of the Bretton-Woods-System which was a system, functional between 1945 and 1971, where foreign exchange rates all around the globe were fixed5.
After a number of years of with unpredictable floating rates, the European Community (EC), with an exception of the United Kingdom, came to an agreement to form the European Monetary System (EMS) in 1979. The implementation of this system was to allow for moderate floating rates for all its currencies.
Though revaluations could be done on the bilateral -rates, the allowed flow of currencies was only within a 2.25% band on either side. Failure to obey this regulation would call for the intervention of the central banks.
This system incorporated the use of currencies in the years that followed up to 1992 when it broke down as a result of critics and propaganda against a number of currencies that included the Swedish crone, Sterling Pound and the Italian Lira.
Despite its reformation, this system did not come to gain its former value gain with a number of the currencies leaving the system while others expanded their bands to 15% hence not much could be fixed. Prior to the downfall of this system, a number of stern actions towards monetary integration were embarked on.
After the 1988-1989 Delor Report, complete capital movement liberalization was attained in 1990. 1992 saw to the creation of a treaty through which the European Community through which a number of achievements were made.
These achievements included the establishment of a common market, incorporation of modern aspects of political and economical integration to the treaty system as well as the establishment of the European Union (Hule, 32).
The Maastricht agreement of 1992 defined 3 monetary integration stages6. Stage one ran between 1990 and 1994 and had various technical necessities that included central bank legislation and capital movements.
Stage two which ran between 1994 and 1999 aimed at strengthening economic- policy convergence between state members as well as the establishment of the European Monetary that would act as a monitoring body. Stage three was to ensure that eligibility criteria be identified.
The pact
It became very distinct and clear in the 1990’s that the Maastricht treaty’s criteria and regulations were not a guarantee to a transitioned without hiccups on the common currency factor7.
The 1997 Amsterdam treaty had a political pact which was linked to the convergence criteria which was erstwhile agreed upon in Maastricht with four legal documents in its roots; article 99 and article 104 of the Maastricht treaty, June 17th general council resolution, and July 7th regulation 1466 and 1467 of the council8.
The stability and growth pact is made up of three main elements; political adherence by all parties, preventive elements and dissuasive elements. Preventive elements are convergence programs that ensure monetary convergence in the European community which is to be reported by all members to the commission.
The dissuasive elements are mainly the excessive budget deficit procedure. Of most importance to the pact are the obligations which are to be met by the members, the council and the commission but not the convergence criteria. Member countries have a commitment to a balanced budget or a certain medium run surplus and they ensure all the required goals are met to make this a reality.
One function of the commission is reporting of the excessive budgets to the members as a criterion of early warning and facilitation of strictness, timeliness and effectiveness in the functioning of the pact.
The commission is the core guardian which monitors the main body of the stability and growth pact. It carries out coordination matters whilst decision making is left to the council in order to make the body run smoothly. The council also has the critical function of enhancing timely and rigorous implementations of the pact elements if there happens to be violations in the convergence criteria9.
The Convergence Criteria
In addition to the self-commitment of all significant players in EMU, the accord on certain criteria of convergence is very crucial for the SGP10. These criteria approved on in 1992 and yet again in 1997, and functional from 1997 on for likely and authentic members, are as follows;
Price stability: inflation should be less than 1.5 per cent greater than in the three countries’ most price stable.
Interest rates Convergence: the long term interest rates has to be less than 2% higher than in the 3 countries most price stable.
Exchange rate stability: the exchange rate’s is not permissible to lead the groups of the EMS (in fact 15 per cent whichever side) or its innermost rate to be de-evaluated for at least 2 years (this decisive factor leads to a two years delay of any additional attainment, so that an improvement of the Euro zone is not possible before the year 2006, and improbable before the year 2007).
Budgetary balance budget and a debt criterion): national budget shortfalls are not permissible to go beyond 3 per cent comparative to GDP and the overall lack of debts is not tolerable to surpass 60 per cent comparative to GDP, even though these duties are declining continually11.
The first 3 of these criteria have proven to be and are particularly significant during the accession progression to the “monetary union”, the fourth is additionally important for assessment of the existing EMU. While on or after accession on the first 3 criteria are not in national capability, but mainly in the accountability of the “European Central Bank” (ECB), the responsibility for the 4th relics with the national governments.
This has raised an eyebrow amongst many scholars on whether a common policy is a possibility in an area where there are differing fiscal policies12. Precisely due to the reason that the member states remain committed, it is not enough to have self control which is interdependent and the European Union has to do the monitoring and the controlling of the processes.
Economic point of view
The method of thinking following the SGP represented from unswervingly from the assumption of optimum legal tender sections (which in actual fact is there or thereabouts a theory of “in service” currency regions).
At the center of this theory (in whatever alternative) 2 “influences” are analyzed: the influence of economic directness within the individual area and the influence of economic union13. Both powers act in favor of “monetary union: the more open countries are (the more they trade
Relative” to the GDP), the more they are damaged economically by exchange rate changes and consequently it makes logic to bring in a single currency (in addition to due to the cost cutting effect of trade facilitation by the regular currency); the more there is economic union between countries, the reduced amount of likely non-symmetric shocks are and the less likely it is essential or even makes logic to accurate for shocks by means of the available exchange rate changes14.
The Convergence Criteria are unswervingly drawn from this examination, particularly from the convergence account and to a third significant account: to provide self-assurance in the monetary union.
All tangible goals that are to be reached (the slim inflation, rates of interest, and exchange rates corridors, and the existing numbers in lieu of budgetary discipline) in actual fact have been brought in to promote economic union before – and optimistically during the monetary union (MU) at the individual rate and level15.
This is particularly true for the criterion measuring price increases, because large price increases and differences between the member countries put demands on the set exchange rates and for that reason these countries cannot outline a most favorable currency region (and might also have troubles in forming an operating currency region).
This is measured by the inflation rate decisive factor in the diminutive run, at the same time as the interest rate decisive factor has been set up to compute inflation prospects in the long run16.
The exchange rate measures has been put into practice to integrated marketplace forces into the scheme as some variety of routine stabilizers and as scheming forces. If the marketplace believes that union will be sustainable to a sufficient amount, then the exchange rate will not be critically re-valued by the marketplace.
Also the budgetary criterion is due to putting weight on the states so as to guarantee this important sustainability. Large shortfalls may lead to price increases in the average run and a far above the ground debt ratio hence means that more hazard of budget deficit in the long run.
As a final point, to extend confidence in this joint self commitment of all affiliate countries, the supporting obligations have been subjected to a code. This makes it potential to take lawful actions at the “European Court of Justice” (Court) to elucidate, who has dishonored the treaty17.
One may justifiably doubt if this attentiveness on the “convergence account” and the particular focus on the “self-assurance account” are sufficient to ensure the changeover of the associates of the ‘monetary union” into a most favorable currency region (or at least an operating currency area).
Some extra as well significant forces have considered: from the economist’s opinion especially labor markets and wage suppleness, from the politician’s standpoint particularly centralization of observation, and authorizing power.
The stability and growth pact institution
The SGP is a structure of rules about the association between states within a group of people to provide global public merchandise like economic stability and also growth18.
These “merchandise” are “globally public” due to the significance of “stability and growth” contained by an area which is economically extremely mutually dependent and owing to the reality that countries can take pleasure in the reimbursement from “stability and growth” without paying the cost.
Growth in particular pertaining to the leading economies in the union leads due to the widespread marketplace and to trade put into effect the effects to expansion in the EU as a sum total and to more augmentation in all of its associate countries, and monetary steadiness leads to extra predictability of the monetary surroundings and for that reason reduces threats and costs for all the members19.
Furthermore the SGP is a multifaceted organization, because it is entrenched into the institutional structure of the European Union in a multi-layer organization.
It can be analyzed as an economic organization in this logic either with regard to its tangible rules (for example the information used for the union criteria) at the height of “supremacy” or with revere to its overall structure (for example what competencies what a particular body has) at the height of “surroundings”20.
The following argument will be centered on the competencies with only a few considerations with reference to the previous criteria, although a tangible history of only faintly more than ten years is not exceptionally long for an “environmentally oriented” institutional organization to develop fully.
This associates that the procedure of potential transformation of the SGP is quite sluggish, and that this procedure is centered on the splitting up of competencies between associate countries, the Commission, and lastly the Council. Furthermore the study is entirely focused on general necessities and regulations (e.g. “we need convergence criteria”); not on existing measures (e.g. “what criteria should be implemented”)21.
This also entails, that the study is educational in the logic, that the recent communal discussion in relation to the SGP is not very much reproduced in it, for the reason that this discussion is focused on punctual modification of the agreement (which seems not to be very effective, predominantly in the middle and extended run), and not on legitimate questions similar to anchoring the SGP in a novel European constitution and also on how (which happens to be extremely significant for the future of EMU)22.
The inquiry to be responded is, if there is equilibrium of players and a stability of power included in the SGP that will show the way the economic procedure to the outcome desired.
Connection of the SGP to the political system of the European Union
The SGP in its current design features three more troubles, directly associated to the political organization of the Union: the equilibrium of actors and consequently the equilibrium of power are not made certain; the means of alteration are indistinct; and each and every one if this leads to the truthful unfeasibility of sanction.
The three pertinent actors for the SGP are the Council, Commission, and lastly the associate state(s).
The association between these players is not very obvious, which has shown the way to a grievance by the Commission at the “Court” against the “non action” of the Council in the case of countries like Germany and France in the autumn of 2003. In the month of July 2004 the Court affirmed this as an infringement of the pact, which to some extent changed the equilibrium of power in favor of the “guardian of the treaties”23.
Until in recent times the Commission was having a serious shortfall in pressure compared to the associates states, since the final choice concerning an “excessive deficit procedure” and concerning sanction was politically motivated, to be decided on – by competent majority in the Council.
