Author: Cecilia Smitt Meyer

Rebuilding Ukraine: The Gender Dimension of the Reconstruction Process

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The post-war reconstruction of Ukraine will have to comprehensively address a number of objectives to set the country on a path of stable, sustainable and inclusive growth. In this Policy Paper we argue that the principles of “building-back better” need to take the gender dimension under consideration. While the war has exposed women and men to different risks and challenges, various types of gender inequality were also pervading the Ukrainian society prior to it. Gender responsiveness in the preparation, design and execution of reconstruction programs is essential to ensure fair and effective allocation of the coming massive inflow of resources in the reconstruction effort. We argue that the principles and implementation mechanisms developed under the gender responsive budgeting (GRB) heading are suitable to apply in the process. We also document that the principles of GRB have in recent years become well established in Ukrainian public finance management and point out areas where the application of a GRB approach will be of particular importance.

Introduction

In August 2022, in the midst of the full-scale Russian invasion, the Ukrainian government adopted the State Strategy for ensuring equal rights and opportunities for women and men for the period until 2030 and approval of the operational plan for its implementation for 2022-2024 (Cabinet of Ministers of Ukraine, 2022), reaffirming its commitment to promote gender equality in Ukraine with a focus on empowering women and eliminating gender-based discrimination in all areas of life. The Strategy follows a number of earlier legislative initiatives that had placed gender equality at the center of Ukrainian public policy and included a comprehensive approach to the design of fiscal policy at the central and local government level, adopting the principles of gender responsive budgeting (GRB). Given substantial gender gaps in numerous areas of life in the Ukrainian society these principles will have to be considered in the future reconstruction process to address such disparities. Following the overall guidance presented by the authors of the CEPR Report published in late 2022, titled “Rebuilding Ukraine: Principles and policies” (Gorodnichenko et al., 2022), this Policy Paper examines some key dimensions of the future reconstruction of Ukraine from the perspective of gender equality with a focus on consistent and effective adoption of the principles of GRB.

Gorodnichenko et al. (2022) noted the critical importance of thinking already today about how Ukraine will rebuild after the war is over – “advanced planning and preparations now will save lives and increase chances of success (…) these steps will give hope to millions of Ukrainians that after the horrors of the war there is light at the end of the tunnel”. We argue, that if the reconstruction is to result in stable, sustainable development and bring tangible benefits to all Ukrainians, the principles of “building-back better” need to take the gender dimension under consideration. This is important for efficiency as well as equality reasons. Such an approach is fully consistent with the 2022 State Strategy which recognizes that gender equality is not only a human right but also a driver of economic growth and social development. The Strategy also provides a framework for mainstreaming gender into government policies and programs, including the budget, and recognizes the importance of gender budgeting as a tool for promoting gender equality and ensuring that public resources are allocated in a fair and equitable manner. Different forms of gender inequality permeated Ukrainian society before the war: while women were more educated than men, they were less likely to participate in the labor force, were severely under-represented in senior positions in business and politics as well as in fast-developing sectors such as information and communication technology, were earning lower wages, and were more likely to be victims of gender-based violence (see, e.g. World Economic Forum, 2021). The war has also exposed women and men to different risks and challenges (see, e.g., Berlin Perrotta and Campa, 2022). Gender responsiveness in the preparation, design and execution of the reconstruction programs is crucial to ensure fair and effective allocation of the vast amount of resources that will be mobilized through the reconstruction effort, providing a unique opportunity to address pre-war and war-related gender inequalities. We argue that the principles and implementation mechanisms developed under the heading of gender responsive budgeting are suitable tools to apply in the process. There are numerous examples from various post-disaster reconstruction experiences showing how sensitivity along the gender dimension can determine the success or failure of specific initiatives, and how thinking in advance along gender equality lines can help address the change from an ineffective and unfair status quo, to successfully “build-back better” (see Box 1).

The dimensions of post-war reconstruction of Ukraine covered in Gorodnichenko et al. (2022) range from necessary changes in governance, through reforms in the business and finance environment, energy and transportation infrastructure, as well as the labor market, the education and the healthcare system, to a discussion of the structure most efficient to deliver international aid. The Report offers an invaluable blueprint for peace-time reconstruction and development of Ukraine and constitutes a crucial reference point for the discussion about the efficient use of resources necessary to ensure rapid and sustainable development of the country. Below we build on its main principles, examine them through a gender lens and apply a gender responsive budgeting approach to highlight the areas where it can be used at different stages of the reconstruction process.

In what follows we draw on the growing literature in the fields, among others, of political economy, development, education and labor economics, that examines the importance of gender diversity and identifies implications of gender inequalities for socio-economic outcomes at the micro and the macro level. On the basis of this literature, we point out the dimensions of the reconstruction process where a gender responsive approach can be particularly beneficial, and specify the stages of the process where the principles of gender responsive budgeting can be effectively applied to ensure efficient and fair distribution of recovery resources. The paper begins with a brief introduction to gender budgeting (Section 2), followed by three sections focusing on key categories of the reconstruction. First, in Section 3, we discuss how a gender responsive approach can shape governance reforms in the post-war period. In Section 4 we examine how gender sensitivity combined with the principles of GRB can influence the allocation of recovery funds in the process of physical rebuilding after the war, as well as the design of the physical environment. Finally, Section 5 highlights the crucial role of human capital in post-war development and points out a number of areas where reconstruction policies might have to be carefully drafted, taking into consideration the specific needs and requirements of women and men. We stress throughout that the concept of gender budgeting and gender responsiveness has been exercised in Ukraine for some time and that it is well rooted in Ukrainian public policy making. These principles should thus come naturally to representatives of key institutions in the discussion of plans for the country’s reconstruction and their execution.

2. Applying Gender Responsive Budgeting Principles to the Process of Post-war Reconstruction

At the heart of gender responsive budgeting lies the recognition of the potential of financial and fiscal policies to influence gender disparities. Gender budgeting integrates “a clear gender perspective within the overall context of the budgetary process through special processes and analytical tools, with a view to promoting gender-responsive policies” (Downes et al. 2017). It is aimed at ensuring that fiscal policies and public financial management practices and tools are formulated and implemented with a view to promote and achieve gender equality objectives, and that adequate resources for achieving them are allocated (IMF, 2017). For GRB to be effective, gender considerations ought to be included in all the stages of the budget cycle, including:

  1. the setting of fiscal policy goals and targets
  2. the preparation of the annual budget and its approval by the legislature
  3. the control and execution of the approved budget
  4. the collection of revenues, the preparation of accounts, and financial reports
  5. the independent oversight and audit of the budget

At each stage of the process, different tools have been developed to ensure that discussion on the gender impact of a specific fiscal policy will constitute an integral part of budget decision-making, execution and reporting. These tools include documents ensuring that spending ministries and agencies are fully briefed on the legal and administrative procedures to be followed in implementing gender responsive budgeting as well as on the requirements to include gender-relevant indicators in budget requests, to provide data disaggregated by sex, or to request specific budgetary allocations for gender-related programs or projects (Budlender, 2015). Moreover, gender budget statements can be published with the budget document as strategic tools to implement gender-responsive policies by allocating adequate resources to reach strategic goals and measuring impact and results. Gender budgeting also includes requirements for gender-impact assessment of the potential direct and indirect effect of policy proposals on gender equality and more broadly on different groups in the society. The regulations may require such assessments to be made prior to implementation (ex-ante assessment) as well as after the roll out of the policies (ex-post evaluation).

