Author: Admin
Russia and the WTO
Eighteen years after the start of the accession process, Russia is closer than ever to joining the World Trade Organization (WTO). The negotiations have been long and hard as Russia had to agree the accession terms with 57 out of the 153 WTO member countries which formed the working group. Moreover, the number of goods for which the extent and timeframe of the change of Russian tariffs were agreed exceeded 10,000. The negotiation team led by Maxim Medvedkov has done an immense amount of work and found compromises on sensitive issues such as pay for the flights of foreign planes over Siberia, compensating European producers for the discriminatory law on industrial assembly, the amount of support for the agricultural sector, access to the market of banking services, etc. Now, all these differences have been ironed out and the WTO has agreed with all the participants, and put on the table the final terms of Russia’s accession.
Terms of Accession
It has to be noted that the change of tariffs after Russia’s accession to the WTO will be insignificant. Average tariffs on goods after all the agreements have come into force will decrease to 7.8% from 10% in 2011.
The tariffs on agricultural goods will drop to 10.8% compared with the current level of 13.2%, and for manufactured goods from 9.5% to 7.3%. The duties on some goods will, however, drop significantly. For example, the tariff on new cars will be cut by half from 30% today to 15%. On the other hand, one has to bear in mind that the agreed decrease of all tariffs will not happen overnight after the Russian accession. It will rather take place gradually at a rate which has also been agreed on with the WTO members. The tariff for new cars will drop to 25% immediately after accession and will remain at that level for the next three years before the cuts resume at an annual rate of 2.5% over the following four years to reach the targeted level of 15%. Russia has no commitments to reduce tariffs any further. The tariffs on used cars up to 7 years old will be fixed at 25% at accession and will not change over the next five years before being cut to 20% over the following two years. Duties on cars older than 7 years will not change at all. On the whole, tariffs will be changed completely immediately upon accession only on one-third of the goods. For many goods the process will extend over three years, and for some over 8 years after accession.
Not only trade in goods, but also service and foreign direct investment spheres will be liberalized. One of the most difficult negotiation items was the banking sector, where some WTO member countries (notably the USA) demanded a total opening up of the Russian market of banking services to foreign financial and lending institutions. Moscow, for its part, insisted on preserving the current situation where only the subsidiaries and not branches of foreign banks operate in the Russian market. The difference between the former and the latter is that the activities of subsidiaries on Russian territory are regulated by the Russian Central Bank, while branches are regulated by the laws of the country of origin. The Russian position prevailed, which means that the situation for foreign banks will not change and the cost of entering the Russian market will remain at the current level. Accordingly, the cost of banking services for Russian clients will not change. This is not good news for Russian small and medium-sized enterprises which had hoped that a massive entry of foreign banks could help bring down the interest rates on loans.
Major changes may take place in the insurance market when Russia allows branches of foreign insurance companies. However, a nine-year transitional period appears to be enough for all the stakeholders to prepare themselves.
Assessment of the Consequences of Russia’s Accession to the WTO for the Economy
The question that is uppermost in the minds of all Russians is whether the economy stands to gain or lose as a result of WTO accession. On the one hand, opponents of accession point to the not very successful experience of accession to the WTO of some former Soviet republics. These opponents paint lurid pictures of the social consequences of the closure of a large number of Russian enterprises. By contrast, the advocates of accession cite the success of China whose export-led growth accelerated significantly after the country joined the WTO. Time will tell what the results of a WTO accession will be for Russia. The result will in many ways depend on well-thought-out and coordinated actions of the Russian federal and regional authorities. In the meantime, we can only talk about what we expect from accession and what its potential consequences may be. The Russian government and the World Bank have conducted several major studies, seeking to determine the economic consequences of a WTO accession. While there are some discrepancies in evaluating the quantitative changes in specific sectors and at the economy-wide level, researchers more or less agree in qualitative terms. The general consensus is that the changes in outputs, consumption, prices and welfare due to the new tariff agreements are likely to be fairly small. Because the overall reduction of import tariffs in Russia will be insignificant, one may expect that changes in specific sectors, too, will not be dramatic (within plus-minus 1-3% of the base level).
CEFIR jointly with the Belgian TML Centre and the German ZEW with the support of the European Union Seventh Framework Programme, recently build a general equilibrium model of the Russian economy SUST-RUS (CEFIR 2011) which makes it possible to assess the effect of a Russian WTO accession on specific sectors. Several scenario calculations have been made to model the short term (one or two years after the reduction of all the tariffs) and long-term (five or six years after the reduction of all the tariffs) effects of a Russian WTO accession. The results of the scenario modeling should be seen as an indication of the direction of market processes caused solely by a WTO accession without taking into account any other possible changes in the economic environment (for example, a change of energy prices, the strengthening or weakening of the ruble against the leading world currencies, changes in the domestic market, etc.).
The short-term scenario assumes only a change of the tariff timetable. The long-term scenario has a further assumption concerning the return on foreign direct investments for the business service sector. Business services include banking insurance, financial services, transport services, wholesale trade, etc. Some terms of Russia’s WTO accession pertain to the business service sphere and envisage considerable liberalization of foreign companies’ access to these sectors. One can expect that lower barriers to entry would push down prices in these sectors and make them more accessible for Russian enterprises, which in turn would reduce their costs, boost production and create more jobs. The general equilibrium modeling of this mechanism assumes a conservative reduction of barriers for foreign investments of about 10% of the current level.
According to CEFIR’s results, the potential growth of welfare in the economy caused by a WTO accession in the short term will be 0.4% per year, and in the long term 1% per year. Budget revenues will fall due to diminished tariffs, and there may be a dip in the rate of GDP growth in the short term. Model calculations show a significant change of the trade balance, possibly a reduction of the trade surplus to 10%. At the sectorial level, a WTO accession will reduce domestic prices of timber and articles made from wood, foodstuffs, transport means, as well as equipment, clothes, chemicals and petrochemical products by 1.5-2.5% in the short term and by up to 3% in the long term. This will increase consumption by between 0.2% and 0.4% in the short term and up to 1.5% in the long term. It has to be noted that the liberalization of the service sphere is a very important assumption of these calculations as it accounts for half of the long-term gains for consumers.
The World Bank has also carried out a study of the consequences of a Russian accession to the WTO in 2004 (Jensen et al, 2004). That study put the net positive gain from liberalization of tariffs at 3.4% of the GDP. That analysis was based above all on the economic effect from a change in import tariffs. Trade liberalization is historically associated with lower tariffs. Most sectors stand to gain from accession. Because the authors identify two main causes of the gains from liberalization – easier access to foreign markets and cheapening of the ruble in proportion to the change of tariffs – the sectors that will benefit are those which has a high share of exports, and which have not been heavily protected by tariffs to begin with.
The biggest beneficiary will be metallurgy, with a 25% increase in output and employment in ferrous metallurgy and 15% in non-ferrous metallurgy. The growth in the chemical and petrochemical industries can be up to 10% and in coal mining up to 6%. The significant gains predicted by the World Bank study owe something to the optimistic view of the possible terms of Russia’s accession to the WTO. For example, it assumed that all the import tariffs would be cut by 50% and all (100%) of the administrative barriers to investment in business services would be removed. More modest assessments of the potential gains for Russia in other studies reflect the smaller Russian commitments to liberalization of import tariffs and the services sphere. For example, CEFIR’s results show that steel-making enterprises will not experience difficulties after a WTO accession and may grow by about 2% in the long term.
Along with the cut of import duties, Russian producers will face tougher competition on the part of foreign goods for which prices will be cut. Accordingly, Russian producers will also have to cut their prices to be competitive. This is good news for consumers. Not all domestic producers will be able to cut their prices. The enterprises whose production costs turn out to be higher than the new prices, and which fail to cut their costs, will be pushed out of the market. The sectors where one can expect a drop in production are above all those which have long been protected against international competition by high import duties. CEFIR’s study has shown that in the short term, negative consequences may ensue for the food industry, pharmaceutical companies and textile enterprises which may see their output drop by between 0.5% and 2%.
According to the World Bank study, the biggest decline in output and employment may occur in the machine-building sector (12%) and in the food and light industries as well as in the construction-material industry (up to 7%). The above figures of decrease or increase refer to the summary effect from liberalization accumulated over a period of 7-10 years after a Russian accession to the WTO. Several studies have been devoted to the consequences of a WTO accession for regional economies. For example, World Bank experts (Rutherford and Tarr, 2006) point to positive, but uneven consequences of a WTO accession for Russian regions. The biggest beneficiaries from lower tariffs are likely to be the Tyumen region, the North Western District as a whole, and in particular, St. Petersburg, where welfare may increase by 1%. Low growth or no growth may be expected in the Central District and in the Urals. These results tally with the assessments of the consequences of WTO accession for the Russian regions made by the Independent Social Policy Institute (ISPI 2004) which also included some regions of the Volga Federal District among the high-risk regions.
Results of studies of changes in the labor market in the wake of WTO accession, generally accord with the other findings. The International Labor Organization (ILO 2003) predicts an average loss of 6000 jobs in industry in the year following accession and up to 1000 jobs in seven or eight years’ time. The biggest number of jobs will be lost in the light-industry sector (up to 15,000 during the transitional period). Such a drop in employment will hardly make any difference to the unemployment situation in the country as whole, but may differ from one region to another.
Most studies agree that Russia may gain from easier access for Russian enterprises to foreign markets after a WTO accession, but that the gain will not be great compared to the potential gain from the liberalization of the service sphere. There are not many export-oriented enterprises in the country, but they exist. There are about 6,000 export-oriented enterprises in the processing industry. These enterprises include chemical, metallurgical and high-tech enterprises, and are the most efficient and competitive producers in the country. These enterprises may be expected to pick up the slack in the labor market due to redundancies in sectors that will be affected by a WTO accession. The coordinating role of the state is very important in creating conditions for movement of labor. The gradual reduction of tariffs may dampen the social consequences of Russia’s WTO accession. In the regions where some production facilities are “doomed”, programs for retraining of labor must be launched without delay, especially in information technologies, and the services and skills required for starting a new business. The aim of such retraining should be to enable those who lose their jobs to be employed in other spheres of the economy. It is equally important to develop new forms of financing migration of the population within the country. The solution of this task may become one more – and very important – result of the WTO accession for Russia.
References
- CEFIR. 2011. SUST-RUS project. www.sust-rus.org
- ILO. 2003. “Social consequences of Russia accession to WTO.” Moscow office of ILO (in Russian)
- ISPI. 2004. “Russia’s accession to WTO: real and imaginary social consequences.” (In Russian)
- Jensen, Rutherford, Tarr. 2004. “Economy-Wide and Sector Effects of Russia’s Accession to the WTO.” World Bank
- Rutherford, Tarr. 2006. “Regional Impacts of Russia’s Accession to the WTO.” The World Bank
Does Service-Sector Liberalization Increase Productivity in the Manufacturing Sector?
