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Economics of Childbearing and Pronatalist Policies
The brief opens a series of FROGEE Policy Briefs aimed at providing overviews and the popularization of economic research related to gender equality issues. The current brief introduces the general rationale behind fertility decisions and policy interventions. It summarizes the economic literature on the effects of different types of policy interventions on enhancing childbearing. The brief is followed by country reports presenting country-specific contexts, various policy challenges, implemented reforms and a discussion of other policy options covering childbearing.
Country Reports
| Belarus country report (EN) | Belarussian language version (BY) |
| Georgia country report (EN) | Georgian language version (GE) |
| Latvia country report (EN) | Latvian language version (LV) |
| Poland country report (EN) | Polish language version (PL) |
| Russia country report (EN) | Russian language version (RU) |
| Ukraine country report (EN) | Ukrainian language version (UA) |
Introduction to Economics of Childbearing
From an economic point of view, there are several potential reasons why public policy interventions concerning fertility may be beneficial for society and why – when left without support – decisions of parents might be suboptimal from the social point of view. In order to better understand these, one must first consider the intuition behind the theoretical economic approach to family relations in general and to fertility decisions in particular, much of which draws on the seminal contributions of Gary Becker (Becker & Lewis 1973; Becker & Tomes 1976).
In economics, goods are any real objects that satisfy people’s needs and typically come at some cost. Becker’s approach to the family extends this reasoning to human relations and presents decisions on partnership, divorce and family formation in the context of ‘economic’ trade-offs between costs and benefits. Since having children is associated with considerable costs (both in terms of money and time) as well as gains in a number of dimensions, the decision to have a child can be formulated as an economic decision. However, viewed from this perspective, the choice to have children turns out to be special in several dimensions.
Negative Income-Fertility Relationship and Low Fertility
One of the most robust observations regarding fertility is that – in contrast to many other types of expenditures – there is a strong negative association between earnings and the number of children (Figure 1). This negative income-fertility relationship has been observed in every developed nation, both when examined over time in relation to income growth and when looked at in a cross- country comparisons (see Jones et al. 2011). Figure 2 shows this relationship in a broad macro perspective: historically, as the world’s per capita GDP has grown fertility rates have tended to decline.
There are several potential drivers behind the above relationship. Two of the most established explanations are opportunity cost and quality- quantity trade-off, and they relate to several special features of the costs and benefits of having a child and the very nature of the family.
Figure 1. The relationship between total fertility rate and GDP per capita
Source: World Bank.
Figure 2. Trends in total fertility rate by region, 1950-2050.
Source: World Bank.
Money and Time Costs
A rather unique property of family formation is that costs related to childbearing are expressed both in terms of money and time. Because of the latter, high-earning parents face higher opportunity costs of the time necessary to raise a child. This might not only contribute to the aforementioned negative fertility-income relationship but has also been shown as one of the main reasons behind low fertility in developed countries. One of the most common policies used to increase fertility is money transfers which come in the form of family allowances, baby bonuses or tax credits. According to the UN Population Facts, at least 96% of developed nations have this type of policy. OECD countries, on average, spend around 4% of their GDP on this kind of assistance and the average effect of such interventions has been estimated to increase the total fertility rate (TFR) by 0.08 – 0.35 (Luci-Greulich & Thevenon 2011). The main reason why one needs to spend a lot of money to gain a relatively small increase in TFR is that low fertility is a «first world» problem, i.e. most of the targeted individuals are not bounded by the monetary costs of a child.
Policies that take the time-cost of children into account promise a higher potential effect in developed countries. For example, Raute (2019) uses German data to find an 18% increase in fertility among women with earnings above the median after the introduction of earnings- dependent paid maternity leave policy.
Quality — Quantity Trade-off
In economics, the idea that education, health and other factors increase human productivity and potential is conceptualized in a notion of “quality of human capital”. As the return on investment in human capital rises, parents may choose to have fewer children and focus their time and financial ‘investments’ in their quality. Some of the most convincing evidence on the strength of the quality- quantity trade-off was revealed using the data on twin births and on family sizes by Hanushek (1992) and Li et al. (2008).
Cultural Norms
Relatively recent research on the determinants of fertility has documented the substantial and persistent influence of cultural norms on fertility. This is reflected in the variation of fertility levels within countries among people of similar financial status, but coming from different cultural backgrounds. For example fertility levels among immigrants in the developed world tend to resemble those in their countries of origin (see, e.g. Beach & Hanlon 2019, Families and Societies 2015), and while cultural norms change and can also be affected by the policy environment (Bassi & Rasul 2017), there tends to be a substantial degree of time-dependence in how norms evolve and adjust.
Internal Costs and External Benefits
The last special feature of childbearing from an economic perspective is that although most of the costs in terms of time and money related to children are borne by parents, a large portion of future economic gains of an additional person is external to the family and benefits the wider society. When an adult enters the labor force, begins to produce goods and services for other people and pays taxes to the government, his or her parents would not be able to capture any significant portion of these benefits (Schoonbroodt & Tertilt 2014). From an economic perspective this suggests that the social value of children is higher than the private (parental) one. This situation is one of the main arguments for public policy intervention with regard to fertility. Whenever social benefits outweigh private benefits, subsidizing private choices may result in overall welfare improvements.
Fertility Enhancing Policies: What Works and What Doesn’t?
From the perspective of encouraging fertility, there is a wide range of options available to policymakers. On the one hand paid parental leave and subsidized childcare can mitigate the conflict between career and parenthood, while the introduction of paternal leave attempts at balancing out the time out of work between the two parents and at changing their allocation of time to childcare. On the other hand, child-related money transfers are aimed at reducing financial constraints on families who limit or postpone fertility because of their financial status.
In practice it is often hard to measure the effects of particular fertility-enhancing policies due to the lack of data and an absence of specific policy implementation designs, which would allow policy evaluation. However, there is evidence that fertility-enhancing policies can be successful in stimulating fertility. Luci-Greulich & Thevenon (2011) find that the most effective cash transfers are those targeted at the youngest children (aged 0-3), while those that are paid out around the birth appear to be less efficient. A number of studies prove the positive impact of transfers to families with children on fertility rates (d’Addio & d’Ercole 2005, Ermisch 1998, Milligan 2005, Whittington 1992, Whittington et al. 1990). Developments over the recent decades in Sweden are often used as an example of a successful family focused package, although given the multitude of different schemes running at the same time it is difficult to disentangle their specific implications (see Björklund 2006 for the evidence from Swedish policy reforms and Luci-Greulich & Thévenon 2013 for a broader overview of the existing research on fertility-enhancing policies).
Kalwij (2010) and Raute (2019) focus their attention on policies which alleviate career — parenthood trade-offs. Raute (2019) finds especially large effects of the adequate compensation of forgone earnings of high earning women (the author also contributes a comprehensive literature review of studies on the effects of alleviating the opportunity cost of children). Doepke and Kindermann (2016) complement these findings by providing evidence that fertility is especially responsive to policies that specifically reduce the childcare burden for women.
The evidence on the effects on fertility of another popular type of family policy, maternity leave, is less clear. Since most of the developed nations nowadays do have paid maternity leave, it is hard to measure the effect of its availability on the decision to have children. However, different durations of maternity leave across countries and changes in those durations allow economists to draw some conclusions. Although some researchers do find a positive effect of maternity leave duration (Adserà 2004), others fail to support this conclusion using different sources of data and experimental designs (d’Addio and d’Ercole 2005, Olivetti and Petrongolo 2017).
Concluding Remarks
A better understanding of the economic approach towards family formation and fertility can be helpful in thinking of a re-design of family-focused policy packages. It is beyond the scope of this brief to provide a full overview of the extensive body of economics research on this topic, but the evidence tends to suggest that a set of successful policy tools to encourage fertility is available. The basic concepts presented here can hopefully serve as background to a systematic and evidence-based discussion on public policy in this field. It should be noted that since parenthood is one of the most important choices in the life of many people, it is inherently related to many other individual choices and outcomes. Therefore, any policy aimed at increasing fertility will inevitably affect other important dimensions such as income inequality, taxation, gender equality, health and child development, among others. This means that any public intervention should always carefully consider its potential positive and negative side effects.
About FROGEE Policy Briefs
FROGEE Policy Briefs is a special series aimed at providing overviews and the popularization of economic research related to gender equality issues. Debates around policies related to gender equality are often highly politicized. We believe that using arguments derived from the most up to date research-based knowledge would help us build a more fruitful discussion of policy proposals and in the end achieve better outcomes.
The aim of the briefs is to improve the understanding of research-based arguments and their implications, by covering the key theories and the most important findings in areas of special interest to the current debate. The briefs start with short general overviews of a given theme, which are followed by a presentation of country-specific contexts, specific policy challenges, implemented reforms and a discussion of other policy options.
Income Inequality in Transition. New Results for Poland Combining Survey and Tax Return Data
We re-examine the evolution of income inequality in Poland in the process of post-socialist transition focusing on the previously neglected problem of under-coverage of top incomes in household survey data. Multiple statistical techniques (Pareto imputation, survey reweighting, and microsimulation methods) are applied to combined household survey and tax return data in order to obtain top-corrected inequality estimates. We find that the top-corrected Gini coefficient grew in Poland by 14-26% more compared to the unadjusted survey-based estimates. This implies that over the last three decades Poland has become one of the most unequal European countries among those for which top-corrected inequality estimates exist. The highest-income earners benefited the most during the post-socialist transformation: the annual rate of income growth for the top 5% of the population exceeded 3.5%, while the median income grew on average by about 2.5% per year. This brief summarizes the results presented in Brzezinski et al. (2019).
Introduction
There is a large economic literature documenting income inequality changes experienced by former communist countries during their post-1989 transformations. While in Russia and in many post-Soviet economies, inequality exploded during the transition, Poland is often perceived as a country where inequality grew rather moderately. However, these conclusions may be unreliable as they are based on inequality measures estimated using income data only from household surveys.
Many recent studies show that surveys are plagued by significant under-coverage of top incomes, which leads to a severe downward bias of the inequality estimates. Several approaches have been proposed to correct for this problem. One of them is to combine survey data with income information taken from administrative sources such as tax returns. While top-corrected inequality estimates have been produced for many advanced economies, transition countries received little attention in this context so far.
For Poland, Bukowski and Novokmet (2019) provided series of top income shares estimated using tax data. However, their estimates are constructed for gross (pre-tax) income distributed among tax units. This kind of income concept deviates considerably from the primary measure of the standard of living analysed in income distribution literature, namely disposable equivalized household income defined for the entire population. Estimates based only on tax data are not directly comparable to standard survey-based measures, which makes it difficult to decide which of the two kinds of results are closer to the underlying inequality trends and levels.
In a recent paper (Brzezinski, Myck, Najsztub 2019), we provide the first estimates of top-corrected inequality trends for real equivalized disposable incomes in Poland over the years 1994-2015. These estimates can be readily compared with standard survey-based estimates available from Statistics Poland or from Eurostat. Our analysis re-evaluates distributional consequences of post-socialist transition in Poland.
According to the standard view, the Polish transition to a market economy was an almost unqualified success story. Poland managed to achieve fast and stable economic growth (around 4.3% per year since 1994) that was at the same time broadly inclusive and shared rather equally by various social classes and segments of the income distribution. Survey-based estimates suggest that the Gini index for Poland has not increased significantly since 1989 and reached the average level among the EU countries in 2015. In contrast to the standard view, our top-corrected results show that the inequality of living standards in Poland grew sharply over 1989-2015. The adjusted Gini index grew by 4-8 p.p. to a level that ranks Poland among the most unequal European countries for which comparable estimates exist.