Therefore, the associates, in particular the big ones which include France, Germany, and Italy, in actual fact were capable to triumph over any stern restriction on the budgetary guidelines, on condition that at least there was a hazard that adequate other countries may have comparable problems in close proximity to the future. It has been demonstrated by some researchers in advance of the EMU that this is a vital problem related to the
SGP, for the reason that in actual fact there was never be severe consequences for the countries which were violating the agreement.
This was viewed to be a specific risk for confidence in the steadiness of the monetary merger. Although not sufficient time has passed over to confirm this thesis in an empirical manner, the proof seems to be fairly clear and confirming. On the other hand, at the moment the Court has elucidated that the main Council and also the associate states are also closely connected by the SGP.
But still after this pronouncement the query remains opened, if the Court will be capable to really consign the Council and the associate states. In actual fact the Court does not have real sanctioning authority.
The Court still made clear that the Council on one side does not have the right to stop the extreme deficit procedures entirely, but at the other face has the right to setback the procedure owing to reasons particular probably impromptu by this organization.
Thus also the way of change of the treaty is very much connected to this issue of power. This is one significant reason why no more than negligible alterations of the pact came about during the debate about the Convention24.
These transformations do not correct for authority imbalance and do not describe the relationship amid the Council, the Commission, the Supreme Court, and the associate countries more clearly, but they are slight ones nurturing the flexibility of the accord: deliberation of the business phase and of augmentation and employment consequences, and also the recommendations found in several fields25.
Fiscal rules rationale
Fiscal regulations in a monetary merger can serve up a double purpose; that of fostering the acceptance of time dependable fiscal policy within states and improving the policy harmonization between the countries concerned.
Drawing some parallel with the monetary strategy, an effectual way to show aggression on the politically persuaded shortfall bias and a main obstruction to the medium and the long term fiscal restraint in many states is from end to end a rules based fiscal structure that holds back the prudence of policy makers and promotes the adoption of plausible, time consistent policy.
Moreover, rules are capable of playing a crucial responsibility in coordinating the fiscal policies athwart different controls, especially by plummeting detrimental spill-over. The architects of the EMU were predominantly mindful of the supra-national measurement26.
Under unchecked caution, the political communications can encourage time-inconsistent policies, which may include a fiscal debit bias. The most advantageous fiscal policy is recurrently viewed all the way through the prism of inter-temporal tax even, with the current net present value of expenditure equivalent to the net present value of the revenues.
With this probably being the case, the budget is upheld in structural equilibrium but deficits can be able to arise from the liberated play of routine stabilizers. However, such a strategy might not be followed by policymakers for a variety of the reasons relating to the political structural design.
Alesina and Perotti (31) said persuasively that the conflicting fiscal results across industrialized countries, chiefly in the 1970s and also in the 1980s, could not be put in plain words by the prevailing economic hypothesis absent from any political and economy issues27.
The literature gives you an idea about that a plethora of inter-related aspects like fragmented regimes, a high quantity of high spending ministers acting autonomously, relative electoral systems, electoral vagueness, and short government durations, can all proceed to make sub-optimal, time inconsistent fiscal guiding principles (Roubini and Sachs, 1989; Grilli, Masciandaro, and Tabellini, 1991; Kontopoulos and Perotti, 74; Milesi-Ferretti, Perotti, and Rostagno, 613)28.
Before the coming on of the Maastricht treaty, the results of unconstrained caution manifested themselves throughout various structures of time inconsistent policies.
For the most part, many countries had persistent and indefensible deficits that fed in the course of the rapid public arrears accretion, countries like Belgium, and Greece saw their arrears spiraling higher than 100 percent of the GDP for the duration of the 1980s or in the early hours of 1990s with deficits suspended around 10 percent of the GDP in countless years.
Secondly, most EU states ran highly pro-cyclical fiscal courses of action, particularly during high-quality times (Jaeger, 20). This also leant to be more probable under alliance governments (Skilling, 29) and wherever political powers were dispersed (Lane, 2665)29.
Thirdly, most governments in most of the countries tended to create long term welfare states assurances with slight concentration to how it was possible to pay for them, foremost to the accretion of large implied liabilities (Alesina and Perotti, 24).
In addition to this, electoral deliberations affected proposed fiscal policy outcomes across all of the European democracies (Alesina, Roubini, and Cohen 213). Spillovers on or after lax fiscal policies in a monetary merger created their own common pool difficulty, justifying region wide fiscal regulations.
The aptitude to pass on in any case some of the costs of extravagant fiscal policies to other associates can worsen the common pool trouble and intensify the tendency in the direction of time inconsistent policies in any monetary amalgamation. In the euro region, the most commonly raised issues include:
A country that is running into fiscal some intricacies could be bailed out by some other countries or probably by the ECB obtaining its debt. Although prohibited by the “Maastricht treaty”, many of the observers deem that this pathway would be selected to stave off a crisis in the banking system. The probability of such a rescue leads to ethical hazard problem30.
Price constancy could be put at risk as the ECB incurs pressure from extravagant states to lower the interest rates and also to be able to inflate the debt away. Any announced price rises targets could consequently lack trustworthiness, leading to an inflation preconceived notion (Kydland and Prescott, 481; Barro and Gordon, 591).
This defeat of credibility might manifest itself throughout the depreciation of the euro, even though some policy in the counterpart countries obviously also plays a role in such a circumstance31.
Expansionary fiscal strategy in one country may perhaps add to area-wide interest rate. Domestic policy makers fell short to take into consideration the feel of the local fiscal policy on the other countries in the region. The relation between local fiscal plan and interest rates is hence loosened32.
Procedure for excessive deficit
A deficit superior than 3 percent of the GDP will trigger the EDP on condition that the surplus is not well thought-out to be outstanding, provisional, and close to the allusion value. This decisive factor is also content if the shortfall has declined considerably and incessantly and comes close up to 3 percent of the GDP.
A comparable caveat for the arrears ratio is still looser: in this realm, all that requirements to come to pass is for the proportion to be approaching the 60% of the GDP threshold at a reasonable pace.
When putting in order its original report below the EDP, the Commission takes into consideration as to whether the shortfall exceeds administration investment and at the same time considers “all other relevant factors, including the medium term economic and budgetary position of the member state”33.
Exceptional conditions
An exception is characterized to have stemmed from “an occasion externalized from the command of the associate states… which has a most important consequence on the financial situation of the common government, or when ensuing from a harsh economic slump”. In such a case like this one case, a stern economic slump is defined as a plunge in actual GDP by at least 2%.
A drop between 0.75 and 2% may perhaps be exceptional, given the supporting confirmation. It is usually not the same case when it is less than o.75%. The shortfall is termed to be provisional if it will “fall under the value which is used for reference subsequent to the end of the odd event or the harsh economic slump”.
The SGP is not known to define the nearness principle. All the three must be relevant for this run away clause to be made use of34.
First stage: in three months after the coverage date, the ECOFIN Council comes to a decision whether an extreme deficit possibly exists. If that is the case, it will right away issue a suggestion giving:
four months to obtain “effective accomplishment” and;
A time limit for the elimination of the unnecessary deficit, which is characteristically the year that follows its classification, therefore barring the special circumstances.
Second stage: After a period of four months, on condition that the ECOFIN Council thinks that the associate states is not putting into practice the measures, or that they are insufficient, or that information indicates that the disproportionate shortfall will not be approved within the instance limits which are specified, it will budge on to the subsequent step.
If the state is deemed as to have taken some effective act, the modus operandi is positioned in abeyance35. Otherwise, in one month, the Council goes ahead and gives notice for the associate states to take, in a specified instant limit, the measures required to reduce the shortfall.
This phase is only appropriate to countries in the concluding stage of the EMU. The Council might request the associate state to present regular reports to keep an eye on the adjustment efforts which are under the enhanced fiscal observation.
Final stage: If the associate state is in conformity with the given notice, the course of action is detained in abeyance. If this is not the case, the ECOFIN Council moves to the sanctions stage surrounded in two months. By this schedule, sanctions are able to be imposed in ten months of the coverage date. A non interest incurring deposit will hence be requisite.
The first phase of the deposit includes a fixed constituent of 0.2% of GDP and a changeable component equivalent to 1/10 of the difference amid the deficit and the 3%, in percent of the GDP. Each subsequent year, the Council might decide to strengthen the sanctions by having need of one more deposit (variable constituent only).
No solitary deposit can go beyond 0.5% of the GDP. If the extreme deficit has not been approved two years subsequent to the time that the deposit was completed, it shall be transformed into a fine. If, prior to a time when two years are up, the lead Council thinks about the excessive shortfall to be corrected, it consequently abrogates the modus operandi and precedes the deposit.
Fines are however not reimbursed. Interests on deposits, and the fines, shall also be distributed amongst member countries without too much deficits (Schwartz, 9).
Criteria for good fiscal rule
The SGP is required to be judged along two equivalent dimensions; first, does it promote the adoption of time consistent strategies, remedying shortfall biases? Secondly, is there an advantage in having a supra-national law at all? The answer to both these questions is definitely a yes, despite a variety of enforcement impenetrability36.
As a rule based structure, the SGP is well suitable to addressing the shortfall bias in the fiscal policy. As with monetary strategy, time consistent procedures can be attained by fastening the hands of the policymakers, by having nothing to do with unconstrained judgment, and by taking on a rule based structure.
In a lot of ways, the framework for organizing fiscal policies of the EU countries shows the characteristics of a replica fiscal regulation and is generally suitable in the circumstance of the economic union (Kopits and Symansky, 97). It is elegant, insofar as it remains simple, and also clearly defined, and crystal clear, particularly with respect to the parts that relay to unpleasant policy mistakes37.
Also, the description of gross policy faults (deficits exceeding 3 percent of GDP) is sufficient regarding the goal of upholding stability in the economic union. Absent policies to correct the fiscal pressure correlated to aging, the monetary policy might face some major difficulties above the longer run.