Authors: Oleksandr Shepotylo and Volodymyr Vakhitov, KEI.
This policy brief summarizes the results of recent research on the effect of service-sector liberalization in Ukraine, 2001-2007, on productivity in the manufacturing sector. We use a sample of manufacturing firms and construct a firm-specific index of service-sector liberalization. We find that the manufacturing firms which more intensively use liberalized services, on average, have gained 9 percent in total factor productivity (TFP). The service liberalization is associated with increased foreign presence which also has a positive and significant effect on TFP. The effect is stronger for domestic and small firms.
A Resonant Signal: the Russian Parliamentary Elections of December 2011
Days before December 4, prospects of electoral democracy in Russia looked bleak. Consolidation of the authoritarian rule of Vladimir Putin, Russia’s paramount leader since 1999, adoption of non-democratic electoral laws and politically-motivated law enforcement, constant harassment of media, civil society organizations, and election observers, and outright involvement of the government in the electoral process gave little hope that elections would make the political leadership accountable. The courts and electoral officials were used to prevent most opposition leaders from registering a party or participating in elections; opposition financial supporters had been driven into exile. Parliamentary elections in December 2007 and presidential elections in March 2008 were marred by such irregularities that many observers, myself included, had stopped counting. However, the outcome of December 4, 2011 will arguably have a major impact on future political developments in Russia.
Firstly, the official results of United Russia, the party that is led by Vladimir Putin and had a constitutional majority in the previous parliament, showed a significant drop in support for the current political leadership among the general public. Despite overwhelming presence on state-controlled TV channels, significant support by government officials, and outright vote fraud, the official results show the ruling party deserted by more than a quarter of its supporters (12.8 million out of 44.7 million who voted for United Russia in 2007).
Secondly, those who turned out to vote (the turnout was significantly lower than at previous parliamentary elections) showed obvious discontent with Putin/United Russia policy and, possibly, with the way elections were conducted. In particular, millions of Russians voted for Just Russia, a party with no charismatic leader and a platform that is not substantively different from that of United Russia.
Thirdly – and perhaps most importantly – there was a visible and dramatic upsurge of voter activism on the Election Day. Without any large-scale centrally organized campaign, hundreds of volunteers went to polling stations to work as election observers. They witnessed, prevented and/or reported hundreds of violations by electoral officials via social networks (despite coordinated DDoS attacks on the most important networks and popular news sites on the Election Day) and via You Tube. By December 5, some of the You Tube clips showing electoral fraud had more than 1,000,000 hits.
Reported Results and Corrections for Voter Fraud
As is always the case in a semi-democratic state, result of the official count may deviate significantly from how people actually voted. In Russia, the parliament is formed by representatives of political parties: voters vote for party lists, rather than for individual candidates. The officially announced results were: 49.5 percent for United Russia, 19.2 for Communist party, 13.2 for Just Russia, and 11.7 for the Liberal Democrats (Vladimir Zhirinovsky). Other parties, including Yabloko, the only liberal-leaning party that was allowed to participate in elections, fell short of the 7 percent required to enter parliament. However, the observations of international observers concur with those of opposition parties and independent Russian observers: ballot stuffing in favor of United Russia was witnessed/recorded and was widespread; electoral laws, draconian in themselves, were grossly violated by state officials, including police, at polling stations. In a number of cases, the elections results certified by local election boards do not coincide with the data presented by the central electoral commission, with every major discrepancy being in favor of United Russia.
Results obtained by the Citizen Observer project, which brought about 500 Moscovites to 160 polling stations as observers, give an impression of the scale of the fraud. Unfortunately, the project did not use a randomized distribution of observers, which would make the sample statistically representative of the whole of Moscow. However, Moscow districts have demonstrated fairly homogenous voting patterns in the last two decades, and there is no reason to think that any major change in this pattern occurred, so the report offers a fairly reliable estimate of election fraud. Averaging across polling stations where the observers did not report any serious violations, the Communist party won 25.3 percent of votes, United Russia 23.4, Just Russia and Yabloko 17.6 percent each, and the Liberal Democrats 12.5 percent. Turnout was 49 percent.
I would therefore estimate the effects of irregularities at 10 percentage points, i.e. the real share of votes cast for United Russia nationwide would be 39 percent rather than the reported 49 percent. But it would be reasonable to suppose the effect of irregularities at between 7 and 15 percentage points, so real votes for United Russia would be between 34 and 42 percent of votes cast. It is conceivable that the real share of votes cast for the Communist Party in Moscow (19.4 percent in official returns) was close to that of United Russia; it is not inconceivable that the Communists won the majority of real (not “counted”) votes by Moscovites.
Explanations
Following such a major surprise, any explanation offered only three days after the event risks being way off mark. Public opinion surveys predicted a significantly larger plurality for United Russia. (Personally, I have doubts about the quality of surveys of electoral intentions by major Russian polling firms. I find it particularly disturbing that, in the past, such firms have proved good at predicting – supposedly based on voter intentions – the reported results, rather than the results as adjusted by a realistic estimate of electoral fraud.)
The most obvious explanation for the United Russia setback is economic. Russia suffered more than any other G20 country as a result of the world financial crisis in 2008-09: an EBRD Transition Report 2011 found, based on an extensive survey of Russian citizens, that 38 percent of households had to cut their food consumption as a result of the crisis (11 percent of West European households were affected the same way). This is a major impact. In a democracy, such economic impact alone would most probably result in loss of power for the incumbent leadership.
Another explanation is growing discontent among Russians with the harshness of Putin’s administration and with rampant corruption. When oil prices were rising and real incomes were growing by double digits, the Russian public exhibited markedly high tolerance even when political decisions ran contrary to the will of the majority (for example, no opinion survey in five years showed majority approval of the abolition of regional gubernatorial elections, which was a cornerstone of Putin’s political changes) or when they had to pay substantial corruption premiums in the marketplace. In harder times, people are less willing to have their wishes ignored or to tolerate high and rising prices.
Consequences
In the Yeltsin era, such an outcome of parliamentary elections (even by the official count, United Russia lost almost 13 million votes as compared to 2007) would have triggered a major change in the composition of the cabinet. In 2011, there is even more reason for such a change: a number of prominent cabinet members, who had remits to run United Russia slates in specific provinces led their slates to dismal results (low 30s by the official count). However, low mobility in the upper echelons of the Russian elite during the last decade suggests that drastic changes in the near future are unlikely.
More important than the loss of seats in parliament for United Russia is the possibility that Vladimir Putin, the current prime minister with de facto presidential powers and the head of United Russia, is no longer assured a safe victory in March 2012 presidential elections, which looked a foregone conclusion just a couple of months ago. He is still arguably the favorite, even if (very improbably) there is no ban on opposition candidates participating in the elections (in 2008, the field was restricted to three contenders, all of them effectively pseudo-candidates; in 2004, other candidates were de facto prohibited from raising money for the campaign, while the incumbent had the full capacity of the state at his disposal). With a ban on opposition participation, he is the overwhelming favorite. However, we do not rule out an initiative by the government to make outcome of presidential elections even more secure in the near future by a major crackdown on the opposition.
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Five Million Tourists in Georgia by 2015 – a Myth or a Nightmarish Reality?
Anybody traveling on the Georgian countryside will be astonished by the pace of development. Mestia, the capital of Svaneti, resembles one big construction site. The new concrete road from Zugdidi promises to shorten the travel time to 2 hours. A whole network of ski lifts is currently being planned, carrying a promise of turning Svaneti, a long-isolated region of Georgia, into the Switzerland of the Caucasus.
Mestia and Svaneti are representative of a broader effort by the Georgian government, assisted by international financial institutions, to develop the Georgian tourism sector. This has mainly involved infrastructure projects and tax breaks to encourage private investment in the tourism industry. A very partial list of touristic destinations that have received or are receiving a major facelift includes Old Tbilisi, Mtskheta, Signagi, Kutaisi, Gudauri, Mestia, Batumi, Kobuleti and Anaklia.
Tourism is one of Georgia’s main exporting sectors and earns hard currency and helps to reduce the current account deficit. As a labor intensive industry, it helps to create a lot of formal and informal jobs (particularly in the periphery where they are most needed). The growth in tourism also spurs business development in many related sectors of the economy – agriculture, transportation services, arts and crafts to name just a few.
Georgia is not the only country in the world riding on the wave of tourism expansion. Tourism is currently the fastest growing sector in the global economy, particularly important for developing countries. According to UNWTO tourism barometer, the flow of foreign tourists into developing countries increased by 4.5% in 2011 compared to the previous year. The rate of increase stands at 9% for Central and Eastern European countries.
For Georgia, however, the growth of tourism has been truly spectacular. According to the Georgian Border Security statistics, the number of foreigners visiting Georgia during the first 10 months in 2011 increased by 42% compared to the same period last year. While not reflecting the actual number of tourists (as opposed to foreigners working in Georgia and buyers of re-exported cars), these data illustrate a steep upward trend. Even under most conservative assumptions, the total number of border crossings by foreigners will reach about 2.6 million by the end of 2011, which is 28% above the 2010 level.
Since 2004, incoming tourism has expanded at an impressive average rate of 32% per year, nearly doubling every three years. A simple (simplistic) extrapolation suggests that in four more years, by 2015, Georgia may be receiving more than 5million tourists a year. Is this a realistic estimate? Would it be a blessing or a curse?
What the border crossings statistics conceal is that Georgia remains a very expensive destination, especially during the short high season. According to Travel and Tourism Competitiveness Index for 2011, Georgia is ranked 73rd among 139 countries, the same ranking as in 2009. In particular, Georgia ranked 82nd on information and communication technologies, 105th on air transportation infrastructure and 94th on general infrastructure. Overall, Georgia does better than its South Caucasus neighbors Armenia (100th) and Azerbaijan (87th) but worse than Russia (53rd) and Turkey (50th).
At present, tourists are willing to pay a significant premium to satisfy their curiosity for this Eastern outpost of Western civilization. Despite high prices and mediocre quality of services, Georgia has so far been able to maintain its attraction as an island of democracy; exotic, underexplored and yet secure location with good food and wine. However, as the country enters a period of two closely watched elections in 2012 and 2013, what will be at stake, among other things, is Georgia’s status as a destination of choice for investors, donors, and tourists. As far as mass tourism is concerned, a setback in the global public relations battle could bring into play the “value for money“ factor, making further expansion in the sector more tightly related to infrastructure and service improvements.