Data and Methods
We use data from two sources. Our survey income data comes from the representative Polish Household Survey (PHBS) conducted annually by Statistics Poland since 1957. We use the PHBS data for 1994-2015 as the pre-1994 surveys do not contain data on individual incomes (required for our microsimulation modelling) and 2015 is the last year for which estimates of tax-based inequality measures are available. We adjust the baseline PHBS survey weights to match the census-based number of males and females by age groups (population weights). We also create a further adjusted set of weights to match the number of PIT payers in each tax bracket according to the Polish tax scale (tax weights).
Our main income variable is real equivalent household disposable (post tax and transfer) income. We obtain it from the Polish microsimulation model SIMPL applied to the PHBS data. The microsimulation model allows us to construct a gross (before PIT and employee SSCs) income distribution among the tax units, which is unavailable in the raw PHBS data. This is crucial as it is the gross income distribution between tax units to which we impute top incomes estimated using tax-based statistics.
Our second data source is the series of tax-based top income shares for Poland taken from Bukowski and Novokmet (2019). To construct top-corrected inequality estimates, we follow the methodological approach of Bartels and Metzing (2019). Using the microsimulation model applied to the PHBS data we obtain the distribution of gross income among tax units (individuals). In the next step, we use data on top income shares to estimate the parameters of a Pareto distribution for gross income distribution in terms of tax units. Then, we replace the top 1% (or 5%) of tax units’ incomes with the incomes implied by the estimated Pareto distribution. The resulting imputed gross distribution is subsequently reweighted using either population or tax weights. After imputing top incomes, we again use the microsimulation approach to compute top-corrected real equivalized household net incomes.
Corrected Income Inequality Trends
Figure 1: The Gini index for Poland, 1994-2015: unadjusted vs top-corrected estimates
Note: Vertical lines show 95% confidence
Figure 1 presents our income inequality estimates in terms of the Gini coefficient. For the period 1994-2005, we present two top-corrected series, which can be considered as lower and upper bound estimates of the “true” Gini. The results for this period are more uncertain as they are affected by the 2004 tax reform in Poland that introduced an optional flat tax for non-agricultural business income, which reduced the marginal tax rate for the highest income taxpayers from 40% to 19%. Research suggests that before the reform the problems of tax evasion and avoidance could have been more pronounced in Poland and some of the top incomes were unreported or under-reported. The upper bound series on Figure 1 corrects for the possible higher tax evasion and avoidance before 2005.
The unadjusted Gini series suggests that income inequality in Poland was rather stable over 1994-2015. On the other hand, our top-corrected series point to a very different story. Until 2005, our two correction procedures show similar inequality trends, but somewhat different levels. After 2005, our corrected series shows systematic and high divergence between unadjusted and top-corrected Ginis ranging from 4 to 8 p.p. The top-corrected Ginis increase in the range from 14 to 26% over 1994-2015. While according to the unadjusted data Poland is only moderately unequal, the comparison of top-corrected estimates shows that in 2015 Poland has higher level of income inequality than even high-inequality EU countries such as Germany, Spain or UK.
We also show that each percentile of the disposable income distribution in Poland saw income increases in absolute terms between 1994 and 2015. This implies that on average the incomes of all social groups increased during the transition to market economy. However, these gains were shared unequally. According to our adjusted estimates, the cumulative growth in real income over 1994-2015 for the top 1% of Poles reached 122-167%, while for the bottom 10% the corresponding number is at most 57%.
Redistribution and Progressivity of the Tax System
We also analyse how our correction procedures affect measures of redistribution and progressivity of direct taxation (income taxes, employees’ mandatory social security contributions, and health insurance). The top-corrected estimates show that the percentage reduction in the Gini index due to social insurance contributions and PIT has fallen from 19.2% in 1999 to 11.6% in 2015.
While the unadjusted series suggests that the progressivity of the Polish system of PIT and social insurance contributions has decreased only mildly over time, the top-corrected series points to a much steeper fall, especially during 2005-2009. Without the top-correction, the progressivity in 2015 is overestimated by 2.3 p.p. (or by 40%). Much of the decline in tax progressivity over 2005-2009 is due to the reduction from three PIT brackets and marginal tax rates to just two brackets and rates (18% and 32%) in 2009. Even in terms of the unadjusted data, Poland ranks in the recent years as the country with the lowest PIT and SICs progressivity in the EU.
Conclusion
Our recent paper on estimating the top-corrected measures of income inequality shows that while Poland was already a relatively unequal country in the early 1990s, it has become one of the most unequal European countries (not including Russia) among those for which comparable estimates exist. The results have important implications for the assessment of the distributional consequences of post-socialist transformations or modernization processes in emerging countries. They indicate that using income tax data and imputation or reweighting techniques to account for the problem of missing top incomes in survey data can significantly alter the conclusions about income inequality levels and trends. More reliable inequality estimates would contribute not only to a better understanding of economic transformation and modernization processes but could also shed some light on recent political turmoil in many transition and emerging countries (such as Turkey, Hungary or Poland). As suggested by some recent research, the growing distributional tensions in emerging countries of Eastern Europe and Central Asia may be associated with more distrust in governments and an increased propensity to vote for radical political parties.
Acknowledgements
The authors gratefully acknowledge the support of the Polish National Science Centre (NCN) through project number: UMO-2017/25/B/HS4/01360. For the full list of acknowledgements see Brzezinski et al. (2019).
References
- Bartels, C., Metzing, M. (2019). An integrated approach for a top-corrected income distribution. The Journal of Economic Inequality, 17(2), 125-143.
- Brzezinski M., Myck M., Najsztub M. (2019), Reevaluating Distributional Consequences of the Transition to Market Economy in Poland: New Results from Combined Household Survey and Tax Return Data. IZA DP No. 12734.
- Bukowski P., Novokmet F. (2019), Between Communism and Capitalism: Long-Term Inequality in Poland, 1892-2015. CEP Discussion Paper No 1628 June 2019.
From Partial to Full Universality: The Family 500+ Programme in Poland and Its Labour Supply Implications
The implementation of the ‘Family 500+’ programme in April 2016 represented a significant shift in public support for families with children in Poland. The programme guaranteed 500 PLN/month (approx. 120 euros) for each second and subsequent child in the family and the same amount for the first child in families with incomes below a specified threshold. As of July 2019, the benefit has been made fully universal for all children aged 0-17, an extension which nearly doubled its total cost and benefited primarily middle and higher income households. We examine the labour market implications of both the initial design and its recent fully universal version. Using the discrete choice labour supply model, we show that the initial Family 500+ benefits generated strong labour supply disincentives and were expected to result in the withdrawal of between 160-200 thousand women from the labour market. The recent removal of the means test is likely to nullify this negative effect, leading to an approximately neutral impact on labour supply. We argue that when spending over 4% of GDP on families with children, it should be possible to design a more comprehensive system of support, which would be more effective in reaching the joint objectives of low child poverty and high female employment combined with higher fertility rates.
Introduction
Following the 2015 parliamentary elections in Poland the ruling Law and Justice Party was quick to fulfill their campaign promise of implementing a generous quasi-universal family support programme. In April 2016, all families began receiving PLN 500 (approx. 120 euros) per month for each second and subsequent child, while households that passed an income means test were granted the same amount for their first or only child. At a cost of nearly PLN 22 billion (5.2 billion euros, approx. 1.1% of GDP) per year, the Family 500+ benefit became the flagship reform of the Law and Justice government’s first term.
With new elections approaching in October this year, the government announced a significant expansion of the programme in May, which made it fully universal. The extended programme is nearly twice as expensive with an additional cost of PLN 18.3 billion (4.3 billion euros) per year, valuing the whole package at over 2% of GDP. This takes the total value of financial support for families with children, including family benefits and child-related tax breaks, to 4% of GDP and it means that as far as family support is concerned, the ruling party has brought Poland from one of the lowest-spending countries in the EU to one of the highest over the course of 4 years.
The initial design of the benefit had a significant impact on childhood poverty in Poland, with an absolute and relative decrease from 9.0 to 4.7 percent and 20.6 to 15.3 percent respectively between 2015 and 2017 (GUS, 2017). While a more targeted design could have made a far greater impact, these changes still reflect a significant improvement in the material situation of families with children. The policy may have also had a modest upward effect on fertility rates in the first years following its implementation, although this is difficult to assess given the parallel roll out of several other fertility-oriented policies and other changes which could have played a role in family decisions. Simultaneously, as argued in the ex-ante analysis by Myck (2016) and ex-post analysis by Magda et al. (2018), these positive outcomes came at the cost of reduced female labour market participation. This reduction primarily affected women with both lower levels of education and living outside of large urban areas (Myck and Trzciński, 2019).
The Family 500+ Reform: Design and Distributional Implications
The initial Family 500+ programme directed funds to 2.7 million families in addition to any already existing financial support and has been excluded from other means-tested support instruments. Since families that had a net income of less than PLN 800 per month per person could receive the benefit for the first or only child, the policy had a distinct redistributive element and meant that the bottom half of the income distribution received nearly 60% of the funds. However, the design was characterised by clear labour market disincentive effects, which were particularly strong for second earners and single parents.
In a one-child household (53.3 percent of families with children, GUS, 2016) with the first earner bringing in an income equivalent to 125% of the national minimum wage, the second earner needed only to earn PLN 940 per month in order for the family to cross the means test threshold and stop receiving the Family 500+ benefits. The benefit design is presented in Figure 1 in the form of budget constraints for the first earner (Case A) and the second earner (Case B) in a couple with one child. In the latter case the first earner is assumed to receive earnings equivalent to 125% of the minimum wage. The disincentive effects of the means test are clear in both cases and we can see that for the second earner, the benefit withdrawal comes at a very low income level – far below the national minimum wage of PLN 2100 per month. The “point withdrawal” of the benefit implied that it was enough for the family to marginally exceed the means test threshold for it to completely lose eligibility for the Family 500+ support for the first child.
The expansion of the Family 500+ programme, which came into effect in July 2019, eliminated the means-tested threshold thus making the policy fully universal. It came, however, at the cost of the redistributive character of the programme. Over 32% of the additional expenditure resulting from the universal character of the policy has been passed on to the top quintile of the income distribution and in its new version, the bottom half of households only receive 45 percent of all spending. The expansion of the programme is thus unlikely to further reduce child poverty significantly and – since its beneficiaries are mainly families with middle and high incomes – it is not expected to bring noticeable changes in fertility levels.
Figure 1: Family budget constraints for the first and second earner
Source: Authors’ calculations using the SIMPL microsimulation model.
Partial and Full Universality of the Family 500+ Programme and the Implications on Female Labour Supply
With the use of modelling tools to simulate the labour market response to changes in financial incentives to work, we have updated the initial simulations of Myck (2016) using the latest pre-reform data and examined the simulated labour supply decisions to the expanded fully universal programme, as if it were implemented instead of the initial version of the benefit. The analysis was conducted with data from the 2015 Polish Household Budget Survey, a detailed incomes and expenditure survey conducted annually by the Polish Central Statistical Office.
