Author: Admin

Do Macroprudential Policy Instruments Reduce the Procyclical Impact of Capital Ratios on Lending? Cross-Country Evidence

Posted on May 6, 2019 | Policy Brief

20190506 Do Macroprudential Policy Instruments Image 01

In this brief, we ask about the capacity of macroprudential policies to reduce the procyclical impact of capital ratios on bank lending. We focus on aggregated macroprudential policy measures and on individual instruments and test whether their effect on the association between lending and capital depends on bank size. We find that macroprudential policy instruments reduce the procyclical impact of capital on bank lending during both crisis and non-crisis times. This result is stronger in large banks than in other banks. Of individual macroprudential instruments, only borrower-targeted LTV (loan-to-value) caps and DTI (debt-to-income) ratios weaken the association between lending and capital and thus act countercyclically. With our study, we are able to support the view that macroprudential policy has the potential to curb the procyclical impact of bank capital on lending and therefore, the introduction of more restrictive international capital standards included in Basel III and of macroprudential policies in general are fully justified.

Macroprudential policy after the GFC

The Global Financial Crisis (GFC) highlighted the need to go beyond a purely microprudential approach (i.e. focusing on the health of individual firms) to regulation and supervision of the banking sector. The empirical literature supports the view that macroprudential policies (i.e. those addressing the general condition of the whole financial system) are able to decrease the vulnerability of the banking sector (see Claessens et al., 2013 for a review, and Cerutti et al., 2015). The increased resilience of the banking sector means that banks are able to absorb losses of greater magnitude – due to higher capital buffers (or provisions) or better access to funding sources, thus reducing the likelihood of a costly disruption to the supply of credit (CGFS, 2012), in particular during crises or recessionary periods. Considering this, macroprudential policies are expected to reduce the procyclical impact of capital ratios on loan supply.

Lending activity of banks and capital ratio nexus

It is a well-known tenet in the banking literature that capital adequacy rules have an impact on the behaviour of banks (Borio & Zhu, 2012). They are expected to protect banks from economic death, i.e. from insolvency or going bankrupt. Previous literature stresses the importance of capital ratios for lending behaviour, during both good economic conditions and in crisis or recessionary periods, in particular in banks with thin capital ratios, and thus insufficient buffers needed to cover loan-losses, (see Beatty & Liao, 2011; Carlson, Shan, & Warusawitharana, 2013) or in large banks (Beatty & Liao, 2011). The problem of the effect of capital ratios on bank lending has been studied extensively since the 1990s, when the first Basel Accord was introduced as an international capital standard (see Jackson et al., 1999). In the wake of the recent GFC, the topic has attracted renewed attention as concerns have arisen that large losses at banks would hinder their capital adequacy and restrain their lending. Capital is found to affect lending behaviour in large publicly-traded banks by Beatty and Liao (2011) and in US commercial banks by Carlson et al. (2013). Additionally, in a cross-country study, Gambacorta and Marqués-Ibáñez (2011) show that publicly traded banks tend to restrict their lending more during recessions or crisis periods due to insufficient capital ratios. Such an effect is referred to as a procyclical capital ratio on bank lending (Beatty & Liao, 2011; Peek & Rosengren, 1995a).

However, previous literature on the link between lending and capital can be roughly subdivided into two groups: The studies that considered macroprudential policy instruments have been limited to individual countries (United States by Beatty & Liao, 2011 and Carlson et al., 2013; France by Labonne & Lame, 2014; United Kingdom by Mora and Logan, 2011), so that all banks were equally affected by the country’s banking policy and regulations. In turn, the studies that focused on the link between lending and capital across countries, have not accounted for macroprudential policy and its instruments (Gambacorta & Marqués-Ibáñez, 2011).

In our recent paper (Olszak, Roszkowska, and  Kowalska, 2019) we extend the existing research by exploring the countercyclical effects of macroprudential policy factors on the association between loan growth and capital ratios on a large cross-country panel.

Why can macroprudential policy affect the link between lending and capital ratios of banks?

While policy standard-setters argue that the new macroprudential approach to regulation and supervision should reduce procyclicality in banking, and in particular by increasing banks’ resilience, it should diminish the effect of capital ratio on loan supply, the empirical evidence on this subject is not available.

In our paper, we employ a cross-country data-set to examine whether the application of macroprudential policies affects the link between loan supply and capital ratios, before and during the 2007/2008 crisis period in a sample of over 4500 banks from 67 countries. The main purpose of the paper is to examine whether macroprudential policy instruments, which were in use before the GFC, had a significantly negative impact on the positive association between lending and capital ratios, during the crisis and in the non-crisis period. If we identify such a negative effect, we will be able to empirically test the view that macroprudential policy is effective in increasing the resilience of banks and thus affects the procyclicality of bank capital regulation.

Based on the previous evidence, we first hypothesize that the link between lending and capital is positive, and is reduced in countries which applied macroprudential policies in the pre-crisis period. Following the capital crunch theory (see Peek & Rosengren, 1995a; and Beatty & Liao, 2011), we expect that the link between lending and capital is strengthened in the crisis period, and is reduced in countries in which the use of macroprudential instruments was more extensive in the pre-crisis period and continued to be used during the crisis. As the association between loan growth and capital ratios, in particular during crisis periods, was found to be stronger in large banks (see Beatty & Liao, 2011), we also examine whether macroprudential policy effects on the association differ between large and other banks (i.e. medium and small).

We use the Bankscope database and data-set on macroprudential policies available in Cerutti et al. (2015) to test our hypotheses. We analyse the effects of macroprudential policies on the association between lending and capital ratio using individual commercial bank data from 67 countries over the period of 2000–2011.

Findings

We find a consistent and strong effect of macroprudential policies on the association between loan growth and capital ratios.

Further, unlike previous studies on the link between bank vulnerability and macroprudential policy, we differentiate between large, medium and small banks, because previous evidence shows that capital ratios affect bank lending with a different magnitude, depending on the bank size (see Beatty & Liao, 2011). Indeed, we find evidence in favour of the expectation that bank size matters for the impact of macroprudential policies for the link between lending and capital.

Analysis of the role of individual macroprudential policy instruments shows that only loan-to-value caps and debt-to-income ratios weaken the positive effect of capital ratios on lending. This means that in countries which apply such instruments, bank lending is not prone to shortages in capital buffers, in particular during financial crisis. Thus, the banking sector does not add to business cycle fluctuations.

We also identify which instruments are better at curbing the procyclicality of capital standards. In particular, we find that borrower targeted macroprudential instruments (such as loan-to-value caps) or restrictions on balance sheets of financial institutions (such as dynamic provisions or leverage ratios), are more effective in reducing the procyclicality of capital standards.

Policy implications

Our finding that macroprudential policies are able to alleviate the impact of capital ratio on lending, in particular during the crisis, may have certain implications for policy makers in the area of implementation of commonly recognized standards targeted at the reduction of borrower risk-taking. Our results suggest that more frequent use of these instruments may create additional buffers in large banks and in emerging and closed-capital-account economies, thus making large banks’ lending and lending of banks in emerging markets and closed economies less affected by capital ratios during crisis periods. Therefore, in the current work aimed at creating macroprudential regulations, more attention should be focused on instruments which have the potential to reduce borrower risk.

References

  • Beatty, A., & Liao, S. (2011). Do delays in expected loss recognition affect banks’ willingness to lend? Journal of Accounting and Economics, 52, 1-20.
  • Borio, C., & Zhu, V.H. ( 2012). Capital regulation, risk-taking, and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, 8, 236–251. doi:10.1016/j.jfs.2011.12.003
  • Carlson, M., Shan, H., & Warusawitharana, M.(2013). Capital ratios and bank lending: A matched bank approach. Journal of Financial Intermediation, 22, 663–687. doi:10.1016/j.jfi.2013.06.003
  • Cerutti, E., Claessens, S., & Laeven, L. (2015). The use and effectiveness of macroprudential policies: New evidence. IMF Working paper WP/15/61.
  • Claessens, S., Ghosh, S., & Mihet, R. (2013). Macro-Prudential policies to mitigate financial system Vulnerabilities. Journal of International Money and Finance, 39, 153–185.
  • Committee on the Global Financial System. (2012). Operationalising the selection and application of macroprudential instruments. CGFS Papers No 48. Bank for International Settlements. 2012.
  • Gambacorta, L., & Marqués-Ibáñez, D. (2011). ‘The bank lending channel. Lessons from the crisis.’ Working paper series No 1335/May 2011. European Central Bank.
  • Jackson, P., Furfine, C., Groeneveld, H., Hancock, D., Jones, D., Perraudin, W., Yoneyama, M. (1999). Capital requirements and bank behaviour: The impact of The Basle Accord. Basle: Bank for International Settlements.
  • Labonne, C., & Lame, G. (2014). Credit growth and bank capital requirements: Binding or not? Working Paper.
  • Mora, N., & Logan, A. (2012). Shocks to bank capital: Evidence from UK banks at Home and Away. Applied Economics, 44(9), 1103–1119.
  • Olszak, M., Roszkowska, S. & Kowalska, I. (2019). Do macroprudential policy instruments reduce the procyclical impact of capital ratio on bank lending? Cross-country evidence, Baltic Journal of Economics, 19:1, 1-38, DOI: 10.1080/1406099X.2018.1547565
  • Peek, J., & Rosengren, E. (1995a). The capital crunch: Neither a borrower nor a lender be. Journal of Money, Credit and Banking, 27, 625–638.

Acknowledgement: This Policy Brief is based on a recent article published in the Baltic Journal of Economics (Olszak, Roszkowska, and Kowalska, 2019).

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.

Trade Induced Technological Change: Did Chinese Competition Increase Innovation in Europe?

Posted on April 29, 2019 | Policy Brief

20190428 Trade Induced Technological Change Image 01

The last 30 years has witnessed a shift of the world’s manufacturing core from Europe and North America to China. A key question is what impact this has had on manufacturing workers in other developed economies, and also on innovation, patenting, IT adoption, and productivity growth. While a rigorous data analysis on these variables for developing economies, particularly in Eastern Europe, is not yet available, this brief examines the impact of the rise of China on innovation in Western Europe, and also reviews the evidence on the impact of the rise of China generally. Recent research by Bloom, Draca, and Van Reenen (2016) found that Chinese competition induced a rise in patenting, IT adoption, and TFP by 30% of the total increase in Europe in the early 2000s. Yet, we find numerous problems with the Bloom et al. analysis, and, overall, we do not find convincing evidence that Chinese competition increased innovation in Europe.

Few events have inspired the ire of economists as much as Brexit and the rise of Donald Trump, two events seen as related as both were a seeming reaction to both globalization and slowing economic growth, particularly as some (such as Trump himself) saw the former as a key cause of the latter. Both Brexit and the trade war spawned by Trump do seem to have had negative economic effects – US equities have suffered every time the trade war has escalated, while anecdotal reports and more sophisticated economic analyses seem to suggest that Brexit has cost the UK jobs.

And yet, there is a need for policy makers and economists to hold two ideas in our heads simultaneously: Trump’s trade war and Brexit may be policy disasters, and yet globalization can create both winners and losers, even if it is clear that, generally speaking, the overall gains are likely positive and large. This is likely also true of the rise of China – one of the most dramatic events in international economics in the past 50 years. Figure 1 shows the increase in trade with China from the early 1980s to 2017, a period in which US imports from China grew from 7 to 476 billion dollars.

Figure 1. Chinese Imports (in logs, deflated)

Source: World Bank WITS

The academic literature tends to show that this impact, the rise of China, may have cost the US as much as 2.2 million jobs directly (Autor et al.), and as much as 3 million jobs once all input-output and local labor market effects are included. While approximate, these numbers are large enough for the China shock to have played a role in the initial onset of “secular stagnation” – the growth slowdown which began around 2000 for many advanced nations, including the US and Europe. In addition, Autor et al. (forthcoming) found that Chinese competition also resulted in a decline in patent growth. In the European context, however, other authors have found that although China did do some damage to certain sectors, overall, it does not appear to have been quite as damaging, particularly in Germany, which also benefitted from exporting increased machine tools to the Chinese manufacturing sector. And, in a seminal paper, Bloom, Draca, and Van Reenen (2016) find that Chinese competition actually led to an increase in patents, IT adoption, and productivity in Europe from 1996 to 2005, along accounting for nearly 30% of the increase. This is important, as it implies that without the rise of competition with China, the slowdown in European growth would have been even more pronounced than it was. It also implies that, far from being a source of stagnation, Chinese competition has been a source of strength. It also makes it more likely that the slowdown in growth since 2000 was caused by supply-side factors, such as new inventions becoming more difficult over time, as is perhaps the leading explanation among economists, notably Northwestern University business professor, Robert Gordon (2017), and also supported by others (see this VoxEU Ebook featuring a “who’s who?” among economists). It would also be evidence that contradicts the “Bernanke Hypothesis” that the former US Fed Chair first laid out in a 2005 speech at Jackson Hole, in which he suggested that international factors – particularly the savings glut and US trade deficit – were behind falling interest rates in the US. Since then, Ben Bernanke has followed up with a series of blog posts suggesting that these international factors were the cause of the initial onset of secular stagnation.

