Author: Admin
Who Cheats on a Cartel Agreement?
Leniency policies, widely used by antitrust authorities, aim to deter and dissolve cartels by granting a fine reduction (up to immunity) to reporting cartel members. What are the characteristics of the reporting cartel members? Marvão (2014) addresses this question by developing and testing a model where cartel members are heterogeneous in terms of the value of the cartel fine they expect to receive. The author shows that the first reporting firm in a cartel tends to be the cartel leader (in the US) or a repeat offender (in the EU). Reporting is also shown to be more likely in cartels which affect a larger market (in the US) and in cartels which have a lower number of members but which affect a geographical area wider than the EEA (in the EU).
Analysis of Leniency Policies
Cartels are a perennial problem and are one of the main concerns of the European Commission (EC) and the US Department of Justice (DOJ). As cartels are secret, measuring the rate of success of cartel detection is challenging. The increased number of detections in recent years may be the result of a higher desistance rate and/or a higher incidence of cartels. The US and EU Leniency Programmes (LPs) were thus designed to work as a device for the deterrence and dissolution of collusive agreements and have been in place since 1978 and 1996, respectively.
The DOJ’s decision on cartel fines is made in accordance with the “U.S. Sentencing Guidelines” and is, in the vast majority of cases, followed by plea-bargaining. The US Leniency Programme grants full immunity to the first firm coming forward, whereas the other firms receive no leniency reduction. However, plea bargaining is present in over 90% of cartel offences and the settlements often lead to a reduced fine for the subsequent cartel members. Firms are also liable for the damages caused by the cartel’s activity. In addition, the Amnesty Plus Program benefits prosecuted cartel members who disclose previously undetected cartels.
EU fines are set in accordance with the “EU Guidelines on the method of setting fines” and are adjusted to account for aggravating and mitigating circumstances. The total fine is capped at 10% of the total worldwide turnover of the firm in the previous year. In the current LP, the first reporter receives immunity from fines and the subsequent firms receive a reduction of 10-75%, depending on their place in the reporting queue.
The empirical literature on LPs policies is relatively short and recent. It focuses on the adequacy of the leniency reductions and presents conflicting results. However, an understanding of the characteristics of the reporting firms, and of the cartels in which they take part, is vital to make policies provide the correct incentives for firms so as to dissolve and dissuade cartels.
The Issue of Repeat Offenders
The current EU fine guidelines state that a repeat offender is any firm that was previously found to infringe Articles 101 or 102 of the EU Treaty. The DOJ defines repeat offenders as any firm that “after release from custody for having committed a crime, is not rehabilitated”. While repeat offenders are a serious issue, the LP Notices are not explicit as to whether or not they should receive a lower leniency reduction, if any.
Repeat offenders are also a highly debated issue. In Marvão (2012), it is shown that recidivism is one the factors which influence the granting and scale of EU leniency reductions. Connor (2010) has suggested that there is evidence of a significant incidence of recidivism, and identifies 389 recidivists worldwide in the period between 1990 and 2009. This number constitutes 18.4% of the total number of firms involved in 648 international hard-core cartel investigations and/or convictions. Werden et al. (2011) have contested Connor’s definition of recidivism and his calculation of the numbers of multiple and repeat offenders. The main discrepancy between the two arguments appears to be in how cartel members who merge and form a new firm are dealt with. Werden et al. (2011) follow the legal practice (DOJ and EC) and suggest that no repeat offenders have been fined in the US, since 1999.
The Model by Marvão (2014)
The aim of Marvão (2014) is to understand the specific characteristics of reporting cartel members and of the cartels in which they take part.
If firms are similar in everything but their own beliefs on the likelihood of being caught by the authorities, firms may have different incentives to report the cartel. Different beliefs may be generated from public statements issued by EU or US officials, knowledge of the budget allocated to the detection and conviction of cartels, and the proportion of convictions in cartel investigations, among others. Harrington (2013) formalizes this behaviour but his underlying assumption of homogeneity of firms only allows for symmetric equilibria.
Marvão (2014) extends the game in Harrington (2013) to include firm heterogeneity. In the first game stage, a two-firm cartel collapses for internal reasons. In the second stage, each firm receives a private signal on the expected probability of detection and conviction by the authorities. Given the signal received, and the expectations on the other firm’s behavior, firms decide to report if the signal is above their threshold level. In addition to the individual fine, the cartel sanction includes a payment for overcharges and other costs inherent to being fined. These costs may include attorney fees, negative impact on consumer’s perception (which may lead to lower sales), managers being fired, future punishment by other firms and possible future damage claims (from customers). Each cartel member can apply to the LP and receive a fine reduction.
The model shows that the cartel member with the highest expected fine will be the first to report the cartel, provided that it receives a sufficiently high and unbiased signal on the probability of being caught.