Slower growth in tourism may be a blessing in disguise. From the purely economic point of view one has to consider the impact of tourism on long-term economic growth. Unfortunately, tourism – like many other labor intensive service industries – has little potential for substantial productivity growth: it takes about the same amount of labor to cook one khachapuri today as it did in the 19th century. As wages are typically tied to productivity this means that tourism has little potential for long-term income growth. Wages in tourism may eventually increase – a phenomenon known to economists as “Baumol’s cost disease” – when other sectors improve their productivity and start competing for workers with the tourism industry.
Thus, the Georgian government should be advised to worry, not about the sheer number of tourists, but rather the amount of money the tourists spend in the country. According to this view, Georgia should strive to increase the share of relatively wealthy tourists from Western Europe and North America. These tourists account for a meager 3.6% of total border crossings by foreigners in the first 10 months of 2011. A closely related goal should be to smooth the sharp seasonal fluctuations currently plaguing the industry. High season tourism (mainly from the CIS) at “peak load” prices has been growing so far, but there is ultimately a limit to how many tourists Batumi, Kobuleti and Anaklia can absorb in July and August. After all, there are cheaper and better mass-tourism alternatives on the Turkish side of the border. Conversely, increasing offseason tourism would help attract additional investment in human and physical capital and raise the quality of services to a level appropriate for high-end tourism.
Along with the economic pitfalls outlined above, the danger associated with becoming just another “Disneyland” of mass tourism is in losing the very reason why people would want to come to Georgia, as well as losing a part of the national identity. The magnificence of Georgian landscapes is in the wild, untamed nature of their beauty. It is also one of the very few places in Europe where one can still witness and appreciate the tenacity and courage of people who do not merely survive, but “live with” the land, with the nature that is both generous and unforgiving.
Of course, we almost always accept as inevitable the sacrifice of “tradition” for “progress”. Most of the time, it is difficult to tell whether the changes we are going through are for the better or for the worse. In particular, it may depend on what people perceive to be the “core” of their identity. Our feeling is that Georgians as a people have been formed to a great extent by the freedom, the wilderness, and the power of their mountains. Any successful and smart approach to developing the tourism industry would take into consideration these important cultural aspects as well.
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Development Programs and Security in Afghanistan
This policy brief summarizes the results of recent research which studies the effect of a development program in Afghanistan on the security situation there. We use a large-scale randomized field experiment to examine the effect of the largest development program in Afghanistan on the economic wellbeing of villagers and their attitudes toward the government and the security situation. We find that implementation of the program leads to significant improvement in villagers’ economic wellbeing as well as in their attitudes towards the government. The program also leads to an improved security situation in the long run. However, these positive effects on attitudes and security are not observed in districts with high levels of initial violence.
Development programs have long been used to promote economic and political development. In recent years, however, they have assumed yet another role: they have been used to promote security in countries fighting fierce insurgencies, such as Afghanistan and Iraq. The approach contends that such projects, which are commonly used by the domestic government and allied entities to provide basic services and infrastructure, improve economic outcomes, build support for the government, and ultimately reduce violence as sympathy of the population for the insurgency wanes. The idea of using development projects as a counter-insurgency strategy is becoming more and more influential and now constitutes a major component of the new U.S. counterinsurgency doctrine (U.S. Army/Marine Corps, 2006).
The study tests whether this approach works in the context of the National Solidarity Program (NSP) in Afghanistan. NSP is the largest development program in the country and has already brought almost $1 billion in aid to more than 26,000 Afghan communities. Under the supervision of the program communities elect a council, which assumes responsibility for implementing infrastructure projects (e.g. building wells or repairing roads) that are chosen by the villagers and are funded by block grants from the NSP.
To measure the effects of the program, the study uses a field experiment conducted in 500 villages across 10 Afghan districts spanning all parts of the country except for the southern provinces, where security levels were insufficient for the study to be carried out. The experiment divided the villages randomly into two groups of the same size, one of which received the program in autumn 2007, while the other group was to receive the program four years later. Before the start of the program the villages in these two groups were virtually identical, so their comparison over the course of these years shows the effect of the program on the life of village communities. The study uses the results of the extensive survey conducted in these villages two years after the start of the program as well as military information on security incidents around the villages during this period.
Our findings indicate that NSP has a strong positive effect on people’s economic wellbeing and on their attitudes towards the Afghan government (both at the central and local level). NSP also appears to improve attitudes toward NGOs and, to some extent, coalition forces on the ground. Respondents in NSP villages have significantly more positive attitudes toward government figures at almost all levels, including district and provincial governors, central government officials, the President of Afghanistan, Members of Parliament and government judges. Magnitude of effects varies from between 8 percentage points for Members of Parliament to 4 percentage points for the national police. NSP also has a positive effect on the attitudes of villagers toward NGOs and soldiers of the International Security Assistance Force (ISAF). The results for the summary measure indicate that NSPs improve villagers’ attitudes by 13 percent of a standard deviation. However, results for the two eastern districts, which experienced high initial levels of violence, are completely different. There is no positive effect of NSP on attitudes toward any government bodies, ISAF soldiers, or NGOs, and the effect on attitudes towards many figures is, in fact, significantly negative.
The results also indicate that villagers have more positive perceptions about security in NSP villages. There is no evidence, however, that the program affects the number of security incidents around villages recorded by NATO coalition forces (ISAF) in the short run (the first 15 months after the start of the program) or the number of security incidents reported by villagers in the survey. However, NSP does reduce the probability of security incidents in the long-run. The probability that a security incident will occur in one- and ten-kilometer radius around a village is smaller in treatment villages by 2 and 4 percentage points, respectively. For a three-kilometer radius, the probability is lower by 2 percentage points, but not statistically significant. In the two eastern districts, the short-run effect is similar to the average effect, but there are no statistically significant differences between treatment and control villages in long-run effects.
Overall, the empirical evidence suggests that strategies for winning the “hearts and minds” through the provision of development projects are working, but only in relatively secure regions. The development program improves the attitudes of the civilian population toward the government and makes them more likely to think that the government is working in their best interest, which in turn makes them less likely to support the insurgents. The fact that we observe the effect on security only in the long run suggests that support for the government reduces violence mainly by reducing the number of people willing to join the insurgents, rather than by increasing the population’s willingness to share information with the government. The results also suggest that development programs can prevent the spread of violence in relatively secure regions, but they are not effective in reducing violence in regions that are already experiencing significant security problems.
Overall, the results suggest that the benefits of development programs are not limited to the provision of direct economic and social benefits. They can also contribute to long-term sustained development by preventing the spread of violent internal conflicts, which are the core problem in many developing countries.
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.
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Are Natural Resources Good or Bad for Development?
Natural resources undoubtedly play an important role in the economy of many countries. Whether their contribution to development is positive or negative is, however, a contested and difficult question. Arguably countries like Australia, Botswana and Norway have gained enormously over long periods from their natural resources, others like Azerbaijan, Kazakhstan and Russia have gained in economic growth terms but maybe at the expense of institutional development, while in some countries, such as Angola and Sierra Leone, natural resources have been at the heart of violent conflicts with devastating effects for society. With many developing countries being highly resource-dependent a deeper understanding of the sources and solutions to the potential problem of natural resources is highly relevant. This brief reviews the main issues and points to key policy challenges for turning resource rents into driver rather than a detriment for development.
Is it good for a country to be rich in natural resources? Superficially, the answer to this question would obviously seem to be “yes”. How could it ever be negative to have something in addition to labor and produced capital? How could it be negative to have something valuable “for free”? Yet, the answer is far from that simple and one can relatively quickly come up with counterarguments: “Having natural resources takes away incentives to develop other areas of the economy which are potentially more important for long-run growth”; “Natural resource-income can cause corruption or be a source of conflict”, etc.
Looking at some of the starkest cases, the “benefits” of resources can indeed be questioned. Take the Democratic Republic of Congo for example. It is the world’s largest producer of cobalt (49% of the world’s production in 2009) and of industrial diamonds (30%). It is also a large producer of gemstone diamonds (6%), it has around 2/3 of the world’s deposits of coltan and significant deposits of copper and tin. At the same time, it has the world’s worst growth rate and the 8th lowest GDP per capita over the last 40 years.[1] The picture for Sierra Leone and Liberia is very similar – they possess immense natural wealth, yet they are found among the worst performers both in terms of economic growth and GDP per capita. While the experiences of countries such as Bolivia and Venezuela are not as extreme their resource wealth in terms of natural gas and oil respectively seem to have brought serious problems in terms of low growth, increased inequality and corruption. When one, on top of this, adds that some of the world’s fastest-growing economies over the past decades – such as Hong Kong, South Korea and Singapore – have no natural wealth the picture that emerges is that resources seem to be negative for development.
These are not isolated examples. By now, it is a well-established fact that there is a robust negative relationship between a country’s share of primary exports in GDP and its subsequent economic growth. This relationship, first established in the seminal paper by Sachs & Warner (1995) is the basis for what is often referred to as the resource curse, that is, the idea that resource dependence undermines long-run economic performance.[2]
Based on the World Development Indicators database (World Bank). Primary exports consist of agricultural raw materials exports, fuel exports, ores and metals, and food exports.
At the same time, there are numerous countries that provide counterexamples to this idea. Being the second largest exporter of natural gas and the fifth largest of oil, Norway is one of the richest world economies. Botswana produces 29% of the world’s gemstone diamonds and has been one of the fastest-growing countries over the last 40 years. Australia, Chile, and Malaysia are other examples of countries that have performed well, not just despite their resource wealth, but, to a large extent, due to it.
Given these examples the relevant question becomes not “Are resources good or bad for development?” but rather “Under what circumstances are resources good and when are they bad for development?. As Rick van der Ploeg (2011) puts it in a recent overview: “the interesting question is why some resource-rich economies [.] are successful while others [.] perform badly despite their immense natural wealth”. To begin to answer this question it is useful to first review some of the many theoretical explanations that have been suggested and to see what empirical support they have received. Clearly, our overview is far from complete but we think it gives a fair picture of how we have arrived at our current stage of knowledge.[3]
Theories and Evidence
The most well-known economic explanation of the resources curse suggests that a resource windfall generates additional wealth, which raises the prices of non-tradable goods, such as services. This, in turn, leads to real exchange rate appreciation and higher wages in the service sector. The resulting reallocation of capital and labor to the non-tradable sector and to the resource sector causes the manufacturing sector to contract (so-called “de-industrialization”). This mechanism is usually referred to as “Dutch disease” due to the real exchange rate appreciation and decrease in manufacturing exports observed in the Netherlands following the discovery of North Sea gas in the late 1950s. Of course, the contraction of the manufacturing sector is not necessarily harmful per se, but if manufacturing has a higher impact on human capital development, product quality improvements and on the development of new products, this development lowers long-run growth.[4] Other theories have focused on the problems related to the increased volatility that comes with high resource dependence. In particular, it has been suggested that irreversible and long-term investments such as education decrease as volatility goes up. If human capital accumulation is important for long-run growth this is yet another potential problem of resource wealth.