Table 1: Effects of the initial and the expanded Family 500+ programme on female labour supply
Results of the simulations are presented in Table 1. Simulations were conducted separately for single women, and under two scenarios for women in couples assuming that both partners adjust their behaviour (Model A) and that the labour market position of the male partner is unchanged (Model B). The simulated labour supply response to the initial reform confirms the magnitude of earlier results and suggests an equilibrium effect of 160-200 thousand women leaving the labour force. This is also consistent with results presented by Magda et al. (2018), who found that female labour market participation decreased by approx. 100 thousand women after the policy had been in place for one year.
However, as we can see in the right-hand part of Table 1, the response to a fully universal design – modelled as if it was introduced in 2016 instead of the means-tested version – is essentially neutral. For single mothers the reduction is only about 3000, while for women in couples, the model suggests a small positive reaction under the Model A specification and a small negative one under Model B. In total, the universal design of Family 500+ benefits can be described as labour supply neutral. Since the reaction has been modelled on pre-reform data, and because some women have already withdrawn from the labour market after the introduction of the initial benefit design in 2016, the remaining uncertainty is whether the new set of incentives will motivate these mothers sufficiently to return to work.
Conclusion
The introduction and subsequent expansion, of the Family 500+ programme has substantially increased financial resources of families with children in Poland. The policy rollout of the initial, partially universal programme has seen substantial changes in the level of child poverty in Poland and may have contributed to a modest increase in fertility in the initial years following the introduction of the reform. The means-tested design of the benefit, however, incentivised a significant number of women to leave the labour market. One year after the introduction of the policy approximately 100,000 women were estimated to have left the labour market (Magda et al. 2018), while the equilibrium effect of the policy suggested long-run implications of over 200,000 (Myck, 2016). The updated simulation results using the latest available data suggest slightly lower, though still substantial equilibrium implications of the initial partially universal design of the Family 500+ programme in the range of between 160,000-200,000. However, as we show in our latest analysis, these labour market consequences could be reversed after the expansion of the programme to a fully universal set-up. The simulated effects of the universal design of the programme, which has been in place in Poland since July 2019, modelled as if it was implemented instead of the initial means-tested version, are broadly neutral for female labour supply. The only question is how likely the mothers who left employment in response to the initial policy will return to work given the new set of financial incentives. Considering these positive implications of the fully universal programme, one has to bear in mind that the extended programme, which will cost over PLN 40 bn per year (approx. 2% of GDP), is unlikely to contribute to the other key objectives set by the government, namely reducing child poverty and increasing fertility. Including the Family 500+ programme, the Polish government currently spends about 4% of GDP on direct financial support for families with children. Given the design of the policies which make up this family package, it seems that the joint objectives of higher fertility, reduced poverty and higher female employment could be achieved more effectively under a reformed structure of support that would be better targeted at poorer households, include specific employment incentives, and incorporate support for childcare, early education and long-term care.
Acknowledgements
This brief summarizes the results presented in Myck and Trzciński (2019). The authors gratefully acknowledge the support of the Swedish International Development Cooperation Agency, Sida, through the FROGEE project. For the full list of acknowledgements see Myck and Trzciński (2019).
References
- Goraus, K. and G. Inchauste (2016), “The Distributional Impact of Taxes and Transfers in Poland”, Policy Research Working Paper 7787, World Bank.
- GUS (2016), “Działania Prorodzinne w Latach 2010-2015”, Główny Urząd Statystyczny – Polish Central Statistical Office, Warsaw.
- GUS (2017), “Zasięg ubóstwa ekonomicznego w Polsce w 2017r.”, Główny Urząd Statystyczny – Polish Central Statistical Office, Warsaw.
- Magda, I., A. Kiełczewska, and N. Brandt (2018), “The Effects of Large Universal Child Benefits on Female Labour Supply”, IZA Discussion Paper No. 11652, IZA-Bonn.
- Myck, M. (2016), “Estimating Labour Supply Response to the Introduction of the Family 500+ Programme”, Working Paper 1/2016, CenEA. Jacobson, L., LaLonde, R. and Sullivan, D. (1993). “Earnings losses of displaced workers”, American Economic Review, 83, pp. 685–709.
- Myck, M. and Trzciński, K. (2019) “From Partial to Full Universality: The Family 500+ Programme in Poland and its Labor Supply Implications”, Ifo DICE report 3 / 2019.
Can Loose Macroeconomic Policies Secure a ‘Growth Injection’ for Belarus?
After a relatively long period of macroeconomic stabilization, Belarus faces the threat of a purposeful deviation from it. However, today there is no room for a ‘growth injection’ by means of monetary policy. Moreover, Belarus still suffers from a problem of unanchored inflation expectations. This prevents monetary policy from being effective and powerful. So, unless inflation expectations have been anchored, any discussion about reshaping monetary policy and making it ‘pro-growth’ is meaningless.
Policy Mix and Macroeconomic Landscape in Belarus
Since 2015, Belarus has considerably improved the quality of its macroeconomic policies. The country has fallen back upon a floating exchange rate, and feasible monetary and fiscal rules. This change followed a long history of voluntary expansionary policy mixes associated with numerous episodes of huge inflation, currency crises, etc.
Due to the new policy mix, the country has been displaying a movement towards macro stability in recent years. For instance, the external position is close to being balanced, the fiscal position has even become positive, while the inflation rate is at historical lows around 5%. For Belarus, these achievements are important, taking in mind a ‘fresh memory’ of price and financial instability. Hence, until recently there were no doubts in the feasibility of the commitments of Belarusian authorities to sound macroeconomic policies.
However, despite a relatively strong macroeconomic performance, the threat of a purposeful and at least temporary deviation from policy commitments seems to strengthen. What is important is that this time, popular simple explanations – e.g. political voluntarism (Belarus will have presidential elections in 2020), a naïve perception of economic policy mechanisms by authorities, etc. – are not sufficient for understanding the phenomenon. Rounds of loosening economic policies tend to be justified as ‘lesser evils’. Exploring some rationality in such a justification requires more insight into the Belarusian macroeconomic landscape.
In recent years, the lack of productivity and output growth has become more evident: in 2015-2019 the average output growth rate has been around 0. The root of the problem is the deficit in productivity and growth (Kruk & Bornukova, 2014; Kruk, 2019), while the rules-based policy mix just uncovered it.
However, this direction of causation tends to be challenged by some policy-makers. In an ’archaic’ manner, the policy mix is accused of blocking any pro-output policy discretion, even if there is a justification for it. For instance, an ‘extra’ need for a ‘growth injection’ may be justified by social challenges. Poor growth in Belarus results in a rather sensitive squeezing of relative levels of well-being in comparison to neighboring countries. Between 2012 and 2019, the well-being shrank from around 78% of the average level in 11 CEE countries down to about 63%. This intensified the labour outflow significantly, including for those employed in socially important industries, say, in healthcare. So, according to this view, the ‘growth injection’ is a lesser evil rather than systemic social threat.
A more advanced ‘accusation’ of the new policy mix assumes that it either causes a too restrictive stance of monetary policy with respect to output or that it ignores complicated transmission channels. For instance, one may argue that too much emphasis on price and financial stability can actually result in undermining them, given the huge debt burden of Belarusian firms. The quality of a considerable portion of the debts in Belarus tends to be sensitive to output growth rates. Hence, according to this argumentation, the monetary policy rule should be ‘more pro-growth’, reflecting the debt-growth-financial stability linkage inside it.
‘Translating’ this policy agenda to a research agenda results in two questions. First, is there room for a more expansionary monetary policy? Second, do financial instability risks require making the monetary policy rule ‘more pro-growth’?
The Monetary Policy Stance: Causality and Causes
Monetary policy, as a rule, aims to be counter-cyclical, i.e. generate expansionary incentives during cyclical downturns, and vice versa. In this respect, its stance should be matched to the estimate of the output gap. From this view, given dominating estimates of a near-zero output gap for 2019 in Belarus (National bank, 2019; Kruk, 2019), today’s monetary policy should be roughly neutral. However, analyzing monetary policy stance together with the estimates of the output gap is not a univocal option, especially given doubts about the consistency of any estimate of the output gap (Coibion et al., 2017).
From this point of view, a direct measurement of the monetary policy stance – matching ex-post real interest rate vs. an ex-ante one – is a worthwhile alternative. If the ex-post real interest exceeds the ex-ante rate, it means that the interest rate policy by a central bank is restrictive, while an opposite situation witnesses its expansionary stance (e.g. Gottschalk, 2001). A methodology for identifying inflation expectations by Kruk (2016) allows detecting restrictive and expansionary stances as well. Moreover, doing it in this way allows simultaneously tracing the stance of actual and expected inflation, and study its possible impact on monetary policy (Figure 1).
Figure 1. Monetary Policy Stance, Actual Inflation and Inflation Expectations in Belarus
Note: Positive sign means restrictive stance of monetary policy, while negative sign means expansionary stance.
Source: Own elaboration according to methodology in Kruk (2016) and based on data from the National Bank of Belarus.
First, this diagnostic shows that the stance of the monetary policy today is roughly neutral, which conforms to the diagnosis based on matching with the output gap. In this respect, it means that there is no room for monetary policy softening today.
However, eventually the situation may change and a need for an expansionary monetary policy may indeed arise. Can the National Bank of Belarus unconditionally satisfy such demand? Second, and the more important conclusion, is that the National Bank cannot. Figure 1 also demonstrates that the monetary policy stance in Belarus is very sensitive to the stance of inflation expectations. From this view, the restrictive monetary policy, say in 2015-2016 and 2018, reflected shocks in inflation expectations. The National Bank had to take a mark-up in the expected inflation in respect to the actual one into account and to transform it to the mark-up of the interest rate. If the National Bank ignores such shocks and nevertheless softens monetary policy, it will undermine price stability due to a powerful transmission effect from expected inflation to the actual one. Moreover, a reverse linkage from actual inflation to the expected one is likely to result in a prolonged inflationary period, causing a so-called ‘abnormal’ stance of the monetary environment (Kruk, 2016).
So, a generalized policy diagnosis for today looks as follows. Monetary policy has reached a roughly neutral level due to a considerable reduction in inflation expectations. The latter, in turn, happened due to a prolonged period of a restrictive policy stance (in 2015-2016), which suppressed actual inflation by means of sacrificing output in a sense (the period of cyclical downturn could have been shorter without such limitations in monetary policy).
Unanchored Expectations Bar a More ‘Pro-Growth’ Policy
A deeper cause of the limited room for monetary policies is unanchored inflation expectations. Statistical properties of the inflation expectations series (Kruk, 2019 and 2016), as well as the polls of households and firms by the National Bank, suggest that despite the reduction of the level of inflation expectations, the issue of it being unanchored is still on the agenda. In this respect, expected inflation in Belarus tends to be sensitive to numerous kinds of actual and information shocks, e.g. domestic and global output dynamics, interest rate levels and spreads, exchange rates, financial stability issues, etc. Hence, unless expectations have been anchored, the monetary policy would still suffer from a lack of power. This means that anchoring inflation expectations is the core precondition for normalizing the monetary environment and the power of any monetary policy.
For the monetary rule, this means that it cannot become more ‘pro-growth’, keeping in mind the risks to financial stability. Otherwise, it can spur price destabilization, which may also trigger financial instability. Hence, the logic of a ‘lesser evil’ does not work. Indeed, there are risks to financial stability stemming from poor growth. But combating them through a more ‘pro-growth’ policy will cause price instability and financial instability stemming from that. But what is more important, the logic of a ‘lesser evil’ itself is doubtful with respect to monetary policy. Recognizing the linkage between monetary policy and financial stability does not mean that risks to the latter should be directly traced by the former. Financial stability issues can and should primarily be tackled through macroprudential tools.