Empirical Evidence in Marvão (2014)
The theoretical model is tested with the use of data on cartel convictions. The US data employed in the empirical analysis is an excerpt from John Connor’s Private International Cartels dataset (1984-2009; 799 cartels). The EU data was self-collected by the author and includes 81 cartels in the period of 1998 to 2011.
Cartel Leaders
US data on the individual turnover are not available, but sales and overcharges are likely to be larger for the cartel leader. Although this creates a further incentive to report the cartel, the US DOJ guidelines state that leaders cannot receive immunity from fines. It is thus surprising that the results show that, in US cartels, the leader seems to be more likely to report and receive immunity from fines. The cartel leader is identified as the firm mentioned in the DOJ decision as a ringleader or mentioned in the history of the case as the cartel disciplinarian/bully. This result suggests that different definitions of ringleaders are used, or that the rule is not always enforced by the DOJ.
In the EU, it is only the coercer of the cartel who is not allowed, since the LP of 2002, to receive immunity from fines. Although the EU public statements on cartel convictions do not identify the leader or coercer of the cartel, it is likely that the coercer is also the leader of the cartel. However, with no explicit data on the leader, the results cannot be obtained.
Repeat Offenders
Surprisingly, the US results show that repeat offenders are more likely to receive immunity from fines. Even more concerning is the fact that this likelihood is larger with each additional repeat offender in the cartel.
The EU results show that firms that have colluded more than once are more likely to report the cartel and receive immunity from fines. This effect is particularly strong if the report occurs after the end of the cartel.
It may be that repeat offenders are larger in terms of sales or have better knowledge of how to interpret the signals received, perhaps due to their previous collusive agreements, and thus, are better at choosing the timing of the report and what evidence to provide the authorities with. Although it is in the authorities’ interest to give incentives to the reporting of a cartel, legislation should ensure that the deterrence effect is not diminished by the existence of excessive leniency reductions.
Additional Results
Reports are more likely to occur in US cartels which serve markets with a moderate and, to a lesser extent, large number of buyers; as well as in cartels which are shorter and smaller. This is perhaps because collecting evidence is easier and/or quicker. In addition, firms which are convicted in both US and EU are more likely to be the first reporter in the US if they received a lower EU fine, perhaps because they are quicker to report the cartel to the DOJ.
EU Reports are more likely to occur in longer and smaller cartels. The latter result is noteworthy as it contrasts with the work done in Sjoerd (2005) and Brenner (2009), where the number of cartel members is never significant.
In EU cartels reported after their end, the reporter is less likely to have received other reductions. Although these reductions could be due to firms claiming not to know that the agreement was illegal, it could also be that firms apply for other reductions if they do not expect to receive a (large) leniency reduction.
Conclusions
When the perceived probability of conviction is high, firms are more inclined to report the cartel. This prosecution effect is magnified by the existence of the EU and US Leniency Programmes. In addition, a pre-emption effect exists as when firms believe that other firms will report, there is an incentive to be the first reporter and apply for a fine reduction within the LP. Therefore, identifying the most likely reporter in a cartel is key to designing a successful LP.
Marvão (2014) shows that the main sources of fine heterogeneity are recidivism and leadership of the cartel, which illustrate the need for more proactive competition authorities.
Reports are also more likely in cartels that affect a larger market (in the US) and in cartels that have a lower number of members but which affect a geographical area wider than the EEA (in the EU). Leniency Programmes should thus be in line with these incentives, by focusing on dissolution of cartels in these markets and by increasing firm’s beliefs on the likelihood of conviction. This could be done, for example, through unannounced inspections, screenings and requests for information or for a meeting with a firm representative. These measures, provided that they are credible, would supplement and enhance leniency.
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References
- Brenner, S., 2009. An empirical study of the European corporate leniency program. International Journal of Industrial Organization 27 (6), 639–645.
- Connor, J. M., 2010. Recidivism revealed: Private international cartels 1990-2009. CPI Journal 6, 2.
- Harrington, J. E., 2013. Corporate leniency programs when firms have private information: The push of prosecution and the pull of pre-emption. Journal of Industrial Economics 61 (1), 1–27.
- Marvão, C., 2012. The EU Leniency Programme: Incentives for self-reporting. Trinity College Dublin. Working paper.
- Sjoerd, A., 2005. Crime but no punishment. An empirical study of the EU 1996 leniency notice and cartel fines in Article 81 proceedings. Master’s thesis, Economic Faculty of the Universiteit van Amsterdam.
- Werden, G., Hammond, S., Barnett, B., 2011. Recidivism eliminated: Cartel enforcement in the United States since 1999. Research Paper
Education for the Poor
Authors: Lasha Lanchava and Zurab Abramishvili, ISET and CERGE-EI.