The empirical support for the Dutch disease and related mechanisms is mixed. Some authors find that a resource boom causes a decline in manufacturing exports and an expansion of the service sector (e.g. Harding and Venables (2010)), others do not (e.g. Sala-i-Martin and Subramanian (2003)). But even the studies that do find evidence of the Dutch disease mechanism, usually do not analyze its effect on the growth rates. In principle, Dutch disease could be at work without this hurting growth. Another problem is that the Dutch disease theory suggests that natural resources are equally bad for development across countries. This means that the theories cannot account for the great heterogeneity of observed outcomes, that is, they cannot explain why some countries fail and others succeed at a given level of resource dependence. The same goes for the possibility that natural resources create disincentives for education. Gylfason 2001, Stijns (2006) and Suslova and Volchkova (2007) find evidence of lower human capital investment in resource-rich countries but the theory cannot explain differences across (equally) resource-rich countries.
As a result, greater attention has been devoted to the political-economic explanations of the resource curse. The main idea in recent work is that the impact of resources on development is heavily dependent on the institutional environment. If the institutions provide good protection of property rights and are favourable to productive and entrepreneurial activities, natural resources are likely to benefit the economy by being a source of income, new investment opportunities, and of potential positive spillovers to the rest of the economy. However, if property rights are insecure and institutions are “grabber-friendly”, the resource windfall instead gives rise to rent-seeking, corruption and conflict, which have a negative effect on the country’s development and growth. In short, resources have different effects depending on the institutional environment. If institutions are good enough resources have a positive effect on economic outcomes, if institutions are bad, so are resources for development.
Mehlum, Moene and Torvik (2006) develop a theoretical model for this effect and also find empirical support for the idea. In resource-rich countries with bad institutions incentives become geared towards “grabbing resource rents” while in countries where institutions render such activities difficult resources contribute positively to growth. Boschini, Pettersson and Roine (2007) provide a similar explanation but also stress the importance of the type of resources that dominate. They show that if a country’s institutions are bad, “appropriable” resources (i.e., resources that are more valuable, more concentrated geographically, easier to transport etc. – such as gold or diamonds) are more “dangerous” for economic growth. The effect is reversed for good institutions – gold and diamonds do more good than less appropriable resources. In turn, better institutions are more important in avoiding the resource curse with precious metals and diamonds than with mineral production. The following graph illustrates their result by showing the marginal effects of different resources on growth for varying institutional quality. Distinguishing the growth contribution of mineral production in countries with good institutions with the effect in countries with bad institutions, the left panel shows a positive effect in the former and a negative one in the latter case. The right-hand panel illustrates the corresponding, steeper effects when isolating only precious metals and diamond production.
Even if these papers provide important insights and allow for the possibility of similar resource endowments having variable effects depending on the institutional setting, two major problems still remain. First, the measures of “institutional quality” are broad averages of institutional outcomes (rather than rules).[5] Even if Boschini et al. (2007), and in particular Boschini, Pettersson and Roine (2011) test the robustness of the interaction result using alternative institutional measures (including the Polity IV measure of the degree of democracy) it remains an important issue to understand more precisely which aspects of institutions that matter. An attempt at studying a particular aspect of this question is the paper by Andersen and Aslaksen (2008), which shows that presidential democracies are subject to the resource curse, while it is not present in parliamentary democracies. They argue that this result is due to higher accountability and better representation of the parliamentary regimes.
A second remaining issue is that even if one concludes that the impact of natural resources differs across institutional environments it is an obvious possibility that natural resources have an impact on the chosen policies and institutional arrangements. For example, access to resource rents may provide additional incentives for the current ruler to stay in power and to block institutional reforms that threaten his power, such as democratization. In a well-known paper with the catchy title “Does oil hinder democracy?” Ross (2001) uses pooled cross-country data to establish a negative correlation between resource dependence and democracy.
However, one needs to be careful in distinguishing such a correlation from a causal effect. There are at least two issues that can affect the interpretation: First, there could be an omitted variable bias, that is, the natural resource dependence and institutional environment can be influenced by an unobserved country-specific variable, such as historically given institutions (which in turn could be the result of unobserved effects of resources in previous periods), culture, etc. For the same reason, cross-country comparisons may also be misleading. One way of dealing with this problem is to use fixed-effect panel regressions to eliminate the effect of the country-specific unobserved characteristics. This approach produces mixed empirical results: in the analysis of Haber and Menaldo (2011) the effect of resources on democracy disappears, while Aslaksen (2010) and Andersen and Ross (2011) find support for a political resource curse.
Second, the measures of natural resource wealth may be endogenous to institutions and, in particular, its level of democracy. For example, the level of oil production and even the efforts put into oil discovery can be affected by the decisions of (and constraints on) those in power. Thereby one would need to find instrumental variables that influence the level of democracy only through the resource measures.[6] Tsui (2011) investigates the causal relationship between democracy and resources by looking at the impact of oil discovery event(s) on a cross-country sample. His identification strategy is based on using the exogenous variation in oil endowments (an estimate of the total amount of oil initially in place) to instrument for the amount of total discovered oil to date. The idea is that, while the amount of oil discovered could well be influenced by the institutional environment, the size of the oil endowment is determined only by nature. Tsui’s findings also support the political resource curse story.
There are also numerous studies about the effect of resources on particular institutional aspects and policies. For example, Beck and Laeven (2006) find that resource wealth delayed reform in Eastern Europe and the CIS, Desai, Olofsgård and Yousef (2009) point to natural resource income as central for the possibilities of autocratic governments to remain in power through buying support, Egorov et. al. (2009) show that there is fewer media freedom in oil-rich economies, with the effect being the strongest for the autocratic regimes. Andersen and Aslaksen (2011) find that natural resource wealth only affects leadership duration in non-democratic regimes. Moreover, in these countries, less appropriable resources extend the term in power (in line with the ruler incentive argument above), while more appropriable resources, such as diamonds, shorten political survival (perhaps, due to increased competition for power). Several papers show that in a bad institutional environment natural resources increase corruption (e.g., Bhattacharyya and Hodler (2010) or Vincente (2010)), and reduce corporate transparency (Durnev and Guriev (2011)).
Implications for Policy
Overall the literature points to potential economic as well as political problems connected to natural resources. Even if some issues remain contested it seems clear that many of the economic problems are solvable with appropriate policy measures and in general that natural resources can have positive effects on economic development given the right institutional setting. However, it seems equally clear that natural resource wealth, especially in initially weak institutional settings, tends to delay diversification and reforms, and also increases incentives to engage in various types of rent-seeking. In autocratic settings, resource incomes can also be used by the elite to strengthen their hold on power.
Successful examples of managing resource wealth, such as the establishment of sovereign wealth funds that can both reduce the volatility and create transparency and also smooth the use of resource incomes over time, are not always optimal or easily implementable. Using the money for large investments could be perfectly legitimate and consumption should be skewed toward the present in a capital-scarce developing setting (as shown by van der Ploeg and Venables, 2011). But no matter what we think we know about the optimal policy it still has to be implemented and if the institutional setting is weak the problems are very real. This is just because of potentially corrupt governments but also due to the difficulty to make credible commitments even for perfectly benevolent politicians (see e.g. Desai, Olofgård and Yousef, 2009).
Many political leaders in resource-rich countries have pointed to the hopelessness of their situation and have expressed a wish to rather be without their natural wealth. Such conclusions are unnecessarily pessimistic. Even if it is true that the policy implications from the literature more or less boil down to a catch-22 combination of 1) “Resources are bad (only) if you have poor institutions, so make sure you develop good institutions if you have resource wealth” and 2) “Natural resources have a tendency to impede good institutional development”, there are possibilities. Some countries have succeeded in using their resource wealth to develop and arguably strengthen their institutions. Even if it is often noted that Botswana had relatively good institutions already at the time of independence, it was still a poor country with no democratic history facing the challenge of developing a country more or less from scratch. And at the time of independence, they also discovered and started mining diamonds which have since been an important source both of growth and government revenue. This development has to a large part been due to good, prudent policy.
There is nothing inevitable about the adverse effects of natural resources but resource-rich developing countries must face the challenges that come with having such wealth and use it wisely. The first step is surely to understand the potential problems and to be explicit and transparent about how one intends to deal with them.
References
- Andersen, J. J. and Aslaksen, S., 2008. “Constitutions and the resource curse.” Journal of Development Economics, Volume 87, Issue 2.
- Andersen, J. J. and Aslaksen, S., 2011. “Oil and political survival.” mimeo.
- Andersen, J. J. and Ross, M., 2011, “Making the Resource Curse Disappear: A re-examination of Haber and Menaldo’s: “Do Natural Resources Fuel Authoritarianism?”.” mimeo.
- Aslaksen, S., 2010. “Oil and Democracy – More than a Cross-Country Correlation?,” Journal of Peace Research, vol. 47(4).
- Beck, T., and Laeven, L., 2006. “Institution Building and Growth in Transition Economies.” CEPR Discussion Paper 5718, Centre for Economic Policy Research:London.
- Bhattacharyya, S., and Hodler, R., 2010. “Natural resources, democracy and corruption” European Economic Review, Elsevier, vol. 54(4).
- Boschini, A.D., Pettersson, J. and Roine, J., 2007. “Resource curse or not: a question of appropriability” Scandinavian Journal of Economics, 109.
- Boschini, A.D., Pettersson, J. and Roine, J., 2011. “Unbundling the resource curse” mimeo.
- David, P. A., and Wright, G.. 1997. “The Genesis of American Resource Abundance” Industrial and Corporate Change 6.
- Desai, R. M., Olofsgård, A. and Yousef, T., 2009. “The Logic of Authoritarian Bargains” Economics & Politics, Vol. 21, Issue 1.
- Durnev, A. and Guriev, S. M., 2011. ”Expropriation Risk and Firm Growth: A Corporate Transparency Channel.”, mimeo
- Egorov, G., Guriev, S. M. and Sonin, K., 2009. “Why Resource-Poor Dictators Allow Freer Media: A Theory and Evidence from Panel Data.” American Political Science Review, Vol. 103, No. 4.
- Gylfason, T., 2001. “Nature, Power, and Growth” Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(5).
- Gylfason, T., Herbertsson, T. T., and Zoega, G., 1999. “A mixed blessing” Macroeconomic Dynamics, 3.