Conclusions
After a relatively long period of macroeconomic stabilization, Belarus faces some risk with respect to it. However, today’s monetary policy stance is roughly neutral in Belarus. Hence, a ‘growth injection’ may result in inflation resurgence. Moreover, even today’s near-neutral monetary policy stance is a considerable achievement, as the country still experiences the challenge of unanchored inflation expectations. This issue is a deep underlying problem, which keeps the monetary policy from being more effective and powerful. So, unless inflation expectations have been anchored, any discussion about reshaping it and making it ‘pro-growth’ is meaningless.
As for today’s justifications for monetary policy softening – poor growth and financial instability risks – they hardly relate with the monetary policy agenda. The challenge of poor growth requires thinking in terms of productivity issues, while financial stability risks in terms of macroprudential tools first.
References
- Coibion, O., Gorodnichenko, Y, Ulate, M. (2017). The Cyclical Sensitivity in Estimates of Potential Output, National Bureau of Economic Research, Working Paper No. 23580.
- Gottschalk, J. (2001). Monetary Conditions in the Euro Area: Useful Indicators of Aggregate Demand Conditions? Kiel Institute for the World Economy Working Paper No. 1037.
- Kruk, D. (2019). Belarusian Economy in Mid-2019: the Results of the Recovery Growth Period, BEROC Policy Paper No. 69.
- Kruk, D. (2016). SVAR Approach for Extracting Inflation Expectations Given Severe Monetary Shocks: Evidence from Belarus BEROC Working Paper No. 39.
- Kruk, D., Bornukova, K. (2014). Belarusian Economic Growth Decomposition, BEROC Working Paper No. 24.
- National Bank of the Republic Belarus (2019). Information on the Dynamics of Consumer Prices and Tariffs and Factors of Changes Therein, 2019Q3.
Buyer Competence and Procurement Renegotiations
This brief deals with the extent to which a more competent public bureaucracy can contribute to better economic outcomes. It addresses this question in the context of public procurement, governments’ purchase of goods and services from private contractors, which accounts for about 15% of GDP in most economies and is on the rise. The efficiency of the procurement process directly influences the prices and quality of many government-provided goods and services that are crucial to social welfare objectives and sustained economic growth. Several issues challenge this efficiency. Media attention is typically on episodes of corruption, which can of course be a major source of waste. Here, we focus on a less glamorous, often overlooked, but potentially even more important source of waste, the lack of procurement competence.
Public procurement is a complex task. Contracting authorities must know market characteristics, design and implement efficient award mechanisms, balance risks and incentives in drafting contracts, effectively manage the contracts in the execution phase, etc. Effective procurement, in particular for complex services or works, requires teams endowed with legal, marketing, engineering, and economic/strategic expertise. The World Bank‘s Benchmarking Public Procurement 2017 compares the quality of the legal and regulatory environments of 180 countries and reveals the existence of great heterogeneity in the quality of the procurement processes across countries. Saussier and Tirole (2015) focus on the case of France, documenting that 63% of the staff of French contracting authorities do not have a legal profile, and only 39% have qualifications specific for managing public purchases.
Recent research focusing on prices of standardized goods showed that (lack of) buyer competence among public buyers could make an even bigger impact on the waste of public funds than corruption. For example, Bandiera, Prat and Valletti (2009) estimate that Italian public buyers would save 21 percent of their expenditures if they all paid the same as the buyers at the 10th percentile of the estimated procurement price distribution. Savings could reach 1.6-2.1 percent of the Italian GDP per year. They then estimate that bureaucratic inefficiency also linked to incompetence is the main cause of waste, accounting for 83 percent of total estimated waste, compared to only 17 percent due to corruption. In a similar vein, Best, Hjort and Szakonyi (2017) report that over 40 percent of within-product price variation on standardized goods in Russia in 2011-2015 can be ascribed to the bureaucrats and organizations in charge of procurement. They estimate that if the least effective quartile of bureaucrats and organizations had the effectiveness of the 75th percentile, the Russian government would save around $13 billion per year – roughly one fifth of the total amount spent on health care by the Russian government at federal, regional, and municipal level combined.[1]
The role of competence in complex procurement
This problem is becoming even more serious now that, being under fiscal pressure after the crises, many governments are promoting the use of public procurement not only as a tool to save budgets – sometimes at the expense of quality – but also to achieve more complex objectives like fostering innovation, protecting the environment, and promoting social objectives, a multiplicity of goals that per se makes the procurement mission even more complex.
Little is known about the importance of procurement competence in more complex procurements, not least because it is very difficult to measure performance in these environments. In our paper (Decarolis et al. (2019)) we try to make a step in this direction by focusing on works and services, typically more complex than goods. We use data from the US, probably the country with the most well-developed system of production and certification of procurement competences. Thus, our estimates of the effect of lack of competences should provide a lower bound of most other countries.
We combine, for the first time, three large databases: contract-level data on procurement performance in the Federal Procurement Data System (FPDS); bureau-level data from a survey conducted by the Office of Personnel Management since 2002 on federal employees, the Federal Employee Viewpoint Survey (FEVS); and Federal Workforce Data (FedScope) containing information on characteristics of the public workforce at the employee level.
To quantify the extent to which the government-bureau-level competencies determine procurement outcomes, we use the first database to construct procurement performance measures and the second dataset to build measures of procurement offices’ competence. We then use the third database to construct instruments that help us addressing important endogeneity issues. Our identification strategy exploits the exogeneity of death events involving public officials to allow for a causal interpretation of bureau competence on procurement performance.
Measurement Challenges
Indeed, there are three main challenges that our analysis needs to overcome. The first is how to measure procurement performance. Unit price comparisons have been used for standardized goods, but they are not suitable for the more complex procurements we focus on as they are heterogeneous in many non-recorded dimensions and their contracts are often incomplete. We use FPDS instead to construct three proxies of performance based on time delays, cost overruns, and the number of renegotiations. Although the first two measures are widely used in the literature, we are careful to take into account that cost overruns and delays may be due to new or additional work requested by the public buyer, in which case they should not be viewed as indicative of a poor outcome. We, therefore, consider only those which have occurred to deliver the work or service that was originally tendered. The third performance measure, the overall number of renegotiation episodes, is new and aims at capturing Williamson’s “haggling costs,” which are a pure deadweight loss present whatever the reason behind the renegotiation and have been shown to be economically sizeable for complex contracts. Our data reveals a surprising and persistent heterogeneity along these three dimensions across US federal bureaus.
The second challenge is the measurement of bureaucratic competence. Other papers in the field have measured it using buyer fixed effects. We use a novel approach based on the mentioned survey of employees’ subjective evaluations (FEVS). The survey is extremely rich, and we chose the most general question as an overall measure for competence (How would you rate the overall quality of work done by your work unit?). Responses to this question should be seen as measures of the overall efficacy of the workflow and processes within the bureau, hence proxying for the ideal measure of competence on the many different aspects relevant to procurement. An extensive set of robustness checks support our idea of measuring competence through the FEVS data.
The third measurement problem is the association between more complex contracts and more competent buyers: the most competent buyers may consistently produce poor performance because they are allocated the most complicated procurements. This point is well illustrated in a case study showing that the performance of the agencies that are worst in terms of competence (the Department of Veterans Affairs and the Department of Justice) is superior to that of the two most competent agencies (the NASA and the Nuclear Regulatory Commission) in terms of both delays and cost overruns. This striking inversion indicates that any straightforward regression of performance on competence would grossly underestimate the impact of competence.
We, therefore, develop an instrumental variable strategy exploiting exogenous changes in competence. We use FedScope to build instruments for bureaus’ competence based on the deaths of specific types of employees: bureau managers and white-collar employees who are relatively young and earn a relatively high wage. The idea is that more competent offices adopt better managerial practices, routines and processes that are more resilient to risks, such that of an unexpected loss of a key employee, and less dependent on specific individuals. This is precisely what the first stage of our IV strategy documents. Our instruments perform well in terms of their statistical properties and they allow us to estimate a causal effect of bureau competence on procurement outcomes that is an order of magnitude larger than the corresponding OLS estimate.
Results
We find that one standard deviation increase in competence reduces the number of days of delay by 23 percent, cost overruns by 29 percent and the number of renegotiations by half. This implies that if all federal bureaus were to obtain NASA’s high level of competence – corresponding to the top 10th percentile of the competence distribution – delays in contract execution would decline by 4.8 million days, and cost overrun would drop by $6.7 billions over the entire sample analyzed. We also find a consistently negative effect of greater competence on the number of renegotiations: one standard deviation increase in competence causes 0.5 (39%) and 0.8 (71%) fewer cost renegotiations and time renegotiations, respectively.
Finally, we try to understand what exactly makes a bureau ‘competent’ using the FEVS data to identify three different components: cooperation among employees, incentives and skills. Separately estimating their causal effects is unfeasible with instruments like the two described above as the validity of the exclusion restriction, which can be argued to be satisfied when measuring a broadly defined notion of bureau competence, is unlikely to hold for more specific components. However, we provide multiple pieces of evidence suggestive that cooperation is the key driver behind the positive effects of bureau competence. This finding conforms with the view that successful procurement requires appropriate coordination of a multiplicity of tasks involving different individuals. We also consider the extent to which the role of cooperation is due to the presence of capable managers, able to lead a group to effective cooperation, exploiting the heterogenous effects obtained through instruments considering the deaths of different subgroups of employees. We find that the deaths that matter the most are those of relatively young and best paid white-collar employees.
These results point at the large potential improvement in the performance of public contracts that could be achieved by investing more resources in increasing the competence of contracting authorities, even in a country with long-established procurement training and certification institutions such as the US. In Europe, recent policy initiatives see the introduction of qualification systems for public procurers as a necessary response to the generally lower procurement competence coupled with the greater discretion granted by the 2014 Procurement Directives. Our results on the role of cooperation suggest that certification programs would be also useful at the level of the procuring office, and should include features such as the organisation of the acquisition process and the prevailing management practices, as is often done for private firms.
References
- Bandiera, Oriana, Andrea Prat, and Tommaso Valletti. (2009). “Active and passive waste in government spending: Evidence from a policy experiment.” American Economic Review, 99(4): 1278-1308.
- Best, Michael Carlos, Jonas Hjort, and David Szakonyi. (2017). “Individuals and Organizations as Sources of State Effectiveness, and Consequences for Policy.” NBER Working Paper 23350.
- Bucciol, A., Camboni R., and P. Valbonesi. (2017). ”Buyers’ Ability in Public Procurement: A Structural Analysis of Italian Medical Devices.” Working Paper n.17, Department of Economics, University of Verona.
- Decarolis, F, L Giuffrida, E Iossa, V Mollisi, and G Spagnolo. (2019 revision), “Bureaucratic Competence and Procurement Outcomes”, NBER Working Paper 24201.
- Saussier, S, and J Tirole. (2015). “Strengthening the Efficiency of Public Procurement”, French Council of Economic Analysis, April.
- World Bank (2017), Benchmarking Public Procurement 2017, The World Bank.