The principles of GRB originated in the 1980s in the Australian government in the form of the so-called ‘Women’s Statement’. The principles were applied more broadly in transition and developing countries with support of UN Women and numerous NGOs and research institutions. In recent years, mainly as a result of recognition of the effectiveness of GRB from international financial institutions, such as the IMF, the World Bank and the OECD, the approach has been more firmly integrated with other existing budget tools. It has thus become much more common as a standard technical budget instrument in numerous developed and developing countries (For more details on the development of GRB theory and practice see for example: Budlender et al. 2002; O’Hagan and Klatzer 2018, and Kolovich 2018). Currently over ninety countries around the world apply some form of GRB. While in most of them its use has not been systematized and fully integrated in the overall budget process, countries such as Australia, Austria, Canada and the Spanish province of Andalusia apply GRB consistently across all levels of government and systematically monitor its execution. Ukraine is also among the countries that in recent years have made rapid progress towards comprehensive integration of GRB in its public policy (see Box 2).

The Ukrainian government firmly upheld the principles of GRB after the Russian invasion in February 2022, at a time when one might think that gender equality considerations would lose priority in the management of public finances. Throughout the war the Ministry of Finance has continued to ask line ministries to provide gender responsive budget requests, and fiscal policy has been monitored to ensure informed policies with regard to the distribution of the limited crisis-budget funds among different groups in society. These policies together with the State Strategy for ensuring equal rights and opportunities for women and men for the period until 2030 and approval of the operational plan for its implementation for 2022-2024 (Cabinet of Ministers of Ukraine, 2022), adopted in August 2022, reaffirm the Ukrainian government’s commitment to gender responsive policy making and lay the foundations for the application of such an approach during the post-war recovery process. Effective implementation of GRB principles requires specific knowledge and expertise, and the lack of which has often been a key challenge in meaningful integration of gender analysis in financial processes and documents. Competence in finance among civil servants in line ministries and the Ministry of Finance needs to be combined with gender expertise in sector budget analysis. Development of the combination of these competencies in Ukraine in recent years bodes well for integrating the GRB principles in the process of recovery and reconstruction.

At different stages of the reconstruction process the needs of various social groups along the gender dimension as well as others such as age, disability or religion, ought to be taken into account. To ensure fair and effective use of recovery funds the process should consider the following principles:

  • Participation: consultation with different population groups by gender, age, disability, profession, and other characteristics should enable assessment of the priority objectives for reconstruction in specific localities.
  • Equity: there is always a risk of neglecting the needs of different categories of people (e.g. people with disabilities) while focusing on the needs of the majority of the population.
  • Addressability: it is important to realize that a reconstruction program aimed at “everyone” risks significant misallocation of funds, reaching “no one”. A careful approach needs to consider different economic, cultural, recreational, educational and service needs of well-specified groups of individuals.

The planning and execution of the reconstruction process could follow the lines of intersectional gender budgeting analysis which focuses on the analysis of how different budget measures impact different groups of citizens – women and men – taking into account their disability status, age, place of residence and other variables. Taking as an example a foot bridge reconstruction, a gender responsive analysis would enable information on the citizens in the area, their needs, and their use of the infrastructure. The reconstructed bridge should benefit pedestrians, often women who might sell their products at the marketplace, or whose access to various services requires to cross the river. The analysis would also consider employment levels among women in the reconstruction of the bridge, etc. Considering the example of a school reconstruction, the process needs to consider if there are children in the area and/or whether they will return to that area with their families; whether there is/will be sufficient access to transportation and whether – in case the school is not reconstructed – the children can conduct their education in other schools in the area. Reconstructed educational institutions should consider gender-sensitive infrastructure and account for design of facilities, such as ramps, to address the needs of individuals with disabilities.

The Ukrainian government is strongly committed to supporting gender equality trough, among other means, gender mainstreaming processes with well-established legal frameworks for gender budgeting. Reconstruction efforts shall acknowledge and use the existing analytical tools in Ukraine to ensure that donor funds, projects and initiatives achieve their objective of sustainable and equitable development. Effective and fair distribution of the reconstruction funds will require that substantial care is paid to the analysis of the beneficiaries at the stages of planning and during reconstruction.

3. The Gender Perspective on Governance in Post-war Reconstruction

The institutional arrangements adopted both at the national level in Ukraine and at the international level for the administration and distribution of reconstruction funds will be of crucial importance to the success of recovery efforts and their translation into rapid and sustainable development of the country. In this Section we take the gender perspective on these two dimensions of governance. First, we argue that, at the national level, improvements could be made in the Ukrainian electoral system to extend women’s access to elected political positions in order to increase women’s influence in the overall process of policy-making. Drawing on international evidence we argue that this would not only further ensure support for the application of the gender budgeting approach, but it would also help selecting more competent and non-corruptible politicians. Second, we build on the proposal in Mylovanov and Roland (2022) to create an EU-affiliated agency that would manage the funds from multilateral donors (the “Ukraine Reconstruction and European Integration Agency” – UREIA) and examine how the GRB principles should be applied to efficiently integrate them with other dimensions of such an agency’s activities.

3.1 Increasing Women’s Representation in Ukrainian Political Institutions

In international comparisons, Ukraine lags behind in terms of women’s representation in politics, with gender gaps persisting in national as well as local institutions – in spite of some recent progress. It is likely that a large presence of women in political institutions would help addressing concerns regarding the effective implementation of the gender budgeting principles.  Local and central politicians could promote ex-post evaluations of local and national projects to verify that the intended gender-breakdown of beneficiaries were reached, and they could consider and implement corrective measures when unintended balances were found. In this respect we note, once again, that key decision-makers in Ukraine have shown strong commitment to the principles of gender-budgeting, by supporting and prioritizing its implementation – even during the dramatic circumstances of the Russian invasion (see Box 2). However, the commitment to gender-budgeting among policy-makers in Ukraine would likely become even stronger with a larger presence of women among them. The gender composition of political institutions has been shown to affect the allocation of public funds. For example, Chattopadhyay and Duflo (2004) find that female village chiefs in India tend to spend more money in budgetary areas that appear to be especially important for female villagers. Similarly, an analysis of the bills proposed by French legislators shows that women tend to work more on so called “women’s issues” (Lippmann, 2022). We would therefore expect female politicians to be more likely to support an effective implementation of gender-budgeting principles. Moreover, we expect project proposals crafted by more gender equal groups to be more representative of both women and men’s needs and priorities, which in turns should make the reconstruction process more balanced across different areas and allow it to address numerous inefficiencies of the pre-war status quo (see Box 1).