Figure 2. European Growth Relative to Trend

Source: World Bank WDI

In this brief, I present new research in which my coauthor and I test the robustness of the research finding that China had a positive impact on innovation in Europe (Campbell and Mau, 2019). We find that these findings are very sensitive to controls for time trends and other slight changes in specification. We also find that the number of patents matched to firms in the sample shrinks over the sample period (from 1996 to 2005). Overall, we conclude that, unfortunately, it is unlikely that the rise led to a significant increase in innovation in Europe, although more research is needed. Our research also sheds light on the so-called “replication crisis” currently gripping the social sciences, as researchers begin to realize that many published findings are not robust.

Trade-Induced Technical Change?

Bloom, Draca, and Van Reenen (2016) – hereafter BDV – tried to isolate the impact of the rise of China on Europe using several methods, using firm-level data for Europe. They placed each firm in a 4-digit sector, where they measured imports from China over time. First, they just looked at changes in patents, IT, and total factor productivity (TFP) at the firm level for sectors in which Chinese imports increased a lot vs. other sectors. But, because economists are always weary of the difficulty of isolating a causal relationship from non-experimental data, the authors, worrying that the sectors which saw increases in Chinese imports might differ systematically from the others, the authors also used what is called an instrumental variable. That is, they used the fact that when China joined the WTO in 2001, they also negotiated a reduction in textile quotas. Thus, BDV reason that textile sectors which had tightly binding quotas prior to removal were likely to have had fast growth in Chinese imports after China’s accession to the WTO. Thus, they end up comparing textile sectors in which the quotas were binding to sectors in which they were not binding. We went back and compared the evolution of patents in these same groups (sectors with binding textile quotas vs. not binding) below in Figure 3.

Figure 3. Patent Growth in China-Competing Sectors (Quota Group) vs. Other Sectors

Notes: The vertical red lines are dates when textile quotas were removed. The blue line shows the evolution of patents in the sectors without binding quotas (non-competing sectors), and the red line is the evolution of patents in the China-competing sectors. The dotted lines are 2 standard deviation error bounds.

What is immediately obvious in Figure 3 is that patents are declining rapidly over the whole period in both groups. The overall level of patents was falling in both groups for the full period. There is a 95.8% decline in patenting for the China-competing group, vs. a 96.2% decline for firms in the non-competing (“No quota”) group. By 2005, average patents per firm are close to zero in both groups (.04 in the China-competing sectors vs. .11 in the others). However, in the “No quota” group, the initial level of patents – close to three per firm per year – was much larger than in the quota group. Since patents are falling rapidly in both groups but bounded by zero, the level of the fall in patents in the non-quota group is larger, but one can easily see that much of this decline happens before quotas are removed. If we control for simple time trends, the effect goes away. Also, given the tendency of patents to decline, we can also remove the correlation between Chinese competition and patent growth in some specifications by simply controlling for the lagged level of patents. The overall declining share of patents in the BDV data also raises questions about data selection issues, as patents granted in the BDV data in the later years were a smaller share of the total patents actually granted in reality.

BDV also look at the impact of the rise of China on IT adoption. However, here they proxied IT adoption by computers per worker, but they did not collect enough data to control for pre-trends properly in the data, so we cannot be sure whether this correlation is causal or not. (For what it is worth, on the data we do have, from 2000 to 2007, including trends in the data renders the apparent correlation between Chinese import growth and computers-per-worker insignificant.)

Lastly, BDV look at the impact of the rise of China on TFP growth. Here, unlike before, we find that their measure is robust across various estimation methodologies. However, when we look at changes in a commonly used alternative measure of productivity, value-added per worker, instead of TFP (as TFP needs to be calculated using strong assumptions about the functional form of technology), we find no impact (see Figure 4 below).

Figure 4. Value-Added per worker Growth: China-competing sectors vs. others

Figure 4 above compares the evolution of value-added per worker in the most China-competing sectors vs. the others. Trends look similar for firms in either group of sectors (China-competing or otherwise), and we do not find a correlation. We also do not find that Chinese competition led to an increase in profits, nor an increase in sales per worker (in fact, we found a significant decrease in most specifications).

Conclusion

All in all, we find that the BDV findings suggesting that the rise of China had a large impact on innovation in Europe is not robust. However, in most specifications, we also don’t find a negative impact as did Autor et al. (forthcoming) for the US. This might have to do with data quality, although it does seem to be closer to other work, such as Dauth et al. (2014), which suggests that the rise of China had a smaller impact in Germany than in the US.

We also felt it was a bit alarming that a simple plot of  the trends in patents for China-competing and not-competing sectors was enough to seriously question the conclusions of BDV, as their paper was published in the Review of Economic Studies, a top 5 journal in academic economics. If influential articles published in the most fancy journals can exhibit such mistakes, this underscores the extent which the profession of economics may suffer from many published “false-positive” results. The reasons why this could be the case are obvious: researchers are under pressure to find significant results, as top journals don’t often publish null results, and replication is exceedingly rare in a field in which one needs to make friends to publish. However, there are signs that replication is becoming more mainstream, and as it does, we can certainly hope that voters around the world will turn back to science.

References

  • Autor, D., D. Dorn, G. H. Hanson, G. Pisano, and P. Shu. Forthcoming. Foreign Competition and Domestic Innovation: Evidence from US Patents. Forthcoming: AEJ:Insights.
  • Bloom, N., M. Draca, and J. Van Reenen. 2016. “Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity.” The Review of Economic Studies 83 (1): 87–117.
  • Campbell, Douglas and Mau, Karsten. 2019.. Trade Induced Technological Change: Did Chinese Competition Increase Innovation in Europe?”, mimeo
  • Dauth, W., S. Findeisen, and J. Suedekum. 2014. “The Rise of the East and the Far East: German Labor Markets and Trade Integration.” Journal of the European Economic Association 12 (6): 1643–1675.
  • Gordon, R.J., 2017. The rise and fall of American growth: The US standard of living since the civil war (Vol. 70). Princeton University Press.

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 Nordic Model of Prostitution Legislation: Health, Violence and Spillover Effects

Posted on April 21, 2019 | Policy Brief

20190422 The Nordic Model of Prostitution Image 01

An emerging literature is studying, with the help of new types of data and clever identification strategies, the effects of different legislative measures regulating the market for sexual services. The primary target of such measures are arguably the participants in the market, prostitutes and their clients, and law and order concerns in their immediate vicinity. In a new research project, we mean to shift the spotlight on potential broader spillovers from these policies, both to other outcomes and other countries. In their presence, we cannot understand the full impact of a law change if we limit our analysis to the prostitution market in that country alone. We focus on a particular model of prostitution legislation, first adopted in Sweden in 1999 and known since as the Nordic model.

The Nordic model

The debate on prostitution legislation shares clear similarities with the standard arguments put forward for or against alcohol prohibition or drug liberalization. The criminalization of an activity is most likely shrinking the corresponding market, because it increases the cost of participation. It also functions as a signal of what a society deems acceptable or not, and coordinates behavior to potentially change social norms. At the same time, however, it pushes the remaining market into the darkness, where criminal activity potentially increases. In the specific case of the prostitution market, what is particularly feared is an increased risk of violence and general worsening of conditions for the potentially fewer sex workers.

When, in 1999, Sweden enacted the first asymmetric criminalization of prostitution, whereby buyers but not sellers of sexual services are punished, a third way between criminalization and legalization seemed to appear. This legislation would still give a clear signal on societal values, but at the same time protect the, in large part female and in large part exploited, sex workers. The model proved very successful in deterring street prostitution, and, under the catchy name of the “Nordic model”, has subsequently been adopted by Norway, Iceland, Canada, and France. It is currently under consideration in further countries as well.

This is where most reports and policy evaluations stop. In a new project at SITE, involving an international research cooperation, we propose to investigate the impacts of this legislation beyond the participants in the prostitution market. Specifically, we encompass other outcomes such as gender-based violence, health outcomes and online behavior, both within Sweden and other countries that implemented the reform, but also, most importantly, across their borders. The idea is that law changes in one country may also affect the demand and supply of prostitution in other countries, especially but not exclusively those bordering the country that enacts the law change. Two possible channels for such cross-border effects are sex tourism and human trafficking.

This brief summarizes the preliminary evidence we collected so far.

Violence

The focus on the role of policies is a recent but rapidly growing addition to the economic literature on prostitution. The risk of violence, both for the participants and within the neighboring geographic areas, is a natural area of concern for policy in relation to the sex market, and to criminal activities in general. To improve on cross-country comparisons and draw causal links from policies to outcomes, the most robust contributions in this area focus on natural experiments. Cunningham and Shah (2018) study an unintentional, and therefore unexpected and temporary, decriminalization of indoor prostitution in Rhode Island, and find that reported rape offences fall by 30%. Cunningham and coauthors (2019) also look at the geographic expansion of the erotic services section of Craigslist, a popular advertisements website, before online solicitation was banned in 2018. The possibility to use online platforms for their work, by allowing prostitutes to keep mostly indoors, and screen their potential clients to a larger extent, appears to have been very beneficial: the study finds lower female homicide rates by 10-17% when and where the service was available. Ciacci and Sviatschi (2018) find that the opening in a neighborhood of indoor prostitution establishments decreases sex crime by 7-13%, with no effect on other types of crime, arguing that the reduction is mostly driven by potential sex offenders resorting to the establishments, instead, to satisfy their needs. What is common to these studies is the finding that allowing the sex market to exist in some form is beneficial for outsiders, while indoor prostitution is safer for the sex workers themselves.

Preliminary findings from our project (Berlin et al., 2019 a) are consistent with this. We base our strategy on a comparison, within Sweden, between counties that are above or below average in terms of representation of women among police force and elected officials (we refer to them as treated and control counties, respectively). Both these indicators have been found in previous studies to drive greater reporting and lower incidence of crimes against women (Iyer et al., 2012; Miller and Segal, 2018). Looking at population-wide rates of violence against women in Sweden, we observe an increase in assaults committed by acquaintances indoors by about 10% and an increase in rapes indoors by more than 20% in treated as compared to control counties. Since the reform is argued to have eliminated street prostitution, and pushed the remaining sex trade indoors, violence against prostitutes will be counted in the indoor assaults statistic. However, in treated counties, where we observe the increase in violent crimes against women, we at the same time find fewer convictions for buying sex. We argue therefore that the increase in assaults we observe is not likely in the context of the sex market, but rather indicates increased violence against non-prostitutes from frustrated former customers, in other words a negative externality of deterring prostitution. In order to distinguish whether this increase is only in reported or actually committed crimes, we look at hospitalizations of women for injuries that are related to sexual interactions. If we think that seeking hospital care is less sensitive than reporting a violent man to the police, the series of hospitalizations should be closer to the true violence than the convictions. Although numbers are small and differences not significant, hospitalizations spike up in treated counties directly after the reform, as Figure 1 shows. All in all, our preliminary evidence from Sweden suggests that intimate partner violence and violence on women in general might have increased as a consequence of the “Nordic model”.

Figure 1. Hospitalizations of women

Source: Hospitalizations of women for injuries related to sex, from Berlin et al. (2019 a).

Other outcomes

Besides violence, health outcomes are also a policy relevant objective with the regulation of prostitution. Indicators such as the spread of sexually transmitted infections serve the double purpose of giving a rough indication of the changes in the size of the sexual market while at the same time enabling inference on the work environment and general living conditions for prostitutes. In a companion paper, which is underway, we examine these statistics for Sweden and Norway, in terms of within country changes but also with a mind to capture potential cross-border spillovers between the two countries.