[1] See also, Bucciol et al (2017) who study procurement of standardized medical devices purchased by local Italian purchasing bodies, finding that the price for the same medical devices paid by Italian public buyers differ substantially, and that the differences are explained by ‘buyers fixed effects’ capturing all specific buyers characteristics, including their competence levels.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
The Long Shadow of Transition: The State of Democracy in Eastern Europe
In many parts of Eastern Europe, the transition towards stronger political institutions and democratic deepening has been slow and uneven. Weak political checks and balances, corruption and authoritarianism have threatened democracy, economic and social development and adversely impacted peace and stability in Europe at large. This policy brief summarizes the insights from Development Day 2019, a full-day conference organized by SITE at the Stockholm School of Economics on November 12th. The presentations were centred around the current political and business climate in the Eastern European region, throwing light on new developments in the past few years, strides towards and away from democracy, and the challenges as well as possible policy solutions emanating from those.
The State of Democracy in the Region
From a regional perspective, Eastern Europe has seen mixed democratic success over the years with hybrid systems that combine some elements of democracy and autocracy. Based on the V-Dem liberal democracy index, ten transition countries that have joined the EU saw rapid early progress after transition. In comparison, the democratic development in twelve nations of the FSU still outside of the EU has been largely stagnant.
In recent years, however, democracy in some of those EU countries, such as Bulgaria, the Czech Republic, Hungary, Poland and Romania have been in decline. Poland, one of the region’s top performers in terms of GDP growth and life expectancy, has experienced a sharp decline in democracy since 2015. Backlashes have often occurred after elections in which corruption and economic mismanagement have led to the downfall of incumbent governments and a general distrust of the political system. Together with low voter turnout, this created fertile ground for more autocratic forces to gain power helped by demand for strong leadership.
An example from Ukraine illustrated the role of media, both traditional and social, for policy-making. In some countries of the region, traditional media is strictly state-controlled with obvious concerns for democracy. This is less the case in Ukraine, where also social media plays an important role in forming political opinions. The concern is that, as elsewhere, opinions that gain traction on social media may not be impartial or well informed, affecting public perception about policy-making. A recent case showing the popular reaction to an attack on the former governor of the Central Bank suggests that those implementing important reforms may not get due credit when biased and partial information dominates the political discourse on social media.
Another case is the South Caucasian region: Armenia, Georgia and Azerbaijan. The political situation there has been characterized as a “government by day, government by night” dichotomy, implying that the real political power largely lies outside the official political institutions. In Georgia, the situation can be described as a competition between autocracy and democracy, with a feudalistic system in which powerful groups replace one another across time. As a result, trust in political institutions is low, as well as citizens’ political participation.
In the case of Azerbaijan, there is an elected presidency, but in reality, power has been passed on hereditarily, becoming a de facto patrimonial system. Lastly, in Armenia, the new government possesses democratic credentials, but the tensions with neighbouring Azerbaijan and Turkey have given increasing power to the military and important economic powers. Overall, democratisation in these countries has been hindered by a trend for powerful politicians to form parties around themselves and to retain power after the end of their mandates. Also, the historical focus on nation-building in these countries has led to a marked exclusion of minorities and a conflict of national identities.
The last country case in this part of the conference focused on the current political situation in Russia and on the likely outcomes after 2024. The social framework in Russia appears constellated by fears – a fear of a world war, of regime tightening and mass repressions, and of lawlessness – all of them on the rise. Similarly, the economy is suffering, in particular from low business activity, somewhat offset by a boost in social payments. Nonetheless, it was argued that it is not economic concerns, but rather political frustration, that has recently led citizens to take to the street. Despite this, survey data shows that trust in Putin is still over 60%, and that most people would vote for him again. However, survey data also points out that the most likely determinant of this trust is the lack of another reference figure, and that citizens are not averse to the idea of political change in itself. Lastly, Putin will most likely retain some political power after 2024, transiting “from father to grandfather of the nation”.
Voices from the civil society in the region also emphasized the importance of a free media and an active civil society to prevent the backsliding of democracy. With examples from Georgia and Ukraine, it was argued that maintaining the independence of the judiciary, as well as the public prosecutor’s office, can go a long way in building credibility both among citizens and the international community. The European Union can leverage the high trust and hopeful attitudes it benefits from in the region to push crucial reforms more strongly. For example, more than 70% of Georgians would vote for joining the EU if a referendum was held on the topic and the European Union is widely regarded as Georgia’s most important foreign supporter.
Weak Institutions and Business Development
The quality of political and legal institutions strongly affects the business environment, in particular with regards to the protection of property rights, rule of law, regulation and corruption. Research from the European Bank for Reconstruction and Development (EBRD) highlights that the governance gap between Eastern Europe and Central Asia and most advanced economies is still large, even though progress in this area has actually been faster than for other emerging economies since the mid-‘90s. This is measured through enterprise surveys as well as individual surveys. In Albania, for instance, a perception of lower corruption was linked to a decrease in the intention to emigrate equivalent to earning 400$ more per month. Another point concerned the complexity of measuring the business environment and the benefits of firm-level surveys asking firms directly about their own actual experience of regular enforcement. For example, in countries such as Poland, Latvia and Romania the actual experience of business regulation measured via the EBRD’s Business Environment Enterprise Performance Survey, is far worse than one would expect from the World Bank’s well known Doing Business rating.
From the perspective of Swedish firms, trade between Sweden and the region has remained rather flat in the past years, as the complexity and risks of these markets especially discourage SMEs. Business Sweden explained that Swedish firms considering an expansion in these markets are concerned with issues of exchange rate stability, and the institutional-driven presence of unfair competition and of excessive bureaucracy. Moreover, inadequate infrastructure and the presence of bribery and corruption make everyday business operations risky and costly. It was generally emphasized that countries have to create a safe investment environment by reducing corruption, establishing a clear and well enacted regulatory environment, having dependable courts and strengthening domestic resource mobilization. Swedish aid can play a part, but there is a need to develop new ways of delivering aid to make it more effective.
An interesting example is Belarus, that has seen more economic and political stability than most neighbours, but at the same time a lack of both economic and political reforms towards market economy and democracy. Gradually the preference towards private ownership, as opposed to public, has increased in recent years and the country has seen a rising share of the private sector, even without specific privatization reforms. Nonetheless, international businesses are still reluctant to invest due to high taxes, a lack of access to finance as well as to a qualified workforce, but most importantly due to the weak legal system. An exception has been China, and Belarus has looked at the One Belt One Road Initiative as a promising bridge to the EU. Scandals connected with the two main Chinese-invested projects have damped the enthusiasm recently, though.
The economic and political risks of extensively relying on badly diversified energy sources, as is the case with natural gas imports from Russia in many transition states were also discussed. It was shown how some countries such as Ukraine, Poland and Lithuania have improved their energy security by either benefitting from reverse-flow technology and the EU’s bargaining power or building their own LNG terminals to diversify supply sources. However, either of these, as well as other energy security improving solutions are likely to come with an economic cost, though, that not all countries in the region can afford.
A Government Perspective
The main focus of this section was the Swedish government’s new inspiring foreign policy initiative, “Drive for Democracy”. Drawing from a definition of democracy by Kerstin Hesselgren, an early Swedish female parliamentarian, democracy enables countries to realize and utilize the forces of the individual and draw them into a life-giving, value-creating society. It was emphasized that the values of democracy are objectives by themselves (e.g. freedom of expression, respect for human rights) but also that democracy has important positive effects in other areas of human welfare. The Swedish government views democracy as the best foundation for a sustainable society, equality of opportunity and absence of gender or racial bias.
The “Drive for Democracy” specifically identifies Eastern Europe as one of the main frontiers between democracy and autocracy, and the Swedish government promotes human rights and stability through various bilateral programmes through the Swedish International Development Cooperation Agency, Sida, and multilateral initiatives within the EU, such as the Eastern Partnership. It was also emphasized that democracy is a continuous process that can always be improved, as indeed experienced by Sweden. Political rights were granted to women only in 1919 followed by convicts and prisoners in 1933 and to the Roma people only in 1950. Political and democratic rights are thus never once and for all given, and it is crucial that the dividends from democracy are carried forward to the younger generation.
Conclusion
In sum, the day illustrated clearly how democracy engages all segments of society, from the business sector to civil society, and the potential for but also challenges involved for democratic deepening in Eastern Europe. To get more information about the presentations during the day, please visit our website.
Participants at the Conference
- PER OLSSON FRIDH, State Secretary, Ministry for Foreign Affairs.
- ALEXANDER PLEKHANOV, Director for Transition Impact and Global Economics at EBRD.
- TORBJÖRN BECKER, Director, SITE.
- CHLOÉ LE COQ, Associate Professor, SITE and Professor of Economics, University of Paris II Panthéon-Assas.
- THOMAS DE WAAL, Senior Fellow at Carnegie Endowment for International Peace.
- NATALIIA SHAPOVAL, Vice President for Policy Research at Kyiv School of Economics.
- ILONA SOLOGUB, Scientific Editor at VoxUkraine and Director for Policy Research at Kyiv School of Economics.
- KETEVAN VASHAKIDZE, President at Europe Foundation, Georgia.
- MARIA BISTER, Senior Policy Specialist, Sida.
- HENRIK NORBERG, Deputy Director, Ministry for Foreign Affairs.
- YLVA BERG, CEO and President, Business Sweden.
- LARS ANELL, Ambassador and formerly Volvo’s Senior Vice President.
- ERIK BERGLÖF, Professor in Practice and Director of the Institute of Global Affairs, London School of Economics and Political Science.
- KATERYNA BORNUKOVA, Academic Director, BEROC, Minsk.
- ANDREI KOLESNIKOV, Senior Fellow, Carnegie Moscow Center.
Gender Gaps in Wages and Wealth: Evidence from Estonia
This policy brief introduces two related papers examining two types of gender gaps in Estonia. First, it presents the work of Vahter and Masso (2019), who study the wage gender gaps in foreign-owned firms and compare this gap with the situation in domestic ones. Then it summarizes a paper of Meriküll, Kukk, and Rõõm (2019), who focus on the wealth gender gaps and highlight the role of entrepreneurship in this gap.
Gender inequality is not only a moral issue. An extensive literature has highlighted the cost of gender inequality in terms of economic (in)efficiency. Most of the academic work has, however, focused on either the US and Western Europe or developing countries. Research focusing on systematic gender disparities in Eastern Europe is rather scarce. Yet, there is much to be learned from this region. The purpose of the FROGEE (Forum for Research on Gender in Eastern Europe) project is to study several issues related to gender inequality in former socialist countries.
This policy brief summarizes two papers presented at the 2nd Baltic Economic Conference at the Stockholm School of Economics in Riga, on June 10-11, where a special session on gender economics was held with the support of the FROGEE project. The event, organized by the Baltic Economic Association (see balticecon.org), gathered more than 85 researchers from the Baltics and all over the world. These two papers focus on Estonia, one of the most successful economies among the transition countries, where however the gender wage gap is among the largest in the European Union.
Firm ownership and gender wage gap
An important source of wage inequality originates in firm-specific pay schemes (see for instance Card et al. 2016). Understanding the characteristics of firms associated with a gender pay gap is thus a necessary step to design relevant policy responses. In a paper entitled “The contribution of multinationals to wage inequality: foreign ownership and the gender pay gap”, Jaan Masso and Priit Vahter, both at the University of Tartu, compare the situation in foreign-owned firms with domestic ones. The fact that foreign-owned firms provide on average higher wages to their employees is well documented. However, the question of whether this premium differs between men and women remains largely overlooked.
