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Understanding the Economic and Social Context of Gender-based and Domestic Violence in Central and Eastern Europe – Preliminary Survey Evidence

Posted on May 11, 2022 | FROGEE PROJECT, Policy Brief

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This brief presents preliminary findings from a cross-country survey on perceptions and prevalence of domestic and gender-based violence conducted in September 2021 in eight countries: Armenia, Belarus, Georgia, Latvia, Poland, Russia, Sweden and Ukraine. We discuss the design and content of the study and present initial information on selected topics that were covered in the survey. The collected data has been used in three studies presented at the FROGEE Conference on “Economic and Social Context of Domestic Violence” and offers a unique resource to study gender-based violence in the region.

While the COVID-19 pandemic has amplified the academic and policy interest in the causes and consequences of domestic violence, the Russian invasion of Ukraine has tragically reminded us about the gender dimension of war. There is no doubt that a gender lens is a necessary perspective to understand and appreciate the full consequences of these two ongoing crises.

The tragic reason behind the increased attention given to domestic violence during the COVID-19 lockdowns is the substantial evidence that gender-based violence has intensified to such an extent that the United Nations raised the alarm about a “shadow pandemic” of violence against women and girls (UN Women on-line link). Already before the pandemic, one in three women worldwide had experienced physical or sexual violence, usually at the hands of an intimate partner, and this number has only been increasing. The tragic reports from the military invasion of Ukraine concerning violence against women and children, as well as information on the heightened risks faced by war refugees from Ukraine, most of whom are women, should only intensify our efforts to better understand the background behind these processes and study the potential policy solutions to limit them to a minimum in the current and future crises.

The most direct consequences of gender-based and domestic violence – to the physical and mental health of the victims – are clearly of the highest concern and are the leading arguments in favour of interventions aimed at limiting the scale of violence. One should remember though, that the consequences and the related social costs of gender-based and domestic violence are far broader, and need not be caused by direct acts of physical violence. Gender-based and domestic violence can take the form of psychological pressure, limits on individual freedoms, or access to financial resources within households. As research in recent decades demonstrates, such forms of abuse also have significant consequences for the psychological well-being, social status, and professional development of its victims. All these outcomes are associated with not only high individual costs, but also with substantial social and economic costs to our societies.

This policy brief presents an outline of a survey conducted in eight countries aimed at better understanding the socio-economic context of gender-based violence. The survey, developed by the FREE Network of independent research institutes, has a regional focus on Central and Eastern Europe, with Sweden being an interesting benchmark country. The data was collected in September 2021 in Armenia, Belarus, Georgia, Latvia, Poland, Russia, Sweden and Ukraine. The socio-economic situation of all these countries irrevocably changed with the Russian invasion of Ukraine on 24 February 2022, the ongoing war, and its dramatic consequences. The world’s attention focused on the unspeakable violence committed by the Russian forces in Ukraine, the persecution in Belarus and Russia of their own citizens who were protesting against the invasion, and the challenges other neighbouring countries have faced as a result of an unprecedented wave of Ukrainian refugees. This change, on the one hand, calls for a certain distance with which we should judge the survey data and the derived results. On the other hand, the data may serve as a unique resource to support the analysis of the pre-war conditions in these countries with the aim to understand the background driving forces behind this dramatic crisis. In as much as the gender lens is necessary to comprehend the full scale of the consequences of both the COVID-19 pandemic and the war in Ukraine, it will be equally indispensable in the process of post-war development and reconciliation once peace is again restored.

Survey Design, Countries, and Samples

The survey was conducted in eight countries in September 2021 through as a telephone (CATI) survey using the list assisted random digit dialling (LA-RDD) method covering both cell phones and land-lines, and the sampling was carried out in such a way as to make the final sample representative of the respective populations by gender and three age group (18-39; 40-54; 55+). The collected samples varied from 925 to 1000 individuals. The same questionnaire initially prepared as a generic English version was fielded in all eight countries (in the respective national languages). The only deviations from the generic version were related to the education categories and to a set of final questions implemented in Latvia, Russia and Ukraine with a focus on the evaluation of national IPV legislation.

Table 1 presents some basic sample statistics, while Figure 1 shows the unweighted age and gender compositions in each country. The proportion of women in the sample varies between 49.4% in Sweden and 55.0% in Belarus, Russia and Ukraine. The average sample age is between 43 (Armenia) and 51 (Sweden), while the proportion of individuals with higher education is between 29.3% in Belarus and 55.4% in Georgia. The highest proportion of respondents living in rural areas could be found in Armenia at 62.9%, while the lowest was in Georgia at 24.1%. Figure 1 illustrates good coverage across age groups for both men and women.

Table 1. FROGEE Survey: samples and basic demographics

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Figure 1. FROGEE Survey: gender and age distributions

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Socio-economic Conditions and Other Background Characteristics

To be able to examine the relationship between different aspects of domestic and gender-based violence to the socio-economic characteristics of the respondents, an extensive set of questions concerning the demographic composition of their household and their material conditions were asked at the beginning of the interview. These questions included information about partnership history and family structure, the size of the household and living conditions, education and labour market status (of the respondent and his/her partner) and general questions concerning material wellbeing. In Figure 2 we show a summary of two of the latter set of questions – the proportion of men and women who find it difficult or very difficult to make ends meet (Figure 2A) and the proportion who declared that the financial situation of their household deteriorated in the last two years, i.e. since September 2019, which can be used as an indicator of the material consequences of the COVID-19 pandemic. We can see that the difficulties in making ends meet are by far lowest in Sweden, and slightly lower in the other EU countries (Latvia and Poland). The differences are less pronounced with regard to the implication of the pandemic, but also in this case respondents in Sweden seem to have been least affected.

 Figure 2. Making ends meet and the consequences of COVID-19

a. Difficulties in making ends meet


b. Material conditions deteriorated since 2019

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Perceptions and Incidence of Domestic and Gender-Based Violence and Abuse

Frequency of differential treatment and abuse

The set of questions concerning domestic and gender-based violence started with an initial module related to the different treatment of men and women, with respondents asked to identify how often they witnessed certain behaviours aimed toward women. The questions covered aspects such as women being treated “with less courtesy than men”, being “called names or insulted for being a woman” and women being “the target of jokes of sexual nature” or receiving “unwanted sexual advances from a man she doesn’t know”, and the respondents were to evaluate if in the last year they have witnessed such behaviours on a scale from never, through rarely, sometimes, often, to very often. We present the proportion of respondents answering “often” or “very often” to two of these questions in Figure 3A (“People have acted as if they think women are not smart”) and 3B (“A woman has been the target of jokes of a sexual nature”). We find significant variation across these two dimensions of differential treatment, and we generally find that women are more sensitive to perceiving such treatment. It is interesting to note that the proportion of women who declared witnessing differential treatment in Sweden is very high in comparison to for example Latvia or Belarus, which, as we shall see below, does not correspond to the proportion of women (and men) witnessing more violent types of behaviour against women.

Figure 3. Frequency of differential treatment (often or very often)

a. People have acted as if they think women are not smart


b. A woman has been the target of jokes of a sexual nature

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Questions on the frequency of witnessing physical abuse were also asked in relation to the scale of witnessed behaviour. Here respondents were once again asked to say how often “in their day-to-day life” they have witnessed specific behaviours. These included such types of abuse as: a woman being “threatened by a man”, “slapped, hit or punched by a man”, or “sexually abused or assaulted by a man”. The proportion of respondents who say that they have witnessed such behaviour with respect to two of the questions from this section are presented in Figure 4. In Figure 4A we show the proportion of men and women who have witnessed a woman being “slapped, hit or punched” (sometimes, often or very often), while in Figure 4B being “touched inappropriately without her consent”. Relative to the perceptions of differential treatment the incidence of a woman being hit or punched (4A) declared by the respondents seems more intuitive when considered against the overall international statistics of gender equality. The proportions are lowest in Sweden and Poland, and highest in Armenia and Ukraine. However, the perception of inappropriate touching by men with respect to women (Figure 4B) shows a similar extent of such actions across all analysed countries.

Figure 4. Frequency of abuse (sometimes, often or very often)

a. A woman has been slapped, hit or punched by a man


b. A woman has been touched inappropriately, without her consent, by a man

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Perceptions of abuse

The questions concerning the scale of witnessed behaviours were complemented by a module related to the evaluation of certain behaviours from the perspective of their classification as abuse and the degree to which certain types of gender-specific behaviours are acceptable. Thus, for example respondents were asked if they consider “beating (one’s partner) causing severe physical harm” to be an example of abuse within a couple (Figure 5A) or if “prohibition to dress as one likes” represents abuse (Figure 5B). This module included an extensive list of behaviours, such as “forced abortion”, “constant humiliation, criticism”, “restriction of access to financial resources”, etc. As we can see in Figure 6, with respect to the clearest types of abuse – such as physical violence – respondents in all countries were pretty much unanimous in declaring such behaviour to represent abuse. With respect to other behaviours the variation in their evaluation across countries is much greater – for example, while nearly all men and women in Sweden consider prohibiting a partner to dress as he/she likes to be abusive (Figure 5B), only about 57% of women and 36% of men in Armenia share this view.

The questionnaire also included questions specifically focused on the perception of intimate partner violence. These asked respondents if they knew about women who in the last three months were “beaten, slapped or threatened physically by their intimate partner”, and the evaluation of how often intimate partners act physically violent towards their wives.

Figure 5. Perceptions of abuse: are these examples of abuse within a couple?

a. Beating causing severe physical harm


b. Prohibition to dress as one likes

Source: FROGEE Survey on Domestic and Gender-Based Violence.

A further evaluation of attitudes towards violent behaviour was done with respect to the relationship between a husband and wife and his right to hit or beat the wife in reaction to certain behaviours. In Figure 6 we show the distribution of responses regarding the justification for beating one’s wife in reaction to her neglect of the children (6A) or burning food (6B). The questions also covered such behaviour as arguing with her husband, going out without telling him, or refusing to have sex. As we can see in Figure 6, once again we find substantial country variation in the proportion of the samples – both men and women – who justify such violent behaviour within couples. This was particularly the case when respondents were asked about justification of violent behaviour in the case of a woman neglecting the children. In Armenia as many as 30% of men and 22% of women agree that physical beating is justified in those cases. These proportions are manyfold greater than what can be observed in countries such as Latvia, where 3% of men and women agreed that abuse was justifiable under these circumstances, or Sweden, where only 1% of men and women agreed.

Figure 6. Perceptions of abuse: is a husband justified in hitting or beating his wife

a. If she neglects the children


b. If she burns the food

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Seeking help and the legal framework

The final part of the questionnaire focused on the evaluation of different reactions to incidents of domestic and gender-based violence. Respondents were first asked if a woman should seek help from various people and institutions if she is beaten by her partner – respondents were asked if she should seek help from the police, relatives or friends, a psychologist, a legal service or if, in such situations, she does not need help. In Figure 7 we show the proportion of people who agreed with the last statement, i.e. claimed that it is only the couple’s business. The proportions of respondents who declare such an attitude is higher among men than women within each country, and is highest among men in Armenia (48%) and Georgia (25%). Again, these proportions are in stark contrast to men in Sweden, or even Poland, where only 4% and 8% of men agreed, respectively. Nevertheless, looking at the total survey sample, a vast majority believe that a woman who is a victim of domestic violence should seek help outside of her home, indicating that at least some forms of institutionalised support for women are popular measures with most people.

Figure 7. Proportions agreeing that domestic violence is only the couple’s business

Source: FROGEE Survey on Domestic and Gender-Based Violence.

The interview also included questions on the need for specific legislation aimed at punishing intimate partner violence and on the existence of such legislation in the respondents’ countries. The latter questions were extended in three countries – Latvia, Russia and Ukraine – to evaluate the specific sets of regulations implemented recently in these countries and to facilitate an analysis of the role IPV legislation can play in reducing violence within households. Legislation on domestic violence is relatively recent. During the last four decades, though, changes accelerated in this respect around the world. Legislative measures have been introduced in many countries, covering different aspects of preventing, protecting against and prosecuting various forms of violence and abuse that might happen within the marriage or the family. Research strives to offer evaluations on what legal provisions are most effective, in a setting in which statistics and information are still far from perfect, and as a consequence of the dearth of strong evidence the public debate on the matter is often lively. For legislation to have an effect on behaviour through shaping the cost of committing a crime, on the one hand, and the benefit of reporting it or seeking help, on the other, or more indirectly through changing norms in society, information and awareness are key. For how can deterrence be achieved if people do not know what the sanctions are? And how can reporting be encouraged if victims do not know their rights? The evidence on legislation awareness is unfortunately quite scarce. A survey of the criminology field (Nagin, 2013) concludes that this is a major knowledge gap.

Figure 8 shows the proportions of answers to questions concerning the need for and existence of legislation specifically targeted towards intimate partner violence. We can see that while support for such legislation is quite high (Figure 8A), it is generally lower among men (in particular in Armenia, Russia and Belarus). Awareness of existence of such laws, on the other hand, is much lower, and it is particularly low among women. It should be pointed out that all countries have in fact implemented provisions against domestic violence in their criminal code, but only around half of the population, sometimes much fewer, are aware of that.

Figure 8. Need for and awareness of IPV legislation

a. State should have specific legislation aimed at punishing IPV


b. Country has specific legislation aimed at punishing intimate partner violence

Source: FROGEE Survey on Domestic and Gender-Based Violence.

Recent reforms of DV legislation that were implemented in Russia in 2017, in Ukraine in 2019 and in Latvia just a few months ago (at the time of the survey, the changes were at the stage of a proposal) were the subject of the final survey questions in these countries. We find that awareness of these recent reforms is very low in all three countries, and knowledge about the reform content (gauged with the help of a multiple-choice question with three alternative statements) is even lower. Our analysis suggests that gender and family situation are the two factors that most robustly predict support for legislation, while education and age are associated with awareness and knowledge of the reforms. Minority Russian speakers are less aware of the reforms in both Ukraine and Latvia, in Ukraine are also less likely to answer correctly about the content of the reform, and in Latvia are less supportive of DV legislation in general.

Analyses of this type are useful for policy design, to better understand which groups lack relevant knowledge and should be targeted by, for example, information campaigns to combat DV, such as those many governments around the world implemented during the covid-19 pandemic.

Future Work Based on the Survey

The above is just a small sample of the rich source of information that has resulted from conducting the survey. Already from this simple overview we can see some interesting results. There are, for example, clear differences between men and women in perceptions of how common certain types of abusive behaviour are. However, for many questions differences between countries are larger than those between men and women within a country. Interestingly such differences are also different depending on the severity of the abuse or violence. In Sweden the perception of women being victims of less violent abuse is higher than in some other countries where instead some more violent types of abuse are reported as being more common. This could, of course, be due to actual differences in actual events but it is also possible that there are differences in what types of behaviour are considered to represent harassment and abuse in different societies. More careful data work is needed to try to answer questions like this and many others. Currently there are a number of ongoing research projects based on the survey results, three of which will be presented at the FREE-network conference on “Economic and Social Context of Domestic Violence” in Stockholm on May 11, 2022. Our hope is that this work will help in taking actions to prevent gender-based abuse and domestic violence based on a better understanding of underlying cross-country differences in social norms and attitudes and their relation to socio-economic factors.