Cross-border spillovers

In another working paper (Berlin et al., 2019 b) we study the reform enacted in France on April 13th, 2016, which removed the punishment for solicitation of prostitution (previously set to two months imprisonment plus a fine) and introduced instead a range of fines for the purchasing of sexual services, thereby, pushing the punishment to the side of the buyer. In order to study the cross-border effect of this change, we focus on the German Bundesländer bordering France: Baden-Württemberg, Saarland and Rheinland-Pfalz. The national law in Germany generally allows prostitution, but gives federal states the right to regulate it on a more detailed level. This generates variation at the level of the Gemeinde, the administrative division corresponding roughly to a municipality. The idea behind our analysis is to compare municipalities where prostitution is at least in part allowed with municipalities where it is banned (we refer to them as treated and control municipalities, respectively). Our preliminary results show that foreign tourism to cities where prostitution is at least partly legal increased after the reform more than to those completely overlapping with a Sperrbezirk, i.e. an area in which prostitution is banned. However, so does domestic tourism. This might be seen as a threat to our interpretation, since we can’t connect this increase directly to the French reform, unless we can show that there is a dynamic adjustment of the supply of sexual services, which also attracts domestic flows. We can’t isolate tourism from France in this data, so we go a step further by looking at online behavior.

Google searches

A key contribution of this project is to gather new data that haven’t been analyzed to date in the existing literature. In particular, we collected detailed data on Google searches originating in France using as keywords different German cities. The idea is to capture potential deviations of search trends over time driven by prostitute customers who after the legislative change find it more attractive to look for sexual services across the German border. Preliminary findings show that after the policy change there is a larger increase in search activity for cities closer to the French border relative to cities further away. While searches are generally downward trending over time, the trend is slowed after the French reform, and this effect is stronger the closer a city is to the border, although intermittently significant. Figure 2 reports the differential increase in searches (with 95% confidence intervals) as related to the distance from the border. The negative relationship between size of the impact and distance to the border is consistent when controlling for city and time fixed effects. However, further analysis is needed in order to validate the results and control for confounding factors.

Figure 2. Google searches for German cities before and after the French reform

Source: Google Search data on searches originating in France for cities closer to VS farther from the German border than the indicated distance (in km).

We are currently repeating the same exercise at the French borders with Belgium and Spain, with searches originating in Norway around the time of the Norwegian reform (2009), and at the US-Canada border around the time of the Canadian reform (2014).

Conclusion

When adopting a version of the Nordic model in 2014, the Canadian Department of Justice stated that the “overall objectives [of the reform] are to:

  • Protect those who sell their own sexual services;
  • Protect communities, and especially children, from the harms caused by prostitution; and
  • Reduce the demand for prostitution and its incidence.”

Research seems to show that restrictions on the sexual services market, rather than the sex trade itself, have substantial negative impacts on communities and sex workers. Nevertheless, it is understandable that legislators in many countries, sharing similar concerns and expectations as expressed by the Canadian DoJ, find it unattractive to legalize prostitution. What our project points to, then, is that when considering various forms of criminalization, it is crucial to understand how best to pursue each of these objectives. Taking into account side-effects, or spillovers, such as the ones we highlight above, might reveal the need for complementary policies, in order to avoid unexpected and counterproductive consequences.

References

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.

Resident Altruism and Local Public Goods

Posted on April 15, 2019 | Policy Brief

20190415 Resident Altruism and Local Public Goods Image 01

This policy brief discusses residents’ voluntary payments for local public goods in Russian municipalities in a historic and a comparative international context. We emphasize the behavioral aspects of such collective action and the political economy risks of implementing this financial mechanism. Finally, we use data from the Russian Federal Treasury to offer empirical evidence on the regional variation in the amounts of these payments.

Theoretical grounds

One of the drawbacks of a system of fiscal federalism is that it often results in an inadequate distribution of fiscal authority between regional and local governments. As a result, municipalities may be incapable of levying a due amount of taxes for the provision of the required quantity or quality of local public goods. A solution to the problem may be found in residents’ voluntary monetary and nonmonetary contributions to local projects. In Russia these are financial contributions to projects such as the renovation of roads, pedestrian bridges, parks, sports grounds and playgrounds, street lighting, the cleaning of ponds and rivers, etc. (Besstremyannaya, 2019). The experience of municipalities in the U.S. provides similar examples of residents’ financial contributions to municipal projects: here these resources are used, for example, as additional funds for financing secondary education (Winerip, 2003).

There are several potential theoretical explanations for the motivation of individuals to engage in such voluntary contributions. To start with, they can be motivated by purely altruistic concerns about local public welfare and the benefits of others (Ferris, 1984). Alternatively, the motives of individuals may be better (and, perhaps, more realistically) described by the approach of impure altruism (Andreoni, 1990), which trades off the amount of the public good against the size of contribution in motivating the behavior of the individual.

Further, the phenomenon of voluntary contributions is closely related to the desire of local authorities to substitute for insufficient budgetary revenues. As a result, residents may be coerced to submit monetary or in-kind labor payments for community development (Beard, 2007), for instance to put asphalt on rural roads (Olken and Singhal, 2011). Accordingly, instead of referring to residents’ contributions as donations, one may consider this mechanism of raising extra resources for local budgets as a type of informal tax. Arguably, altruism for the provision of public goods may be more prevalent among residents in developed countries, while contributions for local projects in developing countries reflect direct or indirect coercion by local authorities.

This policy brief analyses voluntary contributions to municipal budgets by residents in modern Russia. The presence of only fragmentary evidence from other countries limits our formal comparative analysis. However, we attempt to summarize common issues on the implementation of this financial mechanism.

Russian experience and legal framework

In contemporary Russia, residents’ contributions to local projects are called self-taxes (“samooblozheniye”) and constitute non-tax revenues of local governments (Article 131 of the Budget Code of 1998, Article 56 of the Local Government Law of 2003).

According to the Budget Code, self-taxes are fixed-size and one-time payments by residents for purposes of local projects, with the list of projects initiated directly by residents and voted at a local referendum. The projects commonly include activities on improving local infrastructure (Balynin, 2015).  The December 2017 revision of the Local Government Law attempted to add additional incentives for self-financing by making it more targeted (in terms choosing urgent local projects) and easier to coordinate (in terms of organizing a referendum) by allowing referendums by residents of only selected parts of a municipality.

According to the Budget Code of the Russian Federation, self-taxes are earmarked items in non-tax revenues of local budgets, and may not be interrelated with other types of revenues or with the deficit of local government.

It should be noted that the use of self-taxes is not new in modern Russia: this funding mechanism was temporary exploited by Soviet authorities  in the 1920s and 1930s, and was revitalized in the emerging Russian economy in the 1990s.

The early use of self-taxes in Soviet Russia illustrates the issue with the transformation of self-taxation into informal taxation. Self-taxation was introduced in 1924 as a formally voluntary decision of residents on financing local public goods. However, one may doubt whether the decision was indeed made by residents without pressure. Moreover, the lists of local public goods to be financed by self-taxes were determined by public authorities (Resolution by the Central Executive Committee and Soviet of National Commissars of the USSR of 3.08.1931). An illustration of the opposition to this informal tax may be found in the protocols of  the council of residents of Roksanka, a village in Kaluzhskaya region from August 1928: citizens decided not to use self-taxes to finance a local school, since they believed there were sufficient budgetary funds – namely revenues from sold public property  (Sergienko, 2015).

Calls to avoid similar retransformation of self-taxes into an informal tax were noted in modern Russia in 2006-2007, when the Bills on the amendments to the Local Government Law attempted to empower local authorities with the rights to deal with issues of self-taxation (Emetz and Makarov, 2016).

International experience

Private contributions in the form of monetary payments or labor participation are common in developing countries and are explained by the need to improve the insufficient quality of basic local public goods. For instance, the mechanism is used for road construction, water supply or primary education (Olken and Singhal, 2011). At the same time, residents of developed countries may choose to contribute to sustaining a high quality of local public goods: fire departments, medical centers, museums (Bice and Hoyt, 2000; Ferris, 1984). For example, the introduction of a redistributional mechanism of budgetary funds across rich and poor municipalities may lead to a decrease in the quality of public goods in the richest municipalities (owing to a fall in per capita funds after the redistribution). Accordingly, residents of rich municipalities may voluntarily decide to collect extra funds to recover the formerly high quality of public goods (e.g. secondary education in the U.S., see Brunner and Sonstelie, 2003; Winerip, 2003).

A common challenge to implementing a mechanism of voluntary payments is associated with the difficulties of reaching a decision within a large group of individuals. Indeed, residents may demonstrate selfish behavior or may follow selected local leaders (Jack and Recalde, 2015; Blackwell and McKee, 2003). Moreover, the common lack of enforcement instruments makes voluntary contributions unreliable (Slemrod, 1998).

Interestingly, the methods of dealing with non-compliance are similar across countries:  the Perm krai of Russia, municipalities in the U.S. and villages in developing countries use techniques as such notification by mail, home visits, disclosing the lists of non-compliers and employing various ways of informal coercion by neighbors or public leaders (Olken and Sighal, 2011; Miguel and Gugerty, 2005; Winerip, 2003).

Data from Russian regions

We use the 2013-2016 annual data of the Russian Treasury, which allows disentangling self-taxes as an item in the list of non-tax revenues of local budgets. Owing to municipal-level data being unavailable, our analysis concerns the sum of local budgets in each region. Only 33  regions out of 83 analyzed regions had positive self-tax revenues in 2013, and the leading regions in 2015-2016 are the Tatarstan Republic, the Bashkortostan Republic, Kirovskaya oblast, Lipetskaya oblast, Kaluzhskaya oblast, and Perm Krai. The share of self-taxes in non-tax revenues is rather low: it amounts to 2-3% in Tatarstan, while it is less than 1% in the remaining regions (Table 1).

Table 1. Top regions according to levied self-taxes in 2015-2016

  Self-taxes in 2015 Self-taxes in 2016
Thousand rubles % of non-tax revenues of local budgets Thousand rubles % of non-tax revenues of local budgets
Tatarstan republic 122268.26 2.11 183413.26 3.44
Kirovskaya oblast 11431.02 0.50 7301.01 0.36
Bashkortostan republic 1943.96 0.02 2781.02 0.03
Lipetskaya oblast 3670.65 0.22 2701.14 0.16
Kaluzhskaya oblast 2073.97 0.11 2620.54 0.15
Permskii krai 3087.31 0.08 2335.02 0.06
Republic South Osetiya-Alaniya 1807.11 0.38 1451.16 0.30
Tyva republic 792.93 0.42 1342.60 0.78
Rostovskaya oblast 1307.36 0.02 1124.40 0.02
Zabaikalskiy krai 847.58 0.08 1092.68 0.11
Samarskaya oblast 1023.76 0.02 978.87 0.02

Arguably, the share of self-taxes in non-tax revenues is not associated with the desire to compensate for insufficient transfers from the federal or regional budgets: the absolute value of the correlation coefficient with the share of transfers to local budgets in non-tax revenues is below 0.25 (Besstremyannaya, 2019, Table 1). Similarly, we found no interrelation of the share of self-taxes with such socio-economic variables as (per capita) gross regional product and density of population.

Next, we focus on the policy of regional governments to provide budgetary funds on top of the money collected through self-taxes. As of 2016, such regional co-financing was present in the Tatarstan Republic, Kirovskaya oblast, Vladimirskaya oblast and Perm Krai  (Emetz and Makarov, 2016; Balynin, 2015). The coefficient of regional co-financing of local projects (the amount of regional funds over the locally provided funds) equals 1 in Vladimirskaya oblast and varies from 1.5 to 5 in other above-mentioned regions. Examples of such co-provision of local public goods by region and municipalities include the renovation of water supply facilities in Perm Krai and the cleaning of lakes in Tatarstan (Nikitin, 2018, Platoshino budget, 2017).

Our estimates reveal that coefficients higher than 1 are associated with a higher prevalence of self-taxes. Indeed, the increase in the share of self-taxes in the revenues of local budgets in such regions is much higher than the corresponding growth in regions without co-financing or with unity co-financing (Besstremyannaya, 2019, Table 2).

Finally, we use the data for Perm Krai which experienced a recent reform with a rise of the coefficient from 3 to 5 in 2014. Our estimates of the treatment effect of such a reform and an extrapolation to other regions reveal that a unit increase of the coefficient causes a 55% growth in the share of self-taxes in non-tax revenues (Besstremyannaya 2019, Table 3).