It is also worth noting that some literature in economics and political science documents that, as more women are elected to political institutions, the average “quality” of elected politicians tends to increase (Besley et al., 2020; Baltrunaite et al., 2018). Moreover, female policy-makers are less likely to engage in corruption and patronage (Brollo and Troiano, 2018; Dollar et al., 2001; Swamy et al., 2001), a dimension which will certainly be closely monitored at an international level, and one which is key in ensuring international public support for the reconstruction.  Policies that increase women’s representation in politics could thus also help improve the quality of democratic institutions, a development that is of utmost importance in the face of Ukraine’s ambition to join the EU. While the existing empirical evidence does not unanimously link women’s representation in politics to more women-friendly budgetary expenditures or better institutions, it is worth noting that there is also no evidence of any major drawback from policies that help women accessing political institutions. Increasing women’s representation in Ukrainian political institutions would also be in line with the argument that bringing a critical mass of new people in politics will help counteracting “oligarchizing” tendencies (Mylovanov and Roland, 2022) in the development of Ukrainian democracy. Numerous options are available in terms of changes in the political ‘rules of the game’ to help address the current underrepresentation of women in Ukrainian political institutions. In Box 3 we list a few of these options.

3.2 Gender Budgeting in the Work of UREIA

Gender-budgeting in the reconstruction process requires an ex-ante gender-analysis of the different projects being financed, which relies on the availability of sex-disaggregated data and specialized skills. Given that gender-budgeting has been part of Ukraine public finance system for a number of years, there is likely a good supply of trained personnel who can work together with international experts right from the beginning of the reconstruction.  Conducting the ex-ante work of gender assessment within the reconstruction agency should speed up the process that we envision, as the tasks involved will be routinely sourced to the same teams of skilled individuals who will analyze different projects through the gender-budgeting lens. The agency should then also be in charge of a centralized evaluation of the various gender-analysis results. This work of overview will provide a comprehensive picture of who is reached by the entire pool of available reconstruction funds, thus allowing to distinguish project-specific gender differences – which can be justified by specific needs being targeted at project-level – from a systematic bias toward one of the genders in the overall reconstruction process. A clear picture of who are the beneficiaries of specific reconstruction initiatives, including statistics disaggregated by gender and potentially by other characteristics, may play a key role in reassuring the Ukrainian society that the recovery funds are used to benefit a broad spectrum of the population, as well as in legitimizing the use of these funds in the eyes of the international donor community.

The conclusions of the international literature on the implications of women’s representation in political institutions for the scope of realized public initiatives mentioned in Section 3.1, pertain also to the functioning of the UREIA. The very design and composition of the agency’s staff ought to ensure gender diversity in its ranks at all levels of seniority to safeguard both the highest quality of the work being carried out by UREIA, as well as the appropriate scope of projects undertaken by the agency, most preferably supported by the principles of GRB. Recent empirical studies indicate that the personal traits of public procurement actors, such as their abilities or competencies, may play a key role in influencing procurement practices and outcomes (see, e.g., Best, Hjort and Szakonyi, 2022 or Decarolis et al., 2020), and gender-based variations in personal characteristics such as risk aversion, ethical values, and others have been demonstrated to be significant, including in the context of corruption (see a review in Chaudhuri, 2012).

4. Post-war Reconstruction: the Gender Perspective on Rebuilding the Physical Environment

The physical environment provides the background for the functioning of societies and at the same time, through its physical durability, imposes a long-lasting legacy that may determine the dynamics of social processes well beyond the time of construction. It shapes the organization of cities, the location and efficiency of public infrastructure, as well as the transport networks and it is also an influential precondition and determinant of behavior and outcomes. There is plenty of examples of how the physical environment affects economic outcomes, both at the individual and societal level. The presence of large infrastructures such as ports or highways determined the process of agglomeration (Ganapati, 2021; Faber, 2014), while paved roads and irrigation canals affect local development and structural transformation of rural areas (Aggarwal, 2018; Asher et al., 2022). Availability of urban green spaces has implications for health outcomes and violence (Kondo et al., 2018) and the safety of commuting routes affects girls’ college choices (Borker, 2021). Moreover, elements of the built environment may also affect social norms (Josa and Aguado, 2019; Baum and Benshaul-Tolonen, 2021).

The post-war reconstruction of the physical environment will shape the structure of Ukrainian cities and villages for decades to come, and hence the process ought to consider very broad aspects of influence of the built environment, with a clear focus on the identity of its users and beneficiaries. We firmly believe that the application of the principles of GRB will facilitate effective use of recovery resources and at the same time help address the inefficiencies of the pre-war status quo to create an environment which fairly takes into consideration the interests of both men and women. With respect to the physical environment in particular, obvious path dependencies limit swift changes to benefit women and other marginalized groups (Hensley, Mateo-Babiano, and Minnery 2014) and from this perspective the post-war recovery process can be thought of as a unique opportunity to address a number of imbalances.

4.1 Gender Mainstreaming in Urban Planning

It has been pointed out that gender mainstreaming in urban planning remains inadequate, which has been linked to the gender bias in the planning industry, both in terms of representation – who plans the cities affects how the cities are planned (Beall, 1996) – and the dominant culture (Sahama et al., 2012). It seems intuitive that a planning approach which takes into account how beneficiaries of the design are disaggregated by gender, and how the design affects the functioning of different groups, would result in an environment much more suited to the needs of these groups. The design should take into consideration different preferences with regard to employment, leisure, housing, open spaces, transportation, and the environment. Gender is relevant across all these issues in urban planning. Including more women in planning and decision-making might be the easiest way to ensure that such perspective is accounted for.

As we argue in Section 5, the effective use of Ukraine’s human capital will be essential for the success of its recovery process and further development. The built environment has important consequences in this realm and so, when rethinking cities, questions such as zoning, connectivity and mobility, as well as the quality of sidewalks and lighting need to be considered in relation to the necessity to juggle work, care for household members, and other daily duties (Grant-Smith, Osborne, and Johnson 2017). The rebuilt physical infrastructure will affect the lives of those who are particularly limited by safety concerns, and it will affect the quality of life of those who walk pushing a pram or supporting elderly relatives. These aspects have been shown to be particularly important for women, increasing their actual and perceived vulnerability when they travel around the city, cutting them off from after-dark activities (Ceccato et al., 2020), but also affecting life choices with a long-lasting impact (Borker, 2021). Utilizing Geographic Information Systems (GIS), satellite imagery and open data sources holds the promise of creating more effective methods for observing patterns of utilization of the city and incorporating a gender responsive approach along these lines in urban planning of reconstructed areas of Ukraine (Carpio-Pinedo et al., 2019).