About FROGEE Policy Briefs

FROGEE Policy Briefs is a special series aimed at providing overviews and the popularization of economic research related to gender equality issues. Debates around policies related to gender equality are often highly politicized. We believe that using arguments derived from the most up to date research-based knowledge would help us build a more fruitful discussion of policy proposals and in the end achieve better outcomes.

The aim of the briefs is to improve the understanding of research-based arguments and their implications, by covering the key theories and the most important findings in areas of special interest to the current debate. The briefs start with short general overviews of a given theme, which are followed by a presentation of country-specific contexts, specific policy challenges, implemented reforms and a discussion of other policy options.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Effects of Sanctions

Posted on May 10, 2022 | Policy Brief

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Sanctions imposed on Russia after its invasion of Ukraine are argued to be the strongest and farthest-reaching imposed on a major power after WWII, more numerous and more comprehensive than all other measures currently in force against all other sanctioned countries. A question often asked, which is hard to answer, is whether sanctions are effective. In the present case, the effect most associate with success would be a swift end of the hostilities, perhaps accompanied by a regime change in Russia. But even when it seems these prizes are out of reach, sanctions certainly have effects, all too often glossed over by the debate but nonetheless of significance.

Why Are Sanctions Seen as Ineffective?

Sanctions are restrictions imposed on a country by one or more other countries with the intent to pressure in effect some desirable outcome, or conversely to condemn and punish some undesired action already taken. When evaluating sanctions, therefore, the focus is naturally on whether they succeed to discourage this particular course of action, or to remove the decision-makers responsible for it. And on this account, sanctions are overwhelmingly seen as unsuccessful. However, a few complications cloud this conclusion.

First of all, sanctions that are implemented already failed at the threat stage. If the threat of a well-specified and credible retribution did not deter the receiving part from pursuing the sanctioned course of action, it is because they reckoned that they can afford to ignore it. So, unless this punishment goes beyond what was expected, in scope or in time, its implementation will also fall flat. This implies that any effort to evaluate sanctions retrospectively suffers from the negative selection problem, when almost exclusively cases of failure, intended in this particular sense, are observed.

Second, sanctions are a rather blunt instrument, that often cannot be targeted with the precision one would desire. Even though sanctions have over time become “smarter”, in the sense that stronger efforts are made to target the regime, or elites that may have the clout to actually affect the regime (think the oligarchs in Russia), they often fail to reach or affect in a meaningful way those individuals that are the real objective, for various reasons. Instead, they can cause significant “collateral damage”, to groups of a population that often are quite far removed from any real decisional power, including those in the sending countries, and even third parties who are extraneous to the situation. The damage inflicted to those parties can only in very special circumstances be part of a causal link eventually impacting the intended outcome. For instance, citizens struggling in an impoverished economy could be led to a riot, or in some other way put pressure on their government – but this implies that the country is sufficiently free for riots to take place or for voters’ opinions to be taken into consideration.

To this, it should be added that, once a course of action has been taken, it might be not obvious how to change or undo it, notwithstanding the signaled displeasure from the sanctioning parties. Sanctions are therefore rarely working in isolation. When positive outcomes are achieved, it is often the case that diplomatic channels were kept open and clear incentives offered for a way out. But then it might be unclear whether it was the sanctions or something else that led to the success.

Other Effects of Sanctions

The pitfalls highlighted above, which make it tricky to answer whether sanctions are effective at reaching their aim, also apply when studying other effects that sanctions might have. There is of course a range of outcomes that might be affected: in this literature we find studies looking at inequality (Afesorgbor et al., 2016), exchange rates (Dreger et al., 2016), trade (Afesorgbor, 2019; Crozet et al. 2020), the informal sector (Early et al, 2019), military spending (Farzanegan, 2019), women’s rights (Drury, 2014), and many more. But as it often happens the most studied outcome is GDP, as this is a measure that efficiently summarizes the whole economy and correlates very nicely with many other outcomes we care about.

Suppose then that we would like to investigate what is the effect of sanctions on a target country’s GDP.  One problem is identifying an appropriate counterfactual; to observe what would have happened in the target country in the absence of sanctions. It is also an issue that the incidence of international sanctions is often a product of a series of events in the target or sender country (e.g. the Iraqi invasion of Kuwait or the apartheid system in South Africa), which also have impacts on the economy that would need to be isolated from the impact of sanctions themselves.

A variety of econometric techniques can be of help in this situation. One first idea is to use, as a reference, cases where sanctions were almost implemented. Gutmann et al. (2021) compare countries under sanctions to countries under threat of sanctions, while Neuenkirch and Neumeier (2015) contrast implemented sanctions to vetoed sanctions, in the context of UN decisions. Both studies find a relatively sizeable negative impact on GDP, in a large group of countries over a long period of time. In the first study, the target country’s GDP per capita decreases on average by 4 percent over the two first years after sanctions imposition and shows no signs of recovery in the three years after sanctions are removed. The second study estimates a reduction in GDP growth that starts at between 2,3 and 3,5 percent after the imposition of UN sanctions and, although it decreases over time, only becomes insignificant after ten years. It should be considered that a lower growth rate compounds over time: experiencing a slower growth even by only 1 percent over ten years implies a total loss of almost 15 percent. As a comparison, the average GDP loss due to the Covid-19 pandemic is estimated to be 3,4 percent in 2020.

These studies have limitations. Countries under threat of sanctions are probably making efforts to avoid punishment, which might imply that these countries are precisely the ones who would be most negatively affected by the sanctions. If so, the impact found by Gutmann et al. (2021) is probably underestimated. Neuenkirch and Neumeier (2015) only look at UN sanctions, which on one hand might give a larger impact because of the multilateral coordination. But on the other hand, the issue of an appropriate counterfactual emerges again: countries whose sanctions are vetoed might be larger, more influential, and better connected within the international community or to some of the major powers, which may also affect their economic success in other ways.

Kwon et al. (2020) adopt a different technique and come to a different conclusion. They use an instrumental variable (IV) approach and find that standard OLS overestimates the negative effect of sanctions, in other words, that sanctions’ effects are less negative than we think. They find an instantaneous effect on per capita GDP that becomes insignificant in the long run, just as if sanctions never happened.

Our confidence in these estimates hinges upon the validity of the IV used. In this case, the actual imposition of sanctions is replaced by its estimated likelihood based on sender countries’ variation in institutions and diplomatic policies (which are exogenous to the target country’s economic developments) and pre-determined country-pair characteristics (trade and financial flows, travels, colonial ties). Therefore, episodes where sanctions are imposed because the sender country happens to be in a period of hawkish foreign policy and because the target does not have strong historical relations with them are contrasted to episodes in which the opposite is true, and sanctions are therefore not implemented, everything else being equal.

The results also show that there is heterogeneity across types of sanctions, with trade sanctions having both a short and long run negative impact, while smart sanctions (i.e. sanctions targeted on particular individuals or groups) have positive effects on the target country’s economy in the long run.  This is quite an important point in itself. Often, sweeping statements about effectiveness of “sanctions” lump all the different measures together, and fail to appreciate that there may be substantial differences. However, the effect of one or another type of sanctions will vary depending on the structure of the economy that is hit.

A third approach is the synthetic control method. Here the researcher tries to replicate as closely as possible the path of economic development in the target country up to the point of sanctions’ implementation, using one or a weighted average of several other countries. In this way, evolution after sanctions’ inception can be compared between the actual country and its synthetic control. Gharehgozli (2017) builds a replica of Iran based on a weighted combination of eight OPEC member countries, two non-OPEC oil-producing countries and three neighboring countries, that match a set of standard economic indicators for Iran over the period 1980-1994. The study finds that over the course of three years the imposition of US sanctions led to a 17.3 percent decline in Iran’s GDP, with the strongest reduction occurring in 2012, one year after the intensification of sanctions (2011-2014) was initiated.

This is a stronger effect than those presented earlier. However, it only speaks to the special case of Iran, rather than estimating a broader global average effect. Another study focusing on Iran (Torbat, 2005) makes the important point that the effect of sanctions varies by type: financial sanctions are found to be more effective (in lowering Iran’s GDP) than trade sanctions – which contrasts with what is found to be true on average by Kwon et al. (2020).

Finally, the relation between economic damage and the effectiveness of sanctions in terms of reaching their goals is debatable. In a theoretical model, Kaempfer et al. (1988) suggest that this relation might even be negative and that the most effective sanctions are not necessarily the most damaging in economic terms. The sanctions most likely to facilitate political change in the target country are those designed to cause income losses on groups benefiting from the target country’s policies, according to the authors.

The Effect of Sanctions on Russia

Are these results from previous studies useful to form expectations about the effects of the current sanctions on Russia? The invasion of Ukraine which started at the end of February was a relatively unexpected event, at least in character and scale, in contrast to what can be said in the majority of situations involving sanctions. However, the context leading up to it was not one of normality either. Besides the global pandemic, Russia was already under sanctions following the Crimean Crisis in 2014. The impact of those economic sanctions, and of the counter-sanctions imposed by Russia as retaliation, is still unclear – and will be in all probability completely dwarfed by the current sanction wave as well as other exogenous shocks, such as significant changes in oil prices in this period. Kholodilin et al. (2016) estimated the immediate loss of GDP in Russia to be 1,97 percent quarter-on-quarter, while no impact on the aggregate Euro Area countries’ GDP could be observed. A Russian study (Gurvich and Prilepsky, 2016) forecasted for the medium term a loss of 2,4 percentage points by 2017 as compared to the hypothetical scenario without sanctions. This pales in comparison to the magnitude of consequences that are being contemplated now. Even the potentially optimistic, or at least conservative, assessment of the current situation by the Russian Federation’s own Accounts Chamber, in the words of its head Alexei Kudrin, suggests that: “For almost one and a half to two years we will live in a very difficult situation.” At the end of April, they published revised forecasts on the economic situation, among which the one for GDP is shown below. Russian Central Bank chief Elvira Nabiullina also sounded bleak, speaking in the State Duma: “The period when the economy can live on reserves is finite. And already in the second – the beginning of the third quarter, we will enter a period of structural transformation and the search for new business models.” The World Bank has forecasted that Russia’s 2022 GDP output will fall by 11.2% due to Western sanctions. These numbers do not yet factor in the announcement of the sixth EU sanction package, which famously includes an oil embargo (see an earlier FREE Policy Brief on the dependency of Russia on oil export).

Figure 1. Revised forecasts of growth rates for the Russian economy

Source: Macroeconomic survey of the Bank of Russia, April 2022.

Are these estimates realistic, and what would have been the counterfactual development without sanctions? If we believe the studies reviewed in the previous section, and also taking into account the unprecedented scale and reach of the current sanctions, at least the time horizon, if not the size, of the consequences forecast by Russian authorities is, though substantial, certainly underestimated. But there is too much uncertainty at the moment, hostilities are still ongoing and sanctions are not being lifted for quite some time in any foreseeable scenario. One reason why these sanctions are not likely to be relaxed, and why their impact is expected to be more severe than in most cases, is that a very broad coalition of countries is backing them. Not only this but the sanctioning countries see Russia’s conduct as a potential threat to the existing world order, so their motivation to contrast it is particularly strong relative to, say, the cases of Iran, North Korea, or Burma.

Moreover, these loss estimates do not yet factor in the announcement of the sixth EU sanction package, which famously includes an oil embargo. Oil is a fundamental driver of growth in Russia. An earlier FREE Policy Brief shows how two-thirds of Russia’s growth can be explained by changes in international oil prices. This is not because oil constitutes such a large share of GDP but because of the secondary effect oil money generates in terms of domestic consumption and investment. Reducing export revenues from the sale of oil and gas will therefore have significant effects on Russia’s GDP, well beyond what the first-round effect of restricting the oil sector would imply.

In short, it is too early to venture an assessment in detail, however, the scale of loss that can be expected is clear from these and many other indicators. In the longer run, it will only be augmented by the relative isolation in which Russia has ended up, implying lower investments and subpar capital inputs at inflated prices, and by the ongoing brain drain (3,8 million people have already left the country since the war began).

Conclusion

In conclusion, the debate about economic sanctions as a tool of foreign policy is often restricted to a binary question: do they work or not? There is ample support in the literature studying sanctions to say that this question is too simplistic. Even if we do not see immediate success in reaching the main aim of the sanction policy, they do cause damage, in many dimensions, and such damage is non-negligible. The political will and the regime behind it may be unaffected, but the resources they need to continue with their course of action will unavoidably shrink in the longer run.

References

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  • Crozet, M., & Hinz, J. (2020). Friendly fire: The trade impact of the Russia sanctions and counter-sanctions. Economic Policy, 35(101), 97-146.
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  • Kaempfer, W. H., & Lowenberg, A. D. (1988). The theory of international economic sanctions: A public choice approach. The American Economic Review, 78(4), 786-793.
  • Kholodilin, Konstantin A. and Netsunajev, Aleksei. (2016) Crimea and Punishment: The Impact of Sanctions on Russian and European Economies. DIW Berlin Discussion Paper No. 1569, SSRN: https://ssrn.com/abstract=2768622
  • Kwon, O., Syropoulos, C., & Yotov, Y. V. (2020). Pain and Gain: The Short-and Long-run Effects of Economic Sanctions on Growth. Manuscript.
  • Neuenkirch, M., & Neumeier, F. (2015). The impact of UN and US economic sanctions on GDP growth. European Journal of Political Economy, 40, 110-125.
  • Torbat, A. E. (2005). Impacts of the US trade and financial sanctions on Iran. World Economy, 28(3), 407-434.
  • World Bank. (2022). “War in the Region” Europe and Central Asia Economic Update (Spring), Washington, DC: World Bank.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Impact of Rising Gasoline Prices on Swedish Households – Is This Time Different?

Posted on May 2, 2022 | Policy Brief

Oil pumping jacks in sunset representing rising gasoline prices

The world is currently experiencing what can be labelled as a global energy crisis, with surging prices for oil, coal, and natural gas. For households in Sweden and abroad, this translates into higher gasoline and diesel prices at the pump as well as increased electricity and heating costs. The increase in energy-related costs began in 2021, as the world economy struggled with supply chain issues, and intensified as Russia invaded Ukraine at the end of February this year. In response, the Swedish government announced on March 14th this year that the tax rate on transport fuels would be temporarily reduced by 1.80 SEK per liter (€0.17) and that every car owner would receive a one-off lump-sum transfer of 1000 SEK in compensation (1500 SEK for car owners in rural areas). This reduction in transport fuel tax rates in Sweden is unprecedented. Since 1960, the nominal tax rate on gasoline has only been reduced three times – and then only by very small amounts, ranging from 0.04 to 0.22 SEK per liter. In this policy brief, we put the current gasoline price in Sweden into a historical context and answer two related questions: are Swedish households paying more today for gasoline than ever before? And should policymakers respond by reducing gasoline taxes?