- Findlay, R. and Lundahl M., 1999. “Resource-Led Growth: A Long-Term Perspective.” Helsinki: World Institute for Development Economics Research.
- Frankel, J. A., 2010 “The Natural Resource Curse: A Survey.” HKS Working Paper No. RWP10-005.
- Haber, S. H. and Menaldo, V. A., 2011. “Do Natural Resources Fuel Authoritarianism? A Reappraisal of the Resource Curse.” American Political Science Review, Vol. 105, No. 1.
- Harding, T. and Venables, A.J., 2011. “Exports, imports and foreign exchange windfalls.” mimeo.
- Hausmann R., Hwang J. and Rodrik, D., 2007. “What you export matters.” Journal of Economic Growth, Springer, vol. 12(1).
- Leite, C. A. and Weidmann, J., 1999. “Does Mother Nature Corrupt? Natural Resources, Corruption, and Economic Growth.” IMF Working Paper No. 99/85.
- Mehlum, H., Moene, K. and Torvik, R., 2006. ”Institutions and the resource curse.” Economic Journal, 116.
- Montague, D., 2002. “Stolen Goods: Coltan and Conflict in the Democratic Republic of Congo.” SAISReview – Volume 22, Number 1, Winter-Spring, pp. 103-118
- van der Ploeg, F., 2011. “Natural Resources: Curse or Blessing?.” Journal of Economic Literature, American Economic Association, vol. 49(2).
- van der Ploeg, F. and Venables, A. J., 2011. “Harnessing Windfall Revenues: Optimal Policies for Resource-Rich Developing Economies.” Economic Journal, Royal Economic Society, vol. 121(551).
- Ross, M.L., 2001. “Does Oil Hinder Democracy?” World Politics, 53(3).
- Sachs, J. D. and Warner, A. M., 1995. “Natural Resource Abundance and Economic Growth.” NBER Working Papers 5398, National Bureau of Economic Research, Inc.
- Sala-I-Martin, X., Doppelhofer, G. and Miller, R. I., 2004. “Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach.” American Economic Review, American Economic Association, vol. 94(4).
- Sala-I-Martin, X., and Subramanian, A., 2003. “Addressing the Natural Resource Curse: An Illustration from Nigeria.” NBER Working Paper 9804.
- Stijns, J.-P., 2006. “Natural resource abundance and human capital accumulation.” World Development, Elsevier, vol. 34(6).
- Suslova, E. and Volchkova, N., 2007. “Human Capital, Industrial Growth and Resource Curse.” Working Papers WP13_2007_11, Laboratory for Macroeconomic Analysis, HSE.
- Torvik, R., 2009. “Why do some resource-abundant countries succeed while others do not?”, Oxford Review of Economic Policy, vol. 25(2).
- Tsui, K. K., 2011. “More Oil, Less Democracy: Evidence from Worldwide Crude Oil Discoveries.” The Economic Journal, 121.
- Vincente, P., 2010. “Does Oil Corrupt? Evidence from a Natural Experiment in West Africa,” Journal of Development Economics, 92(1).
- Wright, G., 1990. “The Origins of American Industrial Success, 1879-1940.” American Economic Review 80.
Footnotes
[1] Based on World Development Indicators database (World Bank).
[2] Its robustness has been confirmed in, for example, Gylfason, Herbertsson and Zoega (1999), Leite and Weidmann (1999), Sachs and Warner (2001) and Sala-i-Martin and Subramanian (2003). Doppelhoefer, Miller and Sala-i-Martin (2004) find that the negative relation between the fraction of primary exports in total exports and growth is one of 11 variables which is robust when estimates are constructed as weighted averages of basically every possible combination of included variables.
[3] The interested reader should consult more extensive overviews such as Torvik (2009), Frankel (2010) or van der Ploeg (2011).
[4] This assumption has been criticized by, for example, Wright (1990), David and Wright (1997), and Findlay and Lundahl (1999) who all point to historical examples where resource extraction has been a driver for the development of new technology. On the other hand others, e.g. Hausmann, Hwang and Rodrik (2007), provide evidence that export product sophistication predicts higher growth.
[5] The distinction between using institutional outcomes rather than institutional rules has been much debated in the literature on the importance of institutions in general. It is, for example, possible for a dictator to choose to enforce good property rights protection even if this is something typically associated with democracy.
[6] The studies by Boschini, Pettersson and Roine (2007) and (2011) also use instrumental variables to try to account for the potential endogeneity problems. The results are in line with the OLS results but instruments are weak in this setting.
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.
Is School Network Optimization An Opportunity for Education in Transition Countries?
Author: Tom Coupé, KEI.
After the fall of the Soviet Union, transition countries have faced an unprecedented demographic shock, with increasing mortality and emigration, but also with a serious drop in fertility. This negative shock to fertility has translated in an increasingly smaller number of school-aged children, considerably reducing school size and class size over time (Berryman, 2000). In addition, given that this drop in children of school age did not go together with a decline of the number of schools, teachers or classes, student-teacher ratios have decreased substantially. As a consequence, transition countries are now in the situation where they have a disproportionately large number of schools, teachers and classes. This oversized system does not appear to have led to great results in terms of the quality of education.
Multidimensional Approach to the Energy Security Analysis of Belarus – Part 2: Economic and Geopolitical Trends
Author: Mykhaylo Salnykov, BEROC
Energy security is a complex phenomenon incorporating a variety of economic, social and environmental aspects of a country’s life. Building on a previous FREE policy brief, published on September 5, which dealt mainly with the situation up until today, this text deals more with the future. It takes a detailed look at existing trends and discusses potential positive effects and challenges to energy security in Belarus. It also provides potential measures for addressing adverse effects of these trends on the country’s energy security.
When evaluating energy security consequences of external and internal factors, a decision maker is advised to view energy security as a complex phenomenon. The main components of Belarusian energy security identified in the first part of this paper published in the FREE Policy Brief Series September 5, 2011, include (i) primary energy source distribution (diversification of energy sources, especially away from natural gas as well as reducing the economy’s energy intensity), (ii) international trade considerations, (iii) the geopolitical context (with a special focus on diversification of energy suppliers and an optimal use of the country’s gas- and oil- transporting systems), and (iv) environmental considerations of the energy use (related to both actual and the perceived impact of the energy production and consumption on the environment).
Other dimensions of energy security also include the social impact of energy production and consumption, as well as the sustainability of energy use.
Below, I provide a detailed look at these and other existing trends. Potential positive effects and challenges in the context of energy security of Belarus will also be discussed. Finally, potential measures of addressing adverse effects of these trends on the country’s energy security will be suggested.
Main Energy Security Challenges for Belarus in 2011-2020
The following components of the energy security of Belarus are considered to be of primary importance:
- Reducing energy intensity of the economy;
- Diversification of energy sources used in heat and power generation, especially diversification away from natural gas consumption;
- Diversification away from Russian fuel imports;
- Securing stable operation of gas and oil pipeline systems close to full capacity;
- Reducing impact of energy production and consumption on the environment.
The main trends in Belarusian and regional policy and economy, as well as their impacts on the aforementioned components of energy security are the following:
- Natural shale gas and liquefied natural gas revolution in Europe;
- Launch of the Nord Stream gas pipeline system in 2011-2012;
- Construction of nuclear power plant station in Astravets;
- New suppliers of hydrocarbons to Belarus.
I will purposefully not discuss important topics as carbon-free technologies development in Belarus, participation in the international carbon-reduction dialog, etc., since these trends are unlikely to become anything close to significant determinants of the Belarusian energy security puzzle within the next decade.
Natural Shale Gas and LNG Revolution in Europe
Recent developments in the technology of natural shale gas extraction in Europe and elsewhere, bring a lucrative prospect of boosting the world’s natural gas supply. Several of the European countries, including Austria, Germany, Hungary, Poland, Sweden, Ukraine and United Kingdom have announced plans to study fields with shale gas extraction potential. This could secure European gas supplies, drive gas prices in Europe down, and diversify European imports away from Russian natural gas. The natural shale gas extraction development factor will be further reinforced by the increased volumes of the LNG imports to Europe from the Americas and Northern Africa.
Contraction of gas prices in the European market will positively affect Belarusian economy as natural gas imports from Russia will become less expensive even if no active steps by the Belarusian government are undertaken. Nevertheless, the natural shale gas and LNG revolution will also widen the body of potential importers of natural gas via pipelines from Poland and Ukraine and by sea freight from seaports in the Baltic States. Specifically, in the summer of 2010, the Belarusian government announced having plans of negotiating a possible construction of a Belarusian LNG terminal in Lithuanian Klaipeda. This terminal is projected to have an annual capacity of five to eight billion cubic meters of natural gas which would be transported to Belarus via the pipeline system.
The shortcoming of the lower prices for natural gas and diversified body of importers in Europe is a reduced demand for Belarusian natural gas transit capacity as Russian exports to Europe contract. Moreover, potential transportation of shale gas from Poland via the pipeline system (see Figure 1) is likely to conflict with the Russian gas transit going into the opposite direction. From an economic perspective, it is very likely that benefits for Belarus obtained from lower gas prices will overweight potential losses from the reduced transit of Russian natural gas to Europe.
Figure 1. Natural gas and oil pipeline systems in Eastern Europe.
Source: http://www.eia.doe.gov/emeu/cabs/Russia/images/fsu_energymap.pdf
From a political perspective, Belarus losing its role as a transit country would substantially weaken its position in foreign relations with both Russia and Europe.
A possible side effect of the lower prices for natural gas is reduced incentives for the Belarusian government to reform power and heat generating sector and contract the energy intensity of the economy. While the former outcome may be economically justified by lower gas prices and diversified sources of natural gas in the new economic environment, the latter raises serious concerns over the pace of economic modernization in the country.
On the other hand, the environmental impact is mixed. While lower incentive to modernize the economy could result in a slower progress of lowering the pollution intensity in energy use, increased incentives to use natural gas, one of the environmentally friendliest hydrocarbons, would play a positive role in ensuring that the intensity of pollution reduces.
Launch of the Nord Stream Pipeline System
Dubbed by the Belarusian President, Aliaksandr Lukashenka “the silliest Russian project ever”, the Nord Stream pipeline system will allow Russia to redirect 55 billion cubic meters of natural gas (nearly 33% of the current Russian gas exports) via this more direct route to the final consumers. Thus, if European demand for Russian gas stays unchanged, the gas transit through Belarus and Ukraine will drop to nearly 100 billion cubic meters from the current 158 billion cubic meters. The 100 billion cubic meters figure is close to the capacity of the Ukrainian gas pipeline system alone. Therefore, one may hypothesize that in the worst case scenario Belarus may suffer a complete loss of its gas transit revenues.
