The Economics of Cultural Heritage:

1. Cultural Heritage and Sustainable Development An Educator’s Handbook MODULE 1 Building a Common Language The Economics of Cultural Heritage: Basic concepts and definitions of heritage as economic capital SESSION 3 The Economics of Cultural Heritage: Basic concepts and definitions of heritage as economic capital This presentation is part of the InHeriT project: This project has been funded with support from the European Commission. This publication reflects the views only of the authors, and the Commission cannot be held responsible for any use, which may be made of the information contained therein. ERASMUS+ KA2 STRATEGIC PARTNERSHIP ADULT EDUCATION PROJECT NO. 2015-1-EL01-KA204-014085 Prepared by: Georgios Mergos, Professor Emeritus, Division of Development and International Economics, Department of Economics, National and Kapodistrian University of Athens

2. Protection and Sharing T.1 THE CHALLENGE : BALANCE PROTECTION AND SHARING

3. Protection and Sharing T.1 What Is Cultural Heritage?

4. Protection and Sharing T.1 UNESCO has declared heritage as the fourth pillar of sustainable development

5. Protection and Sharing T.1 Balance preservation and change; protection and sharing Cultural heritage is important for sustainable development and for human well-being for the present and for future generations, at national, regional, and local level. Of course, cultural heritage assets need to be protected, but, by whom and for whom? Lack of funding for preservation leads to monument destruction and loss for society for ever

6. Protection and Sharing T.1 The choice: When is balance betweenprotection and sharing achieved?

7. Protection and Sharing T.1 What does it means to balance protection and sharing for our approach to cultural heritage? • Heritage is no longer strictly a set of objects, with the sole purpose their preservation for historical, ethical, and archaeological reasons, but more broadly an integral functional part of society and the economy of a country or a place, including political models, economic prosperity, social cohesion, and cultural diversity. • This implies a shift of thinking in three directions in the way cultural heritage assets are approached: • shift from monuments to people, • shift from objects to functions, and • shift from maintenance of monuments to sustainable use.

8. Protection and Sharing T.1 Participation activity 1: Protection and sharing • When is protection and sharing of cultural heritage of a region, city or place achieved. • Assume that you are a decision maker who has to decide how to manage the cultural heritage assets of the region. • Where is cultural heritage best protected? • Where is cultural heritage best shared? • Where does cultural heritage contribute most to local wellbeing?

9. Protection and Sharing T.1 When is balance betweenprotection and sharing achieved? Emphasis on protection Emphasis on sharing

10. Cultural Economics T.2 CULTURAL ECONOMICS BASIC CONCEPTS AND DEFINITIONS

11. Cultural Economics T.2 What questions does economics of cultural heritage aim to answer ? • Is cultural heritage important for the economic development of a city, region or country? • Could one consider heritage assets as social and economic capital? • How do economists define price and value and how do they measure the economic value that an individual (or the community) receives from cultural heritage assets? • How do economists measure the contribution of heritage assets to the economic and social well being of a region or country? • How do economists measure the employment and income generation from an investment in a heritage asset? • What economic methods do they use to put priorities between alternative investment projects or policy measures?

12. Cultural Economics T.2 Cultural heritage and sustainable local and regional development • Achieving sustainable development requires: • Make optimal use of available environmental resources achieving balance between protection and use • Respect cultural authenticity of the community, conserve built and living cultural heritage and traditional values, and contribute to inter-cultural understanding. • Contributing to viable, long-term economic growth, employment, and income. • Ensuring social cohesion providing socio-economic benefits to all stakeholders, fairly distributed, including employment and income opportunities and social services to host communities, thus contributing to poverty alleviation.