The Price of Gasoline in Sweden

Sweden has a long history of using excise taxes on transport fuel as a means to raise revenue for the government and to correct for environmental externalities. As early as 1924, Sweden introduced an energy tax on the price of gasoline. Later in 1991, this tax was complemented by a carbon tax levied on the carbon content of transport fuels. On top of this, Sweden extended the coverage of its value-added tax (VAT) to include transport fuels in 1990. The VAT rate of 25 percent is applied to all components of the consumer price of gasoline: the production cost, producer margin, and excise taxes (energy and carbon taxes). Before the announced tax cut this year, the combined rate of the energy and carbon tax was 6.82 SEK per liter of gasoline. Adding the VAT that is applied on these taxes, amounting to 1.71 SEK, yields a total excise tax component of 8.53 SEK. This amount is fixed in the short run and does not vary with changes in the oil price.

Figure 1. Gasoline pump price: 2000-2022

Source: Monthly data on gasoline prices are provided by SPBI (2022).

Figure 1 shows the monthly average real price of gasoline in Sweden from 2000 to March of 2022. The price has increased over the last 20 years and is today historically high. Going back even further, the price is higher today than at any point since 1960. Swedish households are thus paying more for one liter of gasoline than ever before.

Figure 2. Gasoline expenditure per 100 km

Source: Trafikverket (2022).

However, a narrow focus on the price at the pump does not take into consideration other factors that affect the cost of personal transportation for households. First, the average fuel efficiency of the vehicle fleet has improved over time. New vehicles sold today in Sweden can drive 50 percent further on a liter of gasoline compared to new vehicles sold in 2000. Arguably, what consumers care about most is not the cost of one liter of gasoline per se but the cost of driving a certain distance – the utility we derive from a car is the distance we can travel. Accounting for the improvement over time in the fuel efficiency of new vehicles (Figure 2), we find that even though it is still comparatively expensive to drive today, the current price level no longer constitutes a historical peak. In fact, the cost of driving 100 km was as high, or higher, in the period from 2000-2008.

Second, any sensible discussion of the cost of personal transportation for households should also factor in changes in household income over time. The average real hourly wage has increased by close to 40 percent between 2000 and 2022. As such, the cost of driving 100 km, measured as a share of household income, has steadily gone down over time. Even more, this pattern is similar across the income distribution; for instance, the cost trajectory of the bottom decile group is similar to that of all employees. This is illustrated in Figure 3. In 1991, when the carbon tax was implemented, an average household had to spend around two-thirds of an hour’s wage to be able to drive a distance of 100 km. By 2020, that same household only had to spend one-third of an hour’s wage to drive the same distance. There is an increase in the cost of driving over the last two years but it is still cheaper today to drive a certain distance, in relation to income, compared to any year before 2012.

Taken all of this together, we have seen that over time, vehicles use fuel more efficiently on the expenditure side, and households earn higher wages on the income side. Based on this, we can conclude that the cost of travelling a certain distance by car is not historically high today. On the contrary, when measured as a share of income, it was 50 percent more expensive for most of the 21st century.

Figure 3. Cost of driving as a share of income

Source: Data on average hourly real wages are provided by Statistics Sweden (2022).

Response From Policymakers

It is, however, of little comfort for households to know that it was more expensive to drive their car – as a share of income – 10 or 20 years ago. We argue that what ultimately matters for the household is the short run change in cost – and the speed of this change. If the cost rises too fast, households cannot adjust their expenditure pattern quickly enough and thus feel that the price increase is unaffordable. And the change in the gasoline price at the pump has been unusually rapid over the last 12 months. From the beginning of 2021 until March of 2022, the pump price has risen by around 50 percent.

So, should policymakers respond by lowering gasoline taxes? The possibly surprising answer is that lowering existing gasoline tax rates would be counter-productive in the medium and long run. Since excise taxes are fixed and do not vary with the oil price, they reduce the volatility of the pump price by cushioning fluctuations in the market price of crude oil. The total excise tax component including VAT constitutes more than half of the pump price in Sweden, a level that is similar across most European countries. This stands in stark contrast with the US, where excise taxes only make up around 15 percent of the consumer price of gasoline. As a consequence, a doubling of the price of crude oil only increases the consumer price of gasoline in Sweden by around 35 percent, but in the US by around 80 percent. Furthermore, households across Sweden, Europe, and the US have adapted to the different levels of gasoline tax rates by purchasing vehicles with different levels of fuel efficiency. New light-duty vehicles sold in Europe are on average 45 percent more fuel-efficient compared to the same vehicle category sold in the US (IEA 2021). As such, US households do not necessarily benefit from lower gasoline taxation in terms of household expenditure on transport fuel and are even more vulnerable to rapid increases in the price of crude oil. Having high gasoline tax rates thus reduces – and not increases – the short run welfare impact on households. Hence, policymakers should resist the temptation to lower gasoline tax rates even during the current energy crisis. In the medium and long run, households would buy vehicles with higher fuel consumption and would be more exposed to price surges in the future, again compelling policymakers to adjust tax rates and creating a downward spiral. Instead, alternative measures should be considered to alleviate the effects of heavy price pressure on low-income households – for instance, revenue recycling of the carbon tax revenue and increased subsidies for public transport.

Conclusion

To reach environmental and climate goals, Sweden urgently needs to phase out the use of fossil fuels in the transport sector, which is Sweden’s largest source of carbon dioxide emissions. This is exactly what a gradual increase of the tax rate on gasoline and diesel would achieve. At the same time, it would benefit consumers by shielding them from the adverse effects of future oil price volatility.

The most common response from policymakers goes in the opposite direction. In Sweden, the Social Democrats – the governing party – have announced a tax cut on gasoline and diesel of 1.80 SEK per liter but the political parties in opposition have promised even larger tax cuts. Some proposals would even effectively abolish the entire energy and carbon tax on gasoline. Similar tax cuts have been announced for example in Belgium, France, the Netherlands, and Germany. Therefore, this time is indeed different – but in terms of the exceptional reactions from policymakers rather than in terms of the cost of gasoline that households face.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Financial Aid to Ukrainian Reconstruction: Loans Versus Grants

Posted on April 29, 2022 | Policy Brief

20220429 Financial Aid to Ukrainian Reconstruction Image 00

This brief provides an overview of the discussion on the relative merits of grants and loans in the literature on foreign aid, including a short section on debt relief initiatives. These claims are then tested against the context of Ukrainian post-war reconstruction, and it is argued that the case for providing grants is very strong. This argument is based on the magnitude of the investments needed, the need to create a long-run sustainable economy, the road towards a future EU membership, and the global value of a democratic and prosperous Ukraine as a bulwark against autocratic forces.

Introduction

One topic in the discussion on the post-war reconstruction of Ukraine is to what extent foreign support should come as loans or grants. The case at hand regards reconstruction in the aftermath of a military invasion by an aggressive neighbor. Therefore, Ukrainian reconstruction is sometimes compared to the Marshall Plan, the US package to help rebuild Europe after World War II. But this choice is also part of the more general discussion on foreign aid, comparing concessional loans (loans with lower interest rates than the market rate) with grants (financial transfers with no expectation of repayment), not least since many aid receiving countries have been highly indebted. What are then the arguments in favor of one or the other in the foreign aid literature? And how should we think about this in the context of the Ukraine crisis?

The Case for Loans

From a donor perspective, loans could be preferred from a purely financial viewpoint, as long as they are repaid. This must be put into the perspective of the purpose of foreign aid, though. If the purpose is to increase the welfare of the poor, and if loans cause macroeconomic imbalances that eventually lead to a debt crisis, using loans for aid will defeat its purpose. It is thus important, even from a donor perspective, to differentiate between the pure financial costs and the effectiveness and efficiency of foreign aid in relation to the stated goals. Yet, the paradigm on which development banks such as the World Bank motivate their strategy is that, even from an effectiveness perspective, loans may outperform grants. In their model, the bank has a broad portfolio of investments across multiple countries prioritized in order of the social rate of return. By lending out money, the bank can invest the returns from the most prioritized project into the second-most prioritized project, most likely in a different country. If the money instead had been given as a grant, the best possible outcome is that the receiving country can now invest the returns in the next best project within that country. This argument thus relies on the assumption that development banks can continually identify the most promising recipients among their wide portfolio of alternatives.

It has also been argued that grants may reduce incentives to raise tax revenues, and encourage government consumption over investments, as there is no need to generate net revenues to repay the debt (e.g., Clements et al. 2004; Djankov et al. 2004). From a donor perspective, it can also be argued that the monitoring of grants may be weaker because donors have no direct financial interest in the success of a project if it is financed by a grant. The disciplining effect of loans, though, relies on the absence of moral hazard problems. If receiving governments expect debt to be forgiven anyway when it is perceived as unsustainable and counterproductive to the country’s development, loans may be no better.

Based on arguments such as those above, part of the literature suggests that concessional loans are more likely than grants to promote growth in recipient countries, at least in good institutional environments. Cordella and Ulku (2007) look into this in detail and develop a model linking the degree of concessionality, for a given level of foreign aid (i.e. the extent to which finances are on preferential terms compared to market rates), to the receiving country’s economic growth rate, in a world where default is possible. Concessionality varies from 100 percent grants to 100 percent loans on market terms. The model suggests that a country with better policies and stronger institutions has a higher absorptive capacity for investments, meaning it can handle a lower level of concessionality (i.e., more loans, fewer grants) without going into default. They also argue that the immediate incentives for default on a loan are higher for a poorer and more indebted country as the cost of servicing the loan is higher. This would motivate relatively more grants and fewer loans to countries that are poor and highly indebted. Taking this to the data, they find in consistence with their theory that for any given level of total assistance, the impact on growth is increasing with the degree of concessionality for poor countries with weak policy and institutional environments, whereas this matters less for richer countries with better policies and stronger institutions. Looking at the level of indebtedness, the results are inconclusive.

The Case for Grants

The arguments above generally favor loans over grants, but it is of course crucial to also consider the risks and consequences of excessive debt burdens and sovereign default. Perhaps the most dramatic example of the potential consequences of shouldering a country with an excessive debt burden comes from Germany after the end of World War I. The economic struggles and sense of humiliation that followed have been argued to have contributed to German grievances leading up to World War II. Less dramatic but still with significant implications is the “lost decade” affecting Latin American middle-income countries in the 1980s. The combination of cheap credit from oil-exporting countries and the sudden dramatic increase of international interest rates following US policies in the early 1980s resulted in unsustainable levels of commercial loans. This crisis led to a US initiative, the Brady Plan, by which bank loans were consolidated and partially backed by the US government.

Excessive lending is often the result of distorted incentives. Within development banks, there are widely recognized internal incentives to get projects “through the door” (e.g., Briggs 2021). This “aid pushing” happens for both grants and loans, but the consequences can be more detrimental for loans if this leads to unsustainable debt levels. Similarly, there is evidence of defensive lending, where countries receive loans simply to be able to repay previous loans. Birdsall et al. (2003) find that donors lent more to African countries with bad policies if they had a large existing debt. On the other side, recipient country governments with short-term horizons and in environments with weak institutional checks and balances do not necessarily internalize the full costs of excessive lending. Due to these incentives on both sides, loans too often reach unsustainable levels, with debt to GDP ratios and debt to net export revenues becoming increasingly alarming.

With increased recognition of the costs of development of unsustainable levels of official lending, debt negotiations targeting highly indebted low-income countries have become common. These negotiations have often taken place through the Paris Club (a group of 22 high or upper-middle income creditor nations, including Russia) or through the HIPC (Highly Indebted Poor Countries) initiative (e.g. Birdsall et al. 2002). These debt reduction agreements have been continuously renegotiated, offering more and more generous conditions including debt forgiveness, rescheduling of existing loan terms, and more focus on grants in the portfolios of official financing.

Of particular relevance for this note, though, are the discussions around these initiatives that illustrate the different arguments made in favor of, or against, debt relief. As brought up in Birdsall et al. (2002), critique against the HIPC initiatives came from both sides. On the one hand, some argued that debt forgiveness was just more aid “down the rathole”, encouraging irresponsible policies by receiving governments (e.g. Easterly 2001), and fuelled by commercially motivated bilateral donors and multilateral institutions with misguided bureaucratic incentives. In order for aid to be effective, much more stringent conditionality was needed, and if that didn’t work, stricter selectivity in terms of which governments to partner with. On the other hand, others argued that the initiatives did not go far enough (e.g. Sachs, 2002). The economic arguments largely relied on concepts of a poverty trap, impossible to escape under conditions of a heavy debt burden requiring scarce foreign exchange to be used for debt service and discouraging investments. These countries were perceived as particularly vulnerable to adverse economic shocks, and as such, in need of insurance mechanisms that wouldn’t burden them with claims hampering their ability to prosper looking forward. But there was also a moral dimension, with blame focused on the creditor side, arguing that citizens of poor nations could not be burdened by debt issued for political reasons by creditors looking the other way when receiving rulers used proceeds for personal purposes.

Financing Post-war Recovery

The discussion above relates to foreign aid in general. The situation of financing post-war recovery is more specific, but past examples may give some points of reference. It should be noted, however, that every situation is unique in terms of the level of destruction, preconditions for a quick recovery, the political ramifications, and the risk of a resurgence of violence. And all these factors matter for the ability and willingness of foreign actors to step in and help.

An often-made reference in conjunction with Ukrainian recovery plans is the Marshall Plan, also known as the European Recovery Plan following World War II. Through this plan, financed by the US, initially 16 countries in Europe were getting “help to self-help” at an amount corresponding to roughly 10,5 percent of the countries’ GDP at the time (roughly about $13 billion, or $138 billion in 2019 dollars). The resources were spent differently across receiving countries, depending on the level of physical destruction. Importantly, grants accounted for as much as 90% of the total resources (Becker et al. 2022). More generally, grants usually account for a more significant share of aid flows when it comes to post-war reconstruction. This is natural, as a large share of the funding typically goes to humanitarian relief, and war-torn countries tend to be saddled with debt and a low capacity to raise domestic revenues in the short to medium term given the destruction of the war.

The common reference to the Marshall Plan in the context of Ukraine is probably partly geographically motivated: it is another war in Europe. But there are also other reasons, such as the direct unprovoked aggression by one of the world’s leading military powers, and the potential ramifications for world peace and the existing world order. The Marshall plan was motivated by the desire to avoid the mistakes from the peace agreements after WWI, and to help create a unified western Europe as a bulwark against further communist expansion from the Soviet Union. There are similar arguments to be made for the case of Russia’s war on Ukraine.