This brief summarizes the results of a study by Lanchava and Abramishvili (2015), which investigates the impact on university enrollment of an unconditional cash transfer in Georgia, designed to help households living below the subsistence level. The program, introduced in 2005, selects recipients based on a quantitative poverty threshold, which gives us the opportunity to measure the influence on university enrollment with an econometric regression discontinuity design. We use data on program recipients from the Social Service Agency of Georgia (SSA) and university admissions from the National Examination Center (NAEC) to create a single dataset and compare the enrollment rates of applicants who are just above and below the threshold. We find that being a program recipient significantly increases a student’s likelihood of university enrollment by as much as 1.4 percentage points (while the sample mean of university enrollment is 12.7%). We also find that the impact is stronger for males and the firstborn children in a family. Our analysis also shows that the effect is equally strong across different locations in the country. Our straightforward policy recommendation is that if a government is trying to increase enrollment in tertiary education, need-based university scholarships may prove to be an appropriate instrument.
What Ukrainians Expect From Reforms
Author: Tom Coupé, KSE.
Ukraine needs reforms badly. However, there is a huge difference in how the government, the expert community, and the general public understand reforms. According to a recent survey conducted by a prominent Ukrainian newspaper, people expect that reforms should, in the first place, improve their personal wellbeing. However, research findings beware that in the short run structural changes in the country can worsen economic performance and increase inequality. To reduce the pain of unmet expectations and popular discontent, the government should openly communicate any difficulties to come, and wisely mix the most painfull measures, like the increase of tariffs for the use of public infrastructure, with empowering changes that give citizens a sence of progress, like actions that strengthen democracy and help SMEs to flourish.
Fiscal Decentralization and Budget Discipline in Russian Regions
Authors: Michael Alexeev, Indiana University, Nikolay Avxentyev and Arseniy Mamedov, Russian Academy of National Economy and Public Administration.
We use panel data from the Russian regions for 2005-2013 to estimate the link between intraregional fiscal decentralization and regional budget deficits. Although Russian regions are not as autonomous in their fiscal policies as regions in other federal states such as Switzerland and the US, we obtain rather robust and highly statistically and economically significant results. Most importantly, we show that expenditure decentralization tends to have a positive effect on consolidated regional budget balance, while the weakness of regional tax base (relative to municipal one) is associated with significantly higher deficits. Also, as expected, the dependence of municipal budgets on transfers from the regional government leads to higher deficits of the consolidated regional budget. We conjecture that the deficit-reducing role of expenditure decentralization is due in part to better monitoring by the citizens and more efficient handling of expenditures by officials closer to the place where the funds are spent. Also, it might be easier for the regional government to pre-commit to a given level of expenditures when these expenditures are allocated to municipalities, because most municipalities in Russia appear to have harder budget constraints than the regional government.
The Aid Effectiveness Literature: Is It Over Yet?
Author: Maria Perrotta Berlin, SITE.
After several decades of studies, the academic community still does not have an answer to whether foreign aid affects growth, and in which direction. Part of the reason for such an outcome may lie in a wide variety of models, techniques and data used. However, the main reason is probably that the broad spectrum of effects is difficult to disentangle when looking at the question at an aggregated level.
On Leniency, Damages and Deterrence
Authors: Catarina Marvão and Giancarlo Spagnolo, SITE.
On November 26th of 2014, an EU Directive on antitrust damage actions was signed into law. The Directive is to praise as it does a lot to facilitate private antitrust actions in the EU. However, the Directive also tries to address a possible conflict between public and private antitrust law enforcement due to the central role played by Leniency Programs in cartel detection and prosecution. This conflict has long been at focus of legal debate. Private damage actions may reduce the attractiveness of Leniency Programs for cartel participants if their cooperation with the competition authority increases the chance that the cartel’s victims will bring a successful suit. The Directive strikes a compromise between public and private enforcement by preventing the use of leniency statements in subsequent actions for damages and limiting the liability of the immunity recipient to its direct and indirect purchasers. A new paper by Buccirossi, Marvão and Spagnolo (2014) shows that damage actions will actually improve the effectiveness of such programs, through a legal regime in which the civil liability of the immunity recipient is minimized and full access to all evidence collected by the competition authority, including leniency statements, is granted to claimants, a legal regime already implemented in Hungary since 2011.