13. Cultural Economics T.2 Can we consider cultural heritage assets as social and economic capital? • Cultural heritage, like the environment, represents for economy and society precious public capital with strong development potential that needs to be preserved for future use. • Capital is a factor of production, along with land and labour. In a wider sense, a “capital asset” is any good that can be used in the economic process, thus generating income and employment. • Cultural heritage items or sites are considered as capital assets, since they can enter the production process attracting visitors, encouraging entrepreneurship, contributing to the branding of a place, increasing social well being by generating income and employment at local, regional or national level.

14. Cultural Economics T.2 Why we need to measure the economic value that an individual (or the community) receives from cultural heritage assets and how do we do it? • Evaluation is the necessary point of departure for public policy analysis, either for selecting public investment projects or for selecting public policy measures. • Value reflects the “willingness to pay” of the potential consumer and the importance that the individual puts on the asset. • Sources of value lie both in the desire to use a good or a service or to hold it for other reasons (“non-use values”). • Public policy, either investment projects or policy measures, increase the stream of benefits, market and non-market, to a city, region or a country.

15. Cultural Economics T.2 Cultural heritage provides goods and services to society that are non-marketed, hence they have no price, but have value • Cultural heritage, like the environment, consists of public capital assets that provide to society a stream of services, that are non-marketed but which can be quantified and valued. • For selecting heritage projects and public policy measures we need to understand how the concepts and methods for valuing cultural heritage goods and services are defined and used. • Need to understand the economic characteristics of goods and services provided by cultural heritage assets, thus to know how to estimate benefits and costs of projects in the sector of cultural heritage.

16. Cultural Economics T.2 Why are price and value different ? • The paradox of value (also known as the diamond–water paradox) is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market. • The philosopher Adam Smith is often considered to be the classic presenter of this paradox, although it had already appeared as early as Plato's Euthydemus.[1]Nicolaus Copernicus,[2]John Locke, John Law[3] and others had previously tried to explain the disparity. • Source: https://en.wikipedia.org/wiki/Paradox_of_value • https://www.youtube.com/watch?v=e7S8jWh6AEs

17. Cultural Economics T.2 Are Cultural Heritage goods public goods? • Cultural heritage is not a private good, it is a public good. A good that generates values for a local society, such as an archaeological site or a cultural district, is considered a local public good. • A good that generates values in a global dimension, in the sense that it overcomes geographic barriers, generating values for people who live in distant countries, then it is considered a global public good • Economists define a pure public good as having two properties: non-excludability and no non-rivalry in consumption • Most cultural heritage goods show mostly public good characteristics

18. Cultural Economics T.2 Economic value and willingness to pay • Willingness to Pay (WTP). The economic value to an individual of an extra unit of good or service is the max amount of money he is willing to pay for it irrespective of whether a market exists for this good or service. • WTP provides a theoretical price, dependent on the preferences of the consumer, or on the technology, that assigns a subjective value to a given quantity (taken as a unit) of an economic (public or private) good. • WTP related to the concept of a demand function, or rather of a correspondence between quantities consumed and prices. • The WTP is the principal source of estimation for the social benefit of the production of the good under consideration, if a market for the good in question does not exist or its price is distorted,

19. Cultural Economics T.2 Categories of economic value of cultural heritage goods • Total economic value of cultural heritage goods is usually decomposed into a number of categories of value. The definitions follow the tradition of environmental economics and generally include • (i) extractive, or consumptive, use value; • (ii) non-extractive use value; and • (iii) non-use value. • The former two are generally referred to as “use value”. Each is further subdivided into additional categories. • By disaggregating the value of a cultural heritage site into various components, the problem of value generally becomes far more intelligible and tractable for policy purposes.

20. Cultural Economics T.2 Participation activity 2The economic value of cultural heritage • When is contribution of heritage assets to local economic development stronger ? • When is the employment potential stronger? • Is attracting visitors good for the monuments? • Is attracting visitors good for the society? • Is there a damage to the cultural value of the monuments? If yes, when and of what kind? • When is preservation of the monuments for future generations better served?