Implications for Ukraine Reconstruction

According to World Bank statistics, the total external debt stock of Ukraine in 2020 was $130 billion in current values, or 81,4 % of Gross National Income (GNI). This is already quite high, but the war has of course completely upended the situation and the IMF argued that Ukraine was facing debt sustainability issues already by the beginning of March 2022. Public finances are in the short run facing double pressure from a steep fall in revenues as economic activity drops and the ability to raise taxes is eroded, and an increase in expenditures on defence and humanitarian relief. Looking ahead, estimates of the Ukrainian costs of the war range between $440 and $1 000 billion by end of March 2022, but there is of course high uncertainty, and the bill is increasing for each day that the war goes on (Becker et al. 2022). This could be compared to the 2021 estimate of Ukraine’s GDP at around $165 billion. Even in the most optimistic scenarios, the rebuilding effort will be very costly, and will require massive amounts of foreign capital.

The sheer amount of effort needed in itself speaks to the need for grant financing. Rebuilding will require both public and private capital, and attracting new investments will necessitate an economic environment that is perceived as stable, dynamic, and conducive to long-term growth. As in the discussion on debt forgiveness for low-income countries above, such new investments are unlikely to materialize if the debt situation is deemed unsustainable. Furthermore, arguments in favor of loans over grants on grounds of fostering domestic macroeconomic responsibility and reducing moral hazard problems, fall flat when a country is invaded by an aggressive neighbor. Ukraine has had its share of bad politics, but the current situation is not caused by poor policies, lack of reform, or irresponsible lending under the assumption of future bailouts.

It should also be noted that both the Ukrainian government and representatives of the European Union (EU) have emphasized the long-term ambition that Ukraine should join the EU. This will not be possible, however, unless the country’s economy is in order, including a sustainable debt level, according to EU requirements for all joining members. Were Ukraine to shoulder excessive levels of debt at this moment it would thus jeopardize this ambition. And not least, Ukraine is fighting for its survival, but the war is also part of a wider emerging struggle between democratic and authoritarian forces over the future world order. The result of the war is of great significance for all democratic countries, though it’s the people of Ukraine that are facing the immediate horrific consequences. It is thus in our common interest to rebuild a prosperous and democratic Ukraine also as a bulwark against further authoritarian ambitions to change the existing world order. A Ukraine saddled with an unsustainable debt burden runs completely counter to the interests of the democratic world.

The Marshall Plan was successful in its goal “to permit the emergence of political and social conditions in which free institutions can exist”. This allowed for economic and political cooperation to take roots in western Europe, also contributing to political stability and prosperity. This cooperation expanded further east after 1989 with the inclusion of new member states into the European Union, largely solidifying a move towards market-based democracy in the region (despite some recent setbacks, primarily in Hungary). Let us build on these successful examples. The current situation offers an opportunity to bring an additional 44 million people into the European umbrella of peaceful cooperation in the near future. This ambition would become much more difficult, though, if Ukraine was saddled with an excessive debt burden.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The EU Import Bill and Russian Energy Sanctions

Posted on April 28, 2022 | Policy Brief

20220428 Image of Gazprom office in Russia representing Russian Energy Sanctions

Since the beginning of the Russia-Ukraine war, the West has been contemplating sanctions on Russian oil and gas imports. For the EU, this plan poses a significant challenge due to the long-existing sizable dependency on Russian energy. In this brief, we outline the possible effects of banning Russian oil and gas on the energy import bill across the EU. While the effects of such a ban will go beyond a direct increase in the import costs of oil and gas, our estimates provide a useful reference point in discussing the impact of such sanctions on the EU. Our estimates suggest that the relative increase in the import costs in the case of an oil embargo would be more evenly spread across the Member States, than in the case of a natural gas ban. This parity makes an EU-wide Russian oil embargo a more straightforward sanction policy. In turn, a full replacement of Russian gas imports across the EU – due to either a gas embargo or retaliation from Russia in response to an oil ban – is likely to require some kind of solidarity mechanism.

Introduction

Since the beginning of the Russian invasion of Ukraine, the West has been discussing the idea of sanctioning the aggressor by banning Russian energy imports. The motivation is quite straightforward. In 2021, Russian oil and gas exports constituted 49% of Russian goods exports or 14 % of Russian GDP, and the Western world (in particular, the European Union) is the main recipient of these exports. Banning Russian oil and gas export would, thus, lead to heavy pressure on the Russian economy.

The discussion has been quite heated. The US actually implemented a ban on Russian oil and gas in early March 2022, but this gesture has been largely seen as relatively symbolic, as the US dependency on Russian energy imports is quite limited. EU politicians have voiced different opinions about the feasibility of Russian energy sanctions. While some advocate an immediate ban, others argue for a more gradual decrease in imports or even for continuing imports effectively in a business-as-usual fashion. While the EC has announced plans to cut down the consumption of Russian gas by two-thirds in 2022 and mentioned the implementation of “some form of oil embargo” as part of their 6th sanction package, there is still no consensus across the EU. Sanctions on Russian oil and gas imports have not been implemented in the EU by the time of writing this brief.

The main reason for this hesitation is the extent to which Russia remains the main energy supplier. In 2020, 39% of gas and 36% of oil and oil products in the EU were imported from Russia, and the feasibility and consequences of replacing these with alternative supplies are debatable. Since the beginning of the war academics, international organizations and consultancies have offered a variety of analytical materials on the feasibility and implications of such energy sanctions (see e.g., Bachmann et al. 2022. Chepeliev et al, 2022, Fulwood et al., 2022, Guriev and Itskhoki, 2022, Hilgenstock and Ribakova, 2022, IEA, 2022, RYSTAD 2002a,b, Stehn, 2022 to name just a few).

This brief contributes to these estimates by discussing how a Russian oil and gas ban could affect the energy import bill across individual EU countries. We start by providing details on the EU’s dependency on Russian oil and gas imports. We then proceed to access the scope of the costs that a ban on Russian energy could imply for the EU energy sector. We conclude with a discussion about the feasibility of political agreement on such sanctions.

Import Dependency and Dependency on Russian Energy Across the EU

The two primary channels through which a Russian energy ban would affect the vulnerability of an EU country are the dependency on Russian oil and gas, and the overall energy import dependency. The former matters since a ban would imply an immediate necessity to replace missing volumes of energy. This would lead to an increase in energy prices widely across markets, thereby signifying the importance of the latter channel, the overall import dependency.

Figures 1 and 2 depict the dependency on Russian oil and gas across the EU member states. In Figure 1, the dependency is measured as a ratio of Russian energy imports to the gross available energy for each energy type separately – crude oil, oil and oil products, and natural gas. However, this measure may not reflect the importance of the respective energy type in a country’s energy portfolio. For example, in Finland, Russian gas imports constitute 67% of gross available natural gas. However, natural gas is less than 7% of the country’s energy mix, thus the overall effect of Russian gas on the Finnish energy sector and economy is rather limited. To account for this, Figure 2 offers an overview of the contribution of Russian energy imports to the cumulative energy portfolio across the EU.

Both figures show that there is a large variation both in terms of the contribution of individual energy types and in terms of overall dependency on Russian fuels. For example, the latter is almost negligible for Cyprus and well over 50% for Lithuania (however, Figure 2 accounts for re-exports and, thus, overestimates the role of Russian energy imports for Lithuanian domestic available energy in 2020.

Figure 1. Share of Russian energy imports in gross available energy, by fuel, 2020.

Note: Gross available energy indicates the overall available energy supply on the territory of the country. It is defined as Gross available energy = Primary production + Recovered and recycled products + Imports – Exports + Change in stock. . In several EU member states natural gas transit may be included in the imports. As a result, the high share of Russian energy may reflect not only imports for consumption but also for transit, as well as fuels for refinement and further export (e.g. oil products in Estonia (cut at Figure 1, 285%), Lithuania (cut at Figure 1, 201%), Slovakia and Finland). Austrian data on natural gas imports from Russia are confidential and not represented in the diagram. Denmark and Croatia did not report Russian gas imports data for 2020 to Eurostat. Source: Eurostat

Figure 2. Share of Russian energy imports in total gross available energy, 2020. Source: Eurostat

Note: See Figure 1. Source: Eurostat

While the above data summarizes the EU dependency on Russian energy imports in volume terms, it is also useful to have a sense of the costs of this dependency. As we are not aware of any source that has accurate data on the value of imports across the EU states, we construct a back-of-the-envelope assessment of the costs of Russian energy imports to the EU in 2021 using the available trade data for 2021 and the allocation of imports across the EU Member States for 2020 (see Appendix 1 for more details). Admittedly, these estimates only account for the differences in prices of energy imports from Russia vs. other suppliers; it does not capture e.g., the difference in prices of Russian gas across the Member States. Still, they offer useful insight into the scope of these expenses, in levels (Figure 3) and the share of GDP (Figure 4).

The results suggest that, while the expenses are quite sizable – e.g., the total value of Russian fossil energy imports to the EU in 2021 exceeds 110 bln EUR, – they correspond to around 0.7% of European GDP. Again, there is variation across the Member States, but in most cases – effectively all cases that do not account for re-export – the share of Russian energy imports is below 2% of GDP.

Figure 3. Value of Russian fossil energy imports, bln EUR, 2021.

Source: Eurostat, GazpromExport, Central Bank of Russia, author’s own calculations, see Appendix 1.

Figure 4. Share of oil, oil products and gas imports in GDP, 2021.

Source: Eurostat, GazpromExport, Central Bank of Russia, author’s own calculations, see Appendix 1.

Figure 4 also touches upon the second source of vulnerability towards a ban on Russian energy, mentioned at the beginning of this section. It depicts not only the value of Russian oil and gas imports as a percent of GDP but the overall dependency on imports of oil and gas as a share of GDP. The larger this dependency is, the bigger is the impact of an increase in energy prices for a country. Figure 4 not only confirms the abovementioned variation across the Member States but also shows that some countries with little-to-moderate direct dependency on Russian oil and gas – e.g., Portugal or Spain, – are still likely to experience a sizable negative shock to their energy expenses due to the market price increase.

Importantly, these figures give only a very rough representation of the potential damage that a ban on Russian energy imports may cause to the EU economies. Two EU Member States with a comparable dependency could react to the shortage of Russian gas in very different ways, depending on a variety of other factors – the extent and scalability of domestic production, diversification of their remaining energy portfolio in terms of energy suppliers and types of oil the economy relies on (e.g., light vs. heavy), energy infrastructure (e.g., LNG regasification facilities or storage), consumption structure, etc. Le Coq and Paltseva (2009, 2012) discuss in detail some of these factors, and the possibilities to account for them. However, for the sake of simplicity, in this brief we focus on the (volume- and value-based) measures of dependency.

Potential Costs of Russian Energy Import Ban

In this section, we discuss the potential implications of banning imports of Russian oil and gas on the costs of fossil energy imports in the EU. We offer a few historical parallels in order to assess the potential scope of the price reaction to such a ban. Furthermore, we proceed to provide estimates of the costs of oil and gas imports across the EU Member States, would such sanctions be implemented.

Oil Imports Ban

We start with a potential ban on Russian oil and oil product imports. To put things in perspective, it might be useful to present some numbers. According to the IEA, Russia recently surpassed Saudi Arabia as the world’s largest oil and oil products exporter. In December 2021, global Russian crude and oil product exports constituted 7.8 million barrels per day (mb/d), with exports of crude oil and condensate at 5 mb/d. Out of the total 7.8 mb/d, exports to OECD countries constituted 5.6 mb/d, with crude oil exports amounting to 3.9 mb/d. Assuming that the size of the global oil market in 2021 returns to its pre-pandemic 2019 level (the actual data for 2021 global oil consumption is not available yet), Russian crude oil exports to the OECD constitute 8.6% of global crude exports. The corresponding figure for oil products is 6.8% (BP, 2021).

So, what would happen if the developed world – which for the purpose of this analysis we proxy by OECD – bans Russian oil exports? In the recent public discussion, many voices have compared this potential development to the 1973 oil crisis. This crisis was initiated by OAPEC’s – the Arab members of OPEC, – oil embargo on the US in response to their support of Israel during the Yom Kippur War. The OAPEC, the biggest group of oil exporters at the time, completely banned oil exports to the US (and a number of other western countries), and also introduced production restraints that affected the global oil market. The (WTI) oil price during this episode went up by a factor of three (see, e.g, Baumeister and Kilian, 2016).

However, a few important features are likely to differ between the oil crisis of 1973 and the potential impact of the Russian imports ban. First, the net loss of oil supplies during the Arab embargo was around 4.4 mb/d, which at that point constituted around 14% of traded oil (Yergin, 1992). Recall that Russian supplies to OECD are around half of this share. Moreover, it is likely that the ban would not lead to a complete withdrawal of these amounts from the market, but rather to a partial rerouting of Russian oil to Asia and, consequently, a readjustment of world oil trade flows. Second, Yergin (1992) points out that, at the time of the 1973 oil crisis, oil consumption was growing at 7.5% per year, which exacerbated the impact of the embargo. In contrast, the current assessments of oil demand growth are at around 2% per year (IEA, 2022). Third, the energy portfolios are much more diversified now than in 1973, with gas and renewables playing a more substantial role. In the case of an isolated oil imports ban (not extending to gas imports), this would argue in favor of a more moderate price impact. Finally, the oil embargo of 1973 was a never-seen-before episode in the history of the oil market. The uncertainty about future developments has likely contributed to the oil price increase. While there is substantial uncertainty associated with the impact of a Russian oil imports ban, it is arguably lower than in 1973. Based on these considerations, a three-fold oil price increase in the case of a Russian oil export ban seems highly unlikely.

As a possible lower bound of the price impact, one can consider a much more recent price shock brought about by drone attacks on the oil processing facilities Abqaiq and Khurais in Saudi Arabia in 2019. In the initial assessment of the damage, Saudi Arabian authorities stated that the attack decreased the national oil production by 5.7 mb/d – which is more than the total of Russian oil exports to OECD. As a reaction, the intraday oil price went up by 20 %, and the daily oil price by 12%. In two weeks, production and export capacity was almost back to normal and the price returned to pre-shock levels.

Notice that the scale of the daily shortage in this episode exceeds the likely shortage under the Russian imports ban. However, a moderate price reaction, in this case, was clearly driven by expectations for the temporary nature of the shortage, as the damage was to be repaired in a matter of a few weeks, if not days. In comparison, the Russian oil ban is likely to last much longer. In this way, a price increase of 12%, or even 20%, would be an underestimation of the effect of a Russian oil imports ban.