In addition, persistent breach of the 3 percent limit can destabilize the merger over the average run. In addition, the SGP doles out as a practical external promise technology, which is particularly valuable in nations with histories of macro-economic or even fiscal unpredictability, or politically induced shortfall biases.
However, onlookers have raised issues over whether the structure is sufficiently flexible and also enforceable and also as to whether it allows for enough ownership. Critics have said that the EDP mechanism is too dull and perfunctory. Also, the “preventive arm” is seen as deteriorating to take country precise sustainability issues into account adequately, calling like in CBS in all affected countries in spite of the circumstances38.
Mostly, on the other hand, this disapproval fails to provide due credence to the necessitation for any regulation to be straightforward and crystal clear, chiefly if it is supranational (Schuknecht, 48). Others have strained attention to shortages in the enforcement apparatus as the principal gap in the SGP’s protective covering (Buti, Eijffinger, and Franco, 20).
Inman (1999) claims that at the same time as the EU fiscal structure is effective, it trips up on the enforcement that happens to be partisan rather than sovereign, and resulting from the peer-driven nature it has39. Enforcement harms tend to be connected to possession, as several have argued that SGP is too concentrated and not adequately respectful of the subsidiary (DeGrauwe, 112).
Criticisms
General disapproval of the SGP is mostly about its pro-cyclical nature, the very weak consequences on the growth and also the employment and the possibility of exploitation, its universal incredibility, and the real criteria are approximately completely random.
“Handling” of reported data happens for the duration of the configuration process of the monetary unification and it was expected that it will be probable to rule it out in the course of the yearly convergence and constancy reports.
This leads to the extremely weak impacts on growth that are mostly due the reasons that are outlined a while before. Neither the pro cyclical quality of the agreement nor the disregard of public investment does assist economic expansion. Even supplementary, the whole agreement seems to hold only development effects that are constructed completely on prospects about the “spill-over-effects” and the favorable market behavior.
If the common legal tender will be commenced, than optimistic trade effects will take place, fostering invention and consequently leading to development. Nothing is given to ensure this.
If the monetary unification is believable than the self-confidence of the economic players will be made stronger, lowering indecision, improving prospect, fostering ventures, and consequently leading to development. Nothing is made available to ensure this (Brunila, 58).
If there is financial convergence prior to the monetary union, then the convergence will be also being sustainable and also later afterwards. Almost not anything is provided to make sure this, besides the yearly reports of associate countries, the harmonization of financial and economic politics, and a payable to political cause already strained.
Especially a blend of low price rises’ rates and an impartial budget might even lead to deflation forces and consequently may decrease actual development rates, dropping over to the other part of the EU (particularly if occurring in a big country)40.
This shows the way to some concluding remarks about centralization, the prominent voting authority, and the sanctions. If the budgetary restraint is taken critically as a necessary component of the monetary union to keep away from the bailing out of “sluttish” associates, then more efficient management is needed (Bishop, 300).
Political decisions build the possibility to define “exceptional circumstances” that permit for a divergence from the SGP in each single case on a country to country foundation.
This has some advantages as well as some disadvantages. Particularly the disadvantages could be abridged by a centralization of a checking and the voting competences in the supra-national body which is like a commission, while an intergovernmental body (similar to the Council) could create suggestions if and what
“Unique circumstances” exists that give good reason for a divergence from the SGP. Another answer might be the reweighting of the appointment authority in the Council for SGP based decisions in accordance to the budgetary regulation of the associates: the voting authority of affiliates with a fair budget or a budget excess should be enhanced, at the same time as the voting influence of members infringing the deficit measure is supposed to be reduced (Artis, 89).
One might also put forward stripping affiliates that breach the pact of their voting control completely or to initiate a similar practice according to the price rises standards41.
Works Cited
Alesina, Alberto and Roberto Perotti. “The Political Economy of Budget Deficits,” Staff Papers, International Monetary Fund, Vol. 42, No.1, pp. 1-31.
Alesina, Alberto, Nouriel Roubini, and Gerald Cohen. Political Cycles and the Macroeconomy. Cambridge, Massachusetts: MIT Press, 1999.
Artis, Michael J. The Economics of the European Union. Oxford: Oxford University Press.2001.
Barro, Robert, and David Gordon, 1983, “A Positive Theory on Monetary Policy in a Natural Rate Model,” Journal of Political Economy, Vol. 91, No. 4, pp. 589-610.
Bishop, Graham “The Future of the Stability and Growth Pact”, in: International Finance 6 (2), pp. 297-308.
Buti, Marco, Sylvester Eijffinger, and Daniele Franco “Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?” European Economy Economics Papers, No. 180 (Brussels: European Commission). 2003.
Brunila, Anne The Stability and Growth Pact: the Architecture of Fiscal Policy in EMU. Basingstoke: Palgrave. 2001.
DeGrauwe, Paul.Economics of Monetary Union. Oxford: Oxford University Press.2001 Hule, Richard and Matthias Sutter: “Can the Stability and Growth Pact in EMU Cause Budget Deficit Cycles?” in: Empirica 30 (1), pp. 25-38.
Inman, Robert. P. “Do Balanced Budget Rules Work? U.S. Experience and PossibleLessons for the EMU,” NBER Working Paper No. 5838 (Cambridge, Massachusetts: National Bureau of Economic Research).1996
Jaeger, Albert “Cyclical Fiscal Policy Behavior in EU Countries,” IMF Staff Country Report No. 01/201 (Washington: International Monetary Fund). 2001.
Kontopoulos, Yianos, and Roberto Perotti, “Government Fragmentation and Fiscal Policy Outcomes: Evidence from OECD Countries,” Fiscal Institutions and Fiscal Performance, ed. by James Poterba and Jurgen von Hagen (Chicago, Illinois: University of Chicago Press). 1999.
Kopits, George, and Steven Symansky, “Fiscal Policy Rules,” IMF Occasional Paper No. 162 (Washington: International Monetary Fund). 1998.
Kydland, Finn, and Edward Prescott, “Rules Rather Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy, Vol. 85, No. 3, pp. 473-92.
Lane, Philip R., “The Cyclical Behavior of Fiscal Policy: Evidence from the OECD,” Journal of Public Economics, Vol. 87, pp. 2661-675.
Milesi-Ferretti, Gian Maria, Roberto Perotti, and Massimo Rostagno, 2002, “Electoral Systems and Public Spending,” Quarterly Journal of Economics, Vol. 117, No. 4, pp. 607-57.
Schuknecht, Ludger, “EU Fiscal Rules: Issues and Lessons from Political Economy,” European Central Bank Working Paper, No. 421 (Frankfurt: European Central Bank). 2003.
Schwartz, Anna J. “Risks to the Long-Term Stability of the Euro”, in: Atlantic Economic Journal 32 (1), pp. 1-10
Skilling, David, “The Political Economy of Public Debt Accumulation in OECD Countries Since 1960,” mimeo, New Zealand Treasury. 2000.
Williamson, Oliver E.“The New Institutional Economics: Taking Stock, Looking Ahead.” in: Journal of Economic Literature 38 (3), pp. 595-613. 2000
Footnotes
1 Williamson, Oliver E.“The New Institutional Economics: Taking Stock, Looking Ahead.” in: Journal of Economic Literature 38 (3), pp. 595-613. 2000
2 Kopits, George, and Steven Symansky, “Fiscal Policy Rules,” IMF Occasional Paper No. 162 (Washington: International Monetary Fund). 1998.
3 Lane, Philip R., “The Cyclical Behavior of Fiscal Policy: Evidence from the OECD,” Journal of Public Economics, Vol. 87, pp. 2661-675.
4 Jaeger, Albert “Cyclical Fiscal Policy Behavior in EU Countries,” IMF Staff Country Report No. 01/201 (Washington: International Monetary Fund). 2001.
5 Hule, Richard and Matthias Sutter: “Can the Stability and Growth Pact in EMU Cause Budget Deficit Cycles?” in: Empirica 30 (1), pp. 25-38.
6 Hule, Richard and Matthias Sutter: “Can the Stability and Growth Pact in EMU Cause Budget Deficit Cycles?” in: Empirica 30 (1), pp. 25-38.
7 Lane, Philip R., “The Cyclical Behavior of Fiscal Policy: Evidence from the OECD,” Journal of Public Economics, Vol. 87, pp. 2661-675.
8 Schwartz, Anna J. “Risks to the Long-Term Stability of the Euro”, in: Atlantic Economic Journal 32 (1), pp. 1-10
9 Skilling, David, “The Political Economy of Public Debt Accumulation in OECD Countries Since 1960,” mimeo, New Zealand Treasury. 2000.
10 Skilling, David, “The Political Economy of Public Debt Accumulation in OECD Countries Since 1960,” mimeo, New Zealand Treasury. 2000.
11 Artis, Michael J. The Economics of the European Union. Oxford: Oxford University Press.2001.
12 Bishop, Graham “The Future of the Stability and Growth Pact”, in: International Finance 6 (2), pp. 297-308.
13 Artis, Michael J. The Economics of the European Union. Oxford: Oxford University Press.2001.
14 Artis, Michael J. The Economics of the European Union. Oxford: Oxford University Press.2001.
15 Alesina, Alberto, Nouriel Roubini, and Gerald Cohen. Political Cycles and the Macroeconomy. Cambridge, Massachusetts: MIT Press, 1999.
16 Alesina, Alberto and Roberto Perotti. “The Political Economy of Budget Deficits,” Staff Papers, International Monetary Fund, Vol. 42, No.1, pp. 1-31.
17 Williamson, Oliver E.“The New Institutional Economics: Taking Stock, Looking Ahead.” in: Journal of Economic Literature 38 (3), pp. 595-613. 2000
18 Williamson, Oliver E.“The New Institutional Economics: Taking Stock, Looking Ahead.” in: Journal of Economic Literature 38 (3), pp. 595-613. 2000
19 Milesi-Ferretti, Gian Maria, Roberto Perotti, and Massimo Rostagno, 2002, “Electoral Systems and Public Spending,” Quarterly Journal of Economics, Vol. 117, No. 4, pp. 607-57.