21. Cultural Economics T.2 When is contribution of heritage assets to local economic development stronger ?

22. Economic Methods T.3 ECONOMIC METHODS AND TOOLS USED TO ASSESS THE ECONOMIC DEVELOPMENT POTENTIAL OF CULTURAL HERITAGE

23. Economic Methods T.3 A summary of global experience • Balance conservation with an acceptable degree of change. Stakeholders should weigh the different values and trade-offs between conservation and development, identifying the acceptable level of change and the extent of adaptive reuse. • Promote a blend of regulation and incentives. Measures to conserve historic city cores and heritage assets are not limited to rules and regulation that restrict activities. Incentives are also essential for achieving “integrated conservation.” • Ensure a dialogue between public and private sectors. Heritage is a pub- lic good and the economic justification for public sector investment is well established. But, it is unreasonable to expect the public sector to be the sole investor, and the solution is to have a combination of public and private investment, with a balance between the two, varying depending on the project scheme and context.

24. Economic Methods T.3 What economic tools/approaches we should use to study the economic development potential of cultural heritage? • Economists approach cultural heritage development: • As an economic sector separately using resources, generating products, and creating jobs and profits, thus applying the usual economic sector analysis; • As a project or as a policy measure encouraging development activities, thus having an impact on employment, income and social cohesion, using social cost benefit analysis; • And, as a development strategy through branding of a place, city, or region, thus using strategy analysis.

25. Economic Methods T.3 Foundations of the Economic Analysis of Public Policy • Public debate over an investment or a policy measure: in favor or against • The debate is usually political and sometimes is based on power and influence. Such a debate is not based on reason, is not rational economic and social behavior, and is not an orderly debate but with confrontation and violence • Often the debate is using the WRONG tools. Need to use rationality and consistency in the evaluation of the economic and social impact of projects and of policy options. • The proper tool for the evaluation of public policy options is SOCIO-ECONOMIC ANALYSIS

26. Economic Methods T.3 Economic Analysis of Public Policy Measures “Whenever people decide whether the advantages of a particular action are likely to outweigh its drawbacks, they engage in a form of benefit-cost analysis (BCA). In the public debate, formal CBA is a sometimes controversial technique for thoroughly and consistently evaluating the pros and cons associated with prospective investment actions or with the undertaking or the choice among public investments or policy measures”

27. Economic Methods T.3 Estimation of costs and benefits It is easier when ….the project involves materials for which there are market prices. For example: If a road project involve 3 tons of asphalt, a 5-person crew and 16 hours of work, each of these resources can be valued at market prices. It is difficult when… the project involves materials for which there isn’t a ready market price. For example: If the previously mentioned road project is going to save an average of 30 minutes of travel time for 20,000 commuters. How we value this time saved for the individual and for the economy? Could we use the wage rate to calculate value of time saved? Does using the wage rate give the same answer as using the “willingness to pay?”

28. Economic Methods T.3 The evaluation of costs and benefits for measuring the impact of a project or an activity on the economy is difficult … When costs and benefits are goods and services without a market and therefore without a market price

29. Economic Methods T.3 Feasibility and sustainability:To be examined for any public intervention • Economic Feasibility. The impact of the policy or investment on the well-being of society, on long-term economic growth, on employment, and on incomes. Also, on social cohesion and on poverty alleviation. • Financial Sustainability. The capacity to ensure project or policy operation without an increasing financial burden on already stringent public financial resources. This means the capacity to generate revenues that at a minimum meet operational and maintenance expenditures.

30. Economic Methods T.3 Participation activity 3Public perception of the development potential of cultural heritage • What does ‘cultural heritage’ mean to local people?” • How do people perceive the role that heritage assets can play in generating sustainable development at the local level?”, • Are community expectations on the role of heritage assets in local development being met? • What is the contribution to the identity of place? • How should decision makers choose among alternative investments when they have budget constraints

31. Economic Methods T.3 Public perception of the development potential of cultural heritage assets