While the above discussion suggests some bounds for the possible price effects of a Russian oil ban, the uncertainty around such price developments is very high.  Figure 5 shows the cost estimates of oil and oil products imports to the EU for two potential price levels – $120/b, and $180/b. Each price would roughly correspond to an increase of 33%, and 100%, respectively, relative to the pre-invasion price of $90/b. In the estimation, we simplistically assume that the price of oil products increases by the same amount as the price of crude oil. We also assume that the missing Russian oil can be replaced by alternatives, such that oil consumption does not change compared to the 2021 level for the lower price scenario and that it decreases by 2% for the high-cost scenario due to the demand adjustments.

Figure 5. Estimated effect of Russian oil ban on oil and gas imports in 2022: value of oil and oil products imports, EUR bln (left axis), and oil import expenses relative to 2021 level (right axis).

Source: Eurostat, GazpromExport, Central Bank of Russia, author’s own calculations, see Footnote 1.

The estimates suggest that the total oil and oil products import costs for the EU would be just above EUR 640 bln for the $120/b price level and EUR 940 bln for the $180/b price level. Furthermore, the costs across the EU Member States would vary greatly depending on the size of the economy and its exposure to oil imports.

This shows that – provided that the Russian oil will be fully replaced but at a higher price – the expected cost of this is in the range of 1.7-1.9 times the 2021 expenses at 120$/b, and 2.5-2.8 times that if the price would be 180$/b. While there is some variation across Member States, mostly driven by the removal of the somewhat cheaper Russian oil from the consumption basket, it is rather limited. Figure 5 also demonstrates that the ban on Russian oil imports is going to affect not only countries that directly depend on Russian oil but also countries with large oil and oil products imports due to the market price effects.

Gas Imports Ban

Now we proceed to discuss the costs of banning Russian gas imports into the EU. While LNG has increased the fungibility of the natural gas market, it remains sizably segmented. Therefore, we concentrate on the effect on the European market.

Russian gas constituted around 39% of the EU gas consumption volumes in 2020, and just below 30% in 2021 due to restricted supply during the second half of the year (McWilliams, Sgaravatti and Zachmann, 2021). It is currently a common understanding that fully substituting 155 Bcm of Russian gas imports in 2021 with imports from other pipeline suppliers, LNG, storage, and increasing domestic production is not feasible in 2022. Different sources have given different estimates on the extent of the resulting shortage, see e.g. Table 1.

Table 1. Alternatives to replace EU imports of Russian natural gas

Source: Rystad Energy (2022a, 2022b), Fulwood et.al (2022), IEA (2022).

As shown in Table 1, the net missing gas consumption ranges between 12% and 22% across different scenarios. As there are no historical episodes in the gas market to which such a development can be compared, it is difficult to assess the potential price reaction. One rough comparison can be made based on the oil market situation during the Arab oil embargo of 1973 discussed above. Then, the net loss of oil constituted about 9% of the oil consumption in “the free world” (Yergin, 1982), even lower than the most optimistic prognosis in Table 1. However, 33 Mcb of Russian gas (or 6% of 2021 the EU’s gas consumption) has already been imported to the EU since the beginning of 2022, making the potential gas shortage quite comparable to the oil shortage of 1973. Subject to all differences between the two shocks, one can, perhaps, still argue that the gas price increase following a ban on Russian gas imports should not exceed three-fold from before the invasion.

It is important to stress here that the EU gas market situation in the case of the Russian gas embargo would be principally different from the oil market one. Due to supply shortage not coverable by the alternative gas sources, a gas embargo would lead not only to a stronger price increase than in the case of oil, but also to significant downward demand adjustments, rationing and, perhaps, even price controls. (This, again, parallels the developments during the 1973 oil crisis). The negative effect of such rationing is not accounted for by the import bill. On the contrary, a shortage of supply would imply lower gas import volumes, biasing the impact on the gas import bill downward. In this way, an import bill reaction to sanctions in the case of natural gas may more strongly underestimate the overall impact on the economy than in the case of oil.

While the above argument suggests a higher price increase in the case of a gas embargo in comparison to an oil ban, there is still a lot of uncertainty in forecasting the gas price. Figure 6 depicts the estimates for the natural gas cost across the EU for two potential price levels – EUR 160/Mwh, and EUR 240/Mwh, a two- and three-fold increase relative to the pre-invasion price level of EUR 80/Mwh. Both estimates assume a (moderate) 8% decrease in the demand reflecting the abovementioned supply shortage and demand adjustments. We assume that the shortage is affecting both the importers of Russian gas and those who use other suppliers due to the common gas market in the EU and the use of reverse flow technology – as was the case for Poland which was denied Russian gas on April 27th, 2022 due to not paying for it in Rubles (see Appendix 1 for a discussion of implications of this assumption).

Not surprisingly, the gas import costs increase drastically in comparison to 2021. The total figures for the EU would be just below EUR 680 bln in the two-fold price increase scenario, and exceed 1 trn EUR in the case of a three-fold increase, in contrast to EUR 185 bln in 2021. Again, the largest economies bear the highest costs in absolute value.

When it comes to the relative increase in gas import value, two further observations follow from Figure 6. First, there is a huge variation in the increase in the value of gas imports across the Member States, from no effect in Cyprus which does not import natural gas, to 7.7 times in the case of a price doubling and 11.5 times in the case of a price tripling. Again, this variation originates from the necessity to replace cheaper Russian gas with more expensive gas sources, and the effect is much stronger than for oil. However, just like in the oil case, the states not directly importing Russian gas will still experience a huge negative shock from such a price hike. (Recall also, that the variation of the impact across the Member States is likely underestimated here, as the gas bill does not account for potential rationing which may differentially impact the importers of Russian gas).

Second, the increase in the value of gas imports exceeds the scale of the price increase even for the least affected Member States (excluding Cyprus). This is due to the unprecedented gas price increase during the EU gas crisis that took place between late 2021 and the beginning of 2022. Due to this increase, the pre-invasion gas price in February 2022 was 60% higher than the average gas price in 2021.

Figure 6. Estimated effect of Russian natural gas ban on gas imports in 2022: value of gas imports, EUR bln (left axis), and gas import expenses relative to 2021 level (right axis).

Source: Eurostat, GazpromExport, Central Bank of Russia, author’s own calculations, see Footnote 1.

Conclusions

The above estimates suggest that a ban on Russian oil and gas imports is going to be costly for the EU. While uncertainty is very high concerning the possible energy price increase following such a ban, historical parallels together with the market characteristics suggest that both the price increase and the rise in the value of imports are going to be stronger for natural gas. The resulting increase in the EU-wide import values relative to 2021 ranges from 1.8 to 2.6 times for the considered oil scenarios, and from 3.7 to 5.5 times for the natural gas scenarios.

Unsurprisingly, the most sizable import costs will be faced by the larger EU Member States, as well as those most dependent on oil and gas imports. However, all EU countries are going to be affected due to the market price increase. While the relative rise in the import costs of oil and oil products will be fairly uniformly met across the EU states, the increase in the costs of gas exports will vary greatly, with the largest relative losses faced by the EU states that are currently more exposed to Russian gas imports.

The above figures provide a rough assessment of the potential costs of a Russian fossil fuels ban. The approach does not take into account substitutability between different fuels and resulting cross-effects on prices, which implies that the costs could be both under- and overestimated. It has a very limited and simplistic take on the demand reaction to a price increase, which again may lead to either over- or underestimation of the effect. Neither does it account for the consequences of such price increases on the costs of electricity and implications for the non-energy sector within the economies. The latter may, again, be differentially affected depending on the industrial composition and their relative energy intensity. Another factor to consider is the interconnectivity between the EU economies – for example, an increase in Germany’s energy bill is likely to have a large impact on the entire EU. Moreover, the use of the import bill as a proxy for the overall effect on the economy may have further limitations in the case of supply shortage and rationing. To provide a more precise estimate of the impact of such a ban on the entire economy, for instance on GDP, one would require an extensive and sophisticated model along the lines of the CGE approach, relying on large amounts of data (Bachmann et al. (2022) provide an excellent example of such a study of the effect on Germany). This, however, is beyond the scope of the current assessment.

Still, even this relatively simplistic assessment of import costs of a Russian energy ban offers sufficient food for thought for the discussion of the scale of damage across the EU Member States and the feasibility of oil and gas sanctions. For example, the assessment suggests that an oil ban is likely to yield relative parity across the Member States in terms of the increase in the 2022 oil import bill as compared to the 2021 level. This would imply that, were the EU to decide on a gradual sanctioning of Russian oil and gas, it would be easier to reach an EU-wide agreement on oil sanctions. In turn, moving away from Russian gas – due to either the decision to ban gas imports or retaliation from Russia in response to oil sanctions, -implies very uneven import cost exposure. Thus, to face the challenge of replacing Russian gas imports, the EU would likely need to implement some kind of energy solidarity mechanism.

References

  • Baumeister, C., & Lutz Kilian. (2016). “Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us.” Journal of Economic Perspectives, 30 (1): 139-60.
  • Bachmann, R., D., Baqaee, C., Bayer, M., Kuhn, B., Moll, A., Peichl, K., Pittel & M. Schularick. (2022). “What if? The Economic Effects for Germany of a Stop of Energy Imports from Russia”, ECONtribute Policy Brief 28/2022.
  • BP. (2021). Statistical Review of World Energy
  • Chepeliev, M., T. Hertel and D. van der Mensbrugghe. (2022). “Cutting Russia’s fossil exports: Short-term pain for long-term gain”, VoxEU.org, 9 March.
  • Fulwood, M., Sharples J., & J. Henderson. (2022). ”Ukraine Invasion: What This Means for the European Gas Market”, The Oxford Institute of Energy Studies, March
  • Guriev, S. & O. Itskhoki. (2022). “The Economic Rationale for Oil and Gas Embargo on Putin’s Regime”.
  • IEA. (2022). “A 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas”.
  • Hilgenstock, B. & E. Ribakova. (2022). “Macro Notes – Russia Sanctions: A Possible Energy Embargo”, Institute of International Finance
  • Le Coq, C. & E. Paltseva. (2009). “Measuring the security of external energy supply in the European Union”, Energy Policy 37: 4474-4481.
  • Le Coq, C. & E. Paltseva. (2012). “Assessing Gas Transit Risks: Russia vs. the EU”, Energy Policy, 4: 642-650.
  • McWilliams, B., Sgaravatti G., Tagliapietra S., & Zachmann G. (2022). “Can Europe Survive Painlessly without Russian Gas?”, Bruegel, 27 February.
  • McWilliams, B., Sgaravatti G.,  & Zachmann G. (2021). “European Natural Gas Imports”, Bruegel Datasets
  • Rystad Energy. (2022a). “Energy Impact Report, Russia’s Invasion of Ukraine, public version”, March 2
  • Rystad Energy. (2022b). “Energy Impact Report, Russia’s Invasion of Ukraine, public version”, March 21
  • Stehn, S. J., Ball, S., Durre, A., Radde, S., Schnittker, C., Taddei, F. & Quadr, I. (2022). “The Impact of Gas Shortages on the European Economy”, Goldman Sachs, March
  • Y. Daniel. (1992). The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon and Schuster.

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.

On the Necessity of Pension Reform in Belarus

Posted on April 25, 2022 | Policy Brief

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Belarus has a pay-as-you-go pension system that becomes unsustainable with an ageing population. The country has recently finished the process of increasing the retirement age by 3 years to 63 and 58 for men and women, respectively. In Lvovskiy and Bornukova (2022), we show that this reform is not sufficient for delivering sustainability to the pension system, and further reforms are necessary. We show that the available space for further increasing the retirement age is limited and cannot eliminate deficits. The introduction of a fully-funded component delivers balance and pension gains in the long run but deepens the deficit problem for the first 30 years after its introduction. Reforming the pension system and transitioning to a fully-funded system would be a major policy challenge for Belarus after political change, and possible policy options should be explored now.

Demographic Challenges

Similar to many European countries, the population of Belarus is ageing. The average age is rising both due to increasing life expectancy and low fertility.

Another demographic peculiarity that has contributed to population ageing is the series of strong demographic waves post-WWII, which were entrenched by the fertility crisis 1990s following the dissolution of the Soviet Union. As a result of these waves, one of the largest cohorts is entering retirement in Belarus in the coming years, while being replaced by one of the smallest cohorts in the labor market.

Figure 1. Old-Age Dependency Ratio in Belarus

Source: Own projections based on Belstat data on current demographic trends. The base scenario assumes the current total fertility rate of  1.38 children per woman and current age-specific death rates. The emigration of 200 thousand scenario represents the base scenario in addition to 200 thousand working-age adults emigrating from the country in 2022. The TFR= 1.73 scenario assumes current age-specific death rates but an increase in TFR to the recent high of 1.73 children per woman.

Due to the combination of population ageing and the demographic waves, old age-dependency (number of people above the retirement age per number of working-age people) is projected to increase from 0.4 in 2020 to around 0.65 in 2055 (see Figure 1).

Status Quo in the Pension System

Currently, the Belarusian pension system is almost entirely pay-as-you-go, with today’s workers paying contributions that are channelled directly into pension benefits. Almost all workers pay 35% to the Social Security Fund, with 27 percentage points dedicated to pension expenditure. There are several exemptions with lower rates applied: agrarians, IT, and individual entrepreneurs. Considering all the exemptions, we have estimated the effective rate of pension contributions to be 18%.

If the pension system does not undergo substantial reform, it would need to go into large deficits (as shown previously in Lisenkova & Bornukova, 2017), or the pensions (as a percentage of the average wage) would have to decrease. Based on current demographic data, our own demographic projections and financial data from the Social Security Fund, we have simulated two scenarios without any reforms.

Figure 2. Two Scenarios under Status Quo.

Source: Own projections based on Belstat data on current demographic trends.

Base Scenario 1 assumes that the level of pensions remains at the current 39% of the average wage. As seen in Figure 2, under this Scenario the deficit rapidly takes off from the current level of around 0.5% of GDP and surpasses 5% of GDP annually after 2050. Theoretically, it is possible to finance this deficit with budget transfers, but it will require a lot of budget consolidation.

Scenario 2 assumes that the Social Security Fund deficit remains constant at 0.31% of GDP as in 2019, while the size of the pensions adjusts. In this case, by 2050 the replacement rate (the ratio of the average pension to the average wage) falls below 26% from the current level of 39%. While this replacement rate would be similar to the lowest among the OECD countries (31% in Lithuania, OECD 2022), it would put many retirees below the poverty line, given the low earnings in Belarus.

There Is No Easy Way Out

To avoid the negative scenarios that assume either a significant budget consolidation or a deterioration in the well-being of retirees, Belarus would have to reform its pension system. The reforms could either be parametric, like increasing the retirement age; or structural, implying a shift to a fully-funded pension system.

Figure 3. Effects of Retirement Age Increase

Source: Own projections based on Belstat data on current demographic trends.