20 Milesi-Ferretti, Gian Maria, Roberto Perotti, and Massimo Rostagno, 2002, “Electoral Systems and Public Spending,” Quarterly Journal of Economics, Vol. 117, No. 4, pp. 607-57.
21 Kopits, George, and Steven Symansky, “Fiscal Policy Rules,” IMF Occasional Paper No. 162 (Washington: International Monetary Fund). 1998.
22 Kopits, George, and Steven Symansky, “Fiscal Policy Rules,” IMF Occasional Paper No. 162 (Washington: International Monetary Fund). 1998.
23 Lane, Philip R., “The Cyclical Behavior of Fiscal Policy: Evidence from the OECD,” Journal of Public Economics, Vol. 87, pp. 2661-675.
24 Kydland, Finn, and Edward Prescott, “Rules Rather Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy, Vol. 85, No. 3, pp. 473-92.
25 Lane, Philip R., “The Cyclical Behavior of Fiscal Policy: Evidence from the OECD,” Journal of Public Economics, Vol. 87, pp. 2661-675.
26 Kydland, Finn, and Edward Prescott, “Rules Rather Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy, Vol. 85, No. 3, pp. 473-92.
27 Alesina, Alberto and Roberto Perotti. “The Political Economy of Budget Deficits,” Staff Papers, International Monetary Fund, Vol. 42, No.1, pp. 1-31.
28 Alesina, Alberto and Roberto Perotti. “The Political Economy of Budget Deficits,” Staff Papers, International Monetary Fund, Vol. 42, No.1, pp. 1-31.
29 Lane, Philip R., “The Cyclical Behavior of Fiscal Policy: Evidence from the OECD,” Journal of Public Economics, Vol. 87, pp. 2661-675.
30 Barro, Robert, and David Gordon, 1983, “A Positive Theory on Monetary Policy in a Natural Rate Model,” Journal of Political Economy, Vol. 91, No. 4, pp. 589-610.
31 Kydland, Finn, and Edward Prescott, “Rules Rather Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy, Vol. 85, No. 3, pp. 473-92.
32 Barro, Robert, and David Gordon, 1983, “A Positive Theory on Monetary Policy in a Natural Rate Model,” Journal of Political Economy, Vol. 91, No. 4, pp. 589-610.
33 Artis, Michael J. The Economics of the European Union. Oxford: Oxford University Press.2001.
34 Artis, Michael J. The Economics of the European Union. Oxford: Oxford University Press.2001.
35 DeGrauwe, Paul.Economics of Monetary Union. Oxford: Oxford University Press.2001
36 DeGrauwe, Paul.Economics of Monetary Union. Oxford: Oxford University Press.2001
37 Kopits, George, and Steven Symansky, “Fiscal Policy Rules,” IMF Occasional Paper No. 162 (Washington: International Monetary Fund). 1998.
38 Schuknecht, Ludger, “EU Fiscal Rules: Issues and Lessons from Political Economy,” European Central Bank Working Paper, No. 421 (Frankfurt: European Central Bank). 2003.
39 DeGrauwe, Paul.Economics of Monetary Union. Oxford: Oxford University Press.2001
40 Bishop, Graham “The Future of the Stability and Growth Pact”, in: International Finance 6 (2), pp. 297-308.
41 Artis, Michael J. The Economics of the European Union. Oxford: Oxford University Press.2001.
The purpose of this study is to find out how risk assessment can be used to minimize the losses that are occasioned by the risk and insecurity which are inherent of bad commercial loans that are extended to small and medium enterprises. This paper will discuss points that outline the good practices that risk assessment aims to accomplish.
Using risk assessment to spot latent frauds
Knapp and Knapp (2001, 28) state that: “explicit fraud risk assessment instructions resulted in more effective assessments of the presence of fraud” when it was carried out in the procedures that were used to analyze the possibility of fraud in financial statements. Risk assessment should, as a result be used to dig deeper into scenarios that may look satisfactory in the rating of credit worthiness, but whose particulars may not correspond to the prevailing economic environment of the SME or its financial standing in the concerned industry.
Using risk assessment to predict the insolvency of an SME
Risk assessment can employ predictive scoring to group SMEs into different credit categories. The category that has the lowest score is generally considered as the one posing the greatest risk of issuing slow payments and the one that can easily fall into bankruptcy (Dichev, 1998,1135 ). The lowly rated SMEs would call for a more assertive follow up on their payments and even an outright suspension of their accounts to avoid being burned with a bankrupt customer.
Using risk assessment to make good use of technology
Risk assessment should employ predictive scoring together with technological tools to create a more accurate picture of credit retrieval outcomes. Automated assistive technologies enable the bank to undertake comprehensive analysis of their accounts on a repetitive basis, and at the same time increase the overall efficiency without a corresponding increase in the costs.
Using risk assessment to avoid uneconomical credit evaluations
Risk assessment should be used to avoid the traditional approach of undertaking manual assessments of credit applications. These can easily be manipulated and more likely to become subjective, as the applicant is more likely to paint a particular credit picture with inaccurate data.
Using risk assessment to avoid undertaking bad debt from established SMEs
Existing customers who have passed the initial credit risk assessment procedures may fall into lower credit ratings due to the highly fluid nature of business environments. These SMEs pose risks to future credit relationships with banks and should be constantly monitored for risk.
Methodology
This paper discussed how risk assessment should be used by commercial banks to minimize the risks and uncertainty that is occasioned by bad commercial loans that are extended to SMEs. Risk assessment is an important part of risk management as it predicts potential bad credit of a small and medium sized enterprise and can also be used to forecast the occurrence of a loan default.
This study has shown that the prediction of bad credit is important because it enables better use of a financial institutions monetary resource, and enables them to be channeled to those SMEs that would enable good business to be possible.
Due to the recurring of financial crises, for example those of the 1980’s and 2009, the fairly accurate determination of risk associated with small and medium enterprises has become of paramount importance to banks that extend loan facilities. This study used statistical data that was acquired from loan data that is used by the Canadian government as described by Riding and Orser (2007, 6) to look for predictors of risks of small and medium enterprises in the Prairie Provinces.
According to the data acquired from the data on the financing of small and medium enterprises that is released by the Survey of Suppliers of Business Financing, the data shows that $164 billion was released to enterprises in the Prairie Provinces, while $868 billion was released in Canada whereby 1.6 million of the transactions were dealing with small and medium enterprises.
This study used averages of the number of SMEs provided by the survey on Canadian SMEs in 2004 to determine how many were more likely to have been awarded credit.
Data Collection
This study used data provided by the statistics department of the government of Canada and is usually provided by the Industry Canada and Finance Canada institutes to show how small and medium sized enterprises get access to loans when they are starting up. This study made use of that data to illustrate how banks generally rate different types of small to medium enterprises.
The extra data provided by the statistical arm of the government of Canada was about the awarding of loans to small and medium sized enterprises that tried to access further credit from the financial institutions was also useful in determining how these banks used risk assessment. The small and medium sized enterprises were of varying attributes, thus the data could be used to display how banks assess different types of risks that were occasioned by the enterprises that cut across different industries.
The data that is used in this study is also used by different sectors of the Canadian economy, thus would be of a fairly accurate depiction of how small and medium enterprises are regarded in terms of the risks that they pose to their credit worthiness when they relate with financial institutions. Financial institutions employ the data from this survey to determine the credit worth of small and medium enterprises when they are compared to their counterparts in other industries or when compared to enterprises within the same industry.
The government of Canada relies on the data provided by the survey on small and medium enterprises to enable it to determine how the country’s enterprises are dealing with the prevailing economic conditions thus enables the government to formulate policies to minimize the resulting risks.
Target Population
The small and medium enterprises that were targeted by the survey whose data is used in this study composed of all the enterprises that are officially recorded in the government of Canada’s Business Register. However, this study did not take into account the data that concerned enterprises that were beyond the criteria of being small or medium sized.
This means that all enterprises that had more than five hundred employees, were joint ventures, were a cooperative movement, were grossing more than $50 million in revenues, were part of the government’s municipal initiatives, or were enterprises that have been marked by the North American Industry Classification System (NAICS) as not possible to classify as small and medium enterprises, namely:
Enterprises that deal with educational services
Enterprises that are involved with the rental or leasing of vehicular equipment
Enterprises that deal with the caring of out-patients
Enterprises that are comprised of laboratories that carry out medical and diagnostic procedures
Enterprises that comprised of wide-ranging medical and surgical practices
Enterprises that deal with the renting and leasing of equipment and other gear that is used commercially or industrially.
Enterprises that deal with the management of other commercial enterprises and establishments
Enterprises that deal with the provision of financial services or insurance services
Enterprises that deal with the administration o public interests
Enterprises that deal with the provision of ambulance services
Enterprises that deal with provision of food stuffs and/or housing services for communities
Enterprises that deal with the provision of relief services, or those that deal with the provision of emergency and rescue services
The questionnaire that was used to conduct the survey that is used in this risk assessment study was designed by the government of Canada’s initiative: Statistics Canada while the Industry Canada initiative collaborated to provide an economical and industry-set perspective.
The Statistics Canada initiative analyzed and enforced the policy set forth by the government of Canada when relating to small and medium enterprises. This ensured that the enterprises that were eventually surveyed fit the description of the government of Canada’s definition of a small and medium enterprise.
Sampling
The survey that is used in this study makes use of a design which is cross-sectional while the government of Canada’s registrar of businesses provides the frame of the survey for all small and medium enterprises that form part of the population that is targeted by this study. The total number of enterprises that were sampled in this study was 1,999,000, while the size of the sample that was studied totaled 37,058 small and medium sized enterprises.