To sum up, regional co-financing of local projects is associated with a growth in the collected self-taxes.

Conclusion

The phenomenon of voluntary contributions to local budgets is relatively common in real life. However, the literature addressing it is rather fragmented. In particular, little is known empirically on the motivation of individuals to engage in such contributions.

Our analysis with the 2013-2016 annual data for Russian regions reveals that residents’ contributions to local public goods are unrelated to insufficient revenues by local budgets. Moreover, the share of residents’ contributions in the budgetary non-tax revenues is positively associated with regional co-financing of these local projects. Hence, one may conjecture that in Russia, this phenomenon may be viewed as an altruistic attempt to raise quality of local public goods or as a means to signal about the most urgent local projects to regional governments.

References

  • Andreoni, J. (1990). Impure altruism and donations to public goods: A theory of warm-glow giving. The Economic Journal, Vol. 100(401), pp. 464-477.
  • Balynin I.V. (2015). The use of self–taxes of citizens in forming the revenues of the local budgets. Finansy i Upravleniye, No.2, pp. 53–62. (In Russian).
  • Beard, V. A. (2007). Household contributions to community development in Indonesia. World Development, Vol. 35(4), pp. 607-625.
  • Besstremyannaya G.E. (2019) Informal taxes for the provision of public goods in Russian regions. Voprosy Ekonomiki No.1, pp 124-134. (In Russian).
  • Bice D.C., Hoyt W.H. (2000). The impact of mandates and tax limits on voluntary contributions to local public services: An application to fire–protection services. National Tax Journal, Vol. 53(1), pp. 79–104.
  • Blackwell C., McKee M. (2003). Only for my own neighborhood?: Preferences and voluntary provision of local and global public goods. Journal of Economic Behavior and Organization, Vol. 52(1), pp. 115–131.
  • Brunner E., Sonstelie J. (2003). School finance reform and voluntary fiscal federalism. Journal of Public Economics, Vol. 87(9–10), pp. 2157–2185.
  • CEFIR project for the Ministry of Finance of the Russian Federation “The development of methodological recommendations for increasing the revenues of Russian regions and municipalities” (Final report of November 2017)
  • Emetz M.I., Makarov M.A. The self–taxation of citizens as a source of local budget revenues. Ekonomika i Menedgment Innovatsionnyh Tehnologii, No. 12, http://ekonomika.snauka.ru/2016/12/13433 (In Russian).
  • Ferris J.M. (1984). Coprovision: Citizen time and money donations in public service provision. Public Administration Review, pp. 324–333.
  • Jack B.K., Recalde M.P. (2015). Leadership and the voluntary provision of public goods: Field evidence from Bolivia. Journal of Public Economics, Vol. 122, pp. 80–93.
  • Miguel E., Gugerty M.K. (2005). Ethnic diversity, social sanctions, and public goods in Kenya. Journal of Public Economics, Vol. 89(11–12), pp. 2325–2368.
  • Nikitin, E. (2018) Self-taxation in Tatarstan republic provides for 4 to 1 budgetary cofinancing https://www.tatar-inform.ru/news/2018/02/16/593910/
  • Olken B.A., Singhal M. (2011). Informal taxation. American Economic Journal: Applied Economics, Vol. 3(4), pp. 1–28.
  • Platoshino budget for 2017 and forecast for 2018-2019. http://www.platoshino59.ru/index.php/2012-01-05-09-21-25/2016-08-28-09-18-38/item/403-publichnyj-byudzhet-platoshinskogo-selskogo-poseleniya-na-2017-god-i-planovyj-period-2018-i-2019-godov-byudzhet-dlya-grazhdan
  • Sergienko, N.S. (2015). Self-taxation as a form of voluntary participation of the population in socioeconomic development of settlements. Sovremennye Issledovaniya Sotsialnyh Problem, Vol. 1, No. 21, pp. 266–270. (In Russian).
  • Slemrod, J. (1998). On voluntary compliance, voluntary taxes, and social capital. National Tax Journal, Vol. 51(3), pp. 485–491.
  • Winerip, M. 2003. On Education: Giving green or turning red. The New York Times, Feb 26.

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.

Capital Flows from Russia — The Bigger Picture

Posted on April 8, 2019 | Policy Brief

A bunch of dollar bills covering table that represents capital flows in Russia

There is an increasing focus on how Russian capital flows are being channelled through Western banks to various destinations, including offshore havens. There are of course legitimate reasons and legal ways of moving capital across borders, but much of the international focus on capital flows in recent decades is linked to the financing of terrorism, tax evasion, and money laundering in connection with criminal activities. This brief provides the macro view of capital flows between Russia and the rest of the world to paint the bigger picture behind the more specific stories we read about in the news that involve individual businessmen, corrupt officials, criminals, and banks.

International capital movements have a clear role in allocating resources efficiently across countries. However, today’s media coverage instead typically focuses on the role of capital flows in financing terrorists and avoiding taxes. Recently, money laundering has been creating headlines around the world in the Panama papers and other similar stories, illuminating complicated schemes in the global financial system in connection with illegal activities such as tax evasion, corruption, drug dealing and human trafficking.

In the international policy making arena, since 1989, the Financial Action Task Force (FATF) has the objective “to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system”. After the terrorist attacks in 2001, the issues of anti-money laundering (AML) and combatting the financing of terrorism (CFT) also became a central area of the IMF’s work and has since become an increasingly important policy question.

In several of the news stories, money flowing from Russia features prominently. This brief provides the bigger picture of Russian capital flows based on publicly available data as a complement and background to the news stories that are based on inside information, or “leaks”, and that focus on particular individuals and banks.

Composition of capital flows

In the official balance of payments statistics, capital flows are divided into a number of different categories, for example, private vs public or banks vs non-banks. There is also a distinction made between foreign direct investments (FDI) on the one hand and portfolio flows, loans and other types of transactions (PLO) on the other. Since the balance of payments also has to balance (despite the fact that not all international transactions have been recorded) there is also a term called errors and omissions (E&O) that take care of various discrepancies. In environments with poor data collection and a large share of activities that take place “off the books”, this term tends to be large. For Russia, this term has become smaller over time as the economy and data collection has matured.

In terms of volatility and magnitude of flows, the distinction between FDI and PLO is often important and so also in Russia. Figure 1 shows the private sector flows to and from Russia over the last two plus decades.

Figure 1. Capital flows to and from Russia

Source: Central Bank of Russia and author’s calculations

After a rather slow start in the early years of transition, capital flows took off as Russia started to generate growth in 2001, and the flows kept growing until the global financial crisis. As expected, FDI flows have been less volatile than PLO flows but perhaps more surprising, in- and outflows in both categories seem to move closely together (see Becker (2019) on why this is the case). We can also note that there has been a marked downturn in flows at the time of the annexation of Crimea and subsequent sanctions and counter sanctions between the West and Russia.

Cumulative capital flows

By computing net flows from the data in Figure 1 and accumulating this over time, we get a clearer idea in Figure 2 of the massive amounts of capital that have left Russia over the last decades. In the early years, the outflows were in the form of errors and omissions (E&O) and PLO, but the PLO trend was reversed in the early 2000’s and turned total accumulated flows back to zero before the global financial crisis hit. The global financial crisis was a clear turning point for capital flows in general and PLO flows in particular.

Figure 2. Net private capital flows

Source: Central Bank of Russia and author’s calculations

In the year following the global financial crisis, almost USD 300 billion left Russia. Outflows then continued, albeit at a slower pace, only to accelerate again at the time of Russia’s annexation of Crimea. By mid-2018, USD 700 billion had left Russia since 2008, mainly in the form of PLO flows. This is equivalent to twice the amount of fixed capital investments in Russia in 2017.

For a country like Russia that is in need of increased investments both from domestic and foreign sources to generate long-term sustainable growth, these outflows are very costly at the macro level even if they are beneficial to individual entities that are behind the flows.

Destinations of capital flows

Where the money from Russia ultimately ends up should matter less to people in Russia than the fact that they are not invested and generating growth at home. However, it can matter a great deal to people, policy makers and businesses in the destination countries. Not only because it involves business opportunities and employment to some, but also because it generates concerns among regulators, law enforcement and tax authorities regarding the origins and purposes of the investments.

We do not have full coverage of where all the money Russian entities invest or park abroad end up, but official statistics are available for at least part of the investments. First of all, there is data on cross-border assets and liabilities of the banks that report to the Bank of International Settlement (BIS), which shows what foreign residents have deposited in the banks. Russian claims on BIS reporting banks are shown in Figure 3, where we can note that total claims by Russians amount to USD 131 billion. Half of this amount was deposited with French, Swiss, UK, and Belgian banks at the end of September 2018.

Figure 3. Russian claims on BIS reporting banks in different countries (USD bn, Sept. 2018)

Source: BIS and author’s calculations

Given the recent scandal in Danske Bank, we can also note that USD 8 billion was deposited by Russian entities in Danish banks, which may not sound much in this context but amounts to around 2 per cent of Danish GDP.

Again, macro level data does not tell us if the flows behind the numbers are illicit or legitimate, but it provides some sense of the order of magnitude and possible significance for the entities involved in the transactions and their regulators and supervisors.

The next piece of information is due to the IMF’s and others’ efforts to collect and harmonize data on the destination of portfolio and FDI assets, and the data for Russia is presented in Figures 4 and 5.

The prime locations for Russian owned portfolio assets are Ireland and Luxembourg, followed far behind by the Netherlands, UK and US. In total, official portfolio assets are rather modest at USD 69 billion, which is far off the cumulative net PLO flows in Figure 2 of over USD 500 billion even if we add the BIS reporting bank deposits in Figure 3.

Figure 4. Russian portfolio assets by the destination country (USD bn, Sept. 2018)

Source: Central Bank of Russia and author’s calculations

This could have many explanations, including that a significant share of Russian PLO assets is not in BIS reporting banks or in countries that provide transparent reporting of other types of PLO assets. The fact that cumulative flows and stocks reported in international statistics are so different, though, clearly asks the question where the remaining assets are invested.

The last component for which we have data is the location of Russian FDI assets. This turns out to be the most significant asset class available in the official statistics with a total of USD 364 billion invested abroad. Given that the magnitudes of FDI flows in Figures 1 and 2 are much smaller than PLO flows, this is somewhat surprising. Less surprising is the fact that more than half of this is invested in Cyprus, which is a well-known destination for Russian money.

However, it also begs the question on how assets are classified and where; Cyprus annual GDP was USD 24 billion in 2018, or 13 per cent of what is classified as Russian FDI assets in Cyprus. The only reasonable interpretation is that Cyprus is an offshore destination to park Russian money and not the ultimate location of direct investments from Russia. It is not unlikely that similar explanations are also valid for a significant share of the assets recorded as investments in the Netherlands, Austria and Switzerland, not to mention the British Virgin Islands (BVI) or the Bahamas. This problem is not unique for Russian data, but the magnitude of the problem regarding this data is still striking.

Figure 5. Russian FDI assets by the destination country (USD bn, Sept. 2018)

Source: Central Bank of Russia and author’s calculations

Policy conclusions

Capital leaving Russia is mainly a problem for investments and growth in Russia, but, as has become far too clear recently, some of the flows also create problems in other countries. In particular, flows that are associated with money laundering and channelled through financial institutions in the West can create massive problems for banks that do not have sufficient control mechanisms in place or are guided by short-term profit maximization that encourages staff to look the other way when illicit flows are coming in.

Given the massive scale of flows coming from Russia, it can obviously be tempting to be part of this business while at the same time very costly to implement procedures and routines that control all of the flows adequately. However, not understanding the bigger picture of Russian flows can be even costlier.

References

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 Tragedies in the Soviet Countryside of the Early 1930s: Research Frontiers and Rival Interpretations of the Famines

Posted on April 1, 2019 | Policy Brief

20190401 The Tragedies in the Soviet Countryside Image 04

In November 2018, Viktor Kondrashin, expert historian on the Soviet famine in the early 1930s, organized a workshop at the Institute for Russian History of the Academy of Sciences (IRI RAN). Contributions by Russian and Ukrainian as well as British, Irish and Swedish historians summed up their research projects concerning the famines in Russia, Kazakhstan and Ukraine in 1929–1933. They highlighted the opposing interpretations of the causes of these famine-stricken regions. They also scrutinized the recent debates in the West of Anne Applebaum’s book Red Famine. Motivated by this enlightening discussion, this brief offers a short overview of the history, and contemporary state, of the Soviet famine debate.