The Political Economy of the Latvian State Since 1991: Some Reflections on the Role of External Anchors
This brief discusses the role of external anchors or goals such as WTO accession, NATO and EU accession in Latvia’s development strategy since 1991. On the one hand the external goals ‘depoliticised’ many potentially contentious areas of Latvian life. On the other hand, some developments would not have happened or would not have happened as fast without the constraints imposed by the external goals. For example liberalisation of the citizenship laws was prompted by NATO accession and the balance was tipped when the rejection of Latvia from fast-track EU accession talks in December 1997 led Latvia to abandon its quota or ‘windows’ naturalisation system. Most recently, Eurozone accession was an externally defined exit strategy from the austerity episode induced by the economic and financial crisis. Today there are no big external goals left to guide policy making. Home grown problems such as inequality require home grown solutions. But even now an external dependency persists. For example a long needed reform of the financing model of higher education has had to wait for a World Bank report published in September 2014 for action to be taken.
On January 1st, 2015 Latvia assumed the Presidency of the European Union. This milestone represents a certain level of maturity of the Latvian state and offers an opportunity for reflection on some aspects of how politics and political economy have evolved in Latvia between 1991 and today.
After Latvia regained independence in 1991, it faced (at least) two political economy challenges: one was to disentangle the economy from the Soviet system in which it had been deeply integrated, and the second, perhaps more difficult challenge, was to create an independent nation state. At a formal level, the solution to the latter challenge appeared straightforward – assume continuity of the Latvian state. Effectively this meant reinstating the pre-war constitution, which was indeed done for the most part. Symbolically this continuity was signalled by, for example, calling the first post-Soviet parliamentary elections held in June 1993 the elections for the 5th Saeima (parliament). The elections for the 4th Saeima had taken place more than 60 years earlier in October 1931.
At a practical level the challenges were more complex – Latvia had had no practical experience of statehood for nearly fifty years and mistakes were made. For example, Latvia initially diplomatically recognised Taiwan rather than the Peoples Republic of China.
There was a presumption that newly independent Latvia should become a market economy but little consensus on how this should be achieved. This is in contrast to Estonia where a group of ‘young market economy Turks’ were able to implement a kind of zero option i.e. zero tariffs, fast privatisation, etc. In Latvia there were strong protectionist sentiments and the initial privatisation was a muddled process.
Advice and advisers were abundant in post-independence Latvia. In the early 1990s, Latvia was awash with international advisers: the IMF and the World Bank were both present, the Germans were advising on a constitution for the Bank of Latvia, the British were active in public administration reform, the Danish advised on research and higher education and so on. Advice was often conflicting with different advisers promoting their own visions of structures as models that Latvia should adopt e.g. on legal and education systems. Today, we see something akin to this in the Eastern Partnership countries such as Moldova and Ukraine.
There was a general sense of the desirability of a ‘return to Europe’ but no plan or strategy. Nevertheless, even without a conscious plan a strategy emerged – namely a strategy of external anchors.
The external goals or anchors that emerged included the following:
- World Trade Organisation, 1998
- NATO, 29 March 2004
- European Union, 1 May 2004
- Eurozone, 1 January 2014
The most important effect of the external anchors was that they ‘depoliticised’ many potentially contentious areas of Latvian life. This has been particularly important given the fragmentation that has historically dominated Latvian politics. Thus, in the interwar period, no less than 32 different political parties were represented in the Saeima. In the early post-Soviet parliaments, similar tendencies were observed with newly created parties being the winners in terms of the number of seats in the first four elections. The election of 2006 was the first in which the previously largest party returned as the largest party. Between the first post-Soviet election in 1993 and the 2014 election, there have been no less than 17 governments which mostly have been uneasy coalitions of 3 or 4 partners with divergent views and interests. In this context the benefit of external anchors is self-evident.
The external anchors each contributed in different ways: WTO accession contributed to modify the protectionist sentiments that were rife in the early years of independence. Rather curiously, Estonia, which adopted a radical free trade policy right from the first days of independence, had more difficulties in achieving their WTO membership than ‘protectionist’ Latvia. Estonia was obliged to implement additional economic regulations in order to conform to the rules of the WTO and the EU (to which it was committed to join as its WTO application proceeded), and as a consequence, Estonian WTO accession was delayed to 1999. The WTO accession process also gave Latvia’s fledgling Foreign Ministry invaluable experience of multi-lateral negotiation.
Apart from the obvious security benefit, NATO membership was conditional on the creation of the Latvian anti-corruption Bureau (KNAB) and on the liberalisation of citizenship legislation, the latter because NATO was concerned about the prospect of a member state with a large number of non-citizen residents.
EU accession represents the biggest and most significant anchor. The requirement of candidate countries to accept the EU acquis communautaire took huge swathes of economic and social legislation out of the political arena. While the economic criteria for accession presented few difficulties of principle for Latvia – most people were in favour of a market economy – the requirement of respect for and protection of minorities presented problems for many Latvian politicians and liberalisation of the citizenship law was resisted until after 1997 when the rejection of Latvia from fast-track EU accession talks in December 1997 prompted a rethinking of Latvia’s intransigent position on the quota or ‘windows system’.