Increasing the retirement age is a relatively easy way out, and Belarus is already moving in this direction: since 2017, the retirement age was set to gradually increase by 3 years to 58 and 63 years for women and men, respectively. However, Figure 3 clearly shows that this step alone is not enough. Further increasing the retirement age, especially for men, might be problematic given the low life expectancy (69.3 for men and 79.4 for women). Healthy life expectancy for men is 62.3 years (WHO, 2022), already lower than the retirement age. Hence, while minor retirement age increases are possible in the future, at the moment the potential for such reform would be limited to women only

Figure 3 shows how two different scenarios of the retirement age increase could improve the status quo (63/58). Equalizing the retirement ages for men and women to 63/63 keeps the Social Security Fund deficit below 3% of GDP annually in the long run, while further increasing to 65/65 would keep it under 2%. However, the retirement age increases are not enough to balance the Social Security Fund in the long run and still require additional sources of financing.

Introducing a Fully-Funded Pillar

Introducing a fully-funded pillar is not a panacea as it will not resolve the deficit problem in the next 20-30 years. However, it could provide background for a non-deficit Social Security fund in the future, as well as an increase the well-being of retirees.

When introducing a fully-funded component while keeping the pay-as-you-go system, it is important to find the optimal distribution of social contributions between pillars. Through simulations, we found that the optimal amount of contributions to the fully-funded pillar (the amount that minimizes aggregate deficits of the Social Security Fund by 2100) is one-third of total contributions. This amount is also delivering a zero-sum of discounted deficits by 2100.

 Figure 4. Introducing a Fully-Funded pillar

Source: Own projections based on Belstat data on current demographic trends.

As we can see in Figure 4, introducing a fully-funded pillar in 2025 will initially deepen the deficits (since part of the contributions would now go into saving instead of financing current pensions), but after around 30 years of reform, the pension system would turn into a surplus. The surplus could be used to increase the replacement rate and well-being of retirees and pay back the debt accumulated during the initial stage of the reform.

Conclusion

Population ageing makes the pay-as-you-go pension system in Belarus unsustainable. Without reform, the system would need extra financing from the budget (up to 5% of GDP annually). Alternatively, financial sustainability could be achieved at the cost of a lower replacement rate and lower well-being of retirees.

An increase in the retirement age and the introduction of a fully-funded pillar are two of the most frequently discussed options of reform. Our simulations show that none of the options could help Belarus avoid deficits in the medium run. The fully-funded system delivers long-term sustainability.  However, the need to finance large deficits in the process of introducing a fully-funded pillar represents a policy challenge as the policy will deliver benefits only in the long run.

Of course, other policy options are also on the table. Belarus (after political change) could secure loans from IFIs to finance the deficit in the medium run. It could use the proceeds from privatization to cover the deficits, at least partially. The effective contributions rate could be increased by minimizing exemptions and loopholes. Finally, Belarus might decide to finance the deficit of the pension system with the budget expenditure, finding fiscal space elsewhere.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Support the Future of Ukraine

Posted on April, 2022 | Videos

20220301 Ukraine support

The Stockholm School of Economics (SSE) together with the Stockholm Institute of Transition Economics (SITE) and the Embassy of Ukraine in Sweden hosted a hybrid event to learn more about the impact of the war in Ukraine and to support fellow students and faculty members from the FREE Network partner school, the Kyiv School of Economics (KSE) and Ukrainian academics and students more generally.

Speakers

Speakers and participants from all over the world, including of course colleagues from the Kyiv School of Economics (KSE), joined the event. A number of highly distinguished speakers discussed the matter, among them:

During the evening, funds were raised for the newly formed Swedish nonprofit organization, the Friends of KSE, to help provide intellectual and humanitarian support to researchers and students at KSE, working within and outside Ukraine’s borders.

About “Friends of KSE“

Friends of KSE is a Swedish nonprofit (“Ideell förening”) with the purpose to support academics with links to Ukraine and in particular, though not exclusively, those at the Kyiv School of Economics. This will be done through fundraising and financial as well as intellectual support. The funds raised will only be used to support Ukrainian academics and faculty, staff, and students at KSE. The administrative cost of the association is capped not to exceed 5% of the funds raised. Anyone that wants to support KSE is welcome, and there is also an opportunity to join the association.

Disclaimer: Opinions expressed during events and conferences are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Social Norms, Conspiracy Theories and Vaccine Scepticism: A Snapshot from the First Year of the Covid-19 Pandemic in Poland

Posted on April 19, 2022 | FROGEE PROJECT, Policy Papers

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In January 2022, Poland experienced the highest rate of SARS-CoV-2 transmission since the beginning of the COVID-19 pandemic. Considering the widespread consensus among experts about the efficacy of vaccines in preventing hospitalisation and death resulting from the virus, low vaccination rates and widespread anti-vaccine sentiments in Poland are of great concern. We use data from the DIAGNOZA+ Survey to demonstrate the relationship between various demographic characteristics, opinions around certain gender norms, the propensity for conspiratorial thinking, concern about the pandemic, and vaccine scepticism. While controlling for exogenous demographic characteristics, we measure the strength of the relationship between various beliefs that people hold and how they feel about the COVID-19 vaccine. Our analysis indicates that while respondents who hold more traditional views on gender roles are 6 percentage points less likely to get vaccinated, those who agree with a variety of conspiratorial statements are 43 percentage points less likely to vaccinate against COVID-19.

Introduction

As of January 2022, Europe finds itself well into the 4th wave of the COVID-19 pandemic, with some countries, including Poland, experiencing the highest rates of transmission since the virus was first detected. There are a few tools available to policymakers and healthcare professionals for combating the spread of the virus, ranging from preventative measures to strict social lockdowns aimed at reducing interpersonal interaction. A comprehensive literature review of 72 academic studies conducted by the BMJ found that the implementation of preventative measures such as hand washing, mask wearing, and social distancing decreased the risk of transmission by 53% (Talic et al., 2021). But even though such measures reduce transmission, the shortcomings in adherence and enforcement make high vaccination rates much more effective in diminishing the risk of hospitalization and death (Moline et al., 2021). With a consensus among experts reaffirming the effectiveness of vaccines in minimising the more severe cases of COVID-19 illness,  the widespread availability of the vaccine has become the most effective and cost-efficient tool in limiting morbidity while avoiding future instances of economically unsustainable lockdowns. The drawbacks of the alternative scenario have already been made evident in 2020, before the development and distribution of COVID-19 vaccines. Over the course of the year, hospital capacities were overwhelmed in many countries around the world, leading to significant spikes in excess deaths. Poland saw an increase of over 18% in all-cause mortality in 2020 (OECD, 2021), the fourth-highest in the OECD and second-highest in the European Union (Eurostat, 2021).

Considering the central role that prevalent vaccination plays in combating the impact of COVID-19, it is important to understand the underlying factors and demographic characteristics of individuals who are driving the low vaccination rates in countries such as Poland. With this in mind, we use an online survey: DIAGNOZA+ (DIAGNOZA Plus, 2020-2021), conducted on a representative sample of adults in Poland throughout the pandemic, allowing for the identification of characteristics that are most strongly correlated with vaccine scepticism. This kind of analysis can provide useful indicators for the targeting of certain policies and information campaigns that encourage vaccinations, and thereby suppress future outbreaks of SARS-CoV-2, as well as any other future pandemics. Below, we first outline the key features of the DIAGNOZA+ data, describe the methodology adopted in this study, and present results on the relationship between key demographic characteristics, social norms, views of respondents, and attitudes towards COVID-19 vaccination. We show a strong correlation between traditional family values, conspiratorial views, and reservations relating to the vaccination programme. Having traditional family values (expressed by about 40% of the sample) is associated with an over 10 percentage point (p.p.) lower probability to declare a willingness to get vaccinated. This drops to about 6 p.p. when we extend the model to account for conspiratorial thinking, which strongly dominates the relationship. Individuals who express strong conspiratorial and anti-establishment views (about a quarter of the sample), conditional on other demographic characteristics, were more than 40 p.p. less likely to declare a willingness to get vaccinated.

Methodology

The following analysis is based on data from DIAGNOZA+, an online survey collected in seven waves over the course of the COVID-19 pandemic (DIAGNOZA Plus, 2020-2021). The panel survey was conducted with the purpose of assessing changes in the labour market situation of adults in Poland between April 2020 and July 2021. The survey consistently included standard questions on individual and household characteristics such as age, gender and education, as well as questions on as well as questions about the respondent’s labor market status, hours worked, and financial situation. Waves 3 and 4 included additional modules where respondents were asked to express their opinions on a variety of statements surrounding gender norms such as “In general, fathers are as well suited to look after their children as mothers”, “A pre-school child is likely to suffer if his or her mother works” and “When jobs are scarce, men should have more right to a job than women”. The questions were answered on a scale of 1 (strongly agree) to 4 (strongly disagree). For the analysis, these categorical variables are dichotomised, with a value of 1 assigned to responses 1 and 2 (strongly agree or agree) and a value of 0 assigned to responses 3 and 4 (disagree or strongly disagree). Thus, for each question, we develop a binary variable that categorises respondents as either having a progressive or traditional reaction to each particular gender norms statement.

In consecutive waves, the same respondents were asked questions surrounding their willingness to vaccinate against the virus (in wave 5) and their trust in experts and the government response to the COVID-19 pandemic (in wave 6). For this analysis, we select questions that may influence an individual’s likelihood to vaccinate, starting with their level of concern about the pandemic or their fear of the virus itself. Furthermore, we identify individuals with a high predisposition for conspiratorial beliefs based on information from wave 6. Each variable included in this module is converted into a binary measure of agreement or disagreement, as outlined above for the social norms questions. We consider seven statements from the survey related to conspiratorial views, including “Secret organisations influence political decisions” or “I trust my intuition more than the so-called experts” (see the full list of statements in Figure 2). For each of them, the variable is converted into a binary measure of agreement or disagreement, similarly to the social norms questions above. Those who agreed or strongly agreed with all seven statements are classified as having conspiratorial views.

Due to sample attrition and after dropping respondents who did not answer one (or more) of the questions needed for our analysis, the sample reduces to 726 individuals (see table A1 in the Annex). Although each wave of the DIAGNOZA+ survey is carefully weighted to ensure population representativeness of the survey, these cross-sectional weights are only relevant to each independent wave of the survey. Therefore, for our sample, we develop frequency weights by sex and age using population data from Statistics Poland (Statistics Poland, 2021), which are utilised throughout the analysis. Given the low number of participants in the oldest age groups (those above 60 years old), we limit the sample to individuals aged between 21 and 60. Unfortunately, calibrating the weights according to additional characteristics such as education and municipal population is not feasible with a sample of this size. Clearly, the requirement of consistent consecutive participation in at least three waves of the survey has implications for its representativeness. For example, after the sample of respondents that participated in wave 6 is cut to include only those who also participated in waves 3, 4 and 5, we observe a bias in favour of conspiratorial views among the remaining observations, indicating that individuals who hold these views were more likely to continue their participation in the survey. For example, while 18.1% of the total cross-sectional sample of individuals in wave 6 hold conspiratorial views, the proportion is 23.4% in the sample we analyse (falling slightly to 23.2% when weights are applied). From this perspective, while indicative of existing correlations, the results ought to be treated with some caution.

Limiting the sample to respondents who answered all sets of questions across several rounds of the survey allows us to study vaccine scepticism and respondents’ susceptibility to conspiracy theories in relation to a number of personal characteristics. Furthermore, we consider the relationship between a respondent’s attitudes towards certain social norms (asked in waves 3 and 4), their individual response to COVID-19 (asked in wave 5), and their trust in the government’s response to the pandemic (asked in wave 6). We begin the analysis by assessing the relationship between respondents’ demographic characteristics and their opinions on gender roles, their propensity to hold conspiratorial beliefs, and their concern about the pandemic. This is followed by two models measuring respondents’ willingness to vaccinate. In the first of these models, demographic characteristics and traditional family values are used as explanatory variables, while in the second model conspiratorial views are included as well. Finally, we conclude with a summary of results and policy considerations.

Survey Results

Traditional Family Values in Poland

The respondents of the DIAGNOZA+ survey vary, on average, in the ‘traditionality’ of their attitudes towards gender and family depending on the selected indicator. The shares of answers to the three questions about gender norms are presented in Figure 1. The results demonstrate that progressive views on gender norms in Poland were more common in relation to the workplace than the home and family. For example, the statement to which most respondents were opposed was “When jobs are scarce, men have more right to a job than women”, with 37.2% of respondents disagreeing and 50.3% of respondents strongly disagreeing. On the other hand, slightly fewer respondents disagreed (50.5%) or strongly disagreed (34.8%) with “In general, fathers are not as well suited to look after their children as mothers”. Finally, respondents were most ‘traditional’ in their views in reaction to the statement “A pre-school child is likely to suffer if his or her mother works”, with 28% agreeing and 10% strongly agreeing. There is a natural correlation between these different views, and in our analysis, we examine the significance of different combinations of the three indicators. Given the relatively small sample, only the last indicator proved to be significantly related to our main outcome of interest and we use this one to represent the view on the ‘progressive-traditional’ spectrum

 Figure 1. Gender norms in the survey sample

Source: DIAGNOZA+ survey, waves 3 and 4. Note: Data weighted using weights generated from Statistics Poland’s data on population by sex and age. Sample limited to individuals aged 21-60. The statement “In general, fathers are as well suited to look after their children as mothers” from the questionnaire was adjusted in the graph for better readability.

Conspiratorial Views

In wave 6 of the DIAGNOZA+ survey respondents were asked seven different questions relating to trust in government, politicians, media, and the recommendations of experts. As shown in Figure 2, for five out of the seven statements, a majority of respondents agreed or strongly agreed that the government or media are dishonest, intentionally share misinformation, or have ulterior motives. Nearly three quarters of respondents agreed that “politicians and the media deliberately hide certain information”. This result supports data published by the OECD in 2020 showing that, out of the 38 member countries, Poland had the second-lowest trust in government, with only 27.3% of the population expressing confidence (OECD, 2022). However, the DIAGNOZA+ survey goes further to find that nearly half of respondents in our sample reported that they trust their own intuitions more than the experts during the pandemic, while the least widespread belief out of the seven was that “secret organisations influence political decisions”. Still, even this statement, which suggests deep-seeded nefarious behaviour behind the scenes of government, found 39.8% of respondents to be in agreement. Note that we aim to identify individuals who have a general propensity for conspiratorial thinking, rather than those who simply find some of the statements particularly compelling. To this end, we only categorise those respondents who agreed with all seven statements as having a high propensity for conspiratorial thinking, which was the case for 23.2% of our sample after reweighting.

Figure 2. Conspiratorial beliefs and trust in authority

Source: DIAGNOZA+ survey, wave 6. Note: Data weighted using weights generated from Statistics Poland’s data on population by sex and age. Sample limited to individuals aged 21-60.