In this brief, my purpose is to describe research frontiers concerning the Soviet famine in the early 1930s, based on my participation in the workshop at the Institute of Russian History of the Academy of Sciences in November 2018. Starting with a short historiographical background, I give examples of important archival contributions. Then I present contributions by individual scholars and their interpretations, concerning the causes of the 1929–33 famines in Soviet Russia and Ukraine. The separate famine in Kazakhstan 1929–30 was caused by forced sedentarisation and disbanding of the Kazakh people’s nomadic life; it claimed a proportionally higher number of deaths but would require quite a different analysis.

The collectivization of the peasantry was enforced in 1930–31. An initial abundant harvest 1930 seemed as a success for the kolkhoz system. It appeared to supply enough food for city dwellers and industrial workers as well as Red army soldiers. It also seemed to permit a large export of grain. This, and raw material exports in general, was crucial for the Soviet Union as hard currency generators for the import of machinery from the West. The five-year plan 1928–32 had overestimated how much these export commodities would generate. During the Great Depression, terms of trade turned dramatically against the Soviet export commodities. Likewise, the Soviet leadership had not foreseen how intensively collectivization would be resisted by peasants. Not only were many farming processes neglected in the new kolkhozes. Many peasants chose to slaughter horses, rather than giving them to the kolkhozy. The production of tractors could not yet substitute the loss of draught animals by ca. 15 per cent in 1930–31.

Weather conditions worsened and resulted in lower harvests in 1931 and 1932. A severe famine was imminent. Grain exports were cut. Rationing was severed. Although grain collection quotas were lowered in 1932, the greater famine severely hit the grain-producing regions in Ukraine, but also Kuban and Lower Volga regions and Northern Caucasus. The overall Soviet population losses by 1933 are estimated as 6–7 million, with approximately 3.5 million famine-related deaths in Ukraine.

This famine was a taboo topic in the Soviet era. The authorities managed to divert attention from the catastrophic consequences of collectivization and rapid industrialization. After World War Two numerous oral witnesses’ collections were gathered in the Ukrainian diaspora in Canada. In the late 1980s, the British historian Robert Conquest wrote his pioneering study Harvest of Sorrow. An accompanying TV documentary film made the general public in the West aware of the 1930s famine in the USSR.

Before that, during the “Thaw” in the early 1960s, established Russian historians had got Nikita Khrushchev’s directive to study primary sources concerning Stalin’s forced collectivization. However, their dramatic findings and frank book manuscript on the real costs of the collectivization was prohibited in 1965 by Khrushchev’s successors. Only during glasnost could these specialists, with Viktor Danilov (1925 – 2004) as one of the most visionary researchers, again analyze the agrarian history of the Soviet Union in the late 1920s and early 1930s.

Danilov’s primary concern was to make as many archival documents as possible available. He guided archivists and researchers to examine all relevant, central as well as regional, archives. Numerous documentary volumes, articles and monographs were produced, notably the 5-volume project The Tragedy of the Soviet Countryside, which showed both the excesses of the forced collectivization in 1930-33, and the famine conditions all over the USSR. Danilov also cooperated with other archivists to compile a documentary of how the secret police’s local officers in the countryside – often more accurately and frankly the communist party organs – did indeed describe the real situation in the villages. This project The Soviet Countryside as seen by VChK-OGPU-NKVD covers the whole interwar period 1918–39, and added unexpected perspectives on the dramatic period. In particular, it proves – contrary to what is sometimes believed – that Stalin and the leadership were very well informed of the dire situation that resulted from their policy decisions (see Samuelson 2007).

Today, we have not only oral history – eye-witnesses and relatives of the famine victims – but also a sufficiently reliable source base to describe all aspects of the transformation in the countryside. What remains however, is to set all this new empirical material into its context and to explain what caused the famine years 1929–1933? Which were its specific traits in different parts of the Soviet Union?

A most authoritative Russian expert on these topics is Viktor Kondrashin. He has continued the projects started by Danilov and published several archival documentary collections. The first is Famine in the USSR 1930 – 1934 with almost 200 facsimile archival documents. A larger archival publication by Kondrashin in four volumes (2011–13) expands the empirical basis for researchers. Of particular interest are those on the famine in various parts of the USSR. Kondrashin’s recent monograph The 1932-1933 Famine: The Tragedy of the Russian Countryside (2018) outlines his interpretation that the grand famine was the unexpected result of the collectivization. It struck in many regions of the Russian republic. It was not directed specifically against any ethnic group. Grain collection from the kolkhozes in 1931 and 1932 was brutally enforced. The Soviet leadership lacked information in 1932 concerning the real harvest. Only when the famine grew catastrophic in the winter of 1932/33, did the authorities change their policies: lowered grain requisition quotas, sent seed grain back to many regions, tried to evacuate suffering children from famine-struck regions. In short, that millions of people in Soviet Ukraine as well as in Russia died during the famine years was an unforeseen effect of a policy. In other words, it was not an intentional, genocidal policy directed towards the Ukrainian or any other people but a tragedy for all the peoples of the USSR.

In the West, major research on Soviet agriculture was done by Robert Davies and Stephen Wheatcroft. Their monograph The Years of Hunger (2004) is translated into Russian. It provides empirical data on all agricultural branches. Their conclusion is that “the Soviet leadership was struggling with a famine crisis which had been caused by their wrongheaded policies, but was unexpected and undesirable”. Davies and Wheatcroft emphasize that the changing policies in 1932/33 (lowering of grain collection, redistribution back to the peasant and shelter for famine-stricken youngsters) indicate that there was not any intention to “apply famine as a terror-weapon” as Conquest and many Ukrainian historians have stated. Stalin and other leaders made concessions to Ukraine in procurements, and were clearly trying to balance the subsistence needs of Ukraine and other regions. They cut down grain exports in 1932 to a minimum. But they did not acknowledge the famine to the West, asking for relief as Lenin had done in 1921–22, for fear of losing further in credibility worth. Also important to consider is that the Soviet leadership was particularly worried over a possible further Japanese expansion towards the Soviet Far East, after the takeover of Manchuria in 1931-32. This factor precluded any more use of the state reserves of grain (for the armed forces in case of war), to alleviate the situation in the starving areas.

Since the late 1990s, the Ukrainian historians have made different interpretations. The general famine all over the USSR is acknowledged as a consequence of Stalin’s policy. The climate as well as crop diseases led to shrinking harvests in 1931 and 1932. However, the famine that struck Ukraine in 1932/33 was essentially different. It is called Holodomor from holod – famine and morit’ – to kill. This interpretation presumes a genocidal intention of the Soviet leadership against the Ukrainian people, and its peasantry in particular. Since 2006, this interpretation is state law in the Ukraine and stresses that Holodomor was deliberately planned and executed by the Soviet regime in order to systematically destroy the Ukrainian people’s aspirations for a free and independent Ukraine, and subsequently caused the death of millions of Ukrainians in 1932 and 1933. The Ukrainian Rada adopted the law Pro Golodomor 1932 – 1933 rokiv v Ukraïni (Закон України: Про Голодомор 1932–1933 років в Україні) on 28 November 2006, which consequently set out the exact juridical terms that give the established framework for historiography in the Ukraine.

It is testimony of the high standards in the Russian academic tradition that Kondrashin invited the prominent Ukrainian historian Stanislav Kulchitskii and the Canadian-based Roman Serbyn, and others from Ukraine, to contribute to the anthology The Contemporary Russian-Ukrainian Historiography on the Famine 1932 – 1933 in the USSR. Here the reader himself can study and compare their argumentation for the Holodomor-interpretation. They present a different set of empirical data from each theme in this ongoing debate, concerning both agricultural and demographic figures, as well as the Soviet Communist party’s decisions versus Ukraine in late 1932 – early 1933.

The decisive question accordingly remains which of the rival interpretations is most solidly confirmed by traditional methods on history as science. In other words, whether there was an intention from Stalin, from central and/or regional leaders, to cause or to aggravate – as a terror-instrument – the famine in the Ukraine. In addition, it remains to be decided whether or not the concept of genocide, as defined in the 1948 United Nations Convention, is applicable to the famine in the Ukraine and other parts of the Soviet Union. The genocide interpretation is rooted in an academic tradition that stretches from Conquest’s above-mentioned Harvest of Sorrow to more recent works, such as by Timothy Snyder Bloodlands: Europe between Hitler and Stalin, Norman Naimark Stalin’s Genocides and numerous articles by Andrea Graziosi among other historians in the West.

Mention should finally be done of Anne Applebaum’s Red Famine: Stalin’s War on Ukraine (2017) as a most detailed and vivid description of the sufferings of the Ukraine people in the early 1930s. Her book was very positively reviewed not only in the mass media, but also by academic scholars like Sheila Fitzpatrick. However, Fitzpatrick had obviously misread the book and praised it for its refutation of the genocide interpretation. This forced Applebaum to clarify that precisely the opposite was her case: The famine in the Ukraine was intentional and foreseeable by the Soviet leadership, whose intention it was to subdue nationalist aspirations. In turn, this rejoinder forced Fitzpatrick in a commentary to withdraw all her praise for the book!

Given this hot debate, it is not surprising that, in the academic community, it was felt that matters could not be put to rest without thorough arguments. The editors of Contemporary European History organized a solid roundtable on Soviet famines, with written essays by leading historians and specialists (Volume 27, Issue 3, August 2018, pp. 432-434). These concise essays, by N. Naimark, N. Pianciola, T. Penter, J.A. Getty, A. Graziosi, S. Wheatcroft and others may serve as the best introduction to a thorny historical theme that can otherwise be difficult to grasp, not least because of the often politicized nature of the debates.

The autumn 2018 seminar at IRI RAN in Moscow was one in a long row of similar events – conferences and workshops on the history of the collectivization of the peasantry, the dekulakization and repressions against peasant protests, and the famines in various Soviet republics in 1929 – 1934. Already in spring 2004, a landmark conference took place at IRI RAN, where Viktor Danilov and Stanislav Kulchitskii, as representatives of the Russian vs. the Ukrainian perspective, debated for a whole day (!), albeit without converging viewpoints. At that stage, they could sum up a decade of archival research and chisel out divergent points for further research. Over the last fifteen years, scholars in both countries have made great strides to deepen the empirical foundation, notably by detailed mapping of the harvests, demographic changes and other indicators even at the local level. This new level of knowledge was well reflected in the various contributions at the seminar and in the above-mentioned anthology Contemporary Russian-Ukrainian Historiography.

References

  • Applebaum, Anne, Red Famine: Stalin’s War on Ukraine, New York: Doubleday, 2017.
  • Applebaum, Anne, Reply to Sheila Fitzpatrick’s review of Red Famine, Facebook: https://www.facebook.com/anneapplebaumwp/posts/as-an-author-who-also-writes-reviews-i-generally-try-to-avoid-responding-to-revi/704110623118513/
  • Conquest, R., The Harvest of Sorrow: Soviet Collectivization and the Terror-Famine, Oxford University Press, 1986.
  • Danilov, V.P. et altere, eds., Tragediia Sovetskoi Derevni: Kollektivizatsiia i raskulachivanie, 1927 – 1939, (The Tragedy of the Soviet countryside: Collectivization and dekulakization), five volumes, Moscow: Rosspen, 1999–2004.
  • Danilov, V.P. et altere, eds. Sovetskaia derevnia glazami VChK-OGPU-NKVD, 1918 –1939, (The Soviet countryside as seen by VChK-OGPU-NKVD, 1918–1939), four volumes, Moscow: Rosspen, 1998–2005.
  • Davies, R.W. & Wheatcroft, S.G., The Years of Hunger: Soviet Agriculture, 1931–1933, Palgrave Macmillan, 2004; also as translation: Gody goloda: Sovetskoe selskoe khoziastvo, 1931–1933, Moscow: Rosspen, 2011.
  • Fitzpatrick, Sheila, “Red Famine by Anne Applebaum review – did Stalin deliberately let Ukraine starve?”, The Guardian, 25 August 2017, see 2019-03-26: https://www.theguardian.com/books/2017/aug/25/red-famine-stalins-war-on-ukraine-anne-applebaum-review
  • Golod v SSSR 1929 – 1934, (The Famine in the USSR, 1929–1934), Moscow: Mezhdunarodnyi Fond Demokratiia, 2011–2013.
  • Kondrashin, V.V. ed., Sovremennaia rossiisko-ukrainskaia istoriografiia goloda 1932–1933 gg. v. SSSR, (The Contemporary Russian-Ukrainian historiography of the famine 1932–1933 in the USSR), Moscow: Rosspen, 2011.
  • Kondrashin, V.V., Golod 1932–1933 godov: Tragediia rossiiskoi derevni, (The Famine in 1932–1933: The Tragedy of the Russian countryside), Moscow: Rosspen, 2018.
  • Kondrasjin, V.V., “Hungersnöden i Ryssland och Ukraina 1932–33, in Samuelson, L. (ed.), Bönder och bolsjeviker: Den ryska landsbygdens historia 1902–1939, EFI/HHS 2007, p. 140 – 173.
  • Kozlov, V.P., Golod v SSSR 1930–1934//Famine in the USSR 1930–1934, Moscow: Federalnoe Arkhivnoe Agentstvo, 2009.
  • Kulchitskii, S.V., “Obshchii i regionalnyi podkody k istorii velikoi tragedii narodov Rossii i Ukrainy”, (The General and regional approach to the great tragedy of the peoples of Russia and Ukraine), in Sovremennaia…istoriografiia, (above), pp. 107 – 206.
  • ”Roundtable on Soviet Famines”, Contemporary European History, vol. 27: 3, August 2018, see: https://doi.org/10.1017/S0960777318000279
  • Samuelson, L., “Gammal och ny historieskrivning om den sovjetiska landsbygden – “Arkivrevolutionens betydelse sedan 1990-talet”, in Bönder och bolsjeviker: Den ryska landsbygdens historia 1902–1939, EFI/HHS, 2007, p. 26–41.