It is hard to over-estimate the impact of EU accession on Latvia. What would Latvia be like today if it were not a member state of the EU? There are sufficient tendencies even now in Latvia to suggest we would observe something like a tax-haven, off-shore economy, probably with weak democratic institutions. EU accession has saved the Latvian people from something like such a fate.
Even later in Latvia’s largely self-inflicted financial and economic crisis of 2008-10 it was the ‘Holy Grail’ of accession to the Eurozone that politically anchored Latvia’s famous austerity programme.
What of today? The ‘big’ external anchors are used up, and Latvia today:
- Is the fourth poorest country in the EU with GDP per capita in 2013 at 67% of the EU average (only Croatia, Romania and Bulgaria are poorer);
- Is a particularly unequal society – Latvia has some of the worst poverty and inequality indicators in the EU;
- Has a shadow economy at 23.8% of GDP (data on 2013; Putniņš and Sauka (2014)); and
- Has an internationally uncompetitive higher education system.
These and other problematic aspects of Latvian life and society are home grown and it is hard to imagine external anchors that can improve poverty or inequality, that can reduce the size of the shadow economy, or which can improve the quality of the Latvian higher education system.
Nevertheless, Latvian policy makers seem to be addicted to the external anchor concept and often find difficult to progress without it. The recent experience of reform of the financing of higher education illustrates. Latvia has historically had a funding mechanism for universities and other higher education institutions based entirely on student numbers. The lack of a link between funding and quality has resulted in a Latvian higher education system that is strong on enrolment but low on quality e.g. as measured by peer-reviewed publications. At some level this has been understood and there has been much talk of reform. Although various reports and evaluations have been published, there has been little progress on concrete reform until the Ministry of Education commissioned the World Bank in December 2013 to produce a report on funding models for Latvia. The final report was delivered in September 2014 and action has now been taken to adopt the World Bank recommended three-pillar model where the funding criteria will now include performance and innovation.
Of course, the new model will not solve all the problems of Latvian higher education – far from it – but it illustrates the pervasive nature of policy makers seeming dependency on external anchors.
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References
- Putniņš, Tālis & Arnis Sauka (2014). “Shadow Economy Index for the Baltic Countries. 2009-2013,” The Centre for Sustainable Business at SSE Riga, May 2014.
Crisis and Trust
Authors: Maxim Ananyev and Sergei Guriev, CEFIR
Our research uses the 2008-2009-crisis experience in Russia to identify the relationship between income and trust. In 2009, Russian GDP fell an 8-percent drop in 2009. The impact of the crisis was very uneven among Russian regions because of their differences in industrial structure inherited from the Soviet times. We find that the regions that specialize in producing capital goods, as well as those depending on oil and gas, had a more substantial income decline during the crisis. The variation in the industrial structure allows creating an instrument for the change in income. After instrumenting average regional income, we find that the effect of income on generalized social trust (the share of respondents saying that most people can be trusted) is statistically and economically significant. Controlling for conventional determinants of trust, we show that a 10 percent decrease in income is associated with 5-percentage point decrease in trust. Given that the average level of trust in Russia is 25%, this magnitude is substantial. We also find that the post-crisis economic recovery did not restore the pre-crisis trust level. Trust recovered only in those regions where the 2009 decline in trust was small. In the regions with the large decline in trust during the crisis, trust in 2014 was still 10 percentage points below its pre-crisis level. This has straightforward policy implications: governments should pursue generous countercyclical policies especially in the areas that are the most vulnerable to macroeconomic shocks.
The Role of Belarusian Private Sector
The development of a private sector and the expansion of its role in the economy is one of the key goals repeatedly announced by the Belarusian authorities. The reforms carried out in Belarus in 2006-2014 moved the country from 106th to 57th position in the World Bank Doing Business ranking. The official statement is that reforms boosted the rapid development of business initiatives and its impact on economic development. Unfortunately, there is no clear confirmation of this statement. The absence of a transparent and clear methodology in Belarusian statistics on how to evaluate the role of the private sector makes it difficult to evaluate the exact input of the Belarusian business in the economy and compare its role to other countries.
In the last 5 years, the Belarusian authorities have repeatedly highlighted the need to develop the private sector, perceiving it as the main source for sustainable economic growth and competitiveness of Belarus in the future.
However, it may be difficult to assess the real role of the private sector in the Belarusian economy. First, existing data do not allow a clear identification of the boundaries between the private and state-owned sectors in Belarus. Furthermore, there are certain methodological differences in identifying and evaluating the private sector between Belarusian official statistics, the World Bank approach and alternative methodologies. These methodological variations combined with data limitations result in significantly different estimates of the role of the private sector for the Belarusian economy. The problem concerns both the evaluation of the role of small and medium enterprises (SMEs) and the private sector in general.