The enterprise’s employees determined the size of the enterprise, while the number of years that the enterprise has been in operation was determined by the date that was acquired from the government registrar’s records. The sample that forms the basis of this study was then acquired by taking a randomized selection from the categorized enterprises that formed the small and medium based enterprises in the government of Canada business registrar’s records. The preliminary categorization of the small and medium enterprises was based on:
Location of the enterprise
The category of industry that the enterprise participates in
The size of the enterprise
The age of the enterprise
Sources of Data
Data that was used in this study was collected from the answers that were provided by the enterprise’s correspondents of their own free will. The answers to the queries that were posed by this study were recorded from a first person basis.
The data collected from the telephone interviewing system was done using a Computer Assisted Telephone Interviewing (CATI) method which employed the use of live consistency edit checks to note errors that were present in the responses. The extensive use of data processing techniques enabled the detection of other errors that would have been overlooked by the CATI system.
Data consistency inadequacies were compensated for using the data that was garnered from a respondent who fit the same stratification as the source of the inadequate data. This method, thus implanted data from one respondent into another’s, whereby the two respondents were assumed to would provided nearly the same responses.
When data required for the study was found to be missing or wanting, it was estimated from the system that is provided by the Statistics Canada system of data estimation that is called the Generalized estimation System (GES). The government of Canada’s initiative for statistics, Statistics Canada provides data that forms the basis of the estimation system before hand for every industry, and provides this to the concerned researchers.
Data Accuracy
The data that is collected from the survey of the “medium and small businesses” was based on sampling, thus had intrinsic sampling inaccuracies. These sampling errors were then standardized to come up with the quality of errors that the different data sets produced. For example, an error that had standard rating of between 0.025 and 0.05 is considered as being good data.
Findings and Recommendations
This study has been a review of the capacity of different banking institutions to fund small and medium sized enterprises with a keen insight into the risks involved. It is a study of the risk factors. The main aim of this research project was to try and find out the main risk factors through an assessment of the risks involved in lending money to small and medium sized enterprises.
This is a process that has been known to have a variety of implications on the relationship between bankers and their clients who are involved in business. Depending on the criteria that the bank uses to assess the risks in accordance with the investments that it is supposed to be ready to offer has a lot of implications on internal issues like training the staff and such.
Lending by the bank improves the very important relationship between the bank and the clients. It is upon the bank to have a clear cut assessment procedure such that as it seeks to establish a working relationship with its clientele, it does not go down the drains due to losses and bad debts.
Key Findings
Financing Of New Capacities
Proposed and existing small and medium enterprises access various types of financing depending on the relationships that they have with the banks. In order to attract the investors in this pool of money banks have to align themselves to such attitudes as to take greater risks though very carefully.
With the high and the capital intensity of the economy today, the high amount of financing of exports and credits from multilateral companies, the institutions are bound to find higher risks of their financings which tend to balance if they happen to attain their organizational objectives. This argument lays out the fact that the financial institutions which calculate their lending capabilities from risk assessment amongst other factors need to be very careful in their procedures.
To the new investments in proposition, the financing institutions need to apply very strict screening criteria to avert the risks of coming into contact with fraudsters, customers with a bad debt history and the risk of spending too much on loans to a state that they are caught unawares by cases of bankruptcies.
Use of safeguards
Safeguards can be termed as those principles that are applied to those projects that the institutions are proposing to fund. When planning and financing the small and medium enterprises in the initial stages, they have the opportunity of being very effective due to the fact that they have picked the business from a place that was most difficult to commence from.
The safeguards call for a mechanism which will allow for safe and better follow up of the proceeds of the organization by the financiers. The financiers are able to follow up the performance of the organization through key variables (Jeanneau and Micu, 2002). If the safeguards are not met in accordance to the agreement, then there might follow suit an early call for the said loan.
Risk assessment and due diligence
The procedures for risk assessment and due diligence in the lending transactions can reveal practices that are not sustainable. Such practices act as threats to the economic viability of a given project. In cases where some companies are noted to have practices which are not sustainable, there are also other potential risks which are involved in the practice and it is so risky for most investors.
Firms which provide commercial loans have their risks managed on a basis that is portfolio wide. In such a case, the management of credit risks at a macro level basis is precedent over the stringent and stricter control measures over individual loans and individual securities. Pressures arising from competition and the time factor usually discourage appraisals which are specific to the borrowers and the projects.
Limitations of analysis
In any analysis, there has to be some limitations which affect the kinds of decisions that are made. If the company is doing some analysis from an outside source, most of them are found to mostly on projections on price, supply factors and demand factors with less concern being focused on the intricacies of the operations of the companies and the flow of operations.
This is the reason that you will find many Small and medium enterprises are being hailed as fit for loan though at the end of the day, their operations prove to be a burden on debts. Some of these intricacies fail to meet the requirements of the environment and also the social impacts which might cause eventual repercussions to the operational continuity.
Granting of loans
Accounts receivables management commences with making of a decision on whether a customer should be credited. It also looks into how much he or she should be given and also in to how the policy obeys the procedures and the systems of the company. Credit policy should be a balanced operation.
If it happens to be too much, sales as well as profits are lost and when operated at a minimal level, then there is some risk of bad debts and non payments. In order to avoid major risks in the process, the financing organizations need to have some ideal means in which to operate such that the right customers are selected. The company representatives must be aware of the required standards which will favor both sides.
The financing organizations are needed to have credit terms which are understandable and a collection policy which is accessible to all the parties. This helps in the avoidance of credit oriented risks. If an account is doubtful, it is wise to know if the account is famous for bad debts and whether the profits incurred allows for minimally acceptable returns on investment.
If the chosen accounts prove to be successful, the financing institution should rate the amount of profitability that should arise. If the credit account for the particular small and medium enterprise proves to have a high profitability, then the risk factor for that enterprise increases.
Looking at the abovementioned factors, matters of risk assessment are twofold when it comes to the realm of lending and risk management related issues. The higher the risk that a financial institution takes, the more close it happens to get to the client base. The higher the risks taken by the institution, the better it is as there is a greater likelihood to get more returns given that the assessment done by the organization to the small and medium enterprises is perfect and with a greater likelihood to increase returns.
On the other hand risk assessment should be done in a very careful manner. Policies in use by the organization should be stricter and more stringent to mitigate the risk of unwanted losses. In the objectives of this study, there was a bid to look into some of the critical factors affecting lending to commercial investors in Small and medium enterprises.
In one of the objectives, there is focus on the contribution of the customer to bad debt, and identification of potential fraudsters. Fraudsters may appear in form of a well organized small and medium enterprise which is in its initial phases though the real culprits are just purporting to be starting a nonexistent business. With such knowledge as found in the data, the financiers should remain wary of such potential mishaps and keep the potential losses away from their list of people that they can lend.
Recommendations
It is highly recommended that all stakeholders are base their decisions on behaviors that are observable and not on those behaviors which are theoretical as they can confuse and lead to unwarranted results to either sides. In such a time and situation, there needs to be a provision of more details in the reporting activities of the operational data and financial proceedings by the companies.
In order for the said practices of sharing the required information voluntarily without any compulsion, a basis should be adopted by all the stakeholders. This basis should lie on the principle that standards of operation in place are lower than best operating practices.
The regulatory authorities which are responsible for disclosing the relevant information on the companies and the debts that are owed by certain companies or the securities for the equities should report in a concise manner the operational variables for the specific requirements for the period. When regulating the procedures of lending by the institutions, the regulators should take into account to due diligence which is specific to the loans and also risk assessment for the credit in the farfetched visions (Rich, 1994).
The small and medium enterprises should enhance that their operations are better understood in order to raise their levels of disclosure. This would be well id the operations disclosure was set within some of the existent principles.
With this in place, the financing institutions can have a simple time through the establishment of a common standard of reporting by all the organizations in the lending list. Such a standard would prove to be excellent if it involved a clear cut mapping of the resources getting into the organization and also the final product or the output which helps in giving the right estimate.
Observance of the principles that have been recommended, transparency in all the instructions would not just be beneficial to the banking institutions but would be the best to the small and medium enterprises in a number of ways; the organizations will be able to earn trust from the bank and in case of some future requirement of a bigger loan for business expansion, the banks would be more than willing to cooperate with the individuals involved in the organization management (Rich, 1994).
The financial institutions should improve their networks with the other institutions which might help them be able to get the real data and in follow up circumstances. Such institutions are like chambers of commerce and the global reporting initiatives. These companies not only help the financing organizations to have the best possible deals but also they are able to get proper and professional financial advice o matters of lending to Small and medium enterprises.
Banks should be ready to take more risks in their lending procedures though at calculated steps founded by observation. In this case, they will be able to exploit potential opportunities that can bring along very huge profit margin. This is also a tactical way in which the banks will be able to improve how they relate with their customers.
Improvement of bank to customer relationship can lead to an increase in customer loyalty which is the dream of every financial institution. It is obvious that any business dreams at having its clients loyal to them such that the business can proliferate (Jeanneau and Micu, 2002).
References
Dichev, I. D. (1998). Is the Risk of Bankruptcy a Systematic Risk? The Journal of Finance , 53 (3), 1131–1147.
Jeanneau, S and Micu, M (2002). Determinants of International Bank Lending to Emerging Market Countries. BIS Working Papers No. 112.
Knapp, C. A., & Knapp, M. C. (2001). The effects of experience and explicit fraud risk assessment in detecting fraud with analytical procedures. Accounting, Organizations and Society , 26 (1), 25-37.
Rich, B. (1994). Mortgaging the Earth: the World Bank, Environmental Impoverishment and the Crisis of Development. Boston: Beacon Press.
Riding, A., & Orser, B. (2007, September). Small and Medium-Sized Enterprises in the Prairie Provinces. small business financing profiles , 6-7.
Links to the sources
Small and Medium-Sized Enterprises in the Prairie Provinces. Web.