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 Polish 1999 Administrative Reform and Its Implications for Inclusive Regional Development

Posted on March 25, 2019 | Policy Brief

20190325 The Polish 1999 Administrative Reform Image 01

On 1 January 1999, four major reforms took effect in Poland in the areas of health, education, pensions and local administration. After 20 years, only in the last case does the original structural design remain essentially unchanged. We examine the implications of this reform from the perspective of the distance of municipalities from their regional administrative capitals. We show that despite fears of negative consequences for municipalities which ended up on the periphery with respect to their post-reform administrative centres, the reform did not result in slower socio-economic development in these regions. We argue that regional inclusiveness in the process of development is likely to be an important factor behind the stability of Poland’s administrative design.

Introduction

Four major reforms took effect on 1 January 1999 in Poland, substantially changing the structure of healthcare, education, the pension system and local government administration. The extent of the changes and the fact that all four reforms were implemented on the same day could in fact be considered as representing a symbolic final step of the Polish socio-economic transition which had started nearly ten years earlier. However, in 2019, twenty years after the reforms took effect, the originally introduced structural design remains unchanged in only one of the four areas – local government.

In a recent paper (Myck and Najsztub, 2019) we take a close look at the implications of the 1999 administrative reform treating it as a form of a “natural experiment” and analysing its consequences for socio-economic development dynamics in municipalities, which ended up on the periphery with respect to their post-reform administrative capitals. Using a broad set of indicators we find that the reform did not have significant negative consequences for these municipalities and ensured inclusive development at the regional level. This might be an important factor which has determined the longevity of the administrative design implemented in 1999.

The local administrative design in Poland before and after 1999

Major administrative reforms are relatively infrequent, which makes the scope and scale of the one implemented in Poland on 1 January 1999 a rather unique point of reference for analysis of potential implications of administrative restructuring. The reform went far beyond the administrative rearrangement of local government, as it was the culmination of a process that reintroduced local autonomy to the Polish political system.

The goal of the reform was to further decentralise political power and increase public finance transparency. The middle tier of local government – the counties (powiats) – was reintroduced as a body responsible for the administration of institutions beyond the scope of a single municipality (e.g. hospitals, secondary schools, public roads, unemployment). At the same time the number of top tier administrative regions – the voivodeships – was reduced from 49 to 16, and their responsibilities were focused on overall regional development, higher education, regional infrastructure and the prospective management of EU funds. In the end, the reform resulted in the formation of 16 voivodeships, 308 counties, 66 towns with county status and 2478 municipalities. This administrative division of Poland has been in place, with minor modifications, since 1 January 1999 (for details and comments, see Blazyca et al. (2002), Regulski (2003) and Swianiewicz (2010)).

The reform implied the loss of regional administrative capital status for 31 cities (administration in two voivodeships, Lubuskie and Kujawsko-Pomorskie, is split between two capitals), and for nearly 60% of municipalities it resulted in an increase in the distance to their regional administrative centre compared with the pre-reform arrangement. These features of the reform are illustrated in Figure 1. Cities marked in blue used to be administrative capitals before 1999, while those marked in red maintained their status after the reform. The blue rays show the distance of municipalities from their respective administrative capitals before 1999, with the post-1999 distances marked in red. In the case of the two new voivodeships where two cities received capital status (Lubuskie  and Kujawsko-Pomorskie), we measure the distance to the city that became the site of the regional government (sejmik wojewódzki), which is the key institution responsible for regional development.

Figure 1. Administrative arrangements in Poland before and after the 1999 administrative reform: voivodeships, capitals and distance from municipalities to regional administrative centres.

Notes: Blue rays show the distance of municipalities to their respective administrative capitals before 1999; the post-1999 distances to regional administrative centres is marked in red. Distances (in straight lines) between centroids of municipalities.
Source: BDL, own calculations.

Identifying implications of the reform for regional capitals and peripheral municipalities

An important concern related to the introduction of the reform was first, its consequences for the voivodeship capitals which lost this status due to the reduced number of top-tier regions. Secondly, at the level of municipalities, the question was whether the redesign of the administrative network would result in any negative changes of development dynamics in municipalities, which as a result of the reform landed on the periphery with respect to the new voivodeship capitals. In Myck and Najsztub (2019) we consider both of these concerns looking at a number of indicators of socio-economic developments, including population dynamics, local government finances as well as the intensity of nighttime lights measured by satellites, which has recently been treated in the literature as an overall proxy for economic development (Henderson et al., 2012; Pinkovskiy and Sala-i-Martin, 2016). We look at each of these problems using the difference-in-differences approach. In the first instance we compare the developments before and after the reform for voivodeship capitals, which maintained the status and those which did not, and in the latter we look at municipalities for which the distance to their administrative capital increased relative to those for which it remained unchanged or fell.

In the case of voivodeship capitals, due to the obvious differences between the two groups of pre-1999 capitals which in the end determined their post-reform status, our estimates can only be treated as descriptive. In the second case though, since municipalities had little choice with regard to their assignment to the new voivodeships, the results can safely be interpreted as causal. To address the differences between the two groups of municipalities, we apply the entropy balancing method of matching to ensure pre-reform uniformity in the distribution of the analysed municipality characteristics (Hainmueller, 2012; Adda et al., 2014). A summary of the results of both sets of estimations is presented in Table 1 where we show the difference-in-differences coefficients for six socio-demographic outcomes. The estimation period covers the years 1995-2012.

As we can see in Table 1 the only consistently negative and significant coefficient which we find in the two main specifications concerns net migration. Other than that, the results seem to go against the initial concerns with positive coefficients on own revenues, which are statistically significant in the case of the voivodeship capitals, though not in the case of peripheral municipalities. Results for the intensity of nighttime lights are negative in both cases but are not statistically significant. Particularly in the case of peripheral municipalities – where as we argued we can treat the results as causal – we find no evidence of major negative implications of the reform for socio-economic dynamics. This result, as we show in Myck and Najsztub (2019) is confirmed in a number of robustness tests.

Table 1. Diff-in-diff regression estimates for voivodeship capitals and municipalities

Outcome Voivodeship capitals: effect of loss of regional capital status Municipalities: increased distance to administrative capitals
  Coeff. t-stat. Signif. Coeff. t-stat. Signif.
Population
Births, log -0.139 (-5.718) *** -0.000 (-0.027)
Deaths, log 0.020 (1.339) 0.002 (0.160)
Net migration, pers. -1.902 (-2.906) ** -12.579 (-2.372) *
Finances
Own revenues, p.c. log 0.076 (1.872) + 0.024 (1.028)
Own non-capital revenues, p.c. log 0.136 (2.307) * 0.033 (1.246)
Economic indicators
Total lights, p.c. log -0.028 (-1.396) -0.002 (-0.049)
Number of observations: 882 43218


Note: + p < 0.10, * p < 0.05, ** p < 0.01, *** p < 0.001; standard errors clustered at the municipality level. Monetary values in real 2005 PLN terms. Values in log in cases where the dependent variable is log-normally distributed. Per capita estimations (p.c.) weighted by population size. All estimations include capital/municipality and time fixed effects.
Source: Authors’ calculations using data from the Local Data Bank (Bank Danych Lokalnych, BDL; data on population and finances) provided by the Polish Central Statistical Office (GUS) and nighttime lights data provided by the National Oceanic and Atmospheric Administration (NOAA) (Elvidge et al., 2009; National Geophysical Data Center (NGDC), 2010). Data for years 1995-2012.

The socio-economic development in central and peripheral municipalities with respect to the new voivodeship capitals seems therefore to be unaffected by the reform. Importantly also, despite concerns about the marginalization of the cities which lost the voivodeship capital status in 1999, their socio-economic performance has not been much worse compared to those which remained capitals and received greater administrative responsibilities and budgets to manage. From this point of view, the stability of the structure of Poland’s local government and the longevity of the administrative design implemented in 1999 should not be surprising. The claims of the need to change the Polish administrative design and promises of changes resurface at each parliamentary election. These promises have so far been left unmet and inclusivity of socio-economic development at the regional level that followed the reform is likely to be an important factor behind this.

Acknowledgements

The authors gratefully acknowledge the support of the Polish National Science Centre through project no. 2016/21/B/HS4/01574. For the full list of acknowledgments see Myck and Najsztub (2019).

References

  • Adda, Jérôme, McConnell, Brendon, Rasul, Imran, 2014. Crime and the depenalization of cannabis possession: evidence from a policing experiment. Journal of Political Economy 122, 1130-1202. doi:10.1086/676932
  • Blazyca, G., Heffner, K., & Helińska-Hughes, E. (2002). Poland – Can Regional Policy Meet the Challenge of Regional Problems? European Urban and Regional Studies, 9(3), 263–276. doi:10.1177/096977640200900305
  • Elvidge, Christopher D., Ziskin, Daniel, Baugh, Kimberley E., Tuttle, Benjamin T., Ghosh, Tilottama, Pack, Dee W., Erwin, Edward H., Zhizhin, Mikhail, 2009. A fifteen year record of global natural gas flaring derived from satellite data. Energies 2, 595-622. doi:10.3390/en20300595
  • Hainmueller, Jens, 2012. Entropy balancing for causal effects: a multivariate reweighting method to produce balanced samples in observational studies. Political Analysis 20, 25-46. doi:10.1093/pan/mpr025
  • Henderson, J. Vernon, Storeygard, Adam, Weil, David N., 2012. Measuring economic growth from outer space. American Economic Review 102, 994-1028. doi:10.1257/aer.102.2.994
  • Myck, M. and Najsztub, M., 2019. Implications of the Polish 1999 administrative reform for regional socio-economic development. CenEA Working Paper 1/2019.
  • National Geophysical Data Center (NGDC), 2010. Version 4 DMSP-OLS night-time lights time series. https://ngdc.noaa.gov/eog/dmsp/downloadV4composites.html. Accessed 15 June 2015.
  • Pinkovskiy, Maxim, Sala-i-Martin, Xavier, 2016. Lights, camera … income! Illuminating the national accounts–household surveys debate. The Quarterly Journal of Economics 131, 579-631. doi:10.1093/qje/qjw003
  • Regulski, Jerzy, 2003. Local Government Reform in Poland: An Insider’s Story. Local Government and Public Service Reform Initiative, Budapest.
  • Swianiewicz, Paweł, 2010. If territorial fragmentation is a problem, is amalgamation a solution? An East European perspective. Local Government Studies 36, 183-203. doi:10.1080/03003930903560547

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.