Analysis

Table 1 presents regression results on the relationship between specific beliefs reported in the different waves of the survey and a number of individual characteristics. We show these results for three dependent variables: traditional family values, as defined by the opinion that a pre-school child is likely to suffer if his or her mother works; propensity for conspiratorial views, which identifies the respondents that agreed with all seven statements presented in Figure 2; and concern about the pandemic, a binary variable that identifies individuals who expressed great worry or fear about the pandemic. The results indicate that parents who live with their children are 10.1 p.p. more likely to hold traditional family values. After controlling for age, gender and education, living in a small town or village is associated with a 10.9 p.p higher probability of ascribing to more traditional gender norms, while individuals holding a tertiary degree are 18 p.p. less likely to agree that “a pre-school child is likely to suffer if his or her mother works” compared to those with primary education. Interestingly, neither age nor gender significantly correlates with family values, suggesting that the DIAGNOZA+ survey did not capture an intergenerational or gender-driven divide on these issues. This might relate to the online nature of the survey and the implied sample selection, in particular among older individuals.

 Table 1. Regression results on views and attitudes

Standard errors in parentheses. * p < 0.1, ** p < 0.05, *** p < 0.01. Note: Data weighted using weights generated from Statistics Poland’s data on population by sex and age. Sample limited to individuals aged 21-60. Estimates using the linear probability model.

The results presented in Table 1 also demonstrate a relationship between some demographic characteristics and the likelihood to hold conspiratorial views (as defined by expressing agreement to the seven related statements in wave 6). A number of characteristics strongly correlate with conspiratorial thinking: being a parent living with their children aged 0-17, and living in small cities, towns and villages. Each of these characteristics is associated with a higher probability of believing in secret organisations and mistrusting experts. A number of characteristics strongly correlate with conspiratorial thinking: holding such views are 9.3 p.p. more likely among parents living with their underaged children and 10 p.p. more likely among individuals living in smaller towns or villages compared to those living in cities of over 500 thousand inhabitants. Higher education is strongly negatively correlated with the likelihood of holding conspiratorial views – those with tertiary education are 14.5 p.p. less likely to have these views compared to individuals with primary education.

One simple explanation for the increased vaccination rates among certain demographic groups in Poland could be that some segments of the population are more worried about the virus, and thus choose to take greater precautions. The analysis presented in Table 1 demonstrates that people were increasingly likely to be concerned about the pandemic in higher age groups. When asked “To what extent are you concerned about the COVID-19 pandemic?”, the probability of expressing serious concern increases progressively with age. This is an intuitive result considering the strong relationship between age and the severity of COVID-19 symptoms and the associated risk of mortality (CDC, 2021).  Respondents aged between 31 and 40 were 10 p.p. more likely to report being very concerned or frightened than respondents between the age of 21 and 30, while in the age groups 41-50 (12.6 p.p.) and 51-60 (21.4 p.p.) the probability was even higher. There is also a weak but positive correlation (7.7 and 8.6 p.p.) between living in a city with a population of 10,000 to 500,000 inhabitants and expressing fear about the pandemic, as compared to respondents who lived in cities with a population of more than 500,000 people. The relationships between the remaining demographic characteristics and the probability of being seriously concerned about the pandemic are not statistically significant. Below, we use this data to examine the link between people’s beliefs and the likelihood of getting vaccinated.

Vaccine Scepticism, Demographic Characteristics and Conspiratorial Views

In light of the widespread scientific consensus on the safety and effectiveness of COVID-19 vaccines, low vaccination rates in Poland are difficult to explain. In this section, we analyse to which extent they may be driven by the underlying beliefs, on top of the socio-demographic characteristics. Overall, 54% of respondents in the selected sample from the DIAGNOZA+ survey planned to be or had already been vaccinated. Thus, the survey sample closely reflects the actual proportion of the population that was fully vaccinated in Poland as of January 2022. (ECDC, 2022). In Model A of Table 2, we present the relationship between the response to the question “Do you plan to get vaccinated against COVID-19 or are you already vaccinated?” and traditional family values, alongside the usual demographic characteristics. We find that those in the 51-60 age group were 14.5 p.p. more likely to plan to vaccinate than those aged between 21 and 30. This also reflects the higher level of concern about the virus expressed by those over the age of 50, as presented in Table 1, and the risk of serious illness associated with increasing age. However, the relationship between age and the probability of vaccination was much weaker than the relationship between age and the probability of expressing general concern about the pandemic, implying that concern does not translate directly into a willingness to vaccinate. We also find that tertiary education has a particularly strong effect, and respondents who have a university degree were much more likely (17.7 p.p.) to get vaccinated than those with less than secondary education.

Through this analysis we also discover several less intuitive relationships between individual characteristics and the propensity to vaccinate. We find that women are 11.5 p.p. less likely to plan to vaccinate against COVID-19 than men. Moreover, individuals living in a city with less than 500,000 inhabitants were much less likely to vaccinate, with the strongest correlation (-23.5 p.p.) observed for respondents living in medium-sized cities of 100,000 to 500,000 people. However, a strong relationship can also be seen for smaller cities of 10,000 to 100,000 inhabitants (-19.3 p.p.) and small towns and villages (-17.2 p.p.). Respondents’ expressions of traditional family values are also a strong predictor of their propensity to vaccinate. After controlling for gender, age, education and municipality size, those categorised as holding traditional views are 10.6 p.p. less likely to plan to vaccinate against COVID-19. Our findings demonstrate that while population density, education, age and gender, are all strong indicators of vaccine scepticism in Poland, so is the degree of traditionalism in people’s beliefs.

Table 2. Regression results on vaccination: probability of being vaccinated or planning to get vaccinated

Standard errors in parentheses. * p < 0.1, ** p < 0.05, *** p < 0.01. Note: Data weighted using weights generated from Statistics Poland’s data on population by sex and age. Sample limited to individuals aged 21-60. Estimates using the linear probability model.

A commonly cited explanatory factor for vaccine scepticism is the susceptibility to conspiratorial beliefs, as well as scepticism towards information disseminated by figures of authority (Hornsey et al., 2018). Thus, in Model B, we seek to identify a relationship between conspiratorial beliefs and scepticism towards the COVID-19 vaccine in Poland. When adding to our model a binary indicator for agreement with all seven of the conspiratorial statements included in the survey, we find that those who agreed across the board were 43.3 p.p. less likely to get vaccinated. Therefore, it seems that the propensity for conspiratorial thinking is a very strong correlate of willingness to vaccinate, and the characteristic most strongly associated with vaccine scepticism. The impact of the demographic factors goes in the same direction for both models, although the scale diminishes in Model B after controlling for conspiratorial views, reflecting the higher propensity of older individuals to hold such views. Furthermore, the effect of traditional family values is much weaker in Model B, suggesting a positive correlation between traditional family values and conspiratorial beliefs (Figure A1 in the Annex shows how values and views in the analysis views overlap with each other). This is in line with past research that ties traditional moral values and conservatism with conspiratorial beliefs, both before and during the COVID-19 pandemic (Pennycook et al., 2020; Romer and Jamieson, 2021).

One explanation for the strong relationship between conspiratorial beliefs and vaccine scepticism could be that respondents who do not trust the media and figures of authority believe that the dangers of the pandemic have been exaggerated and would thus not be concerned about its consequences. We account for this possibility in Model C by including the indicator for fear of the pandemic. We find that those who are very concerned or frightened are 21.1 p.p. more likely to vaccinate than those who are not. However, including this variable in the model has little effect on the estimates of the relationship between traditional gender views or conspiratorial thinking and the likelihood to vaccinate. Further research is needed to understand what is driving these relationships in this particular context. These findings demonstrate that while individuals that believe in conspiracies are the most susceptible to vaccine scepticism, other elements such as fear of the pandemic, education attainment, and where people live play an important role as well.

Conclusion

By January 2022 most European countries have reached a plateau in their vaccination rates, with free vaccines readily available since the summer months of 2021 to all those who are willing to take them. Not only have the high rates of hospital admissions among the non-vaccinated population proven the epidemiological models about the efficacy of vaccines in reducing hospitalisation and death to be true (a study in the United States showed a more than tenfold reduction in the risk of each measure; Scobie et al., 2021), but disparities between countries in the proportion of the population that is vaccinated have created a natural experiment that further substantiates this hypothesis. Poland, a country with a vaccination rate that is 15 p.p. lower than neighbouring Germany, had virtually the same number of cases per 100,000 people in the first two weeks of December, but almost threefold the number of deaths from COVID-19 (ECDC, 2021). Due to the burden COVID-19 related hospitalisations place on healthcare systems, the issues arising from the significant scale of vaccine scepticism are not only related to physical well-being, but also directly impact economic and fiscal stability.

Despite a fairly small sample size available for our analysis from the DIAGNOZA+ survey, a number of important correlations are identified in this study. We find that people living in cities and towns smaller than 500,000 people are less likely to vaccinate than those living in big cities. We show that women, those with less than secondary education, and young people are less likely to be vaccinated. Moreover, those believing that pre-school-aged children suffer when their mothers work are less likely to vaccinate compared to those with more progressive gender views. The most significant predictor of vaccine scepticism, however, is whether a respondent expressed low trust in authority and belief in the conspiracy theories presented in the survey, which was the case for 23.2% of the sample. These individuals are more than 40 p.p. less likely to express willingness to get vaccinated than the rest of the population. This suggests that the low rate of vaccination in Poland can, in part, be attributed to widespread distrust of government, the media, and scientific experts. Poland has already suffered the consequences of the high magnitude of anti-vaccine sentiments in the population, with the severity of the fourth wave of COVID-19 being one of the harshest in Europe (ECDC, 2021). If the government intends to prevent future outbreaks and protect the healthcare system and the economy, it must present a consistent, clear, and transparent message about the safety and efficiency of vaccines to minimise the misinformation that is driving vaccine scepticism among certain demographic groups.

References

Annex is available in the PDF version.

Disclaimer

This Policy Paper was prepared under the FROGEE project, with financial support from the Swedish International Development Cooperation Agency (Sida). FROGEE papers contribute to the discussion of inequalities in Central and Eastern Europe.  For more information, please visit www.freepolicybriefs.com. The views presented in the Policy Paper reflect the opinions of the authors and do not necessarily overlap with the position of the FREE Network or Sida.

Sergei Guriev: Spin Dictators, Information Wars, and the Conflict in Ukraine

Posted on April, 2022 | Videos

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In recent decades, a new generation of media-savvy authoritarian leaders has emerged. They have adapted their strategies to a digitally connected and information-driven world. These rulers, often called “Spin Dictators”, maintain control not through violence or fear but through careful manipulation of media narratives and public opinion.

The concept of Spin Dictators is crucial for understanding how modern autocrats sustain power while appearing democratic. In this discussion, Sergei Guriev, co-author of Spin Dictators: The Changing Face of Tyranny in the 21st Century, joins Maiting Zhuang, Assistant Professor at the Stockholm Institute of Transition Economics (SITE).

Sergei Guriev on Spin Dictators and Putin’s Shift to Fear Dictatorship

Sergei Guriev, Professor of Economics at Sciences Po, explains how modern autocrats differ from their 20th-century predecessors. Instead of relying solely on repression, Spin Dictators use propaganda, controlled media, and strategic disinformation to build legitimacy.

However, Guriev argues that Vladimir Putin’s transformation from a “Spin Dictator” into a “Fear Dictator” marks a turning point. As the Russia-Ukraine war continues, both repression and censorship have intensified. Consequently, the spin-based model of control is collapsing, giving way to classic fear-driven authoritarianism. This shift demonstrates how fragile image-based regimes can be once truth and credibility begin to erode.

Economic and Media Implications for Russia

During the conversation, Guriev analyzes how the war in Ukraine has transformed Russia’s economy and information environment.  The suppression of independent media has forced citizens to rely on state-controlled news outlets. As a result, the gap between perception and reality continues to widen. The shift from Spin Dictator to Fear Dictator shows the regime’s rising insecurity and declining legitimacy. Therefore, understanding this transition is essential for policymakers, journalists, and citizens seeking to grasp the new dynamics of modern authoritarianism.

About Sergei Guriev

Sergei Guriev is a Russian economist and Professor of Economics at Sciences Po. From 2016 to 2019, he served as Chief Economist at the European Bank for Reconstruction and Development (EBRD). Before that, he was the Rector of the New Economic School (NES) in Moscow, where he also held the Morgan Stanley Professorship in Economics.

In addition, Guriev is a co-founder of True Russia, an organization that collects donations for Ukrainian refugees and promotes freedom of speech and democratic values. He is also known for his outspoken criticism of the Russia-Ukraine war, making him one of the most prominent academic voices on authoritarianism and democracy today.

About Maiting Zhuang

Maiting Zhuang is an Assistant Professor at the Stockholm Institute of Transition Economics (SITE) and an Affiliated Researcher at the Mistra Center for Sustainable Markets. She received her PhD from the Paris School of Economics in 2020.

Her research focuses on Political Economy, Development Economics, and the Economics of Media. Moreover, her work sheds light on how information systems sustain or undermine authoritarian regimes, aligning closely with Guriev’s analysis of Spin Dictators.

Explore More on Sergei Guriev Spin Dictators

To learn more, watch the full discussion with Sergei Guriev and Maiting Zhuang. 

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.

Gender Gap Widens During COVID-19: The Case of Georgia

Posted on April 11, 2022 | Policy Papers

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Gender inequality has been a persistent (albeit steadily improving) problem for years. The COVID-induced crisis put women in a disproportionately disadvantaged position, jeopardizing decades of progress achieved towards equality between men and women. However, these effects of the pandemic were not universal across countries. This policy brief aims to evaluate the gender-specific effects of the COVID-19 crisis in Georgia, looking at labor market outcomes and entrepreneurial activities. As expected, the impact of the pandemic was not gender-neutral in this regard, being especially harmful for women. As the Georgian economy rebounds after the crisis, we show that the widened gender gaps are partially offset only in certain aspects. In order to countervail the disproportionate effects of the pandemic, targeted policy measures are needed to stimulate women’s economic activity.

Introduction

Past economic recessions, including the COVID-induced crisis, have never been gender-neutral (e.g., Liu et al., 2021; Ahmed et al., 2020). While economic crises are usually associated with disproportionate negative impacts on labor market outcomes of men compared to women, the impact of the crisis is, debatably, more severe for women-led businesses as compared to their male-led counterparts (e.g., Torres, 2021; Nordman and Vaillant, 2014; Grimm et al.,2012).