4.2 Gender Sensitivity in the Design of Transport Infrastructure

Transport infrastructure is crucial to the development of society. When a large share of the infrastructure capital needs to be rebuilt or updated, as will be the case in Ukraine, this opportunity may be used to lay new foundations for both economic and social development. To make the most of such an opportunity, attention ought to be paid to a number of identified risks. Unequal resource distribution has been observed both in connection with new construction of infrastructure (MacDonald, 2005) and relocation of the same (Chandra, 2000; Unruh and Shalaby, 2012). The large stakes inherent in these projects can generate high incomes and rent-seeking leading to a deepening of inequalities and further marginalization of those already vulnerable from the conflict. As women have been particularly strongly affected by the war and the resulting internal displacement (Obrizan, 2022a), the reconstruction process ought to pay particular attention to the risks of exacerbating some unequal developments that emerged with the war. Women’s representation in budgeting, procurement, and decision-making might make these aspects more salient and facilitate their integration into the recovery process.

Mobility is connected with social inclusion, more general well-being and a higher quality of life (this literature is reviewed in Josa and Aguado, 2019). The transport infrastructure is particularly important from the point of view of gender equality as usage of transportation and transport mode preferences significantly vary across socio-economic groups, including by gender (Grieco and McQuaid, 2012; Ghani et al., 2016). In the reconstruction planning and rebuilding process the prioritization of public funding for roads, highways, and railways compared to slow modes, such as walking and cycling, should be put in relation to usage and preferences in different groups of the population. One way through which women are excluded, from mobility itself and from other economic outcomes that mobility would help to reach, such as education (Borker, 2021) and employment (Das and Kotikula, 2019), are safety concerns. In dozens of cities around the world, lack of safety and prevalence of sexual harassment in public transit has resulted in the creation of safe spaces to facilitate safer travel conditions for women (Kondylis et al., 2020). The reconstruction could put significant emphasis on the safety of public transportation which would benefit women in particular and facilitate their effective integration in the future aspects of socio-economic development.

4.3 The Gender Perspective in Increasing Energy Efficiency

One of the key focus points of post-war reconstruction will be rebuilding the energy infrastructure, which has, over the course of the war increasingly been a target of Russian bombing. This process will have to be accompanied by considerations of reorientation, in terms of the energy mix, with a focus on self-sufficiency and environmental sustainability, but also most likely of relocation. At the same time the country should pay significant attention to energy efficiency, which may significantly influence both the energy self-sufficiency of Ukraine and the environmental aspects of power and heating.

It is worth noting at this point that natural resources and their exploitation have significant implications for local communities with consequences from projects often spilling over to local attitudes, leading to gender inequalities through channels such as labor and marriage markets, environmental quality and health, fertility and violence (see a review in Baum and Benshaul-Tolonen, 2021). Both exploitation and new energy infrastructure projects – similar to other aspects of the build environment – will have to consider effective connection to the new urban and production mix, so that the energy infrastructure serves the new cities and the updated geographic distribution of various productive sectors, but also the impact that infrastructure positioning can have on surrounding communities. The presence of infrastructure may generate rents and inequality, and the same is true also for energy infrastructure.

The post-war reconstruction will also present a chance to substantially improve energy self-sufficiency through increased efficiency in energy consumption. Ukraine currently has an energy intensity in production that exceeds the EU average by a factor of 2.5. Although energy efficiency in industry and buildings represents the lion share of such gains, households’ consumption behavior has the potential to contribute substantially, both directly through the consumption of fuel and electricity, and indirectly through the consumption of goods and services (Bin and Dowlatabadi, 2005), as well as through the support for a green policy agenda (Douenne and Fabre, 2022). In this area women and gender-related attitudes might be particularly important. Recent literature claims that women tend to be more environmentally friendly than men, partly due to individual characteristics and attitudes considered more prevalent among women, such as risk aversion, altruism, and cooperativeness – important for environmental behaviors (Cárdenas et al., 2012 and 2014; Andreoni and Vesterlund, 2001). There is also empirical evidence that households where women have more decision power display higher energy-efficiency and energy savings (Li et al., 2019), while firms with more women in their board source significantly more energy from renewables (Atif et al., 2020). It might therefore prove instrumental that energy-efficiency policies directed to households (nudges, information/education, financial incentives) and firms respectively (including gender quotas in boards) take these aspects into account.

5. Post-war Reconstruction: the Gender Perspective on Rebuilding and Strengthening Ukraine’s Human Capital

The human cost of the Russian invasion of Ukraine, including the implications from the Russian occupation of Ukrainian territories since 2014, is immeasurable. The loss of lives, as well as the consequences of disabilities, physical injuries and mental trauma will scar the Ukrainian future for decades to come. The invasion has resulted also in massive displacement and emigration, as well as in the loss of numerous aspects of individual capacities. From the point of view of Ukraine’s reconstruction and future development, all these losses, apart from demonstrating dramatic individual human tragedies, need to be perceived as loss of an essential building block of socio-economic growth – human capital.

Successful post-war reconstruction of Ukraine and its long-term sustainable development can only be ensured if sufficient care is taken of areas which are key to the development and effective utilization of human capital. These cover, in particular but not exclusively, the areas of healthcare, education, research and the labor market and all of them have been extensively covered and discussed in Gorodnichenko et al. (2022, see chapters: 10, 11, 12, 13). Drawing on their general conclusions, we particularly focus on some of the gender aspects of human capital development in the context of planning Ukraine’s reconstruction. Highlighting gender aspects is sometimes misunderstood as being focused on achieving gender equality in numbers across domains. This is not our focus here. The starting point is to look at a number of empirical facts about actual conditions and, based on this, point to the importance of taking the gender dimension into account to achieve efficiency in the reconstruction process. Gender sensitivity seems particularly important in the area of human capital development, and given the fundamental role of human capital for growth (e.g., Barro, 2001; Squicciarini and Voigtländer, 2015; Goldin, 2016) it is essential for an effective use of reconstruction resources as well as for ensuring a cost-efficient, sustainable and fair process of redevelopment.

The reconstruction interventions we address in this Section are those in which the gender aspect is particularly salient. We categorize these under three broad overlapping headings: 5.1; supporting internally displaced individuals, returning international migrants, war veterans and other victims of conflict, 5.2; providing effective education and training to younger generations, and 5.2; reducing institutional constraints on labor market participation.

5.1 Supporting Internally Displaced, Returning International Migrants, War Veterans and Other Victims of Conflict

Forced internal displacement and international migration – apart from the resulting direct consequences for physical and mental health – comes with separation from family and local social networks, from jobs and schools as well as loss of physical and financial assets. According to UNWomen 7,9 million Ukrainians have been forced to leave the country and 90 percent of them are women with their children. Of the more than 5 million internally displaced 68 percent are women (as of Jan 2023; UNWomen, 2023). Many of those forced to move will either not be able to return home or will return to their localities devastated by the war along a number of dimensions.