Small and Medium Enterprises
One good example of the abovementioned data issue is the statistics for SMEs sector. Unlike the EU, Belarus does not include individual entrepreneurs to the micro organizations in the SME sector. This results in highly different estimates for the number of SMEs per 1000 inhabitants (Figure 1). If we follow the methodology of the National Statistical Committee of the Republic of Belarus (Belstat), the number is 9.7 firms per 1000 people. However, switching to the EU methodology (IFC report, 2013) raises the number significantly up to 35.9. Moreover, the inclusion of unregistered self-employed individuals involved in the shadow economy (which according to estimations of the authorities amount to at least 100,000 inhabitants) increases the number to 46.5 firms per 1000 people, which is above the level of many European countries.
Figure 1. SME density
Source: own estimations from Belstat data, Eurostat.
Private Sector
As for the private sector in general, the problem here is that the official statistics counts enterprises with mixed form of ownership and state presence to the private sector. This makes it difficult, if at all possible, to obtain the exact input of the private sector to the economy and see the dynamics of its change.
More specifically, there are three potential ways to assess the contribution of the private sector. Unfortunately none of them provides reliable estimates of the role of business. The first method is to use official data. The main problem here is that the private sector according to official statistics includes enterprises with state presence as well as large private companies that are under state control and not totally independent. Thus, the contribution of the private sector calculated based on these figures is likely overestimated.
The second method is to look at enterprises that do not report to the Belarusian ministries, following the methodology of the World Bank used in their evaluation of Belarus machinery industry (Cuaresma et al., 2012). Here, non-ministry reporting enterprises work as a proxy for a private firm, as in this case it doesn’t have to report directly to Belarusian ministries and is independent from the state.
The problem is that the majority of large private enterprises, even though there is no state share in them, are not in this list. In Belarus these enterprises often form a part of state concerns on the one hand and are independent on the other. The example here is JSC “Milavitsa”, one of the largest lingerie producers in EE, which is a part of the Bellegprom concern. Therefore, this methodology likely underestimates the role of the private sector.
The third way is to try to exclude state presence from the official data of the private sector. According to official statistics, the private sector includes several groups of enterprises, such as individual entrepreneurs, legal entities with/without state/foreign presence, etc. However, the absence of a clear distinction between these sub-groups allows for only rough estimates, through the extraction of the state presence.
As a result, all obtained numbers are qualitatively different from each other and there is no clear answer if any of them reflects the real picture.
For example, the contribution of the private sector in total employment according to the three different methods (Figure 2) provides the following results. Officially, in 2013 around 53% of the active labor force worked in the private sector. However, the exclusion of state presence in private property changes the results significantly and the share of the active labor force involved in the private sector drops to a level of 31%, while the non-ministry reporting enterprises employ around 18% of the active labor force.
Figure 2. Private sector in employment (%)
Source: own estimations from Belstat data.
The input of the private sector in the total production volume (Figure 3) is also very diverse depending on the method of evaluation. Official data show that the private sector is responsible for 80% of total production volume. However, the exclusion of state presence decreases the value to a level of just 26%, which is similar to the result demonstrated by the non-ministry reporting enterprises (25%).
Figure 3. Private sector in total production volume (%)
Source: own estimations from Belstat data.
At the same time, the absence of a clear definition of the private sector does not allow for obtaining reliable information about its effectiveness. If we take the rate of return on assets (ROA), again, there is a significant gap in the results of the different methods of estimation (Figure 4). ROA of the private sector according to official statistics is significantly lower than similar indicators based on the data obtained by the other two methods (in 2013: 1.17 vs. 2.4 and 1.3 respectively). Thus, the lower the “measured” state presence, the higher is the productivity of the private sector, especially in comparison with the effectiveness of the state sector (0.25).
Figure 4. Return on Assets (BYR/BYR)
Source: own estimations from Belstat data.
Conclusion
The above discussion has illustrated that diffuseness of data and the definition of the private sector is likely to create troubles for understanding the importance of the private sector in Belarus. This, in turn, may undermine the effectiveness of economic and political measures targeted towards this sector.
The implementation of a clear, unified and transparent methodology of how to estimate the role of business and what exactly can be treated as a private sector in statistics would allow for a better understanding of the obstacles and barriers that the private sector is dealing with, as well as to help developing effective measures of business support. Until then, the official statistics should not stick to just one definition of the private sector. Instead, it can use all three abovementioned gradations, as a better reflection of the realities of Belarusian business.
References
- Cuaresmo, J., Oberhofer, H., Vincelette, G. (2012).‘Firm Growth and Productivity in Belarus: New Empirical Evidence in the Machine Building Industry’, World Bank, Policy Research Working Paper No. 6005.