Ownership Structure, Acquisitions and Managerial Incentives

Posted on March 18, 2019 | Policy Brief

20190318 Ownership Structure, Acquisitions and Managerial Incentives Image 01

Both the theoretical and empirical literature assume that takeovers are less likely to occur when firms have large concentrated shareholders, e.g. family firms. Hence the disciplinary role of takeovers becomes irrelevant in incentivizing the management. We argue that this conjecture is false. Using a contracting model, we show that the existence of takeovers can work in favour of firms with controlling shareholders, amplifying the disciplinary effects relative to firms with dispersed shareholders. We further show how takeover threats interact with alternative governance structures, specifically, with monitoring and performance pay. While carrots (performance pay) and sticks (takeover threat) play substitute roles in incentive provision, the internal monitoring available to large shareholders is a substitute mechanism irrespective of the disciplinary effect of the market for corporate control.

Introduction

The nature of optimal corporate ownership has been a longstanding question in corporate governance literature.  While large controlling shareholders can address managerial agency problems by monitoring management and alleviating the free-riding problem in takeovers (see e.g., Grossman and Hart, 1980; Demsetz and Lehn, 1985 and Burkart, Gromb and Panunzi, 1997), they may also expropriate other  stakeholders by influencing management or deterring efficient takeovers to maintain their private control benefits (Stulz,1988). Empirical evidence about the effect of controlling shareholders, for example a founding family, on firm performance is also inconclusive (see Bertrand and Schoar (2006) who review the empirical studies on family ownership).

Amid the ongoing debate, we provide a new perspective on the role of controlling shareholders in the market disciplinary mechanism, and how it interacts with the firm’s potential synergy characteristics and internal governance mechanisms. While the use of performance pay and internal monitoring are easily justified by the extant literature, the disciplinary effects of the market for corporate control are less obvious. In many countries, there are debates about the social cost of concentrated ownership structures, and some regulators (e.g., the European Commission) have been advocating in favour of breaking up concentrated ownership structures to facilitate the market for corporate control and its managerial disciplinary function.

In contrast to this standard view, our analysis shows that the managerial disciplinary mechanism of synergistic takeover can be strengthened by the presence of controlling shareholders.  Furthermore, while the control premium required by controlling shareholders reduces the incidence of synergistic takeovers, the internal monitoring performed by these shareholders can complement the market disciplinary mechanism in high synergy potential firms.  Overall, it is ambiguous whether dismantling a concentrated ownership structure would increase firm value and, in particular, in firms which provide high synergy potential to acquirers.

Our analysis suggests that more sophisticated policies for the market for corporate control may improve the social welfare more effectively.

Controlling Ownership and Managerial Agency Problem

The managerial agency problem is relevant even when considering takeovers of family firms. Founders hold 15% of the CEO positions, 30% are held by descendants while the absolute majority of approximately 55% are held by professional managers (Villalonga and Amit, 2006). Bidders that operate in the same industry, for example, will be able to observe the state of demand to assess the synergistic improvements. In contrast, family owners are likely to be less actively involved in firm operations, and less informed about the industry/market situation, which suggests their lack of operational expertise vis-a-vis managers.

In the presence of potential conflicts of interest between the management and shareholders, the market for corporate control serves a disciplining role. Then why does the private benefit of controlling shareholders, which increases the takeover premium, strengthen this market disciplinary mechanism?

We argue that, notwithstanding their negative effect on the incidence of synergistic takeovers, the controlling shareholders can strengthen the managerial disciplinary effect of a takeover in firms that offer acquirers large business synergies.

To answer the question intuitively, suppose that the manager has no anti-takeover defense. In this case, the manager can secure herself from takeover threats only by increasing the market value of the firm, and, therefore, the takeover threat can discipline the manager. In firms which offer high synergy potential to the acquirers, however, the manager may find it too costly to increase the market value enough to deter a synergistic takeover. The control premium required by controlling shareholders can complement the market disciplinary mechanism in this circumstance, and, specifically, reduce the profitability of synergistic takeovers and make the acquirers’ bidding choice more sensitive to current market value. That is, it allows the managers of firms that offer high business synergies to reduce the takeover threat significantly by increasing the market value.

Technically, our model shows that the necessary and sufficient condition for the complementarity of ownership concentration and the market disciplinary mechanism is the log-convexity of the distribution function of potential business synergy. The market value increase from truthfully reporting the favorable state may, in itself, not significantly deter the takeover attempts for these firms since acquirers still find the business synergy more than offsets a high stock price. The control premium required by controlling shareholders makes truthful managerial reporting (and the corresponding market value enhancement) more effective in reducing the likelihood of a takeover. Specifically, the control premium increases the manager’s opportunity cost of misreporting and, in turn, it reduces the information rent that shareholders forgo to the manager.

Interaction with Other Governance Mechanisms

The analysis also provides implications for the relationship between ownership structure and other governance mechanisms, such as managerial compensation and the monitoring function of controlling shareholders.

Given that the managerial agency problem cannot be fully eliminated by the takeover threat and managerial compensation, the monitoring function of controlling shareholders can complement the other two governance mechanisms in our setting.

We show that the disciplinary effect of synergistic takeovers reduces the information rent paid to the manager and, thus, it diminishes managerial incentive pay. This implies that managerial pay-performance sensitivity is negatively associated with ownership concentration in firms which offer high business synergies. Furthermore, our analysis also shows that, in high synergy potential firms in which controlling shareholders strengthen the market disciplinary mechanism, monitoring function of controlling shareholders can complement the market disciplinary mechanism, and, thus, ownership concentration increases the operating efficiency relative to firms with dispersed ownership.

Conclusion

Contrary to the common prior, the disciplinary effect of synergistic takeovers can be stronger in high synergy potential firms with controlling shareholders due to improvements in incentives for managerial self-selection. Specifically, the control premium encourages the manager to deter the takeover threat by increasing the current value of the firm. In this case, managerial entrenchment is consistent with improvements in shareholder value.

The disciplinary effect acts as a complement to the internal monitoring efforts of controlling shareholders in reducing the amount of incentive pay required to induce managerial truthfulness. In contrast, the control premium in firms with few synergies isolates the manager from the takeover threat, making incentive provision reliant on internal monitoring.

However, the disciplining effect of synergistic takeovers is not without its costs, making the overall value implications ambiguous. Incentive provision requires that shareholders accept relatively low bidding prices, by allowing takeovers with negative synergies. Furthermore, tailoring correct incentive pay requires a relatively high distortion to effort levels in times of economic downturns. While controlling ownership is able to mitigate these concerns, the existence of a control premium also reduces the incidence of socially desirable synergistic improvements in firm value.

Overall, policy makers should take care when considering implementation of constraints on the controlling states in order to facilitate the market for corporate control.

References

  • Anderson, Ronald C., and David M. Reeb, 2003. “Founding-family ownership and firm performance: Evidence from the S&P 500”, The Journal of Finance, 58, 1301-1327.
  • Bertrand, Marianne, and Antoinette Schoar, 2006. “The role of family in family firms”, Journal of Economic Perspectives, 20, 73-96.
  • Burkart, Mike, Denis Gromb, and Fausto Panunzi, 1997. “Large shareholders, monitoring and the value of the firm”, The Quarterly Journal of Economics,112, 693.
  • Demsetz, Harold, and Kenneth Lehn, 1985. “The structure of corporate ownership: Causes and consequences”, Journal of Political Economy, 93, 1155-1177.
  • Grossman, Sanford J., and Oliver D. Hart, 1980. “Takeover bids, the free-rider problem, and the theory of the corporation”, The Bell Journal of Economics,11, 42-64.
  • Villalonga, Belen, and Raphael Amit, 2006. “How do family ownership, control and management affect firm value?”, Journal of Financial Economics, 80, 385-417.
  • Stulz, Renee, 1988. “Managerial control of voting rights: Financing policies and the market for corporate control”, Journal of Financial Economics, 20, 25-54.

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.

Decentralization, E-Procurement and Efficiency of Public Procurement in Ukraine

Posted on March 11, 2019 | Policy Brief

20190311 Decentralization, E-Procurement and Efficiency Image 01

This brief is based on a research that investigates if there’s a synergy effect of procurement and decentralization reforms in Ukraine on procurement efficiency. The analysis shows the similarity between new and old administrative units procurement performance. Although the analysis does not provide evidence of a significant synergy effect, such a similarity could be considered as something positive (due to the lower market power and capacity of the newly created administrative units) that should be analyzed further.

Decentralization in Ukraine

In April 2014, the Ukrainian government launched a systemic decentralization reform – a delegation of a significant part of resources and responsibilities from oblast and raion-level executive branches of the government to the local self-government level. The key issue of the reform was the creation of a strong basic level of local self-government in line with the European Charter of Local Self-Government. This is done through the creation of amalgamated hromadas (AH), the merger of several settlements with a single administrative centre.

An AH is governed by a council of the amalgamated hromada (CAH), a representative body of a local self-government. It is elected by residents of territorial communities and is responsible to independently resolve local issues, develop and approve AH budgets. Particularly, the government redistributed tax revenues and expanded the system of state subsidies (medical and educational subvention, subvention on development of amalgamated hromadas etc.) that could be used according to AH decisions.

In 2015, 159 AH were established. As of September 2018, 831 AH made up by 3,796 hromadas with 7 million residents (decentralization.gov.ua).

Public E-Procurement

Contemporaneously, a reform of public procurement has been implemented. According to the Law on Public Procurement of Ukraine, since August 2016, public procurement must be announced and executed through ProZorro, a public procurement web portal administered by the state enterprise. The e-procurement system consists of a central database, an auction module and commercial marketplaces (Figure 1).

In order to participate in public tenders, bidders can choose one of 22 commercial marketplaces (7 companies that provided initial investment for the project became the first marketplaces). The commercial marketplaces are web resources managed by private companies that provide access to the electronic procurement system.

Figure 1. ProZorro Architecture

The electronic procurement system does not completely cover the procurement cycle. Actually, it only covers the tendering process while planning and contract execution are mostly out of the system (plans are published online). Moreover, the existing legislation provides opportunities to manipulate tendering process by switching between different procedures. Within the ProZorro system there are 6 main procurement procedures that can be used by procuring entities depending on the volume and specifications of their needs.

Selection of procedures is based on a Threshold principle. There are three thresholds (Figure 2):

  • Lower Threshold (LT). Contracting authorities are not obliged to report procurements in the electronic system if the total value of procurement is lower than UAH 50,000.
  • Higher Threshold (HT). Contracting authorities are not obliged to use open competitive procedures if the total value of tender is lower than a defined level. This level is equal to UAH 200,000 for goods and services and UAH 1.5 million for construction.
  • Euro Threshold (ET). The value of tender that requires applying the strictest competitive auction procedure. The euro threshold corresponds to thresholds used in EU public procurement legislation and is different for goods and services and construction works.

Transparency and efficiency indicators

Typically, a procurement process is divided into three stages: pre-tender stage, tender stage and post-tender stage. To measure efficiency and transparency of AH procurement, we constructed a system of eleven indicators that evaluate each stage of the procurement process (Table 1).

Table 1. Transparency and efficiency indicators used in the report

  • Avoiding ProZorro. Both this and the following indicator would be associated with a decreased transparency, and, while not necessarily evidential, raise suspicions about procurement done in a less efficient and more collusive/corrupt way. AH are not inclined to avoid the ProZorro system. The share of procurements outside of ProZorro per AH is smaller than the corresponding indicators for other administrative units (Raion State Administrations, RSA, and unamalgamated hromadas, UH).
  • Avoiding higher and euro thresholds. An analysis of ProZorro data shows that for AH, 84% and 11% of AH have at least one “suspicious” case for each corresponding threshold. For, RSA the indicators are 73% and 31% respectively.
  • Unanswered questions. Having a productive dialogue with suppliers is of crucial importance for the success of the procurement. It helps to adjust the tender documentation so that it does not include discriminatory demands. Analysis shows that this practice is not dominant: relatively small proportion of AH and UH uses it.
  • Level of competition. Higher competition is normally assumed to imply more efficient procurement deals. There is no difference in competition across administrative units and products (measured by the number of bidders per tender).
  • High disqualification rates can be a consequence of ill prepared tender documentation with unclear technical specification or it can be a consequence of suppliers’ inexperience. It can also be a sign of corruption, when a tender committee is trying to find any reason to disqualify ‘unwanted’ suppliers. The analysis shows that disqualification is not a significant problem and, in fact, there are no significant differences across administrative units and products.
  • Success rates. To successfully complete competitive procurement, the contracting authority has to determine the technical description of a good and its expected value based on their budget and market analysis. It also has to prepare and publish tender documentation and answer questions of potential suppliers. Finally, after the auction, the contracting authority has to evaluate documents of the auction winner and sign a contract. Failure in each of these steps will lead to unsuccessful or cancelled procurement. There is no significant difference across administrative unit groups in terms of procurement success rate
  • Abnormal saving rate. Generally, a high saving rate (the difference between tender expected and contracted values) is regarded as a positive indicator, however, a too high rate is suspicious. It can be a sign of an inadequate expected value or an abnormally low price (suspicious behavior on behalf of the supplier). For the purpose of this study, we consider a saving rate abnormal if it is greater or equal to 30%. The analysis shows that AH had a significantly lower share of tenders with abnormally high saving rate than RSA. On average, 0.6% (in terms of value) of AH tenders are suspicious, for RSA this indicator equals 6.1%
  • Contract termination. Frequent contract termination is a sign of significant inefficiencies in the procurement function of contracting authorities. The share of terminated contracts (as a percentage of the total contract value) is approximately similar for AH and RSA. On average, one AH has 5% of contract value terminated, while RSA indicator equals to 6%.
  • Fixing the price with additional agreements. Although the Ukrainian Law on Public Procurement gives the right to amend the price per unit indicated, this right can be misused. It could lead to significantly higher costs. RSA are strikingly different from the other two groups – on average 20% of the RSA contract value stems from contracts with amended prices. This difference is the consequence of the different structure of goods and services procured by AH and UH on the one hand and RSA on the other.
  • Share of largest supplier. Generally, it is considered to be a good practice, when contracting authorities are not overly dependent on one supplier. Approximately 30% of contract value of average AH and RSA belongs to one supplier. For UH this indicator is even higher (on average 48%) but it could be the consequence of the smaller number of contracts signed by UH.