Business risk is an essential part of any enterprise. It is the first step to innovation, which is undoubtedly crucial for success in the business world. The majority of the management decisions made in any company include a consideration of risk. However, better risk management can prevent catastrophic consequences. To create suitable conditions and effective management strategies for the long-term success of the organization, the risk committee must focus its efforts on identifying and analyzing the scope of possible risks as well as the effect these risks may have on the welfare of the company.
Risk Evaluation
Economic Risks
The Peruvian economy has grown by 5.5 percent on average from 2009 to 2013 with a steady exchange rate and a low level of inflation. The growth has been primarily driven by high international prices for Peru’s natural resources. The growth of Peru’s economy stopped in 2014 due to a reduction in the prices of minerals and metals. Due to the country’s dependence on the exportation of natural resources, the economy of Peru is especially vulnerable to changes in world prices. However, Peru continues to have one of the highest economic growth rates in the Latin American region. Despite the fact that poverty in Peru has been reduced by 28 percent since 2002, social inequality remains one of the most critical problems for the country. In the last few years, domestic demand has been the primary reason for Peru’s economic growth, due to the financing and boosting of this branch. A period of steady inflation and high appreciation of the national currency have made the economy of the country stable (The World Factbook, n.d.).
Today, Peru exhibits a strong macroeconomic performance and high levels of productivity in the financial and labor markets. According to Gov.uk (2015), “The Constitution and associated legal framework guarantee private property rights, the fulfilment of contracts, free capital transfer and remittance of earnings, unrestricted access to internal and external credit and unrestricted access to most economic sectors with only a few exceptions” (para. 15).
Environmental Challenges
The main environmental issues that Peru faces today are water and air pollution, soil erosion, and deforestation. The issues that can particularly affect the growth of All Star company in that country are water and air emissions and deforestation. These environmental problems have an impact on business because the laws of Peru require companies to use equipment that meets the standards of the country—equipment that of course costs money. Thus, the company has to pay for any protective environmental measures required by the government (Franks et al., 2014).
Deforestation has a significant impact on the business because the building of a plant requires space, and it is very likely that space for the plant will be created through deforestation. As a result, the company risks angering local and international environmentalists and getting a bad reputation. In June 2015, 210 social conflicts were registered in Peru, sixty-seven percent of which were caused by environmental protection issues (Gov.uk, 2015).
The manufacturing processes of the toothpaste plant will produce air and water emissions that include hazardous smoke and chemical substances that could enter the groundwater. As mentioned previously, Peru’s environmental protection laws require the use of special equipment and procedures to minimize pollution; in this case, the smoke stacks must be covered with screens of specified gauges, the wastewater must be filtered, and the retention ponds must be lined with clay. All of these measures are very expensive (Franks et al., 2014).
The company will have to pay for all of these required environmental protection measures and hope for positive income gains from the environmentally harmless policy.
Political Atmosphere
Regular changes of the Prime Minister and key Cabinet members during President Humala’s governance have not significantly affected the working of the Peruvian government. The Ministry of Finance and Economy, which is headed by Minister Segura, continues to improve the macroeconomy of Peru. There are also no restrictions on free and fair elections. However, campaign financing in Peru is not transparent. Campaigns are mostly financed through private means, and financing is highly unregulated. The government’s decisions are strongly influenced by business. The armed forces of Peru are mostly under civil control (Gov.uk, 2015).
Cultural and Social Risks
The company must take into account several important cultural and social risks including corruption and the features of Peruvian constitutional law.
The Constitution of Peru guarantees the right to strike. It also states that “all people have the right to equality before the law and that no one may be discriminated against by reason of national origin, race, sex, language, religion, opinion, socio-economic or other status” (Gov.uk, 2015, para. 18). The Constitution prohibits compulsory labor of children.
It should also be mentioned that in recent years, the number of public protests seeking environmental protection has grown. Primarily, these protests have related to the impact of large-scale mining projects on rural communities.
The problems connected with educational inequality and gender discrimination are still widespread in Peru’s highlands and the Amazon basin. Peru is also experiencing internal conflict caused by the government’s cruelty towards rural populations in the 1980s and 1990s (Gov.uk, 2015).
Peru has very high level of corruption in business, even though the most important business alliances of Peru have signed the Integrity Compromise, which unites businesses and the government to combat corruption in the country. Since 2002, the government has taken measures to fight corruption and in 2006 introduced harsh penalties for those involved (Gov.uk, 2015).
Conclusion
To achieve long-term success for the organization, the risk committee should focus on identifying and analyzing possible risks and their impacts. The economy of Peru has grown over recent years, and today it holds the highest growth rate among the countries of Latin America. However, Peru remains dependent on changes in world prices for metals and minerals, which are the primary sources of the country’s income. Today, Peru has a stable economy. Among all of the environmental risks, deforestation and air and water emissions should be given special attention. People in Peru are very concerned about environmental protection, and the company’s plant will require expensive special equipment to protect the environment. The political situation in Peru is stable, and the Ministry of Finance and Economy is doing well to keep the macroeconomy of Peru on a high level. However, the government often makes decisions under pressure from business leaders. Peru has a strong democracy and fights for the rights of citizens, but there are still significant issues with educational inequality, gender discrimination, and corruption on all levels of business and politics. Despite the measures that have been taken by the government, corruption remains one of the biggest business risks in the country.
Franks, D. M., Davis, R., Bebbington, A. J., Ali, S. H., Kemp, D., & Scurrah, M. (2014). Conflict translates environmental and social risk into business costs. Proceedings of the National Academy of Sciences, 111(21), 7576-7581.
The theory of behavioural finance seeks answers to explain why individuals often make useless or even irrational choices when buying stocks or investing their financial means in other actives. Also, individuals who are involved in this sphere of research want to understand what psychological motives influence a consumer’s decision to buy any item, regardless of the fact whether it was necessary for this individual or not. To make appropriate and logical studies in the sphere of behavioural finance, some scholars invented several theories that helped them to find sound justifications of certain behaviours observed among people who purchase stocks regularly. The main elements that have to be considered in the given paper include the modern portfolio theory, asset valuation, and EMH (efficient market hypothesis). The following content will present a literature review that is intended to discuss certain issues of financial models and theories in behavioural finance.
Modern Portfolio Theory
Modern portfolio theory is described by Ricciardi and Simon as “an inclusive investment approach that assumes that all investors are risk-averse, and seeks to create an optimal portfolio in consideration of the relationship between risk and reward as measured by alpha, beta and R-squared”1. It is necessary to mention that the given theory was invented and popularised by an American economist, Harry Max Markowitz. Ricciardi and Simon2 also observe such phenomena that appear in financial markets as correlation, crash, efficient frontier, January effect, and others. All these theories are crucial for investors who seek profitable deals. Moreover, the article by these authors accents on the fact that the modern portfolio theory is intended to analyze the possible return on investments as it requires making a graph to identify the average growth of stocks and their current prices. Moreover, every element of a person’s portfolio must be compared and chosen about other valuable papers purchased by this particular investor.3
Asset Valuation
Asset valuation can be interpreted as a process of assessment of any company’s or non-profitable organization’s financial statement that includes its property, investments, actives, expensive items, and other elements that produce cash flows for it.4 Usually, the services of people who specialize in asset valuation are used when something is being put up on sale. It may be a stock of a corporation, it’s building, transport means, and so on. Statman5 discusses the subject of asset valuation as a pricing model that will be reviewed in detail in the following context. Statman6 also emphasizes on the fact that asset valuation differs from arbitrage pricing theory as the latter is beneficial only for utilitarian benefits. In turn, a behavioural asset is used by professionals for emotional, significant, and expressive benefits. It is necessary to mention that the article by the author mentioned in the given paragraph discussed a wide range of strategies used by Warren Buffet and other notable investors when they made decisions regarding their next stock purchases. In general, Statman7 observes various methods used by professionals in the sphere of behavioural finance and points out some outcomes that become possible with the use of models described in the article.
EMH
As mentioned in the introduction section, EMH is an abbreviation for the efficient market hypothesis. According to the standards and premises of the given hypothesis, all the valuable and important information regarding financial changes in a company’s environment is immediately included in the organization’s stocks. It is obvious that the price of these valuable papers also varies regularly. It appears that the majority of companies in the world have some changes in their financial statements that are updated almost every day. EMH was initially invented by an American economist, Eugene Fama8. Ricciardi and Simon9 describe EMH in their work and say that investors should own the entire market, instead of making multiple attempts to out-perform it. The authors support this statement by claiming that “stocks are considered to be at their fair value, but proponents argue that active traders or portfolio managers cannot produce a superior return over time that beat the market”10. It would be proper to mention that the stock under the name of S&P 500 beats the entire market environment the major part of the time that amounts to 70%.
Another article was written by Titan11 explains the topic of EMH in detail. The author states that this element has three forms that will be discussed below:
Weak-Form of effectiveness can be determined if the price of any market’s active reflects the previous information regarding this position, which can be interpreted as the available data about the previous state of the market that can be observed at the present moment.12
Semi-strong Form of EMH appears when the price of any markets active accurately reflects not only the previous, but also the popular data (that can be accessed by any interested person at the present moment and that is popularised by mass media, politicians, and other instances or important figures.
A strong Form of market effectiveness implies the situation when the price of markets active precisely reflects all the necessary data, including previous information, popular materials, and a corporation’s insights (the information that is only known by a limited number of people who have contact or access to the primary source of it).
CAPM and Returns
CAPM (capital asset pricing model) is a model of financial actives assessment that is used to identify a required level of their profits that is intended to be added to a diversified portfolio considering a market risk of this particular element. The problems of the CAPM in pricing stock or portfolio returns can be formulated as the fact that all the profits and risks are equivalent to the price of any purchased valuable note.13 However, the main cash flow can be identified with the help of its exchange rate. It is necessary to state that CAPM is an advanced approach to the problem as it explores the balance between a market and its rates that are set according to the modern portfolio theory by all investors involved in a particular sphere.