A potential channel linking firm ownership and gender wage gap is the transfer of management practices from the home country of the investor to the affiliate. The great majority of FDI in Estonia originates from Finland and Sweden, two countries that regularly top international rankings on gender equality and that have set the fight against gender inequality as a top priority. Observing a lower level of gender wage gap in firms owned by Swedish and Finnish capital would suggest the existence of such a mechanism, even if there is evidence that Scandinavian countries do not stand out in a positive way when it comes to women in the top of the distribution (see for instance Boschini et al., 2018, and Bobilev et al., 2019).
On the other hand, Goldin (2014) has shown that a large part of the gender wage gap in the US can be explained by differences in job “commitment”: firms disproportionately reward workers willing to be available 24/7, more flexible regarding business trips, spending longer hours in the office, etc. Such workers happen to be more often men than women. Multinational firms may require such commitment and flexibility to a larger extent than domestic firms, due for instance to their higher exposure to international competition. This would imply a larger gender pay gap in foreign-owned firms compared to local firms.
To investigate this issue, Masso and Vahter (2019) rely on Estonian administrative data, providing information on the whole universe of workers and of firms in the country between 2006 and 2014. This matched employer-employee dataset allows to track the wage of individuals over the years, but also to compare wages both across and within firms. It thus becomes possible to estimate the gender wage gap at the firm level (controlling for relevant individual-level factors affecting wages, such as age and experience), and then to check whether this measure systematically differs between domestic and foreign-owned firms.
However, simply comparing the gender pay gap between these two types of firms could lead to spurious conclusions. Foreign-owned firms have on average different characteristics than domestic ones: they do not operate in the same sectors, they do not have the same size nor the same productivity. To overcome this issue, the authors rely on a matching method: for each foreign-owned firms, they match a domestic firm with similar (observable) characteristics.
They find that in domestic firms, women are on average paid 19% less than men, even after accounting for many other factors associated with wage. In foreign-owned companies, both men and women are better paid. However, both genders do not benefit from the same premium: men are paid roughly 15% more in foreign-owned firms, whereas the premium for women is only 5.4%. This difference implies an even larger gender wage gap in multinational firms. To illustrate the economic significance of these results, for a man and a woman earning a monthly wage of 1146 euros (the average gross wage in Estonia in 2016), the premium for switching from a domestic to a foreign-owned firm is respectively 171 and 62 euros. Further, they provide some evidence that lower “commitment” is associated with a stronger wage penalty in foreign-owned firms. All in all, these results suggest that there is not necessarily a relationship between a multinational wage policy (especially in its gender wage-gap dimension) and the gender norms prevailing in its country of incorporation.
Gender and wealth gap
The vast majority of academic papers studying gender inequality focuses on the wage gap. But gender inequality can affect other types of economic outcomes, such as labor force participation, unemployment duration, or wealth. The latter is of particular interest since wealth can greatly contribute to empowerment. Merike Kukk, Jaanika Meriküll and Tairi Rõõm, all at the Bank of Estonia, extend the literature with a paper entitled “What explains the Gender Gap in Wealth? Evidence from Administrative Data”. This paper is one of the first to study the gender wealth gap in a post-transition country. The literature on the gender wealth gap is rather scarce because of a lack of suitable data: wealth measures are often computed at the household level, while individual-level data is necessary for such a study.
The main aim of this paper is to depict a precise portrait of this phenomenon in Estonia. In particular, the authors do not simply estimate the overall wealth gap but investigate the magnitude of the gap across the wealth distribution. In other words, is there a difference between the poorest men and the poorest women? Or on the other side of the distribution, are the richest men more wealthy than the richest women?
For this purpose, Kukk, Meriküll and Rõõm combine administrative individual-level data on wealth with survey results. The administrative data are generally considered of much better quality than the other, but they do not provide a lot of additional information on individuals. On the other hand, survey data provide a wealth of information about individual characteristics. Merging allows getting the best of both worlds. Regarding the methodology, the authors use unconditional quantile regression to track gender differences at different deciles of the wealth distribution. They further decompose this “raw” gender gap into two components: the “explained” part, i.e., the part of the gap resulting in differences in characteristics between men and women (demographics, education, etc.), and the “unexplained” part.
This study estimates the raw, unconditional gender wealth gap in Estonia to be 45%, which is of similar magnitude as in Germany. Interestingly, this difference is essentially driven by differences in the top of the distribution: there is a large gap between the richest men and the richest women. This “raw” difference is however explained by a single variable: self-employment, as men are much more likely to have business assets than women. Once controlling for the entrepreneurship status, the wealth difference between the richest Estonians becomes insignificant. This suggests the need to support policies encouraging female entrepreneurship and to remove barriers particularly affecting women. For instance, the literature has previously pointed out that women have less access to external sources of capital than men (e.g., Aidis et al., 2007). Such distortions can ultimately result in a wealth gap at the top of the distribution, as documented by this paper.
In addition, the literature has proposed several mechanisms that could result in gender-specific patterns of wealth accumulation. The simplest channel is through the wage gap, as it can be seen as the accumulation of the wage gap over time (e.g. Blau and Kahn, 2000). The authors thus compare the gender gaps in wealth and income. They uncover a strong wage gap, with men earning significantly more than women starting at the 6th decile: the higher we go in the income distribution, the larger the wage gap. How to reconcile this finding with the absence of a wealth gap conditional on entrepreneurship status? A possible explanation suggested by the authors is that women simply accumulate wealth better than men do.
Conclusion
These two papers illustrate two different mechanisms explaining gender-specific economic outcomes. The larger wage gap observed in multinational companies can be explained by a stronger commitment penalty for women, mostly because of childcare. This asks for two potential policy interventions. First, the development of childcare could facilitate the reduction in the “commitment gap” that disrupts women’s careers. Second, institutions could support a more flexible repartition of childcare responsibilities. Note however that Estonia already has the longest duration of leave at full pay (85 weeks), and that this leave can be freely split between parents. As for the wealth gap at the top of the wealth distribution, it can to a large extent be explained by the entrepreneurship status. This difference could partly be explained by differences in preferences and risk-aversion, which would require long-run policies to be mitigated. But in the short run, there is room for specific policies supporting female entrepreneurship and removing barriers particularly affecting women, such as a tighter credit constraint.
References
- Aidis, R., Welter, F., Smallbone, D., & Isakova, N. (2007). Female entrepreneurship in transition economies: the case of Lithuania and Ukraine. Feminist Economics, 13(2), 157-183.
- Blau, F. D., & Kahn, L. M. (2000). Gender differences in pay. Journal of Economic perspectives, 14(4), 75-99.
- Bobilev, R., Boschini, A., & Roine, J. (2019). Women in the Top of the Income Distribution: What Can We Learn From LIS-Data?. Italian Economic Journal, 1-45.
- Boschini, A., Gunnarsson, K., & Roine, J. (2018). Women in Top Incomes: Evidence from Sweden 1974-2013. IZA Discussion Paper No. 10979 .
- Card, D., Cardoso, A. R., & Kline, P. (2015). Bargaining, sorting, and the gender wage gap: Quantifying the impact of firms on the relative pay of women. The Quarterly Journal of Economics, 131(2), 633-686.
- Goldin, C. (2014). A grand gender convergence: Its last chapter. American Economic Review, 104(4), 1091-1119.
- Meriküll, J., Kukk, M., & Rõõm, T. (2019). What explains the gender gap in wealth? Evidence from administrative data. Bank of Estonia WP No. 2019-04.
- Vahter, P., & Masso, J. (2019). The contribution of multinationals to wage inequality: foreign ownership and the gender pay gap. Review of World Economics, 155(1), 105-148.
The Dollar and the Global Monetary Cycle
The dominance of the dollar in international markets is at the heart of recent policy and academic debates at almost all conferences on international economics. Most recently, Bank of England Governor Mark Carney has suggested a new global electronic currency to reduce the dominance of the dollar (Carney 2019). What are the negative effects of the dollar’s dominance, and how can countries protect against its influence? We answer this and other related questions in our recent paper (Egorov and Mukhin 2019), which we summarize in this policy brief.
Stable prices
What are the sources of the dollar’s global powers? Ultimately, the dollar matters as long as it is used by private agents in their transactions. Recently, a lot of attention has been devoted to the role of the dollar in global financial markets, which gives rise to the so-called “global financial cycle” (Rey 2013). However, a growing literature (e.g., Gopinath et al. 2019) shows that the dollar also plays a central role in international goods markets with many exporters setting their prices in the U.S. currency. According to recent estimates, the share of goods with dollar prices is about 4-5 times larger than the share of the US in global trade (Gopinath 2016). That means many firms set prices in dollars even when they trade not with the US, but with other countries.
Even though this global invoicing role of the dollar may not seem important, many studies show that prices remain stable, or sticky, in the currency in which they are set. This means that in many countries, the prices of imported goods are almost fixed in dollars. Then movements in the dollar exchange rate immediately result in changes in the prices of these goods in the local currency. Of course, even dollar prices adjust occasionally, but recent empirical studies show that the dollar prices of imported goods remain pretty stable even two years after a change in the exchange rate (Gopinath et al. 2019).
Such stability of global prices in dollars has three important implications. First, the dollar exchange rate affects the volume of global trade. In any given country, appreciation of the dollar raises the local-currency prices of imported goods. Because of that, consumers switch from more expensive imported goods to cheaper domestic goods. The same happens in other countries, and thus all consumers buy fewer foreign goods, and the volume of global trade decreases.
Second, the dollar exchange rate affects world inflation and output. A rise in import prices after appreciation of the dollar increases inflation both directly and indirectly, through an increase in the costs to all domestic firms that use imported goods as inputs. The higher the costs, the more firms raise their prices, and the higher the inflation. Indeed, a recent empirical study shows that the dollar exchange rate is a good predictor of world inflation and the volume of global trade (Gopinath et al. 2019). Moreover, an increase in global inflation reduces consumers’ real income, and this leads to lower aggregate demand and thus to a reduction in world output. Therefore, dollar appreciation could trigger a world recession.
Third, we show that all countries find it optimal to partially peg their exchange rates to the dollar. Since changes in the dollar exchange rate could negatively affect output and inflation, all countries try to protect themselves from these external shocks. If it is not possible for a government to convince its private agents to stop using the dollar in their transactions, then the government could reduce the changes in the dollar exchange rate by pegging its currency to the dollar. Of course, this policy cannot address all issues, but at least the prices of imported goods can become more stable in the local currency.
Rigged system
What does this global use of the dollar imply for the US? First of all, it enables the US’s so-called “privileged insularity”. Since the prices of both local and imported goods in the US are stable in dollars, changes in exchange rates do not lead to inflation or expenditure switching between home and foreign goods. This gives rise to a significant asymmetry across countries: the dollar exchange rate has a substantial effect on other countries, but all other exchange rates have only a negligible effect on the US.
We show that the asymmetry in countries’ exposure to exchange rate shocks leads to an asymmetry in their monetary policy. All countries find themselves responding to US policy by partially pegging their exchange rates to the dollar. In contrast, due to its “privileged insularity”, the US can focus on its domestic targets, respond primarily to domestic shocks, and potentially achieve higher welfare than other countries, which are more exposed to foreign shocks.
So, when a local recession hits the US, the Fed stimulates the US economy regardless of the conditions of the world economy. Then all other countries stimulate their economies as well in order to keep their exchange rates more stable relative to the dollar. This creates what we call a “global monetary cycle”, where the whole world becomes more synchronized even when there are no global shocks common to all countries. The more prominent the role of the dollar is in the international goods market, the stronger this “global monetary cycle”. In fact, a recent empirical study confirms this prediction and shows that the higher the share of the dollar in the country’s import basket is, the stronger its peg to the dollar, and the more nominal interest rates follow the US interest rates (Zhang 2018).