Effect on prices

If contracts are successfully executed, the price of a good usually summarizes the efficiency of the procurement process.

There are many factors that affect the prices of goods in public procurements. On the one hand, AH (a) “realized” that they spent their own money and thus, they have more incentives to save and (b) have more power to choose where to spend. On the other hand, there are some factors that have the opposite effect: (a) because of low quantity demanded, the tenders announced are not interesting for large companies that could potentially provide lower price, and (b) the procurement officers could have insufficient capacity to negotiate lower price. Although, it is impossible to evaluate all these factors, we can assess their outcome – the contract price of a good.

For this analysis we looked at the prices on homogeneous goods such as food (potato, butter, eggs) and fuel (petrol A95, petrol A-92, diesel.

Table 2 summarizes the prices on the goods received by hromadas and compares it to the prices received by other types of entities (UHs and RSAs).

The data shows that for food products, AH average prices are lower or not different from UH, and slightly higher or not different from prices received by RSAs.

Even though there are some differences in prices of Petrol A-95 (partially due to inefficient planning and contracting at periods of higher prices), in general, the price level is very similar between all the entities.

In most cases, despite some warnings, there were no significant gaps between AH’s prices and UH or RSA. Moreover, the more competitive is the market of goods procured, the closer are prices received by different administrative units.

Table 2. Prices of goods by administrative units in 2017

Conclusion

The analysis shows the similarity between AH and RSA in terms of number of procurements, success and disqualification rates as well as competition level and share of terminated contracts. However, in cases when it is allowed by the Procurement Law, AH are more likely than RSA to choose direct selection of a supplier than a competitive procedure. Such behavior can be caused by a lack of professionalism (or even corruption), a desire to select a local trustworthy company or just because it is easier and faster to conduct uncompetitive procedure below the threshold.

On the other hand, AH are less inclined (in comparison to RSA) to avoid the ProZorro system (by using procurements below UAH 50 K) and to sign additional agreements that increase the price. Such behavior is potentially punishable by law. It can be suggested that procurement officers of AH only recently started to work with tenders above HT and are therefore more conscious of possible negative consequences of such actions.

The price per unit is the key indicator that summarizes information on procurement efficiency. Although AH show varying price efficiency, their prices of procured goods, in general, are not worse than in other administrative units’ groups. The more competitive the market, the closer are prices (especially in the case of fuels). Even if some gaps were observed, these differences are decreasing over time. Better planning can help to receive lower prices (better estimation of needs and choosing appropriate  periods for procurement).

Currently, the analysis does not provide an evidence on a significant synergy effect of decentralization and procurement reforms.  There are no significant differences between old and new administrative units. However, usually new communities have lower market power and capacity, and “no difference” could be considered as a positive sign that should be analyzed further.

References

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.

Poverty Dynamics in Belarus from 2009 to 2016

Posted on March 4, 2019 | Policy Brief

20190304 Poverty Dynamics in Belarus Image 00

This brief is based on research that studies the incidence and determinants of poverty in Belarus using data from the yearly Household Budget Surveys for 2009-2016. Poverty is evaluated from a consumption perspective applying the cost of basic needs approach. According to the results, in 2015-2016, absolute poverty in Belarus increased twofold and reached 29% of the population. Large household size, high number of children, single mothers and unemployment negatively affect household welfare and increase poverty risk. Moreover, living in rural areas increases the likelihood of being poor and correlates negatively with welfare.

Introduction

Sizeable and increasing poverty poses a threat to social stability and long-term sustainability for every country. Before 2009, Belarus registered over a decade of high and sustainable economic growth that enhanced the average standard of living and raised a substantial number of Belarusians out of poverty. According to the National Statistical Committee of the Republic of Belarus (Belstat), the poverty rate in Belarus (by official definition) has decreased from 41.9% of the population in 2000 down to 6.1% in 2008. The largest reported decline in poverty was in 2001 – from 41.9% to 28.9%.

Since then, Belarus experienced several episodes of economic crises – in 2009, 2011 and 2015-2016 (Kruk and Bornukova, 2014; Mazol, 2017a). Such economic downturns typically introduce considerable survival problems for many households. For example, according to the World Bank, in some countries the poverty rate may reach 50% (World Bank, 2000). In light of this, the small increase (0.3%) in the official poverty measure during these periods casts doubt on the official methodology used for poverty calculations. This brief describes an alternative measure of absolute poverty based on the widely recognized cost of basic needs approach; and summarizes the results of the study of how economic downturns in Belarus influenced welfare and poverty at the household level.

Data and methodology

The data used in this research are pooled cross-sections from 2009 to 2016 of the yearly Belarusian Household Budget Surveys with on average 5000 households in each sample obtained from Belstat. These surveys consist of household and individual questionnaires that contain important data about households including decomposition of expenditures and income by categories, detailed data on consumption of food items, the size, age and gender composition of households, living conditions, etc.

The analysis applies the cost of basic needs approach (Kakwani, 2003). It first estimates the cost of acquiring enough food for adequate nutrition (nutrition requirements for households of different size and demographic composition) per person (food poverty line) and then adds the cost of non-food essentials (absolute poverty line).  The calculated poverty lines for each sampled household are compared with the household consumption per person. All measures are preliminary deflated to take into account differences in purchasing power over time and regions of residence.

In contrast, the official poverty measurement compares per capita disposable income of a household with national (official) poverty line, which is the average per capita subsistence minimum budget of a family with two adults and two children (see Table 1).

Table 1. Consumer budgets and absolute poverty line by year in Belarus, in constant BYN

Year 2009 2010 2011 2012 2013 2014 2015 2016
Subsistence minimum budget1 247 258 293 317 332 362 369 373
Minimum consumer budget2 372 396 367 448 491 517 554 620
Absolute poverty line3 383 395 437 448 468 475 499 520

Source: 1 Belstat; 2 Ministry of Labour and Social Protection Republic of Belarus; 3 author’s own calculations.

The empirical strategy of the analysis assumes setting the food, non-food and absolute poverty lines using the cost of basic needs approach, estimating poverty measures at the level of entire Belarus and its regions based on Foster-Greer-Thorbecke’s poverty indices (Foster et al., 1984), and analyzing the determinants of welfare and poverty using OLS and probit regressions.

Poverty incidence

The timeline of poverty analysis for Belarus can be subdivided into three periods: crisis of 2009-2011, recovery of 2012-2014, and a crisis of 2015-2016 (see Figure 1).

The results show that during the first period (from 2009 to 2011), absolute poverty at the national level increased from 30.9% to 32.6%. Incidence of absolute poverty for rural and urban areas in 2011 reached 45% and 28% of the population, correspondingly.

Figure 1. Incidence of absolute poverty and GDP per capita growth in Belarus

Source: Author’s own calculations.
Note: Estimates reflect weighted household data.

The second period (from 2012 to 2014) was characterized by a sharp poverty reduction. For example, the absolute national poverty headcount ratio has plummeted from 32.6% in 2011 to 14.9% in 2014, rural poverty dropped by 22.1 percentage points or almost by half and urban poverty decreased by 16.2 percentage points.

In turn, the third period saw a sharp rise in the incidence of poverty. From 2015 to 2016, the headcount ratio for absolute poverty increased by 14.4 percentage points. As a result, in 2016 absolute poverty in Belarus reached 29.3% or almost the same as in 2009 and 2011 (Mazol, 2017b).

Causes and determinants of poverty

The significant increase in poverty in 2015-2016 was due to a combination of several factors, including the household income decline in comparison with its growth in previous years, the increasing need to spend more on food necessities and the growth in food and especially non-food price levels.

As the Figure 2 shows, starting from 2015 there has been a rapid increase in the real cost of non-food budget for Belarusian households, while the food budget has remained almost the same in real terms. Correspondingly, in 2016 the non-food poverty line increased by 14.6%, while the food poverty line went up only by 2.9%.

Figure 2. Real monthly average per capita household expenditure on food and non-food items and real monthly standardized food and non-food poverty lines, 2009-2016, in BYN

Source: Author’s own calculations.
Note: Estimates reflect weighted household data.

Furthermore, as income fell (by 7.2% in 2015-2016), the share of food items in total expenditure increased and real non-food expenditure decreased. This is because household income was not enough to cover both expenditures on food and non-food items. Due to the 2015-2016 economic crisis the cost of meeting the food essentials increased so fast that it has squeezed the non-food budget, leaving insufficient purchasing power for non-food items.

The study also shows that among factors that substantially influence household welfare and poverty at the household level in Belarus are family size, the number of children in a household, presence in the household of economically inactive members. Moreover, single mothers in Belarus appear to be noticeably more vulnerable to macroeconomic shocks than full families both from welfare and poverty perspectives.

Additionally, one of the most important determinants of welfare and poverty in Belarus is spatial location of a household. In particular, poverty highly discriminates against living in rural areas. The poverty incidence for rural areas over 2009-2016 is approximately 10.5 percentage points (or 44%) higher than the national average, while that of the urban areas is nearly 4 percentage points (or 16%) below national average. Moreover, in 2015-2016 urban and rural disparity for poverty widened even more and reached 25.3% for urban vs 40.6% for rural areas.

Finally, two more factors, savings and access to a plot of land, have on average a large positive influence on consumption expenditure and aa negative one on the chance of getting poor.

Conclusion

Poverty alleviation and development reflect economic and social progress in any country. While Belarus initially achieved noticeable progress in this dimension, the economic and social development in recent years seems to increase problem of poverty in Belarus. The estimates show that in 2015-2016, absolute poverty in Belarus increased almost twofold. Household size, large numbers of children in a household, the presence in the household of economically inactive members are all factors that decrease household welfare and increase poverty. Single mothers also appear to be substantially more vulnerable to macroeconomic shocks. Finally, one of the most important determinants of welfare and poverty in Belarus is if a household is rural. These findings are important warning signals for the design of pro-poor policies in Belarus.

References

  • Foster, J., J. Greer, and E. Thorbecke. (1984). A Class of Decomposable Poverty Measures. Econometrica, 52: 761-766.
  • Kakwani, N. (2003). Issues in Setting Absolute Poverty Lines, Poverty and Social Development Papers No. 3, June 2003. Asian Development Bank.
  • Kruk, D., Bornukova, K. (2014). Belarusian Economic Growth Decomposition, BEROC Working Paper Series, WP no. 24.
  • Mazol, A. 2017a. The Influence of Financial Stress on Economic Activity and Monetary Policy in Belarus, BEROC Working Paper Series, WP no. 40.
  • Mazol, A. 2017b. Determinants of Poverty With and Without Economic Growth. Explaining Belarus’s Poverty Dynamics during 2009-2016, BEROC Working Paper Series, WP no. 47.
  • World Bank (2000). Making Transition Work for Everyone: Poverty and Inequality in Europe and Central Asia. Washington DC, The World Bank.

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.