Effective rebuilding and reconstruction will strongly rely on the input from these hundreds of thousands of individuals. We ought to bear in mind that a great majority of international war migrants are women, and supporting them in returning to Ukraine and in reintegration – often in places other than those they had left – will be of vital importance to the process of reconstruction. Significant care will also have to be taken of returning war veterans – most of whom are men, as well as victims of war related sexual violence – mostly women. Ukraine already counts more than 300,000 veterans from different armed conflicts on Ukrainian territory since 1992 – including 18,000 women or about 6 percent (Ministry of Veterans Affairs of Ukraine, 2022). According to the head of the Armed Forces of Ukraine, about 1 million are currently mobilized, with roughly 5 percent being women (Boyko, 2022). The Ministry of Social Policy of Ukraine (2022b) expects the number of veterans and their families to amount to 5 million. To support their involvement in the reconstruction process, short run interventions ought to address the following critical areas: housing and safety, physical and mental health, and active labor market policies. All these areas involve significant gender considerations.

a) Housing and safety

As many of the internally displaced and those returning to Ukraine from abroad will not be able to return to their homes, provision of safe and good quality housing will represent a major challenge in the reconstruction efforts. While ‘roof over your head’ is equally important for everyone, some aspects of the housing infrastructure, especially local safety and safe connectivity with other key locations, are of particular relevance to the wellbeing of women. Although already mentioned in in our discussion of reconstruction of the physical environment in Section 4, it is important to bear in mind that good quality housing and access to critical infrastructure and effective transportation networks have substantial implications for the effective ways of participation of different members of the society in its socio-economic activities. If the human capital of men and women is to be efficiently engaged in the reconstruction process and further developed, the physical context in which it will happen must be adjusted with the objectives of different groups in mind. Housing, neighborhood conditions, and safe transportation translate into access to jobs, training, education, and local services. The design of the physical reconstruction after the war ought to take these different perspectives into account along the lines of gender responsive budgeting to clearly delineate and correctly identify priorities for the allocation of recovery funds.

b) Physical and mental health support

It is clear that experiences from threat to one’s life and safety, the need to flee one’s home and search refuge, continued experience of insecurity, the direct exposure to terror and violence – including sexual violence – and war atrocities will leave a significant proportion of the Ukrainian population traumatized and in need of specialized mental health support. Additionally, numerous individuals will come out of the war with life-changing physical injuries, while to countless people the period of war will result in substantial neglect of common health problems which otherwise would have been taken care of. These dramatic consequences of war will have to be comprehensively addressed as part of the reconstruction effort to support the affected and vulnerable groups, with the aim to address both their physical and mental health deficiencies. The issues involved are too complex for a Policy Paper to deal with in detail – we can only highlight health as an area to be prioritized in the allocation of recovery funds. With that in mind it is important to stress that there are numerous examples in the public heath literature showing the significance of the gender perspective with regard to the efficient use of public resources and appropriate design of health interventions, taking into account the specific requirements of men and women both in physical and mental health (Abel & Newbigging, 2018; Chandra et al., 2019; Diaz-Granados et al., 2011; Judd et al., 2009; Oertelt-Prigione et al., 2017).

War veterans – primarily men – will be a group in need of particular concern and a comprehensive approach with regard to physical and mental health. Specific specialized support will have to be offered also to victims of conflict-related sexual violence – mostly women. The direct health support will often need to go along with education and training as well as assistance in such areas as housing and material conditions.

Already before the full-scale Russian invasion Ukraine had rolled out several programs in support of veterans from the ongoing 2014 conflict. These included establishing private or publicly co-funded therapy centers for treating posttraumatic stress disorder (Colborne, 2015) and creating organized groups of psychological and psychiatric specialists providing psychological assistance (Quirke et al., 2020). They also included conducting special trainings for general practitioners to provide mental health consultations to increase the overall capacity of Ukraine’s health care system to address mental health issues (Kuznetsova et al., 2019), and broadcasting national TV/social media awareness campaigns such as ‘Mental Health Awareness Week’ (Quirke et al., 2021). Since 2017, as part of the broader healthcare reform program, a thorough reform of the mental health services provision has been underway. The key identified challenges targeted with the reform were: securing human rights protection in mental health legislation, improving regulation of the mental healthcare sector and expanding delivery of mental health services outside of the institutionalized settings (The Ministry of Health of Ukraine, 2018; Weissbecker et al., 2017).

c) Active labor market policies (ALMP)

In precarious conditions in particular, women tend to be those responsible for care of elderly and children, which additionally contributes to disconnecting them from the labor market. It seems that large scale ALMP programs for displaced individuals and returning migrants will be essential to improve the match between skills and the local post-war labor market conditions.

With greater war time labor market disconnect among women, many of whom will have spent months without employment or in various forms of war-time subsistence work, ALMPs will be critical for many in the process of post-war reconstruction. Overview studies show that effectiveness of labor market interventions is generally positive for men and women (e.g. Card et al., 2010). These are often similar in size even though in settings with high employment gaps – such as in the case of Ukraine – the programs tend to be more effective for women (Bergman and van den Berg, 2008). Appropriate identification of skill shortages and provision of training can be an effective way of supporting the post-war Ukrainian labor market and the integration of women in particular. The design of these programs ought to pay special attention in order to avoid labor market stereotyping, to provide broad and integrated routeways to deliver the greatest pool of talent, and to ensure that men and women are appropriately matched to jobs suitable to their skills and abilities. Significant training programs should also be directed towards war veterans.

The skills training aspect of ALMPs has other important gender dimensions – women represent a large majority of Ukrainian teachers, and their skills can be utilized not only in schools but also in adult education and retraining, taking particular advantage of the extensive network of vocational education institutions. Similarly, around 83 percent of the country’s healthcare workers are women, and skills upgrading in the healthcare sector – especially focused on increasing the competence and skills of nurses to take over greater responsibilities for primary care – will constitute an important reform element in the Ukrainian healthcare sector (see Gorodnichenko et al., 2022, chapter 12).

5.2 Providing Effective Education and Training to Younger Generations

Ukrainian youth have in recent years faced a double blow to their educational development. The first one in the form of numerous Covid-19 pandemic related restrictions, followed by the disruption in their education process due to the Russian invasion. The latter especially affected those who had to flee their homes and leave their local schools, as well as those whose schools have been destroyed and rendered dysfunctional. However, many Ukrainian schools opted for or were forced to limit the extent of provided classes and/or provided some of the instruction online. According to UNICEF, the war in Ukraine has disrupted education for more than 5 million children (UNICEF, 2023). 60 percent of children have experienced different traumatic events such as separation from family and friends, moving to another region, shelling and bombing, having witnessed the death of relatives or loved ones, etc. In early 2023, 42 percent of children aged 3-17 studied online, 29 percent both online and in school/kindergarten, 26 percent attended educational institutions while 3 percent studied at home (Sociological Group Rating, 2023). As mounting evidence from the Covid-19 pandemic shows, such disruptions accumulate in the form of significant human capital losses (e.g., Gajderowicz et al., 2022, Contini et al., 2021) and post-war recovery will have to address these to minimize the losses to the pool of skills of the future Ukrainian work force.