In fact, even optimistic scenarios of the distribution of the residual transit demand between Ukrainian and Belarusian pipeline systems, imply both a substantial reduction of volumes transferred via Belarusian pipeline system, and a decline in transit tariffs triggered by strong price competition between Belarus and Ukraine. As a result, profits from the gas pipeline system in Belarus are likely to diminish.
This negative outcome is reinforced by the above mentioned trends of increased extraction of natural shale gas in Europe as well as prospective development of the LNG trading routes with Northern Africa and Americas. A conservative estimation of the reduction of European demand for Russian natural gas indicates that it can be reduced by 28 billion cubic meters (17% of the current Russian imports). Coupled with the launch of the Nord Stream, the decline of transit volumes through Belarus and Ukraine can be nearly 75 billion cubic meters annually, which is more than a 50% reduction from current levels.
Notably, these 28 billion cubic meters is an equivalent of the natural gas consumption by Poland and Hungary alone, the European countries currently most dependent on Russian gas imports.
Thus, the launch of the Nord Stream presents a substantial threat to the stable operation of the Belarusian gas pipeline system and requires careful policy steps (which will be discussed further ahead).
The fact that Belarus loses an important lever of its transit capacity may lead to lower negotiation power in fuel prices dialog with Russia, thus, leading to the smaller subsidies for the Russian oil and gas imports. However, a reduction of the world gas prices due to the growing European production of natural gas and LNG trade is likely to at least partly offset this effect.
Reduced profits received from the natural gas transit is likely to lead to a decrease of budget funds available for technological modernization of the Belarusian economy, which, in turn, may lead to an inadequate pace of changes in energy efficiency and pollution intensity of energy use as well as slower modernization of the power and heat generating sector and diversification away from the natural gas use.
On the other hand, the launch of the Nord Stream and reduced negotiation power towards Russia could increase incentives for Belarus to diversify away from Russian fuel imports as subsidies for the Russian oil and gas imports will contract.
Construction of Astravets Nuclear Power Plant
Although the launch of the Astravets nuclear power plant is unlikely to happen before 2017-2018, debates around this controversial project and its rationale requires a discussion of its energy security implications long before the plant is constructed.
The projected two-reactor nuclear power plant has an operating capacity of 2.4 GW. Unadjusted for load fluctuations in demand, this figure is an equivalent of 63.5% of the electricity consumption in Belarus. A rough seasonally unadjusted estimate of the Astravets nuclear power plant electricity production is a 35-40% of the daily peak load electricity consumption in the country – a usual figure for the baseload demand figure. Therefore, it is expected that once in full operation, Astravets plant could provide for the entire baseload demand on electricity in Belarus.
Some opponents of the Astravets plant construction note that the plant’s capacity may be excessive as several other nuclear power plants are being constructed in the region, including a plant in Lithuania and Russia’s Kaliningrad oblast. It is suggested that it may be optimal for Belarus to purchase electricity from these plants rather than constructing its own. This view, however, does not take into consideration two important issues. Firstly, it is highly unlikely that anything but the excess baseload electricity production will be traded (i.e. limited volumes of energy at night for approximately 5 to 6 hours per day); at all other time Belarus would need to rely entirely on its thermal power plants to generate electricity. Secondly, shifting from the dependence on hydrocarbon imports to the dependence on electricity imports will not cause a substantial improvement of the country’s energy security.
Current production of electricity by fossil fuel operated power plants in Belarus is an equivalent of 18 TWh, 55% of the total electricity consumption in the country. A launch of the Astravets nuclear power plant would allow reducing fossil fuel operated power plants’ utilization to virtually zero level. In addition, nearly 15% of the combined heat and power plants may operate as heat plants only.
Yet, it is unlikely to lead to the substantial changes in the usage of the existing heat plants: while nuclear power plants can provide heat, Astravets is located far from densely populated regions of Belarus, which makes heat delivery to the final consumer close to impossible because of the high losses in transfer.
As a result of decreased utilization of power plants and CHP plants, demand for natural gas from the heat and power generating sector will be reduced by 38%. Thus, the share of natural gas in the sector’s consumption balance will shrink to nearly 50% from the current 91% figure. The Astravets plant launch will also lead to nearly 25% reduction of the sector’s demand for petroleum products.
Therefore, the economy-wide TPES of natural gas is likely to contract by 28.5% and TPES of crude oil and petroleum products by nearly 2% once the Astravets plant is in full operation. The estimated annual benefit from the reduced imports of hydrocarbons is likely to reach USD 1 billion at current fuel prices.
Overall, Astravets power plant launch is expected to have strongly positive effect on diversification of energy sources in heat and power generating sector as nuclear power will gain the second largest share among the energy sources used in the sector and the natural share will reduce to nearly 50% of the total consumption by the sector. The plant construction is also likely to have a positive effect on the energy intensity by reducing losses from the power generating sectors and by closure of obsolete plants.
Moreover, the effect on diversifying fuel imports away from Russia is two-fold. Although Belarus will be able to reduce its Russian gas imports by almost a third of its current level, nuclear fuel for the Astravets station is likely to be imported from Russia. Nevertheless, given positive shifts in Belarusian regime’s relations with the West, it is highly likely that by the time of the power plant launch, the current suspicion of the Belarusian government by the international community will have vanished and alternative importers of uranium would then become an option.
Overall, the Astravets plant will have very limited impact on Belarus’ role as a transit corridor for Russian hydrocarbons.
Environmental consideration is probably the most controversial issue with respect to the projected plant. The issue becomes even more uncertain when one takes into account not only objective environmental costs and benefits, but also subjective factors, such as suspicion of Belarusians to nuclear power – a legacy of the Chernobyl accident.
A nuclear power plant will undoubtedly lead to a reduction of pollution intensity in the Belarusian economy. Yet, there are a number of factors that may offset the seeming gains. Firstly, a low probability of technological disaster at the power plant, mean that most Belarusians consider the plant as an environmentally but dangerous project for the country. Secondly, Lithuanian environmentalists have expressed their concerns over the proximity of the projected plant to the Lithuanian capital, Vilnius (only 40 km), especially as the Neris (Viliya) river that flows through Vilnius will be the main water source for the Astravets plant. Thirdly, international environmental experts rarely consider nuclear power plants considerably greener than their fossil fuel operated counterparts as uranium extraction and enriching produces substantial amounts of polluting substances at their fuel producing facilities. Finally, spent nuclear fuel treatment still remains one of the issues without a sustainable technological solution. Belarus is likely to export its nuclear waste to either Russia or Ukraine that have spent nuclear fuel storage facilities.
Therefore, from an environmental perspective, while Belarus will enjoy most of the benefits of the cleaner power generation, it is likely to create substantial trans-boundary environmental risks mostly for Lithuania, Russia and Ukraine.
New suppliers of hydrocarbons
Belarus currently attempts to diversify its oil supply by shipping Venezuelan crude to Black Sea and Baltic Sea ports. In addition, there exists a sound potential of diversifying Belarusian natural gas imports by gaining access to Ukrainian and Polish natural shale gas deposits as well as through constructing an LNG terminal at the Baltic Sea.
While the perspectives of these recent international advancements are not certain, in the case of sustainable progress they are likely to have important implications for the energy security of Belarus, which are closely interrelated to the implications of the shale gas and LNG revolution.
Emergence of new suppliers of hydrocarbons will have a positive impact on diversifying away from Russian fuel imports, but will also reduce incentives for the energy intensity and pollution intensity reduction as well as the modernization of the heat and power generating sector as economic stimuli for technological modernization fade away.
Diversification of hydrocarbon suppliers presents risks for the usage of Belarusian gas and oil pipeline systems. If oil would be transported from either Black Sea or Baltic Sea ports, this oil would compete with the Russian oil transport routes headed into the opposite direction to either Ukrainian Odesa seaport or Baltic refineries (see Figure 1). Pipeline transportation of shale gas from Poland would compete with Russian natural gas going in the opposite direction. At the same time, reduced revenues from transit of Russian hydrocarbons may be overweighed by benefits incurred from lower prices for hydrocarbons from the alternative sources.
Table 1 provides a summary of the reviewed trends and their impact on the energy security challenges faced by Belarus.
Table 1. Summary of the existing trends and their impact on energy security of Belarus
Policy recommendations
Table 1 suggests that the most of the vital energy security components will experience both positive and negative shocks in the nearest future. Nevertheless, it is possible to undertake a number of policy measures to enhance positive effects and secure against risks.
Reducing energy intensity of economy
All possible negative effects on the energy intensity reduction will be a result of either lowering incentives to modernize the existing technologies due to lower hydrocarbons prices or a reduced capacity to modernize due to drop in budget revenues. Yet, as discussed above, improving energy efficiency may become an important driver of economic growth in the foreseeable future.
Besides already existing Energy Efficiency Department of the Committee for Standardization and construction of the Astravets power plant having a positive impact on the energy intensity of the economy, the Belarusian government may also consider the following options:
- Establishing a Research and Development (R&D) program on energy efficiency;
- Creating a special energy efficiency fund to be used for the modernization and energy intensity reduction measures;
- Imposing standards of energy use, especially in energy intensive sectors;
- Introducing taxation schemes on energy use with industry-specific energy intensity reference values in order to provide additional incentives for businesses to undertake modernization and reduce energy intensity;
- Issuing a mandate requiring gradual replacement and rehabilitation of obsolete equipment, especially in heat and power generating and energy intensive industrial sectors.
Heat and power generating sector diversification away from gas
Similarly, to the energy intensity challenge, the HPG sector diversification away from gas will be negatively affected by the reduced incentives to modernize and the lack of budget funds to impose these modernizations. Hence, the following measures may be considered:
- Ensuring adequate progress of the Astravets power plant construction;
- Imposing standards and taxation schemes of energy use by the sector;
- Study options for electricity imports, especially in off-peak hours;
- Gradually replace and rehabilitate obsolete equipment.
A number of steps to encourage use of specific fuel sources can be undertaken:
- Study possibilities of expanding production and/or imports of coal;
- Transfer some smaller-scale heat plants to coal and/or wood as environmental conditions permit;
- Integrate production of fuel wood into conventional forestry and industrial timber procurement;
- Assure quality standards and efficient use for forest chips.
While not being directly related to the sector’s diversification away from natural gas, the following measures will allow improving financial performance of the sector and, thus, providing additional resources to undertake modernizations in the sector:
- Separate commercial operation of the sector’s state-owned companies from the government’s conflicting position as an owner, policy setter and regulator;
- Imposing reporting standards, such as IFRS standards, in the sector in order to improve financial management of the companies and attract possible financiers;
- Adopt and implement OECD 2005 Guidelines on corporate governance of state-owned enterprises. While a number of the guidelines are not applicable to the Belarusian noncorporatized companies such as Belenergo and Beltopgas, general principle allow for more effective management of the companies.