Leveling the playing field
What can other countries do to diminish negative consequences from the “global monetary cycle”? One possible way to discourage firms from using the dollar could be the creation or expansion of a monetary union such as the Euro area. The larger the Eurozone is, the more countries within this area use the euro and not the dollar to trade with each other. Moreover, the Eurozone’s trading partners are more likely to use the currency of a larger monetary union (Mukhin 2018). If enough firms switch from the dollar to the euro, then we find that the Eurozone may gain the same advantage of “privileged insularity” as the US.
Another frequently mentioned policy to protect from the undesirable exchange rate effects is the use of capital controls, which are found to be effective in softening the “global financial cycle”. For example, a tax on borrowing in foreign currency can reduce the size of the foreign-denominated debt, so that depreciation does not lead to an increase in the nominal debt burden and start a recession. However, we find that under the “global monetary cycle” these measures turn out to be much less effective. Basically, capital controls primarily affect decisions in financial markets. But it’s the decisions of global exporters, that is decisions in international goods markets, that give rise to the “global monetary cycle”. And the effect of capital controls on exporters is much more subtle if present at all.
Conclusion
To sum up, we argue that as long as many firms continue to set prices in dollars, it is optimal for central banks to smooth movements in exchange rates in order to diminish the effects of the dollar on their economies. This partial peg to the dollar leads to the “global monetary cycle”. As a result, the US is free to implement a mostly independent monetary policy, while the rest of the world has to follow their lead.
References
- Carney, M., 2019. “The Growing Challenges for Monetary Policy in the Current International Monetary and Financial System”, Speech given at the Jackson Hole Symposium.
- Egorov, K., and D. Mukhin, 2019. “Optimal Monetary Policy under Dollar Pricing”, Working paper.
- Gopinath, G., 2016. “The International Price System”, Jackson Hole Symposium Proceedings.
- Gopinath, G., E. Boz, C. Casas, F. Diez, P.-O. Gourinchas, and M. Plagborg-Moller, 2019. “Dominant Currency Paradigm”, Working paper.
- Mukhin, D., 2018. “An Equilibrium Model of the International Price System”, Working paper.
- Rey, H., 2013. “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence”, Federal Reserve Bank of Kansas City Econoic Policy Symposium.
- Zhang, T., 2018. “Monetary Policy Spillovers through Invoicing Currencies”, Working paper
The Georgian Tax Lottery of 2012 – A Quantitative and Qualitative Evaluation
This policy brief is based on preliminary findings of research that assesses the 2012 Georgian Tax Lottery by Larsen et al. (2019). Tax lotteries are seen as a way to relatively easily augment public revenue while also increasing compliance. Tax lotteries are constructed so that consumers are nudged to ask for a receipt when making a purchase. This receipt contains information which can also be used as a lottery ticket with the possibility of winning prizes. Such tickets also leave traces of transaction records that allow revenue authorities to audit vendors. Given this background, the aim of this paper is to provide a broad, multi-methodological and socio-economic assessment of Georgia’s tax lottery experience in 2012.
Introduction
A well-designed tax system improves economic efficiency, facilitates economic growth and social welfare, (Besley & Persson, 2013). Yet, curbing tax evasion remains one of the key challenges for policy makers, and institutions in charge of revenue administration are experimenting with diverse set of instruments to increase tax compliance and thus revenue.
In addition to the traditional audit-sanctioning mechanism, the taxation literature emphasizes the role of consumers in facilitating tax compliance of businesses. The government can create direct monetary incentives for consumers to request receipts. Turning a receipt into a lottery ticket with a chance of winning a pre-determined prize is an example of such an incentive. The tax lottery motivates and rewards those consumers who become part in the efforts to fight tax evasion by requesting receipts while making purchases. Given that audit-sanctioning mechanisms are very costly for the government, clever usage of a “zero cost policy”, such as tax lotteries, might be advisable (Fabbri & Hemels, 2013).
The aim of this paper is to provide an assessment of the Georgian tax lottery experience in 2012 using both quantitative and qualitative methodologies. The two methodological approaches complement each other and help to investigate the tax lottery from different angles.
The Georgian Tax Lottery
The Georgian Revenue Service (GRS) introduced a tax lottery starting in spring 2012, which was planned to run until January 1, 2013. The aim of the lottery was to popularize the already introduced General Packet Radio Services (GPRS) -based cash registers and make sure that they were used by vendors. Such registers would allow the GRS to gather information about business activities online daily. This, in turn, was due to an effort to fight the shadow economy and be able to audit business revenue, when payments were made by cash. The lottery would thus motivate consumers to ask for receipts. As a communicative resource, the lottery aimed to increase awareness of asking for receipts, as well as to develop a positive attitude in Georgian society towards GRS in the background of harsh fiscal reforms.
In order to participate, customers had to buy goods or services from a vendor who had a GPRS-based cash register. The receipt could be checked for win immediately by mobile phone. The Georgian Tax Lottery was a chance to win money for every customer purchasing anything from groceries, to shoes and hair care. The winning prizes were 10, 20, 50, 100, 10,000 and 50,000 GEL[1]. The 10,000 GEL prizes were awarded once a month while 50,000 GEL prizes were given quarterly.
The lottery ended prematurely on grounds of inefficiency on November 12, 2012 when a new government was elected.
Multi-Method Approach
For the assessment of the tax lottery in Georgia, we employed a multi-method approach combining a qualitative assessment built on an ethnographic approach with quantitative regression-based methods; following the ethnographic approach, we collected opinions, experiences, and views on the tax lottery from the perspective of participating and non-participating businesses, consumers as well as other stakeholders.
The quantitative assessment of the paper investigates whether the existence of the lottery affected businesses’ total revealed turnovers through the facilitation of a receipt-requesting norm. The data for the quantitative analysis conducted in this paper was provided by the GRS. The latter was collected from the daily reports of the GRS system, for two years, 2012 and 2013. The data includes variables, such as the unique cash register identifier, the year and the week of a purchase and address (city and municipality) and the total turnover of the cash register reported through GPRS. GRS also provided the dataset with detailed information on winning tickets. The latter includes daily information on the number of winning tickets and the aggregate daily monetary amount of the prizes.
Three different specifications of linear regression models were run separately on the aggregate country level data. The model-specifications differ in a way that each uses different dependent variables – aggregate weekly sales, average weekly sales per register and number of registers reporting any sales.
Preliminary Results
Table 1: Regression Results of the aggregated analysis on a country level
As may be inferred from the country level regression results reported in Table 1, for all the econometric specifications the ‘lottery’ variable is significant at 1% level. The regression results show that during the weeks of the lottery (weeks 16-46) the aggregate weekly sales are on average 33,363 GEL higher than in the non-lottery weeks (11% more than in non-lottery weeks, based on the log linear model). When looking at the year effect of 2012 in non-lottery weeks, the effects are positive, significant, and, on average, amount to 38,813 GEL. This means that aggregate weekly sales in the non-lottery weeks of 2012, exceed aggregate weekly sales in 2013, on average, by 38,813 GEL. While in this simple model we do not explicitly control for the macroeconomic environment, GDP in 2013 grew by 3.4% while inflation stood close to 0%. These macroeconomic outcomes strengthen predictions of the econometric analysis.
When looking at the average sales per register as the dependent variable instead of aggregate weekly sales, the results are compatible with the results of the first model. There is on average a 282 GEL (7.7%) increase in average turnover during the lottery weeks compared to the non-lottery weeks; and average weekly sales in non-lottery weeks of 2012 exceed average weekly sales in 2013 by 458 GEL, on average. In addition, the positive effect and significance of the year 2012 variable shows that controlling for the non-lottery weeks, something was still driving sales up. This could be the long-term effect of the lottery weeks that continued even after the termination of the lottery; hence some evidence of habit formation.
A similar regression is done with the weekly number of cash registers reporting their income as a dependent variable. The outcome illustrates that during the lottery weeks of 2012, the average number of reported cash registers is 3,199 units (4%) more than those in non-lottery weeks, which is quite compatible with the results reported by the first and second regressions.
Conclusion
Despite seemingly positive results, the lottery was prematurely terminated after parliamentary elections in November 2012. Interviews with stakeholders revealed that the public budget that was allocated for the lottery was deemed insufficient to keep the chances of winning high enough and therefore interest and participation from public had decreased significantly from around 2 mln out of 2.5-2.8 mln receipts checked daily in the first months of the lottery to only 300,000 by the end of the lottery. However, there was a lack of financial resources or interest from the new government to invest additional resources to increase the budget and effectiveness of the lottery.
Regardless of its premature termination lottery itself was thought to have influenced social norms and also started a discussion about tax compliance. The tax lottery also aimed to improve citizens’ attitude towards the GRS. A qualitative analysis, based on multi-ethnographic approach through which we have collected media articles, reports, and other materials expressing views on the Georgian tax lottery, however, showed that strategies of “love and fear” are difficult to make work in combination, and we find it hard to say that citizens’ views of the GRS improved due to the lottery itself. Perhaps even the contrary could be proposed. In terms of an increased trust to the GRS, we conclude with our methodological point that a tax lottery cannot be assessed as an isolated event. Previous and other activities that the revenue services engage in that have an impact on taxpayers and on societal tax, compliance have to be taken into consideration. Fear and unjust treatment especially linger in people’s perceptions.
References
- Besley, T., & Persson, T. (2013). Taxation and development. In Handbook of public economics (Vol. 5, pp. 51-110). Elsevier.
- Fabbri, M., & Hemels, S. (2013). ‘Do you want a receipt?’ Combating VAT and RST evasion with lottery tickets. Intertax, 41(8), 430-443.
- Larsen, L., Arakelyan, R., Gogsadze, T., Katsadze, M., Skhirtladze, S., & Muench, N. (2019). The Georgian Tax Lottery of 2012. A Multi-Methodological Assessment. International School of Economics at TSU, Tbilisi, Republic of Georgia.
- Marcus, G. E. (1995). Ethnography in/of the world system: The emergence of multi-sited ethnography. Annual review of anthropology, 24(1), 95-117.
[1] The exchange rate for a Georgian Lari, GEL, is about 3.0 GEL to 1 EUR.
Liberal Democracy in Transition – The First 30 Years
This year marks 30 years since the first post-communist election in Poland and the fall of the Berlin Wall. Key events that started a dramatic transition process from totalitarian regimes towards liberal democracy in many countries. This brief presents stylized facts from this process together with some thoughts on how to get this process back on a positive track. In general, the transition countries that joined the EU are still far ahead of the other transition countries in terms of democratic development.
The recent decline in democratic indicators in some EU countries should be taken seriously as they involve reducing freedom of expression and removing constraints on the executive, but should also be discussed in light of the significant progress transition countries entering the EU have shown during the first 30 years of transition. The brief shows that changes in a democracy can happen fast and most often happen around elections, so getting voters engaged in the democratic process is crucially important. This requires politicians that engage the electorate and have an interest in preserving democratic institutions. An important question in the region is what the EU can do to promote this, given its overloaded political agenda. Perhaps it is time for a Greta for democracy to wake up the young and shake up the old.