- ‘Business Environment in Belarus 2013.Survey of Commercial Enterprises and Individual Entrepreneurs’, IFC, Report.
Green Transition: Adapting Markets and Policies
This policy brief summarizes the discussion at the 8th annual SITE Energy Day conference, devoted to market adaptations and policies necessary to address the green transition. Recent energy trends with ever more green energy-mixes will have consequences for the functioning of related markets as well as implications for appropriate policy responses. New financial solutions, technological developments, international cooperation, and national policy initiatives in both developing and developed countries are examples of adaptations to this transition process. To discuss these issues, the conference brought together a group of distinguished experts from the energy industry, policy community and academia.
In December 2014, world leaders have gathered in Peru (Lima) for the 20th annual meeting of the United Nations Framework Convention on Climate Change. This convention has as an objective to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system” (see UNFCCC’s webpage). Even though the agreement to reduce emissions to a sustainable level may take years to be negotiated, at least 195 countries have ratified the UFCCC convention. The willingness to reduce environmentally harmful emissions has led to many countries changing their energy profile to include more green energy, a process that is often referred to as “green transition”.
It may be worth mentioning that the label “green transition” consists of two conceptual components. “Green” refers to the ability to generate environmentally friendly energy, which has become a key challenge for our society. Indeed, a majority of people now recognize the pressing need to cut pollution in the face of climate change and environmental degradation. The wording “transition” acknowledges that a shift toward a greener energy mix seems unavoidable, but this shift may not occur immediately or uniformly around the globe. The required time for change is long and the shift itself may not be smooth. To put it differently, the green transition has had and will continue to have wide-ranging consequences for businesses, governments, and the international community.
As a result, there is a need to carefully address the potential implications for the existing energy and related markets and market players, and for government policies, as well as new markets and new policies triggered by the green transition. These topics were the focus of the 8th SITE Energy Day, a half-day conference held at the Stockholm School of Economics on December 2, 2014.
Green Transition and the Energy Markets
The first panel focused on how energy markets have responded to green transition and how they may react in the future. Speakers from electricity companies, regulatory bodies and think tanks discussed how the green transition may affect the use of traditional financial instruments by energy companies; the choice of economically viable technology for producing green energy; and the way markets could be integrated to increase the efficiency of green energy.
As green transition almost always introduces more intermittent production, it is likely that market uncertainty will increase. This is one of the reasons why traditional financial instruments may not be fully adequate. The first speaker Laurent Cheval, Head of Nordic and Fuel Origination in the business division Asset Optimization & Trading at Vattenfall discussed this issue extensively. Energy companies face substantial financial risks since both prices and quantities may be highly volatile. To mitigate these risks, market participants may use an array of financial products. In mature energy markets, the products are fairly standardized. However, more complex and tailor-made financial products are required to face the ongoing changes in the sector. For example, the increased share of renewable energy combined with more interconnected markets create specific market risks. To hedge against risks associated with weather changes, future fuel costs, interest rates and so on, more and more energy providers trade customized derivatives “over-the-counter” (OTC) rather than through a centrally-cleared exchange. Another example is the development of decentralized power production and the rise of the “Prosumer” who simultaneously produces and consumes power. So far, the relevant regulation is underdeveloped and there is an additional demand for innovative financial solutions. Large energy companies such as Vattenfall are for instance offering a range of financial hedging solutions combined with actual physical handling and delivery of energy products.
Green transition should in the long run lead to a domination of environment friendly energy. However it is important that only economically viable technologies subsist. It is therefore necessary to assess the cost of producing green energy. Lars Andersson, Head of Wind Power Unit at the Swedish Energy Agency, reported on an extensive study done by the Agency on this issue. Over the last five years, the production cost of wind power has fallen consistently and capacity usage has increased. This dramatic change in the wind power industry likely implies that the existing subsidies for building wind power plants gradually will be phased out. It is unclear how the industry will react to these cuts in subsidies. Furthermore, according to Andersson, wind production faces at least two challenges. Without developing the capabilities for energy storage, electricity markets will face more energy imbalances as the share of wind power increases. Additionally, the support from the local communities is needed to ensure an expansion of wind power. Addressing these issues requires the development of new regulation and defining a common goal which may promote cooperation between stakeholders.
Ultimately the green transition will end when and if the green energies are largely adopted around the globe. One way to accelerate this green transition may be to coordinate action and development of governmental policies. Martin Ådahl, Chefsekonom at Centerpartiet, and Daniel Engström, Programchef Miljö och Klimat at Fores, presented the current state of the international climate policy and discussed the benefits of linking carbon emission rights markets. Because of conflicting interests, the likelihood of reaching an agreement within the current United Nations climate negotiations is rather small.