Ricciardi and Simon14 claim that the pricing of one stock and changes in it make a significant impact on the same factor of identical ones. In such cases, equal prices must be achieved simultaneously and automatically. It appears that similar values are important to identify additional payments for risk if:
They are used to determine capital investments during the process of an organization’s value assessment. Usually, the objectivity can be reached with the help of market price identification.
The risk management allows one to evaluate stock fond using equal prices.
Size Effect Against EMH
The article was written by Fama and French15 discusses various risks and elements used to identify international stock returns, including momentum, value, and size. To begin with, it is necessary to state that the authors of the article interpret such a phenomenon as size effect as the strategy of one company that has several small firms. According to the academic source, such a methodology of development appears to be more efficient than that of companies with large market capitalization. Fama and French16 state that the manipulation described above is one of the most important factors used to explain and evaluate the Three-Factor Model developed by these scholars.
The article by Fama and French17 then gives a description of the Three-Factor Model, which can be referred to as another asset pricing model that includes the use of CAPM. Moreover, it adds both value and size factors to evaluate the possible risk factors. This model presents competition to EMH that was described above. Although the article by Fama and French18 outlines only advantages of the model, many investors debate about its efficiency and compare it to EMH. Individuals try to understand which model appears to be more efficient in the international financial market.
In his other paper, Fama19 observes this question and gives a more detailed comparison of the pricing models mentioned above. It is necessary to mention that the efficiency also implies more investments in several financial means in one stock, and hence an increased risk of such operations. In turn, the inefficient approach to the problem can be explained as setting the wrong values of certain businesses, which might lead to a long-term investment that will be paid off for decades.20 In this relation, EMH seems to be more beneficial than the Three-Factor Model as the majority of successful investors choose this variant when making their final decisions.
Behavioural and Standard Finance Differences
In this paragraph, the literature review of two articles will be made. The first article by DeBondt, Muradoglu, Shefrin, and Staikouras21 gives the definitions of both behavioural and standard finances. In turn, the academic source developed by Statman22 focuses a reader’s attention only on behavioural finance. While the latter author prefers to describe the mentioned phenomenon and relates it with other theories assessed in previous paragraphs of the paper, DeBondt et al.23 interpret their methodology as “normal” and claim that it is for “normal people”. In turn, the overview of different errors and benefits that people experience when using their suggested method.
According to Statman24, investors who follow the theory of standard finance are more likely to be rational as they do not have any limitations in their decisions. In contrast, it would be proper to state that other investors who prefer to follow the behavioural finance model seem to be irrational in their preferences.25 “Normal people” can be seen to get upset, stressed, and regretting their cognitive mistakes. While reading the article by DeBondt et al.26, it is possible to note that the model of behavioural finance reflects all issues of human conduct. In conclusion, it is essential to claim that spontaneous decisions made by “normal people” bring them more profits and benefits than to their colleagues who follow the standard finance model.
Overconfidence’s Influence on Investors
The article was written by Barber and Odean27 provides an excessive explanation of what overconfidence is. The authors claim that this factor increases the levels of trading in financial markets. “Human beings are overconfident about their abilities, their knowledge, and their prospect”28. Unfortunately, investors overestimate their knowledge and make an inappropriate decision regarding their financial means and investments of other resources. The authors’ paper offers its readers to become familiar with the research of psychologists who were participating in the study. It is necessary to state that the professionals’ conclusions reflect that the majority of men fail to estimate their abilities and all the possible risks appropriately. In turn, women are not likely to think more about themselves than they can. This theory was not suggested by scholars. Instead, they organized a study to check the reaction of both genders to the same items or events. It appeared that men got more excited and emotional than females. As the text continues, Barber and Odean29 use examples from previous studies of their colleagues in the discussed field. According to the survey, “overconfident investors believe more strongly in their valuations, and concern themselves less about the beliefs of others.”30
Conclusion
All the articles given and described above explain various phenomena in financial markets. The literature review performed above was designed to explain some terms related to investments and people’s decisions regarding the allocation of their financial means. It would be proper to state that some people have behavioural issues that hurt their decisions made when investing money. The given work offers some theories that explain individuals’ motives in such instances. Another interesting fact discovered during the literature review is that the use of both EMH and the theory of size-effect vary in different parts of the world. Therefore, it may be essential to consider national preferences when analyzing investors’ choices.
Bibliography
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Brown, W., and Cliff, T., ‘Investor Sentiment and Asset Valuation’, The Journal of Business, vol. 78, no. 2, 2005, pp. 405–440.
DeBondt, W., Muradoglu, G., Shefrin, H., and Staikouras, K., ‘Behavioural Finance: Quo Vadis?’, Journal of Applied Finance, vol. 18, no. 2, 2008, pp.7-21.
Elton, J., and Gruber, J., ‘Modern Portfolio Theory, 1950 to Date’, Journal of Banking & Finance, vol. 2, no. 11-12, 1997, pp. 1743–1759.
Fama, E., ‘Market Efficiency, Long-Term Returns, and Behavioral Finance’, Journal of Financial Economics, vol. 49, no. 1, 1998, pp. 283–306.
Fama, E., and French, K., ‘The Capital Asset Pricing Model: Theory and Evidence’, Journal of Economic Perspectives, vol. 105, no. 1, 2004, pp. 457–472.
Jagannathan, R., and Wang, Z., ‘The Conditional CAPM and the Cross-Section of Expected Returns’, The Journal of Finance, vol. 51, no. 1, 1996, pp. 3–53.
Olsen, R., ‘Toward a Theory of Behavioral Finance: Implications from the Natural Sciences’, Qualitative Research in Financial Markets, vol. 2, no. 2, 2010, pp. 100–128.
Ricciardi, V., and Simon, H., ‘What Is Behavioral Finance?’, Business, Education and Technology Journal, vol. 1, no. 1, 2000, pp. 1-9
Statman, M., ‘Behavioral Finance vs. Standard Finance, Behavioral Finance and Decision Theory in Investment Management’, Borsa Istanbul Review, vol. 14, no. 1, 1995, pp. 14-22.
Titan, G., ‘The Efficient Hypothesis: Review of Specialized Literature and Empirical Research’, Procedia Economics and Finance, vol. 32, no. 1, 2015, pp. 442-449
Yen, G., and Lee, C., ‘Efficient Market Hypothesis (EMH): Past, Present and Future’, Review of Pacific Basin Financial Markets and Policies, vol. 11, no. 2, 2008, pp. 305–329.
Footnotes
V. Ricciardi and H. Simon, ‘What Is Behavioral Finance?’, Business, Education and Technology Journal, vol. 1, no. 1, 2000, p. 3.
V. Ricciardi and H. Simon, ‘What Is Behavioral Finance?’, Business, Education and Technology Journal, vol. 1, no. 1, 2000, p. 2.
J. Elton and J. Gruber, ‘Modern Portfolio Theory, 1950 to Date’, Journal of Banking & Finance, vol. 2, no. 11-12, 1997, p. 1750.
W. Brown and T. Cliff, ‘Investor Sentiment and Asset Valuation’, The Journal of Business, vol. 78, no. 2, 2005, p. 423.
M. Statman, ‘Behavioral Finance vs. Standard Finance, Behavioral Finance and Decision Theory in Investment Management’, Borsa Istanbul Review, vol. 14, no. 1, 1995, p. 14.
M. Statman, ‘Behavioral Finance vs. Standard Finance, Behavioral Finance and Decision Theory in Investment Management’, Borsa Istanbul Review, vol. 14, no. 1, 1995, p. 16.
M. Statman, ‘Behavioral Finance vs. Standard Finance, Behavioral Finance and Decision Theory in Investment Management’, Borsa Istanbul Review, vol. 14, no. 1, 1995, p 17.
E. Fama, ‘Market Efficiency, Long-Term Returns, and Behavioral Finance’, Journal of Financial Economics, vol. 49, no. 1, 1998, p. 286.
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A risk factor evaluation process is basically a managerial tool used in project management to keep certain functional areas of project implementation (like financial expenses, technical expertise, and schedule arrangements) in check. In coming up with a viable risk assessment criteria, the following objectives should be factored in to quantify different perils.
The first objective is checking the project cost variables; the second is to determine the variability of the project schedule and lastly, the third objective is risk assessment. This is done with the determination of the business risk or the project viability in mind because this objective is the ultimate goal of the entire risk management process.
Many researchers and project managers have often used a number of methodologies in risk assessment. Some of the most conventional methods used include the contingency evaluation approach, computer simulation programs and the program evaluation and review techniques (PERT).
These methods have been traditionally used to control identified project risks and generally, to maintain the quality of projects. To ensure the efficiency of these methods, it has been established that the above tools must be used in a continuous manner (Niels 2).
These statistics abound, this report seeks to carry out a risk assessment project for a commercial property to be developed in downtown Toronto by GLM Realtors. Major studies have already been carried out on the feasibility of the project and it has been established that the project is going to be successful after its completion. Considering the fact that the proper groundwork for the project has been covered, this report will undertake a risk assessment identification process with particular emphasis on how such risks ought to be managed.
Identification of Risk Factors
Unrealistic Schedules and Budgets
Unrealistic schedules and budgets can ultimately bring an entire project to a halt, considering budgets and schedules are the major blueprints to the implementation of project plans (Niels 2). Budgets essentially design the costs requirements for each facet of the project implementation process and if it is overestimated or underestimated; the project design and its antecedents may essentially be ineffective.
Unrealistic schedules also imply that there is minimal likelihood that the project will be completed in time (because from project scheduling, project activities are able to be properly coordinated and carried out within the right time) (Niels 3).
Continuing Stream of Requirement Changes
Requirement changes may significantly hamper efforts to undertake the project in due time and within the precise cost allocation because varied requirements potentially mean that there will be varied costs and varied time requirements for the accomplishment of given project tasks (Niels 4).
Requirement changes are however not distinctly odd because most projects tend to accommodate one or two requirement changes, but the problem with requirement changes is observed when they occur frequently (Niels 4). This is likely to be a major problem in the overall completion of the project, if it is not effectively checked.