This brief provides an overview of political developments in transition countries since the first post-communist elections in Poland and the fall of the Berlin Wall 30 years ago. It focuses on establishing stylized facts based on quantitative indices of democracy for a large set of transition countries rather than providing in-depth studies of a small number of countries. The aim of the brief is thus to find common patterns across countries that can inform today’s policy discussion on democracy in the region and inspire future studies of the forces driving democracy in individual transition countries.
The first issue to address is what data to use to establish stylized facts of democratic development in the region. By now, there are several interesting indicators that describe various aspects of democratic development, which are produced by different organizations, academic institutions and private data providers. In this brief, three commonly used and well-respected data providers will be compared in the initial section before we zoom in on more specific factors that make up one of these indices.
The big picture
The three indicators that we look at first are: political rights produced by Freedom House; polity 2 produced by the Polity IV project; and the liberal democracy index produced by the V-Dem project. Figures 1-3 show the unweighted average of these indicators for two groups of countries. The EU10 are the transition countries that became EU members in 2004 and 2007 and include Bulgaria, the Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Romania, Slovakia, and Slovenia. The second group, FSU12, are the 12 countries that came out of the Soviet Union minus the three Baltic countries in the EU10 group, so the FSU12 group consists of Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
Figure 1. Freedom House
Source: Freedom House and author’s calculations
Note: Scale inverted, 1 is best and 7 worst score
Figure 2. Polity IV project
Source: Polity IV project and author’s calculations
Note: Scale from -10 (fully autocratic) to 10 (fully democratic)
Figure 3. V-Dem
Source: V-Dem project and author’s calculations
Note: Scale from 0 to 1 where higher is more democratic
All three indicators convey the message that the democratic transformation in the EU10 group was very rapid in the early years of transition and the indicators have remained at high levels since the mid-90s only to show some decline in the most recent years for two of the three indicators. The FSU12 set of countries have made much less progress in terms of democratic development and remain far behind the EU10 countries in this regard. Overall, there is little evidence at the aggregate level that the democratic gap between the EU10 and FSU12 groups is closing. While the average EU10 country is more or less a full-fledged democracy, the average FSU12 country is at the lower end of the spectrum for all three democracy measures.
The average indicators in Figures 1-3 obviously hide some interesting developments in individual countries and in the following analysis, we will take a closer look at the liberal democracy index at the country level. We will then investigate what sub-indices contribute to changes in the aggregate index in the countries that have experienced significant declines in their liberal democracy scores.
For the first part of the analysis, it is useful to break down the democratic development in two phases. The first phase is from the onset of transition (1989, 1991 or 1993 depending on the specific country) to the time of the global financial crisis in 2009 and the second phase is from 2009 to 2018 (the last data point).
Figure 4. Liberal democracy, the first phase
Source: V-Dem project and author’s calculations
Figures 4 and 5 compare how the liberal democracy indicator changes from the first year of the period (measured on the horizontal axis) to the last year of the period (on the vertical axis). The smaller blue dots are the individual countries that make up the EU10 group while the red dots are the FSU12 countries. The 45-degree line indicates when there is no change between start and end years, while observations that lie below (above) the line indicate a deterioration (improvement) of the liberal democracy index in a specific country.
In the first phase of transition (Figure 4), all of the EU10 countries increased their liberal democracy scores and the average increase for the group was almost 0.5, going from 0.26 to 0.74. This was a result of many of the countries in the group making significant improvements without any countries deteriorating. The FSU12 group had a very different development with the average not changing at all since the few countries that improved (Georgia and Ukraine) were counterbalanced by a significant decline in Belarus and a more modest decline in Armenia.
Figure 5. Liberal democracy, the second phase
Source: V-Dem project and author’s calculations
The very rapid improvement in the liberal democracy index in the EU10 countries in the first phase of transition came to a halt and also reversed in several countries in the second phase of transition. Of course, as they had improved so much in the first period, there was less room for further positive developments, but the rapid decline in some of the countries was still negative news. However, it does point towards that reform momentum was very strong in the EU accession process, but once a country had entered the union, the pressure for liberal democratic reforms has faded.
Overall, the EU10 average fell by 0.1 from 2009 to 2018. This was a result of declining scores in several countries. The particularly large declines in this period have been seen in Hungary (-0.28), Poland (-0.27), Bulgaria (-0.14), the Czech Republic (-0.14), and Romania (-0.12). Again, the average FSU12 score did not change much, although Ukraine (-0.2) put its early success in reverse and lost as much in this period as it had gained earlier.
Country developments
Since much of the current discussion centers on how democracy is being under attack, the figures name the countries that have seen significant declines in the liberal democracy score in the first or second phase of transition. Figures 6 and 7 show the time-series of the liberal democracy index in the countries with significant drops at some stage of the transition process.
Figure 6. FSU12 decliners
Source: V-Dem project and author’s calculations
In many countries, the drop comes suddenly and sharply, with the first and most prominent example being Belarus. There, it only took three years to go from one of the highest ranked FSU12 countries to fall to one of the lowest liberal democracy scores. In Poland, Romania, Bulgaria and Armenia, the process was also very rapid and significant changes happened in 2-3 years.
Figure 7. EU10 decliners
Source: V-Dem project and author’s calculations
In the Czech Republic and Hungary, the period of decline was much longer and in the case of Hungary, the drop was the most significant in the EU10 group. Ukraine stands out as more of an exception with a roller-coaster development in its liberal democracy score that first took it up the list and then back down to where it started. For those familiar with politics in these countries, it is easy to identify the elections and change in government that have occurred at the times the index has started to fall in all of these countries. In other words, the democratic declines have not started with coups but followed election outcomes where in most cases the incumbent leaders have been replaced by a new person or party.
How democracy came under attack
We will now take a closer look at what has been behind the instances of decline in the aggregate index by investigating how the sub-indices have developed in these countries. The sub-indices that build up the liberal democracy index are: freedom of expression and alternative sources of information; freedom of association; share of population with suffrage; clean elections; elected officials; equality before the law and individual liberty; judicial constraints on the executive; and legislative constraints on the executive (the structure is a bit more complex with mid-level indices, see V-Dem 2019a).
Table 1 shows how these indicators have changed in the time period the liberal democracy indicator has fallen significantly (with shorter versions of the longer names listed above but in the same order). The heat map of decline indicated by the different colours is constructed such that positive changes are marked with green, smaller declines are without colour, declines greater that 0.1 but smaller than 0.2 are in yellow and larger declines in red. Note that the liberal democracy index is not an average of the sub-indices but based on a more sophisticated aggregation technique (see V-Dem 2019b). Therefore, the Czech Republic and Bulgaria can have a greater fall in top-level liberal democracy index that what is indicated by the sub-indices.
Table 1. Changes in liberal democracy indicators at times of democratic decline
Source: V-Dem project and author’s calculations
For the countries with the largest changes in the liberal democracy index, it is clear that both freedom of expression and alternative sources of information have come under attack together with reduced judicial and legislative constraints on the executive. Among the EU10 countries, Hungary and Poland stand out in terms of reducing freedom of expression, while Romania has seen most of the decline coming from reducing constraints on the executive. Not surprisingly, Belarus stands out in terms of the overall decline in liberal democracy coming from reducing both freedom of expression and constraints on the executive in the most significant way.
On a more general level, the attack on democracy does differ between the countries, but in the cases where serious declines can be seen, the attack has been particularly focused on information aspects and constraints on the executive. At the same time, all countries let all people vote (suffrage always at 1) and let the one with the most votes get the job (elected officials).
Policy conclusions
This brief has provided some stylized facts on the first 30 years of liberal democracy in transition and some details on how democracy has come under attack in individual countries. It leaves open many questions that require further studies and some of these are indeed ongoing in this project and will be presented in future briefs and policy papers here.
Some observations have already been made here that can inform policy discussions on liberal democratic developments in the region. The first is that changes can happen very rapidly, both in terms of improvements but also in terms of dismantling important democratic institutions, including those that provide constraints on the executive or media that provides unbiased coverage before and after elections. What is also noteworthy is that these changes have almost always happened after an election where a new person or party has come to power, so the democratic system is used to introduce less democracy in this sense.
It is also interesting that in all of the countries, the most easily observed indicators of democracy such as suffrage and having the chief executive or legislature being appointed by elections are given the highest possible scores. In other words, even the most autocratic regime wants to look like a democracy; but as the old saying goes, “it is not who votes that is important, it is who counts”.
The regime changes at election times that have led to declining liberal democracy scores have also in many cases come as a result of the incumbents not doing a great job or voters not turning up to vote. It was enough for Lukashenko in Belarus to promise to deal with corruption and rampant inflation that was a result of the old guard’s mismanagement to turn Belarus into an autocracy. In Hungary, the change of regime came after the Socialist leader was caught on tape saying he had been lying to voters. While in Romania, only 39% voted in the 2016 election. And in Bulgaria, around half of the voters stayed at home in the presidential election the same year.
In sum, both incompetent and corrupt past leaders and disengaged or disillusioned voters are part of the decline in a liberal democracy that we have seen in recent years. It is clearly time for policy makers that are interested in preserving liberal democracy in the region and elsewhere to think hard about how democracy can be saved from illiberal democrats. Part of the answer clearly will have to do with how voters can be engaged in the democratic process and take part in elections. It also involves defending free independent media and the thinkers and doers that contribute to the liberal democracy that we cherish. The question is if the young generation will find a Greta for democracy that can kick-start a new transition to liberal democracy in the region and around the world.
For those readers that want to participate more actively in this discussion and have a chance to be in Stockholm on November 12, SITE is organizing a conference on this theme which is open to the public. For more information on the conference, please visit SITE’s website (see here).
References
- Freedom house data downloaded on Oct 4, 2019, from https://freedomhouse.org/content/freedom-world-data-and-resources
- Freedom house methodological note available at https://freedomhouse.org/report/methodology-freedom-world-2018
- Polity IV project data downloaded on Oct 4, 2019, from http://www.systemicpeace.org/inscrdata.html
- Polity IV project manual available at http://www.systemicpeace.org/inscr/p4manualv2018.pdf
- V-Dem project data downloaded on Sept 24, 2019, from https://www.v-dem.net/en/data/data-version-9/
- Coppedge, Michael, John Gerring, Carl Henrik Knutsen, Staffan I. Lindberg, Jan Teorell, David Altman, Michael Bernhard, M. Steven Fish, Adam Glynn, Allen Hicken, Anna Lührmann, Kyle L. Marquardt, Kelly McMann, Pamela Paxton, Daniel Pemstein, Brigitte Seim, Rachel Sigman, Svend-Erik Skaaning, Jeffrey Staton, Steven Wilson, Agnes Cornell, Lisa Gastaldi, Haakon Gjerløw, Nina Ilchenko, Joshua Krusell, Laura Maxwell, Valeriya Mechkova, Juraj Medzihorsky, Josefine Pernes, Johannes von Römer, Natalia Stepanova, Aksel Sundström, Eitan Tzelgov, Yi-ting Wang, Tore Wig, and Daniel Ziblatt. 2019a. “V-Dem [Country-Year/Country-Date] Dataset v9”, Varieties of Democracy (V-Dem)
- Pemstein, Daniel, Kyle L. Marquardt, Eitan Tzelgov, Yi-ting Wang, Juraj Medzihorsky, Joshua Krusell, Farhad Miri, and Johannes von Römer. 2019b. “The V-Dem Measurement Model: Latent Variable Analysis for Cross-National and Cross-Temporal Expert-Coded Data”, V-Dem Working Paper No. 21. 4th edition. University of Gothenburg: Varieties of Democracy Institute.