Home schooling and school routines disrupted in various ways might, in particular in communities characterized by traditional gender norms, impose additional limitations on the education of girls who may be tasked with greater home and care responsibilities. Thus, while emphasis on catching up on effective learning will be of utmost importance for all students, from the point of view of gender equality, it will be particularly important to closely monitor the school coverage and return to standard school attendance among girls. As post-pandemic evidence from developing countries suggests this may be of particular relevance with regard to teenage students (Kwauk et al., 2021). Post-war recovery initiatives aimed at financial support for households ought to ensure that households with older children in particular do not need to trade off material conditions and schooling opportunities. This might call for programs designed to incentivize school attendance in particular among children in displaced families and for returning international migrants (Aygün et al., 2021).

The post-war reconstruction initiatives in education might also be a chance for the education system to be more forthcoming in promoting high skilled occupations among female students. The 2018 PISA study demonstrated that while Ukrainian 15-year-old girls and boys do equally well in mathematics and science, their objectives with regard to occupation – in particular in STEM areas – differ significantly (OECD, 2019).

5.3 Reducing Institutional Constraints on Labor Market Participation

In order to make most of the potential of the Ukrainian labor force in the process of post-war reconstruction, the plans ought to target various institutional constraints to labor market participation. In this respect the gender equality literature has stressed in particular the provision of early and pre-school childcare to facilitate employment of parents, and in particular of mothers (Addati et al., 2018; Attanasio et al., 2008; Azcona et al., 2020; Gammarano, 2020). Although much has been done during the past decades to improve women integration in the labor market, attitudes in the home and in the family care realm remain traditional and unbalanced (Babych et al., 2021; Obrizan, 2022b). This translates into an unequal division of care and work at home as well as participation in the labor market.

While childcare facilities have been shown to play a key role in supporting female participation in numerous contexts, they are going to be of particular importance to displaced families and returning international migrants, who may lack family support and social networks to organize informal care. Before the full-scale invasion, a relatively high proportion of children aged 3-5 and 5-6 (88 and 97 percent, respectively) were covered by institutional childcare (Ministry of Education and Science of Ukraine, 2021). Returning to such high levels of coverage will be an important element of the reconstruction process. Additionally, authorities should extend the coverage of childcare available to younger children, which in 2019 was much lower (18 percent).

Similarly, welfare arrangements in a broader sense are important to facilitate employment of all working age individuals, men as well as women. It is well established that in situations where government support is cut in various ways, it is typically the women who withdraw from the labor market to manage not just childcare but elderly care and other welfare functions (Mateo Díaz and Rodriguez-Chamussy, 2016). While a high proportion (54 percent) of people in Ukraine before the 2022 invasion declared that care duties should be equally divided between spouses, as many as 41 percent thought that it is the woman’s responsibility (Babych et al., 2021). This implies that it is still likely that, when faced with institutional and informal care constraints, it will be women who will be more likely to drop out of the labor market.

To facilitate effective reconstruction, high participation rates among both men and women will be of utmost importance. To achieve this, substantial reconstruction funding ought to be committed to ensure adequate care support directed both to parents of young children as well as to those with care responsibilities of older family members. Such support will be particularly important in localities with high numbers of internally displaced and returning international migrants. These needs should be correctly accounted for when planning the reconstruction process and allocation of funds, and the GRB approach is likely to be an essential instrument to ensure that objectives of different groups of the Ukrainian society are appropriately addressed.

Conclusions

Over the last few years, the Ukrainian government has introduced substantial reforms in the management of public finances with the aim of developing gender responsive procedures to ensure greater gender equality in the delivered outcomes. The government’s commitment was confirmed in August 2022 with the adoption of the State Strategy for ensuring equal rights and opportunities for women and men for the period until 2030 and approval of the operational plan for its implementation for 2022-2024 (Cabinet of Ministers of Ukraine, 2022). The implemented legislation and the experience from practicing gender responsive budgeting at different levels of government can prove to be an invaluable platform to be utilized in the post-war reconstruction process. Pre-war statistics from many areas of life in Ukraine demonstrated a high degree of inequality along the gender dimension. Gender gaps were high in employment, pay levels, the allocation of home and care responsibilities, and it could also be seen in senior positions in politics, company management, and academia. One of the many tragic consequences of the full-scale Russian invasion and the ongoing war is that these gaps are likely to grow.

If the post-war reconstruction process is to take the principles of “building-back-better” seriously, then, apart from many other dimensions which need to be considered (see Gorodnichenko et al., 2022), recovery planning and execution will also have to address various social inequalities, especially that along the gender dimension. As argued in this Policy Paper, to ensure fair and effective use of recovery funds, the reconstruction process should pay close attention to the identity of its beneficiaries, as well as the way decisions are being made. The authorities, including the central agency responsible for the reconstruction (e.g., UREIA, see Gorodnichenko et al., 2022), should take full advantage of existing tools and instruments of the gender responsive budgeting approach, as well as of an equitable representation within their ranks, and build on the basis of existing Ukrainian legislation and practice of gender budgeting (see Box 2). The reconstruction process will offer a unique chance to set Ukraine on the path of inclusive, stable and sustainable development. We have pointed out a number of areas in which the gender dimension will be particularly important – these include both the reconstruction and rebuilding of the physical environment as well as support and recovery of the full potential of Ukrainian citizens – old and young, men and women. The reconstruction of Ukraine will be a hugely challenging task, and it will have to involve massive resources. International support for channeling those funds to Ukraine and their effective use will depend on how effectively and how fairly they will be used. The application of gender responsive budgeting can help both in ensuring efficiency of allocation of the funds, and in strengthening the legitimacy for the provision of support by the international community.

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.

What Drives Belarus to Be One of the Most Optimistic Nations in Europe?

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War in Ukraine, imposed sanctions on Belarus and the worst yearly GDP drop since the 1990s. Despite these challenges, Belarusian households were the third most optimistic in Europe in late 2022, following Lithuania and Montenegro. The Belarusian Consumer Confidence Index, calculated on the basis of four household surveys conducted in Belarus by BEROC’s Belarus Monitoring Project in 2021 and 2022, shows surprising resilience among Belarusians – especially in Q3 and Q4, 2022.  This brief shortly describes the components of the index and their evolution and discusses what factors might have been driving this high index. The brief argues the found optimism among Belarusians could have been driven by a state-owned media influence and by the Belarusian economy performing better than expected.

Optimism Without Grounds?