I purposefully omit an option of the ownership change of the heat and power generating sector’s companies in our policy recommendations, since this option is not consistent with the existing economic and political environment in Belarus.
Diversification away from Russian fuel imports
While all of the trends analyzed will have positive effect on diversification away from Russian fuel imports, this seeming progress is largely due to the fact that up until recently Belarus has been totally dependent on Russia’s fuel imports. Yet, a number of steps can be undertaken to further augment the diversification progress:
- Ensuring adequate progress of the projects enhancing the diversification away from Russian fuel supply, namely LNG terminal in Kaunas, Astravets power plant and search of alternative suppliers of hydrocarbons;
- Exploring possibility to access and explore Polish and Ukrainian shale gas fields with a possibility to operate some of the extraction facilities;
- Studying an option to create a coal-bed methane extracting consortium with Ukraine to develop technology and extract coal-bed methane in coal-rich Eastern Donbas region;
- Researching and developing biomass as a source of energy to replace a share of oil and gas usage.
Usage of pipeline system up to full capacity
It is next to certain that the configuration of the hydrocarbon routes in Eastern Europe is about to go through fundamental changes in the nearest future due to both reduced demand for Russian hydrocarbons from Europe and the launch of the Nord Stream pipeline system. Still, there exist a number of steps to ensure that Belarusian pipeline system is in operation and is enhancing the country’s energy security:
- Creating a gas-transporting consortium with Ukraine to gain an additional market power to ensure adequate transit tariffs and share of volumes of the residual Russian gas exports to Europe after Nord Stream is launched;
- If Russian hydrocarbons transit volumes fall below critical level, transfer to the reverse direction to make the best use of the Polish shale gas and Baltic seaports’ ability to receive oil for Belarus. By doing so, Belarus will ensure both hydrocarbons imports diversification and adequate operation of its pipeline systems;
- Continuing search for alternative suppliers of oil and natural gas (including LNG) in order to assure adequate usage of the pipeline systems in the reverse direction.
Environmental effect
Similarly to energy intensity considerations, most of the negative effects of the current trends on the environment are related to either reduced incentives to modernize or reduced funds available for modernization projects. The following measures are intended to reduce pollution intensity of energy use:
- Establishing a Research and Development (R&D) program on environmental effects of energy use;
- Imposing environmental standards and taxes on energy use, especially in energy intensive sectors and bringing these policies closer to international standards;
- Issuing a mandate requiring gradual replacement and rehabilitation of obsolete equipment, especially in heat and power generating and pollution intensive industrial sectors;
- Establishing emission trade relations with the Kyoto Protocol Annex B countries to collect funds for the environmental modernization of equipment.
The following steps should be undertaken to minimize both actual and perceived environmental risks of the Astravets nuclear power station:
- Working with the general public to educate them about modern technologies that guarantee nuclear power safety as well as inform them of virtually accident-free record of civil nuclear power besides Chernobyl disaster;
- Establishing relations with the stakeholders that might be affected by the environmental impact of the projected power station, especially, local communities along Neris river;
- On early stages, study the possibilities for the spent nuclear fuel treatment and reach the preliminary international agreements over the potential nuclear waste storage if needed;
- Ensure compliance with the international standards of the power plant construction and operation and advertise this compliance strategy to the stakeholders.
Concluding remarks
Currently Belarus enters a completely new stage of its development as the old economic growth factors vanish, the political situation both within and outside the country transforms, and the geopolitical context changes. This new stage of the country’s development presents new challenges and new opportunities for Belarusian energy security, the key for any country’s independence. Careful consideration of the most critical energy security challenges coupled with professional and effective policy measures to tackle them is a vital task for securing Belarus’ economic growth, political sovereignty and quality of life improvement.
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Whither Legal Turkey?
With the ascent to power of the AKP and its political victory against the secular elite and as the country is about to draft its first civilian constitution, the party’s leadership faces a daunting challenge to transform the country into a real democracy for minorities as well as majorities. The legacy of the party’s leadership will not be determined by its win against a system rigged against them, but how they transform an authoritarian and arbitrary legal system into extended rights for, amongst others, the country’s ethnic Kurds, women, and political rivals. This requires more than a new constitution and will be the real test of whether Turkey can serve as a model for the region or not.
A Sick Man No More
Turkey was once referred to as the ‘Sick Man of Europe’, plagued by financial turmoil, erratic growth, and territorial contraction. Today, it is among the twenty largest countries in the world both economically as well as population-wise, and remains one of few Muslim democracies. While Europe has been undergoing a financial crisis, Turkey has been growing at an unprecedented rate, leading the Economist to label it as ‘The China of Europe’.
Among the Arab countries, Turkey is also increasingly seen as a viable model of combining Islam and democracy, and many have lauded the government for its assertion of civilian control over state institutions. A recent triumphant tour of Egypt and Libya by Turkey’s Prime Minister blurred the distinction between official state visit and celebrity tour.
Yet Turkey’s leaders need all the political capital they can acquire, as steep challenges remain domestically. Whether Turkey can be a model for the rest of the Muslim world will be determined by whether its leadership can solve the remaining political and social injustices. Currently, these are exasperated by an outdated and authoritarian legal system and arbitrary enforcement of existing laws.
From White to Black
During the last two decades, Turkey has experienced something very rare. Historically, power emanated primarily from the country’s security establishment – the judiciary and the military – educated in the country’s elite schools and trained in a Kemalist creed where religious and non-Turkish identities had no place in the public sphere (that is, unless they were secular and Turkish). In the media, this group is often referred to as the ‘White Turks’.
The constitution set up in 1982, following a military coup two years earlier, put security and stability ahead of individual rights and cemented institutions with limited accountability to the public. The need to preserve the state’s security interests allowed for heavily regulated political participation among those deemed threatening to the state, be it Islamists, leftists, or those seeking increased Kurdish autonomy.
Weak coalition governments changed with the season, the debate captured by leaders powerful enough to hinder political rivals from affecting real policy while powerless or unwilling to do so themselves. Human rights abuses, especially in Eastern Turkey provided ample fuel for critics of Turkey’s prospects for EU membership.
Today, the ‘White Turks’ are nearly gone − a democratically elected majority government, made up largely of pious Muslims from the periphery of Turkey, is in power. The President, Abdullah Gül, is from Kayseri, the birthplace of the ‘Anatolian tigers’, a group of successful and piously Muslim entrepreneurs. The Prime Minister, Recep Tayyip Erdoğan, stems from (what was) one of the poorer neighborhoods in Istanbul, and spent time in jail for reciting what the judiciary deemed to be an inflammatory poem. Both men have wives wearing the headscarf, which for the secular elite is what a red rag is to a bull.
After a decade-long conflict between the moderately Islamist Justice and Development Party (AKP) and the secular elite, the former seems to have come out on top. Earlier this year the top brass of Turkey’s military corps resigned en masse following unprecedented arrests of senior military officers related to allegations of plotting a military coup. A constitutional amendment passed last year now allows military personnel, including those involved in the 1980 coup, to be tried in civilian courts and has revamped the appointment procedure of parts of the judiciary. A significant portion of all Turkish officers is currently in jail for conspiring against the AKP government.
With power consolidated behind them, the AKP leadership has their work cut out. While the Turkish model is already being lauded as a role model for the Arab spring countries, within the country significant challenges and injustices remain. Deep institutional reform is required to accommodate a people more than deserving of an open and free society. Full political and economic rights need to be further extended to women, religious minorities, as well as the country’s large Kurdish population. The justice system, especially the Turkish Penal Code needs to be altered to rid it of remnants of the authoritarian system that the AKP government claims to be dismantling. A new constitution is needed in which the state serves the people and not the other way around. Finally, Turkey needs more than new laws; it needs enforcement of, and compliance with, the rule of law in what would be an institutional change not seen since the birth of the republic.
In the name of terrorism…
In a recent survey of anti-terror convictions by the Associated Press in more than 100 countries, Turkey accounted for a third of all convictions. The Turkish state has long been at odds with a large Kurdish minority seeking greater autonomy and has been engaged in a war with the Kurdistan’s Worker’s Party (PKK) since the late 1980s.
The political system is currently rigged against Kurdish political representation, largely because of an extreme rule requiring any party to win at least 10 percent of the national vote to receive any parliamentary seats at all. Kurdish candidates not banned before elections regularly are afterwards and many end up in jail.
Despite the AKP’s attempt at a Kurdish Opening, and the sizeable Kurdish representation within the party, results have come up below expectations and large-scale protests remain commonplace in the region. Due to the Turkish Penal Code allowing anti-terror laws to govern the legal cases of protesters, this creates a source of regular condemnation from human rights organizations.
For example, not only can protesters sympathetic to Kurdish rights be prosecuted for spreading propaganda for a terrorist organization (Article 7/2, Anti-Terror Law), but also many are deemed to be “committing crimes on behalf of the PKK without being a member of that organization” (Article 220/6, Turkish Penal Codes). Consequently, demonstrators for Kurdish rights can be prosecuted as if they were actually fighting the government as armed members of the PKK (Article 314/2, TPC). When added to charges from the Law on Demonstrations and Public Assemblies, this could mean sentences of up to thirty years in jail. Child protesters usually receive much shorter sentences, often between four to five years.
Laws like these have profound effects on press freedom. According to a report by the Organisation for Security and Co-operation in Europe, Turkey has the dubious honor of being the world leader in imprisoned journalists. The report estimated somewhere between 700 and 1,000 ongoing proceedings that could lead to imprisonment of journalists. The length of sentences are occasionally astronomical; Vedat Kurşun and Emine Demir of the Azadiya Welat newspaper were sentenced to 166 and 138 years respectively in prison, while Bayram Namaz and Ibrahim Çiçek of the Atilim newspaper each face up to 3,000 years in prison. Some journalists, such as Halit Güdenoğlu of Halit Yürüyüş magazine, currently face 150 court cases.
At the same time, after 10 years of failing to reach convictions of leading members of the notorious Turkish Hizbullah, an Islamist militant group (unrelated to its Lebanese namesake), several of its leading members were released from custody earlier this year. The organization is thought to be responsible for the deaths of hundreds of people during the mid-1990s during the worst years of the conflict between the PKK and the Turkish state. Evidence suggesting covert state backing for the group’s fight and tactics against the PKK has not led to any serious consequences. The suspects were released in compliance with a new law restricting the amount of time suspects can be held while waiting for the final verdict in their cases to 10 years.