However, Ådahl and Engström suggested that the focus should instead be on reaching agreements between big polluter countries that contribute the lion’s share of global emissions. Indeed, regional emission trading schemes already exist in the EU, the US and China, the three regions which together account for over 50 percent of global emissions. One potential shortcoming of this suggestion is that it may not be enough to stabilize greenhouse gas concentrations in the atmosphere. Thereby, Ådahl and Engström discussed the possibility to link current cap-and-trade markets, as a first step toward an international system with a more formal global agreement. Linking cap-and-trade markets has many benefits, especially in the form of efficiency gains. However, emission caps vary across countries and regions because of different political goals or priorities. When markets are linked, difference in abatement costs (or allowance prices) would lead to a flow of allowances and emissions from countries/regions with low abatement cost to countries with higher ones. Thereby prices would be equalized, benefiting entities with cheaper allowances. To avoid opportunistic behavior, countries would first have to agree ex ante on an exchange rate between different countries’ emission rights. Second, a clear regulatory framework is required. Both Ådahl and Engström emphasized the need of an international organization devoted to climate economics. Such an institutional body could not only regulate the links between cap-and-trade markets, but also provide concrete solutions and technical models to improve on the market design.
Environmental Policies: International Experience
The second panel focused on how governments may promote green transition. Anna Pegels, Senior Researcher at the German Development Institute (DIE), reviewed green policy initiatives in developing countries. Pegels argued based on evidence from e.g. India and South Africa that it is possible to combine substantial growth with green energy. This is good news since emerging countries are among the highest polluters. However, to change a country’s energy profile, governments need to intervene and develop new industrial policies.
Governments can set long-term goals, which are supported by short- and mid-term targets. However, given the large profits that are at stake, officials may likely be subject to the risk of capture and corruption. To limit such risks, Pegel emphasized the need to introduce competition in the energy sector as a whole. Subsidized feed-in tariffs for renewable energy for example should be only a first step, to reach a certain scale of production. But the technology is mature enough that producers should be able to bear some additional risk in their current activity. This should increase the scope for competition. Finally, it is essential that governments continuously engage in policy revision cycles and learn from other countries’ experiences.
Benjamin Sovacool, Professor of Business and Social Sciences at Aarhus University and Director of the Danish Centre for Energy Technologies, talked about the process of low carbon transition in the Nordic region. In spite of large investments into renewable energy, fossil fuels still dominate the consumption in the Nordic countries and considerable measures need to be taken in the decades ahead to make the transition to a greener energy mix. Sovacool highlighted four areas which could help reduce the carbon footprint of the Nordic countries: renewable energy, increased energy efficiency of buildings, transportation, and carbon capture and storage (CCS). In order to be successful, the green transition has to bring about a systemic change engaging actors across the economy, particularly including end-users. There should also be a focus on additional technological progress. Finally, Sovacool noted that a rapid emission reduction such as the one planned in the Nordic countries is unlikely to be followed on a global scale in the near future due to a lack of political feasibility.
Conclusion
The green transition is expected to have a profound impact on the functioning and structure of energy markets as well as the policies that facilitates this transition.
There is an ongoing process of decentralization in the energy sector, with the rise of “prosumer” market places that alter market dynamics. Moreover, market uncertainty is increasing due to more intermittent production (due to renewables) and a stronger interconnectedness between energy markets. It is likely that energy imbalances will be a major concern and that more and more energy trade will take place on real time markets (as opposed to e.g. on the day-ahead market). As markets’ linking becomes stronger, the interdependence between markets in terms of energy type and geographical location will be intensified. The need for coordination and international cooperation will be even more pressing. The uncertainty regarding the development of international cooperation, but also regarding national policy changes, may however disrupt energy markets. Measures such as withdrawing existing subsidies must be handled in a gradual and strategic manner so as not to discourage investment. A key issue for governments is to have a credible green policy in the long-term. Such credibility will also depend on the level of involvement of different actors in the green transition, including the necessity to have a multilevel engagement of the end-users.
References
- Energimyndigheten, (2014), Produktionskostnads-bedömning för Vindkraft i Sverige, ER 2014:16
- Pegels, A. (Ed.). (2014), Green industrial policy in emerging countries, Vol. 34, Routledge
- Rutqvist, J., Engström, A.and Ådahl, M., A Bretton Woods for the Climate. Fores, 2010
- SITE 8th Energy Day, http://www.hhs.se/en/about-us/calendar/site-external-events/2014/site-energy-day/
- UNFCCC, (n.d). First steps to a safer future: Introducing The United Nations Framework Convention on Climate Change, http://unfccc.int/essential_background/convention/items/6036.php [8 December 2014]