In 2022, Belarus experienced a 4.7 percent yearly GDP drop, the worst since the 1990s. The main reasons behind the decline is the Russian war on Ukraine and Belarus’ involvement in it, and, consequently, the severe sanctions imposed on Belarus and its main trade and economic partner: Russia. A surge of exports to Russia to counter the sanctions helped prevent the severity of the drop, although it still remains large. Forecasts for 2023 are also not encouraging. The World Bank expects the Belarusian economy to shrink by 2.3 percent. The European Bank for Reconstruction and Development’s forecast is -1 percent, the International Monetary Fund (IMF)’s is +0.2 percent, and the Eurasian Development Bank’s +0.3 percent, whereas the announced official target is +3.8 percent. In total, the GDP decrease could be as large as -6.9 percent in the two coming years, following the World Bank’s worst prognosis. The question is; Is this a lot?

The last GDP decline occurred in 2020 and amounted to a moderate -0.7 percent, despite the apex of Covid-19 related shutdowns, the decrease in the world economy, and the political crisis following the rigged elections in August. The most recent severe GDP drop happened between 2015 and 2016 with a decline of 3.8 percent in 2015 and 2.5 percent in 2016.

Figure 1. A comparison of GDP changes and the CCI values in Belarus in 2021 and 2022.

Note: Based on Eurostat methodology. Source: Belstat, BEROC.

Surprisingly, the lower the GDP, the higher the consumer confidence, as measured by the Consumer Confidence Index (CCI). For example, the CCI was -18.7 percent in Q4 2021, while the GDP increased by 2.3 percent in 2021. On the contrary, the CCI in Q4 2022 was -15.0 percent, while the GDP dropped by massive -4.7 percent (see Figure 1).

The experience from numerous financial crises in the 2010s may play an important role here by moving the expectation baseline and conclusively undermining confidence in the country’s economic institutions. However, even if this is the case, it would not explain the dynamics of consumer confidence in Belarus in relation to the country’s economic performance. In this brief we dig deeper into the determinants of this seemingly ungrounded consumer optimism.

The Consumer Confidence Index

The Consumer Confidence Index (CCI) used for this brief is based on four household surveys conducted in Belarus by the Belarusian Economic and Outreach Center (BEROC)’s Belarus Monitoring Project. The online surveys were conducted in December 2021, and in April, August and November in 2022. The surveys are representative for the urban population aged 18-64 (approximately 5 million people). They have also been weighted by region, sex and age.

The index is designed to measure consumer confidence from -100 percent to + 100 percent (0 being neutral). Consumer confidence is defined as the degree of optimism regarding the state of the economy which consumers express through their saving and spending patterns.

A few approaches for calculating the index can be used. One of them is the Eurostat methodology, which includes answers to four questions about households previous and expected financial position, the expected economic situation in the country, as well as the propensity to buy durable goods. Another approach is the Rosstat methodology, which, in addition to the Eurostat approach, includes one extra question on the previous economic situation in the country. We considered both methodologies to allow for a comparison of Belarus to countries in Europe as well as to Russia.

Belarus Compared to Russia

The CCI value, applying the Rosstat methodology, was -19.4 percent in Belarus in November 2022 (a 3.6 percentage point growth as compared to August 2022), while the index value in Russia was -22.7 percent (a 0.3 percentage point growth).

It is worth mentioning that there was a sharp drop in Q2 2022 in both countries. However, the index values recovered in Q3 2022 to Q4 2021 values, i.e., to the index values prior to the introduction of large-scale economic sanctions and prior to the war.

The pattern is somewhat similar to that during Covid-19-related restrictions, displaying a sharp drop and then a strong recovery. The magnitude of the drop was however much higher in 2020: 20.3 percent in 2020 compared to 10.3 percent in 2022 for Russia. No data is available for Belarus prior to Q4 2021 but the trajectory was likely similar. Apparently, households in neither country appear be desperate (see Graph 1).

Graph 1. The CCI in Belarus and Russia.

Note: Q1 2022 data not available for Belarus. Source: BEROC, Rosstat.

Belarus Compared to Europe

The Belarusian CCI, when excluding the component of the past state of the economy (i.e. applying the Eurostat methodology), was -15.0 percent in November 2022. This was 3.4 percentage points higher than the value in December 2021 and the third highest value in Europe, following Lithuania (-9.2 percent) and Montenegro (-8.6 percent). Moreover, the index was the highest observed for the entire period of observations by BEROC (from December 2021), as depicted in Graph 2.

Graph 2. The CCI in Belarus and the EU.

Source: BEROC, Eurostat.

The index values of the European Union and the Eurozone have not changed significantly from Q2 2022 and currently stand at -26.3 and -24.9 percent, respectively. Naturally, some countries have faced slight reductions, while others have seen slight increases, for instance, the indices for Italy, Croatia and Cyprus had all increased by more than 4 percentage points in Q4, 2022.

As evident from Graph 2, Belarus has since Q4 2021, moved from a below average position to become a leader in optimism on the European continent.

The Past and the Future

Throughout all four surveys, evaluations of the current state of the country and of personal wellbeing contrasted the projections for the future (see Graph 3). The projections for the future are much more positive, which is evident if we compare question 4 and 2 to question 3 and 1. At the same time, the share of negative answers is higher than the share of positive answers for all questions, and the term “optimism” should therefore be taken as the lack of strong negative views on the past and future.

A higher share of “difficult to say or do not know” answers is unsurprisingly found for questions regarding the future.

Graph 3. The composition of the CCI in Belarus for Q4 2022.

Note: All answers to the questions are distributed along a Likert scale from “will improve (has improved)” or “very good” to “will decline (has declined)” or “very bad”. For question 1 (Q1) and question 2 (Q2), the answer options range from “has improved” and “has declined”; and for question 5 (Q5), the answer options range from ”very good” to “very bad”. Source: BEROC.

The largest negative contribution to the index was the question on the current assessment of the country’s economic situation in relation to the previous year (question 1). The share of negative answers was 72 percent in December 2021, and it decreased only to 63 percent in November 2022, even though the economic performance prior to those periods was a 2.3 percent GDP growth and 4.7 percent GDP decline, respectively. Apparently, the worse the economy performed, the better was the perception of the past.

This is however not the case regarding the state of the household’s financial position. The share of negative answers was 48 and 47 percent, and the share of positive answers was 13 and 14 percent in December 2021 and November 2022, respectively.

The answers concerning the future standing of the economy and one’s personal financial position follow the same logic, with large disparities between the evaluation of the country’s economy – which one is negative about – and personal finances – where respondents are more optimistic.

What could influence the changes? We hypothesize that there are at least four possible explanations for the improvement in the CCI from Q1 to Q4, 2022:

a) a stabilization of the situation on the foreign exchange market
b) a slowing GDP decline, reaching a “local minimum”
c) an influence from Belarusian and Russian state-owned mass media outlets
d) failed negative expectations in previous periods

As discussed in a previous FREE Network Policy Brief by Luzgina (2022), the Belarusian currency market has stabilized since April, 2022. The Belarusian exchange rate is somewhat of a “Holy Grail” and a crucial factor for Belarusians after numerous financial crises in 2010s, so its stabilization could act as a positive signal for households. Indeed, when asking respondents about the factors influencing their income, the share of those who attributed this to the exchange rate had in August 2022 decreased by 25 percentage points, as compared to April the same year (from 45 to 20 percent, respectively).