The disproportionate labor market outcomes of economic crises are claimed to be due to the fact that men are predominantly employed in cyclical sectors such as construction or manufacturing; therefore, women have to increase their employment during economic downturns as a means of within-family insurance (Alon et al., 2021). The recent COVID-induced crisis, due to its unique nature, turns out to be an exception in this regard. The pandemic and the subsequently-adopted measures primarily adversely affected contact-intensive sectors (where the worker is required to perform tasks in close physical proximity to other people) that predominantly employ women (Mongey, Pilossoph, and Weinberg 2020; Albanesi and Kim 2021). Moreover, large-scale lockdowns increased the burden of unpaid care, which is generally shouldered by women disproportionately (Babych, 2021), leaving less available time for them to work. It should be noted that gender gaps in the labor market were a persistent (albeit steadily improving) problem even before the pandemic (Eurofound, 2016). Therefore, COVID-19 poses a threat jeopardizing the progress achieved in this direction and worsening gender inequality.

COVID-19 brought unprecedented adverse consequences for not only employed workers but entrepreneurs as well. Increased unpaid care and housework pose additional burdens on female top managers, making women-led businesses more vulnerable to the crisis.

The unequal gender implications of the COVID-19 crisis have been widely debated. Growing evidence (Albanesi and Kim 2021; Torres et al., 2021; Alon et al., 2020; Caselli et al., 2020, Fabrizio et al., 2021) attests that, on average, the effects of the pandemic put women in a disproportionately disadvantaged economic position. However, the extent of this effect varies across countries and is absent in some cases (Campa et al., 2021; Torres et al., 2021).

This policy brief aims to examine the gender-specific nature of the COVID-19 crisis in Georgia. With this aim, we study the differential effects of the pandemic on the economic activity of women in terms of labor market outcomes and entrepreneurship. First, we contrast labor market outcomes for Georgian men and women during the COVID-19 crisis. Secondly, we try to assess the magnitude of the disproportionate impact on women-led businesses compared to men-led ones. We calculate gender gaps across different measures of firm-level performance, such as sales revenue, liquidity and owners’ expectations of falling into arrears. Finally, we examine whether there are any signs of recovery yet in 2021 and draw policymakers’ attention to emerging issues.

Labor market highlights

The adverse effects of the pandemic on female employment were conditioned by both supply and demand-side factors. The latter include decreased economic activity, mainly in service-related sectors (hospitality, personal care, etc.) that are dominated by women (Eurofound, 2021). In Georgia, as of 2019, women constituted the majority of workers in sectors such as hospitality (56%), education (83%) and activities of households as employers of domestic personnel (99%) that experienced some of the sharpest declines in employment during 2020. Moreover, women are more likely to be employed in part-time and temporary jobs (14% of women, as opposed to 11% of men, were employed part-time as of 2019, Geostat Labor Force Survey 2019), leaving them more vulnerable during times of crisis.  Supply-side factors were triggered by the unequal burden of unpaid work generally undertaken by women in Georgia, mainly due to cultural reasons as well as the higher opportunity cost of time for men (women in Georgia on average earned 64% of men’s salaries in 2019, Geostat). School and daycare closures and decreased childcare involvement of grandparents increased household responsibilities for women. A UN Women survey-based study showed that in the midst of the pandemic in Georgia, around 42% of women reported spending more time on at least one extra domestic task as opposed to 35% of men (UN Women, 2020). This would naturally lead to more women than men leaving the labor force. Indeed, looking at the data, we see that in one year after the COVID-19 outbreak, women contributed to 98% (48,000 individuals) of the decrease in the Georgian labor force in 2020 (Geostat). Moreover, a close look at the percentage point difference between the labor force participation rates of Georgian men and women reveals a notable growth in the gender gap starting from 2020. The same can be said about employment rates (Figure 2).

Figure 1. Difference between male and female labor force participation and employment rates

Source: Geostat

To further elaborate on the tendencies in employment, Bluedorn et al. (2021) look at the differences between employment rate changes among male and female workers in 38 advanced and emerging economies. Replicating the exercise with the Georgian data, we can observe results similar to those obtained in Bluedorn et al. (2021). In Figure 2, we see differences between female and male employment rate changes. For each gender group, the latter is computed as an absolute difference between the quarterly employment rate and its annual average level from the previous year. Once the difference takes a negative value, implying that the drop in employment was sharper for women, one could say that we observe a “She-cession” phenomenon as termed by Bluedorn et al. (2021). As we can see, in 2020, the employment rate of women fell more than that of men. This widened gender gap was partially offset in 2021.

Figure 2. Employment rate changes by gender (deviation from the previous year average)

Source: Geostat

Remote work: a burden or a blessing for women?

One important aspect of the COVID-19 crisis was a wide-scale switch to remote work. This development had some gender-specific implications as well. The evidence shows that the prevalence of the switch to remote work was higher among women compared to men (41% vs. 37%) in the EU (Sostero et al., 2020). This tendency also holds in Georgia, where 11% of women as opposed to only 3% of men reported usually working from home in the last three quarters of 2020 (Julakidze and Kardava, 2021). It is not clear whether this tendency can be explained by gender-related occupational differences of male and female jobs (Dingel and Neiman, 2020; Boeri and Paccagnella, 2020; Sostero et al., 2020) or, rather, different personal choices of men and women working in the same occupations. Interestingly, across different countries, we observe a positive correlation between gender inequality (as measured by the Gender Inequality Index) and gender differences in the switch to remote work (measured by the ratio of the share of remote workers among female and male workers). To account for this observation, we can stipulate that gender differences in switching to remote work might be explained by differing gender roles in households, and in society at large, across countries (as proxied by the gender inequality index).

Figure 3. Relative prevalence of remote work among female and male workers

Source: Eurostat, Statistics Sweden, Statista, Geostat, UNDP Human Development Reports

Regardless of the reason, remote work is likely to have some important implications on gender roles. However, the directionality of these implications is not straightforward. On the one hand, remote work offers flexibility for women to juggle household and work responsibilities. On the other hand, since women compared to men have been shown to be more likely to use the time saved from commuting to engage in housework, the switch to remote work might increase their “total responsibility burden” (Ransome, 2007) and lead to time poverty (Peters et al., 2004; Hilbrecht, Shaw, Johnson and Andrey, 2008). Indeed, according to CARE International South Caucasus (2020), around 48% of female survey participants in Georgia placed additional effort into housework and childcare in the midst of the pandemic. Moreover, as women are more likely and expected to use remote working as a means of balancing work-life responsibilities (Moran and Koslowski, 2019) their bargaining power at work decreases relative to their male counterparts. This could have some adverse career implications for female workers. Recent enforced lockdowns might pose an opportunity in this regard, as once-remote work becomes something close to a “new normal” employers will likely decrease the penalty for remote workers.

Spotlight on women-led business performance during the COVID-19 crisis

Calamities brought by the pandemic worsened financial outcomes for enterprises, affecting their ability to operate and have stable financial income. Similar to other crises, the pandemic has not been gender-neutral (Liu et al., 2021; Ahmed et al., 2020) in terms of the effect on business performance.

Gaps in the performance of women- and men-led businesses have been prevalent beyond any economic crisis as well, and have been documented in a number of studies (e.g., Amin, 2011; Bardasi et al., 2011), registering gender differences in sales and productivity in favor of men-owned enterprises. As suggested by Campos et al. (2019), these performance gaps may be due to lower levels of capital owned by women as opposed to men, a smaller number of employees hired by women-owned firms, as well as different practices in using advanced business tools and innovation. In addition, the existence of these gender gaps has also been explained as stemming from the prevailing social norms that assign certain obligations to women. Nordman and Vaillant (2014) and Grimm et al. (2012) suggest that unpaid housework and family-care led to a constrained number of hours women could afford to spend on the work and management of firms, negatively affecting their productivity.

According to the Women Entrepreneurship Report (Global Entrepreneurship Monitor (GEM), 2021), the pandemic imposed an additional burden in terms of increasing family-care duties on women. The GEM survey (2021) conducted in 43 countries worldwide shows that the likelihood of enterprise closure is 20% higher for women-led compared to men-led businesses. The higher likelihood of closure reflects the adverse factors that may have hindered the operating capacity of firms. For example, a survey conducted by UNIDO (2020) suggests that, as a result of the Coronavirus crisis, African and Middle Eastern women-led firms experienced diminished revenues. In addition, 41% of women-led firms were short of cash flow and unable to fulfill financial obligations, while only 32% of male entrepreneurs were exposed to the same problem.

More rigorous analysis on this matter has been conducted by Torres et al. (2021) and Liu et al. (2021). They try to examine the asymmetric effects of the COVID-19 crisis on women-led firms in several dimensions utilizing new datasets from the World Bank: COVID-19 Follow-up Enterprise Survey and the World Bank Business Pulse Survey. The findings of Liu et al. (2021) for 24 countries from Central Europe & Central Asia and Sub-Saharan Africa confirm that during the pandemic women-led businesses are subject to a higher likelihood of closure than men-led businesses and that female top managers are more pessimistic about the future than their male counterparts. Finance and labor factors were mentioned to be the major contributors to these disadvantages; for example, women-led businesses were found to be less likely to receive bank loans compared to men-led businesses. Lastly, the disadvantages experienced by women-led firms were claimed to widen in highly gender-unequal economies and developing countries. Torres et al. (2021) study the impact of the early phase of the COVID-crisis on gender gaps in firm performance for 49 mostly low- and middle-income countries. The results demonstrate that women-led businesses experienced a greater reduction in sales and lower liquidity compared to their male counterparts, which has been reflected in a higher likelihood for women-led companies in several sectors to fall into arrears. On the other hand, as a response to changing circumstances, women-led firms were found to be more likely to increase the utilization of online platforms and make product innovations. Nevertheless, they struggled to obtain any form of public support.

The impact of the pandemic on firms was not gender-neutral in Georgia

The pandemic-induced fragile environment had an adverse impact on entrepreneurs in Georgia– the effects of the shock were significantly more severe for female entrepreneurs than for their male counterparts. In order to assess the gender differences in the impact of the pandemic on firms, we utilize firm-level data on Georgian enterprises from the second round of the World Bank COVID-19 Follow-up Enterprise Survey, conducted in October – November 2020.

Following the methodology as presented in Torres et al. (2021), we assess whether there are differences in the magnitude of reduction in sales revenue (self-reported percentage change in sales revenue one month before the interview as compared to the same period of 2019) and available liquidity for women- and men-led businesses, and whether falling into arrears in any outstanding liabilities is more expected by female top managers (in the next six months from the interview).

Depending on the type of dependent variable, continuous or binary, either Ordinary Least Squares (OLS) or Probit models are estimated, respectively. Along with the gender of the top manager of firms, we also control for sector and firm size. The Georgian database contains a total of 701 enterprises (581 SMEs and 120 micro-businesses).

Table 1. Magnitude of the disproportionate impact of COVID-19 on women-led businesses in Georgia, October-November 2020

Source: The World Bank COVID-19 Follow-up Enterprise Survey, Second Round. Author’s calculations. ***Significant at the 1% significance level; ** significant at the 5% significance level.

Table 1 presents the results of the regression analysis of gender differences among Georgian enterprises in terms of the impact of the pandemic. As observed, women-led businesses reported larger declines in sales, revenues, and liquidity. The predicted drop in sales was 18 percentage points (pp) higher for enterprises with a female top manager than for men-led firms. The larger drop in sales should have been reflected in the reduced cash flow availability and in hardship to cover operating costs. Indeed, as the results demonstrate, women-led enterprises are on average 12.9 pp more likely to have reduced availability of liquidity. This may explain women’s negative future expectations. Moreover, the average predicted probability of expecting to fall into arrears is 11.3 pp higher for women-led firms in Georgia as compared to men-led businesses.

The unequal effect of the COVID-19 crisis on women-led businesses might have been fueled by the disproportionate burden of unpaid care and housework shouldered by women in Georgia, leaving less time available for work and managing enterprises. On the other hand, as Torres et al. (2021) claim, female business owners tend to employ more female workers (the social group more exposed to the unequal burden of the pandemic) than male owners. This, in turn, could further hamper the productivity of women-led businesses and increase their vulnerability to economic shocks.

On the road to recovery

2021 has been characterized by a rather rapid recovery for the Georgian economy, as evidenced by the 10.6% (preliminary estimate) annual growth rate of real GDP. Signs of recovery can also be observed in the labor market – the labor force increased by 4% (YoY) in the 3rd quarter of 2021, while employment was also characterized by a growing trend (1%, YoY).

Along the lines of economic recovery, the gender gap in the labor market also seems to be narrowing. For instance, the steadily growing gap between male and female labor force participation rates seems to stagnate over 2021 (Figure 1). Moreover, as is illustrated in Figure 2 above, the difference between women’s and men’s employment rate changes is positive in 2021, meaning that the employment rate was increasing more (or decreasing less) for women. If this tendency persists, we might stipulate that the disproportionate effects of the COVID-19 crisis on female employment are on the way to recovery.

To examine whether Georgian firms have experienced concurrent movement in their performance along with the economic recovery, we utilize third-round data (from September 2021) of the World Bank COVID-19 Follow-up Enterprise Survey and scrutinize whether the gender differences have narrowed since the previous round of the survey (Table 2).

Table 2. Magnitude of the disproportionate impact of COVID-19 on women-led businesses in Georgia, September 2021.

Source: The World Bank COVID-19 Follow-up Enterprise Survey, Third Round. Author’s calculations. ***Significant at the 1% significance level.

Although the third-round survey data suggests that the predicted percentage drop in sales sharply declined for both men- and women-led businesses, the findings are not statistically significant and therefore cannot claim any signs of recovery in the gender gap in this respect. No signs of recovery are observed in terms of average predicted probability of reduced liquidity of firms and expectations of falling into arrears, either. Gender gaps in these two indicators still persist and are as strong in magnitude as in the second-round survey estimates (from October-November 2020). It seems that despite the economic rebound, not all traces of the pandemic crisis for firms have been eradicated from a gender perspective.

Conclusion

The pandemic came with high economic costs. It hit women disproportionately harder, adversely affecting their employment and entrepreneurial prospects. The unequal burden of the COVID-crisis shouldered by women in Georgia could be one of the reasons for the massive labor force dropouts among female workers and poor performance of women-led businesses. Georgian enterprises with female owners experienced a significantly larger decline in sales compared to their male-owned counterparts, consequently suffering from a shortage of cash flow and fears of falling into arrears.

Despite the great rebound in growth after the initial COVID-19 shock, the pandemic-associated increase in the gender gap seems to have been only partially offset in Georgia. In particular, there is a larger positive upsurge in women’s employment rate, as well as a diminishing difference between male and female labor force participation and employment rates. Following the ongoing recovery in sales revenue of Georgian enterprises (though the predicted gender difference was statistically insignificant), the gender gap in sales is shrinking too. But, in spite of the economic rebound, differences in available liquidity and expectations of falling into arrears have not yet been eradicated, indicating that the adverse influence of the pandemic on women still persists. It leaves female entrepreneurs a still more vulnerable group, which could be of special interest to policymakers to ease their liquidity problems.

Policies should also be directed towards encouraging women to become more economically active. In this regard, remote work seems to pose an opportunity if coupled with affordable childcare support policies.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.