Shortfalls in Performed Tasks
Many project managers have often encountered the problem of dealing with poorly performed tasks from any quarter of the project team (Niels 5). This risk basically outlines the danger of having to deal with the problem of a shortfall in performed tasks because the danger in such a risk is that poor project performance can come from any quarter of the project (Niels 5). The consequence of such a risk can often be evidenced in a number of functional areas across the board (Niels 5).
Strained Technical Architecture
Strained technical architecture is a common project risk especially if project requirements are not effectively considered in the project plan. Strained technical architecture often occurs when there are no facilitative technological requirements to coordinate the entire project.
This is often evidenced in many projects that rely on heavy IT skills but even the GLM Realtor project is going to significantly depend on such requirements (because a number of its functional areas like inventory systems still rely on such architecture) (Niels 6). The strained technical architecture can be evidenced in certain functional areas such as network coordination, communications with suppliers and communications with other external agents (among other significant functional areas) (Niels 6).
Insufficient Planning
Insufficient planning is also another possible risk in the project implementation process, in the sense that, certain functional areas of the project implementation project may not be included in the project blueprint (Niels 8). This becomes a sensitive risk because there will be no clear framework of the way such omitted functional areas are to be treated.
This may totally distort the overall coordination of the project functional areas, in addition to causing a lot of time wastage because team members would break from their duties to figure out the correct procedures to be followed in undertaking the omitted project functional areas (Niels 8).
Scope Creep and Gold Plating
Scope creep and gold plating is a common project killer in any project design that is not carefully planned to take care of such risks. Shaker explains that:
“Scope creep results from adding new requirements to the scope that are not aligned with the project charter or casually accepting requested changes without conducting a thorough analysis to assess the impact of accepting the change on cost, time, quality, risk, stakeholders, and customer satisfaction” (p. 4).
With regards to Gold plating as a unique risk in this project evaluation, Shaker also explains that “Gold Plating is the other side of the coin whereby the project manager will try to pamper stakeholders by adding fancy features that have never been included in the original scope” (p. 9). These risks are potentially detrimental to the project considering they affect the overall coordination of the project functions and the ultimate approval of the project by the client.
How to Handle Identified Risks
Scope Creep and Gold Plating
Scope creep and gold plating usually occur when projects are delineated or insufficiently strict, such that, the project takes a life of its own (Project Smart 1). It is therefore important for the project to be carefully designed in a strict manner so that any chances of scope creep occurring are sufficiently squashed.
Also as observed above, chances of delineation should be reduced in the general formulation and implementation of the project design so that instances of scope creep and gold plating are equally avoided. In another regard, research studies done to investigate the occurrence of scope creep and Gold creep (cited in Project Smart 9) have noted that the two often occur if there is weak project requirements and a vague description of the project outline; right from the onset of the project development plan.
The same studies have also concluded that scope creep and gold plating often occur because all stakeholders are not included in the implementation of the project (Project Smart 9).
These two variables therefore need to be carefully factored into the overall development of the project blueprint so that scope creep and gold plating is effectively eliminated. In other words, the project requirements should be carefully articulated so that weak areas are avoided in determining the same. Finally, all stakeholders need to be constantly consulted at different stages of project implementation.
Insufficient Planning
Insufficient planning can be effectively avoided if project developers “grow a third eye” when formulating the project plan. This means that a comprehensive foresight needs to be included in the project design stage so that all significant facets of the project are incorporated into the planning stage. Considering the fact that chances of human error are unavoidable; it is important that the planning process is not done a by an individual but rather a group.
When planning is done in groups, there is an increased likelihood that all functional areas will be included in the project plan and any possible errors will be detected. Also, it helps to compare the project plan with previous project plans of a similar nature and contrast their functional areas with the company’s design project plan. This will identify any shallowly developed areas in the project plan.
Strained Technical Architecture
Strained technical architecture can be effectively avoided if all the project demands are communicated to the IT department. A lack of proper communication may consequently causes a strain in technical architecture as described in pervious sections of this report.
Considering a strain in technical architecture is partially caused by a lack of synchrony of the IT infrastructure and the practical demands of the project; it is important to engage the internal IT department (of the organization) and avoid instances of outsourcing such functions to third parties.
This element is important because third-party IT departments may fail to know the project demands of the organization when designing the IT infrastructure. It is therefore important that an internal IT department carry out the given task because they are well versed with the company’s project demands (and therefore they can incorporate such demands when designing the IT infrastructure).
Shortfalls in Performed Tasks
A shortfall in performed tasks may arise from a number of factors defined by employee dynamics. Similarly, these are the factors that affect employee output in any given organization; let alone a given project. Improving performance tasks therefore incorporates a number of human resource strategies that can be effectively employed to improve employee morale.
This will incorporate an introduction of incentives to given team members, whether in monetary compensation, or through human commendation. However, if this fails to work, a more radical approach should be employed. In particular, employees required to carry out given tasks should be required to sign performance contracts that will ensure guaranteed performance; otherwise, compensation will not be given.
Continuing Stream of Requirement Changes
A continuing stream of requirement changes can be avoided through having a clear picture of the project requirements. To ensure a clear picture is obtained in designing the project plan (and in ensuring the project has a sustainability power) it is important to engage more experienced personnel; preferably, those who have had significant experiences with such kind of projects in the past.
Alternatively, the company can consult experts who have more knowledge in the project requirements of the company. This will avoid instances of requirement changes, which are often synonymous with inexperienced project managers.
Unrealistic Schedules and Budgets
The problem of unrealistic budgets and schedules often occurs because of a bottom-top approach to project design development (Harkins 5). This often occurs because lower level employees lack the required foresight to detect any instances of impracticalities. To avoid this inherent risk in project management, it is important for a top-bottom approach to be employed in designing the project blueprint.
However, this does not mean that lower level employees should not be consulted at all (because they should). However, between the two categories of employees, managers often have the bigger picture. Moreover, it is management’s role to increase more resources like time, money and the likes, in case there may be a need to do so.
Conclusion
Risk management in project management is an important element in the effective running of project tasks. In carrying out the GML Realtors’ project, this report identifies the most important risks that need to be covered in ensuring the project runs without any hitches.
Most of the risks identified in this report are risks that are more detrimental to the overall running of the project tasks because they have the potential of touching virtually all areas of the project tasks. The risks identified are also quite general, in the sense that, most project managers can apply them and effectively realize commendable results. This report therefore comprehensively identifies specific project risks for GML Realtors.
Works Cited
Harkins, Susan. Nontraditional Cures for Keeping a Project on Schedule and On Budget. 2009. Web.
Safety of warehouses in the United States is regulated by the Occupational Safety and Health Administration (OSHA), as provided for under the Occupational Safety and Health Act which was legislated by the Congress and signed into law in the year 1970. Safety of the warehouse should, however, not be viewed as just meeting the minimum legal requirements but as an obligation to prevent occupational health risks, illnesses, injuries and even deaths.
Yet, most industrial, commercial as well as retail facility warehouses still fail to promote safety due to insufficient time, inadequate resources, or simply because of unwillingness to comply with the moral requirements. The potential warehouse risks that have been identified in the assessment and which have also been cited by OSHA as the most common include risks associated with fire, general housekeeping including floors, chemical safety, noise, material handling equipments and fork lifts.
Fire is perhaps the most challenging and potentially most devastating of all warehouse safety risks. It calls for cautious safety plans such as proper warehouse fire safety design, installing in-rack fire extinguishers and adoption of sufficient fire prevention practices. “Catastrophic fires can easily be prevented or minimized by investing in competent fire expertise” in the daily operation of the warehouse (Roughton 38). It is important to redesign the warehouse to improve its accessibility, to provide fire walls, smoke and heat removals, so as correspond to the standards as stipulated in the Fire and Inspections Code.
A number of incidents and accidents in the warehouse can also be mitigated easily through good house keeping. Basic general house keeping practices such as making sure that the floor is free of dents, pits or pot-holes are essential to a safe warehouse. Slippery, loose and damaged floors that pose tripping hazard should be repaired forthwith. Working tools, cords, wires and other items not in use should also not be allowed to scatter on the floor, but should be stacked properly in a secure place.
The presence of chemicals in the warehouse also poses a very serious safety risk. Other common warehouse liquid chemicals such as aerosols and oxidizers are explosively flammable and should therefore be kept away from open flames. On the other hand, chemicals that form part of the warehouse inventory should be handled with great care and should always be stored as prescribed by the manufacturer or as per the recommendations of the Fire Code.
Warehouse operators should also be “properly educated about the available chemicals and should have adequate knowledge on their usage”, appropriate handling requirements and recommended first aid procedures (Ladou 46). Again, regular employee education programs should incorporate aspects of safety and should also integrate training on fire fighting and evacuation procedures.
Forklifts and other material handling equipment are very crucial for moving heavy loads in the warehouse. Yet, if not used properly, these important equipments can become equally hazardous. Therefore, only properly trained, competent and licensed persons should be allowed to operate mechanical forklifts and other automated equipment.
Apart from delineating aisles, door ways and dock areas, it is also important to prohibit walking on pallets. It is also important to make sure that all employees are knowledgeable in handling equipment, particularly to stop machinery in case of an emergency.
It is always good to keep in mind that apart from preventing ugly incidents, a safe warehouse reduces damage of equipment as well as inventory. “A safe warehouse also minimizes loss of fixtures, saves on costs” and improves overall productivity (Nagurney 21).
Works Cited
Ladou, Joseph. Current Occupational and Environmental Medicine. Toronto: McGraw- Hill Professional, 2006. Print.
Nagurney, Anna: Supply Chain Network Economics: Dynamics of Flow. New York: Edward Elgar Publishing, 2006. Print.
Roughton, James. Developing an Effective Safety Culture: A Leadership Approach. London: Butterworth-Heinemann, 2002.Print.