As if this was not ironic enough, the ten years of detainment without trial is now being used against the secular elite; officers, academics, journalists, former police chiefs, public prosecutors, and theologians alike. In two of the most controversial legal cases in Turkish history, around 500 individuals have been detained. Prosecutors in the Ergenekon investigation accuse detainees with membership of what is described as a clandestine terrorist organization seeking to destabilize the country’s Islamist-leaning government. In the Sledgehammer investigation, high-ranking members of the military stand accused of plotting a coup in 2003. Explained by the government as instrumental to the dismantling of the so-called “deep state”, the cases are increasingly criticized for the flawed, if not fabricated, evidence put forward by the prosecutors.
As noted by many observers, the detainees seem to have nothing in common except their opposition to the AKP government, as well as a social movement referred to as the Gülen movement. The actions of the prosecution approached that of a farce when earlier this year police raided the prospective publisher of a book about the the Gülen movement, written by detained journalist Ahmed Sik, and proceeded to delete every digital copy of the manuscript. The 12th Court for Serious Crimes described the draft as an “illegal organizational document” and ruled anyone refusing to hand in a possessed copy would be accused of “aiding a criminal organization.” Weeks later, seven theologians were arrested, and computers and documents were confiscated. The sole similarity between the theologians seems to have been their questioning of Gülen’s credentials as a theologian.
The independence of the judiciary is also under pressure. In 2007, a regional public prosecutor, Ilhan Cihaner, had started investigating links between Islamist organizations and the fixing of state contracts. After refusing to drop his investigations in late 2009 after pressure from the government, Cihaner was removed from his position and on February 17 2010 he was arrested and charged with membership of Ergenekon.
The Elephant in the Room: Women’s rights
Several of Turkey’s laws are also simply not enforced. Examples of this are laws regulating women’s rights. Despite a “Law 4320 on the Protection of the Family”, women’s de facto situation remains highly vulnerable – “enforcement officers, judges, and prosecutors neglect their duties, often due to lack of expertise or will to deal with cases of violence against women and girls”.
A recent survey by Hacettepe University reported that around 42 percent of all women older than 15 in Turkey—approximately eleven million women in total—have experienced physical or sexual violence at the hands of a husband or partner at some point in their lives.
Women who want to report abuse are turned away, and in some cases have been murdered despite having obtained protection orders. The law requires women’s shelters in every settlement above 50,000 inhabitants yet more than a hundred are still missing.
In the 2010 Gender Gap Report from the World Economic Forum, Turkey scored a rank of 126 out of 134 countries surveyed, behind its neighbors Iran, Syria, and Egypt. There are two main components that drove this abysmal performance in gender equality. The first is labor force participation; according to World Bank female labor force participation was a meager 24 percent in 2009 (on par with Saudi Arabia, Syria, and Egypt and below the rate found in Iran).
The second component is upper secondary education (high school), since this is where the combination of voluntary participation and the headscarf ban keeps many conservative families from sending their daughters to school. Almost a hundred years after Ataturk imposed a reform making primary education mandatory for women, gender inequality in education and labor remains one of the more serious impediments to Turkey’s future economic development.
The ban on the headscarf, especially in universities, a remnant of an increasingly archaic ideology, stands out as the unequivocal symbol of gender inequality. However, improving women’s rights and economic opportunities is about more than the headscarf – for example, making upper secondary education mandatory would be another less politically charged road ahead. But in order to further women’s participation in public institutions such as the labor force, education, and politics, political leaders need a pragmatic approach in outmaneuvering a deeper resistance to female emancipation.
Turkey needs more than a new constitution…
One of the AKP’s campaign promises of the recent June elections was the drafting of a new constitution. The political capital gained by the AKP in its fight with the military as well as its role as a model in the Muslim world, provides a unique opportunity to, for the first time, set up a civilian constitution that does away with many of the autocratic elements of the 1982 constitution.
A formal document with principals such as asserting the primacy of individual rights over the state is much needed. But without deeper reforms that seep into the justice system and the security establishment, this will simply become another superficial reform without real implications.
As long as the Turkish Penal Code and the anti-terror laws can be used in an arbitrary manner to pursue political opponents; be it Islamists, secular elites, or Kurds; constitutional reform will fail to bring about real change. Until real independence from political pressure is granted to judges and journalists alike, Turkey will not know freedom of expression. And without real change in female participation in markets and institutions, Turkey will not know gender equality. An age-old saying in Turkish goes “Happy is he who can call himself a Turk.” If only it was that easy.
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Further Reading
- Acemoglu, Daron, Simon Johnson, and James Robinson, 2005, “Institutions as the Fundamental Cause of Long-Run Growth”, Handbook of Economic Growth, Elsevier, edition 1, Vol. 1, No. 1.
- Duflo, Esther, 2005, “Gender Equality in Development”, BREAD Policy Paper.
- Jenkins, Gareth, 2009, “Between Fact and Fantasy: Turkey’s Ergenekon Investigation”, Silk Road Paper
- Hacettepe University Institute of Population Studies, ICON-Institute Public Sector GmbH, and BNB Consulting, “National Research on Domestic Violence against Women in Turkey 2008”, January 2009, http://www.ksgm.gov.tr//tdvaw/doc/Mainreport.pdf
- Human Rights Watch, “Protesting as a Terrorist Offense – The Arbitrary Use of Terrorism Laws to Prosecute and Incarcerate Demonstrators in Turkey”, Human Rights Watch Report, November 1st 2010, http://www.hrw.org/reports/2010/11/01/protesting-terrorist-offense-0
- Human Rights Watch, “He Loves You, He Beats You – Family Violence in Turkey and Access to Protection”, Human Rights Watch Report, May 4 2011, http://www.hrw.org/en/reports/2011/05/04/he-loves-you-he-beats-you-0
- World Economic Forum, The Gender Gap Report 2010, http://www3.weforum.org/docs/WEF_GenderGap_Report_2010.pdf
Polish Pre-Election Polls Seem Unmoved by Electoral Giveaways
As in every election, numerous electoral pledges have been made prior to the election that will take place in Poland on the 9th of October. It seems however, that support for different parties has remained largely unaffected by the scale of the giveaways.
As in every elections, numerous electoral pledges have been made prior to those that will take place in Poland on the coming Sunday, the 9th of October. It seems, however, that support for different parties has remained largely unaffected by the scale of the giveaways.
As the elections get nearer, the electoral race between the main contenders, the ruling Civic Platform (PO, popular support at about 32%) and the main opposition party Law and Justice (PiS, 29%), seems to be getting closer, with the result of Sunday’s vote remaining wide open. Behind the two leaders in opinion polls are the Polish People’s Alliance (PSL, 5%) which has been in coalition with PO for the past four years, and the Democratic Left Alliance (SLD, 10%) together with two recently formed parties – Palikot’s Movement (RP, 8%) and Poland is Most Important (PJN, 2%). To guarantee seats in the parliament any of the parties need to cross the 5% support threshold.
In the second part of its Pre-election Report published on 28th of September, the Centre for Economic Analysis (CenEA) presented a detailed analysis of electoral proposals focused on tax and benefit policies which would directly affect the financial situation of Polish households (Myck, et al., 2011a).
The two coalition parties (PO and PSL) have approached electoral declarations with surprising modesty by either fuzzy non-specific commitments (like the PSL) or electoral slogans which sound generous but are in fact relatively cheap to implement. The Civic Platform promised a “radical increase in the tax credit for the third and subsequent children in the family”. As the Report shows this would only affect about 30% of “3+” families or about 5% of all Polish families, and would cost only about 70m euro per year (0.02% of the GDP) – a burden that may be possible to bear even at the difficult times of the crisis.
The opposition parties are much more generous with PiS and SLD both offering to increase pensions and broaden eligibility criteria for family benefits. These policies in each case would cost about 1,5 billion euro (0.5% of the GDP). On top of that the SLD proposed a new benefit for low income families who cannot take advantage of the existing child tax credit. This policy would stretch the government’s budget further by another billion euro. Neither of the two parties suggest convincing ways of financing of the proposals and they are both adamant that they would not raise taxes.
The most stunning proposals came from the recently formed PJN, a party established after last year’s presidential elections by former members of PiS close to the late President Lech Kaczyński. PJN’s program promises extremely generous additional resources for families with children. When put together with additional proposals of changes in personal taxes, and minimum pensions the overall cost of the giveaways adds up to about 17bn euro, or about 5% of the GDP. Some of the resources for this purpose would come from introducing a uniform rate of the VAT, but the full package still leaves a hole in of about 12 billion euro (3.7% of the GDP). This cost seems impossible to pay at the time when the government is struggling with a very high level of debt and desperately tries to reduce the budget deficit.
The recent discussions concerning the parties’ spending plans may be one of the reasons behind the narrowing of the gap between PO and PiS, but other more generous electoral promises of other parties – do not seem to have caused much change in support. In fact, the party which has recently gained most in the polls (RP) is the only one which, with its suggestion of linear income tax and a uniform VAT rate – both at 18%, would significantly raise household taxes by nearly 3% of the GDP.
Such outcome may be interpreted in many different ways. First, it might relate to the failure of parties to clearly explain which population group would gain once the proposed changes get implemented. Secondly, the public opinion may generally have poor understanding of consequences of different solutions. It must be said that for a long time the campaign focused much more on personalities and several general issues than on specific details and proposals in the area of taxation or social support. Moreover, as demonstrated in the first part of CenEA’s Pre-election Report (Myck et al., 2011b), the ruling parties over the last two terms of parliament have generally failed to deliver their earlier promises related to tax and benefit policy. This may have made voters skeptical of what has been announced this year. The slogan that “no one will give you more than the politicians will promise” has been very popular in Poland over the recent weeks. Such slogans get reinforced by the fact that parties fail to identify convincing sources of funding for their new policies.
Politicians who want their promises to be taken seriously must realize that any proposed additional expenses may only be financed by extra taxes or through credible solutions concerning savings. The experience of this year’s campaign in Poland shows that until both sides of the equation are taken seriously by the parties, voters won’t pay too much attention to what is announced.
References:
Myck, M., Morawski, L., Domitrz, A., Semeniuk, A. (2011a) „Raport Przedwyborczy CenEA, część I. Wybory parlamentarne 2011: kto zyska, a kto straci i ile to będzie kosztowało?” (CenEA’s Pre-election Report. Elections 2011: who will gain, who will lose and how much it will cost?), Microsimulation Report 02/11, Centre for Economic Analysis, Szczecin.
Myck, M., Morawski, L., Domitrz, A., Semeniuk, A. (2011b) „Raport Przedwyborczy CenEA, część I. 2006-2011: kto zyskał, a kto stracił?” (CenEA’s Pre-election Report: 2006-2011 who gained and who lost? ), Microsimulation Report 01/11, Centre for Economic Analysis, Szczecin.
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.