The GDP decline slowed in the second half of 2022, from -4.9 percent in August to -4,7 percent in November. An additional positive development for Belarusians was that the inflation declined in November.

Media consumption is another essential factor in understanding consumer confidence. State-owned and independent media consumers showed significant differences in their assessments of the economy. Only 22 percent of state-owned media consumers rated the economy as “bad” or “very bad” compared to 68 percent of independent media consumers.

In April 2022, the World Bank estimated a possible Belarusian GDP change at -6.5 percent, the IMF
-6.4 percent and S&P -15 percent. The CCI in April was also at the lowest throughout BEROC’s observations at -23.0 percent. Despite these extremely negative forecasts for Belarus’ GDP, the actual outcomes were less catastrophic than expected. This might have improved respondents’ assessment of the future economic situation.

Conclusion

Data from the online household surveys show that imposed sanctions, the Russian war on Ukraine, and a declining economic growth in 2022 have not yet significantly affected the sentiments of Belarusians on a large scale. Rather, Belarusians’ expectations have improved despite serious current and future challenges to the Belarusian economy. In fact, Belarus is among the most optimistic nations in Europe, according to the surveys.

This is arguably due to a financial stabilization and an economic performance above expected, as well as exposure to state-owned media.

With this in mind, we may see an increase in households’ consumption in the following months, which will contribute to a slowdown in the GDP decline or even a slight economic recovery in 2023 – pending no new shocks occur.

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.

Would a Higher Minimum Wage Meaningfully Affect Poverty Levels Among Women? – A Simulation Case from Georgia

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In economic literature the effect of minimum wage on the labour market and its relevance as an anti-poverty, equality-enhancing policy tool, is a matter of vigorous debate. The focus of this policy brief is a hypothetical effect on poverty rates, particularly among women, following an increase in the minimum wage in Georgia. A simulation exercise (Babych et al., 2022) by the ISET-PI research team shows that, in Georgia, a potential increase in the minimum wage is likely to result in an overall positive albeit small reduction in poverty rates in general. At the same time, women are likely to gain more from such minimum wage policy than men. The findings are consistent with the literature claiming that a minimum wage increase alone may not result in meaningful poverty reduction. Any minimum wage increase should thus be enhanced by other policies such as training programs increasing labor force participation among women. 

Many countries around the world have enacted minimum wage laws. According to the International Labour Organization (ILO) “Minimum wages can be one element of a policy to overcome poverty and reduce inequality, including those between men and women” (ILO, 2023). In economic literature, the minimum wage debate has been particularly acute, with pros and cons of the minimum wage increases, their effect on the labor market, and their relevance as an anti-poverty and equality-enhancing policy tool fiercely contested in empirical studies and simulation studies. In this policy brief, we focus on the effect of a minimum wage increase in Georgia on poverty rates, and in particular poverty rates among women.

Minimum Wage Effects

According to the European Commission (2020) a number of benefits is associated with the introduction of minimum wage. These benefits include a reduction in in-work poverty, wage inequality and the gender pay gap, among others.

International evidence, however, cautions against considering an increase in minimum wage as the silver bullet to end poverty. A 2019 report by the International Labour Organization (ILO, 2019) shows that the incidence of poverty among the working poor is comparable to the incidence of poverty among individuals outside of the labor market. Therefore, even if an increase in minimum wages would lift all working poor out of poverty, a substantial number of poor would remain.

Moreover, minimum wage can have a potential adverse effect on employment of the most vulnerable by deterring firms from hiring low-wage, low-skilled labor (Neumark, 2018).  The adverse employment effect will be stronger if current wages correspond more closely to the real productivity of labor. In such scenario companies would lose by retaining low-productivity workers and, likely respond to the increase in minimum wage by laying off workers, resulting in the loss of wages, rather than in their increase. On the other hand, if salaries are lower than the real productivity of the less productive workers, companies might still be able to profit from employing them and will not be forced to lay them off, resulting in a wage increase for low-wage workers.

Whether – and to what extent – the introduction of a minimum wage reduces poverty and/or assists low-income households then depends on how many individuals are going to lose their jobs, how many workers will maintain their jobs and receive a higher wage, and where these winners and losers are positioned along the distribution of family incomes.

With regard to employment effects, the results are not perfectly homogeneous. On the one hand, a large body of evidence suggests that minimum wages do lower the number of jobs accessible to low-skill employees (Sabia, Burkhauser and Hansen, 2012; Sotomayor, 2021; Neumark, 2018) On the other hand, some scholars argue that once the study design is changed to take into account the non-random distribution of minimum wage policies in different parts of the country in question, the “disemployment effect” of minimum wage policies (considering the example of United States) largely disappear (Allegretto et al., 2013; Dube et al., 2010).

With regards to poverty, a number of studies look at minimum wage as an anti-poverty policy tool for developing countries and consider its effectiveness in reducing poverty and/or inequality. For example, a study by Sotomayor (2021) suggests that poverty and income inequality in Brazil decreased by 2.8 and 2.4 percent respectively within three months of a minimum wage increase. Effects diminished with time, particularly for bottom-sensitive distribution measures, a process that is consistent with resulting job losses being more frequent among poorer households. The fact that the subsequent yearly increase in the minimum wage in Brazil resulted in a renewed drop in poverty and inequality shows that possible unemployment costs might be outweighed by benefits in the form of higher pay among working persons and – potentially – by positive spillover effects such as increased overall consumption.

Minimum Wage and Female Poverty

As in the case of poverty in general, there is some discrepancy in the literature on whether a minimum wage increase would help reduce poverty among women. Single mothers have been the focus of research in this regard since they are typically the most vulnerable low-wage workers, likely to be hurt by the loss of employment following an increase/ introduction of a minimum wage. Burkhauser and Sabia (2007) argue that the minimum wage increases in the U.S. (1988-2003) did not have any effect on the overall poverty rates, on the poverty rates among the working poor, or on poverty among single mothers. They argue that an increase in Earned Income Tax Credit (EITC), which provides a wage subsidy to workers depending on income level, tax filing status, and the number of children, would have a higher impact on poverty, in particular among single mothers.

In the meantime, Neumark and Wascher (2011) find that EITC and minimum wage reinforce each other’s positive effect for single women with children (boosting both employment and earnings), but negatively affects childless single women and minority men. Another study on the U.S. (Sabia, 2008) looked at the effect of minimum wage increases on the welfare of single mothers, finding that most of them were unaffected as they earned above-minimum wage. Single mothers with low-education levels did not see an increase in net incomes due to the negative effect on employment and hours worked: for low-skilled individuals, a 10 percent increase in minimum wage resulted in an 8.8 percent decline in employment and an 11.8 percent reduction in hours worked.

Yet another study (DeFina, 2008) focus on child poverty rates and show that minimum wage increases have a positive (reducing) impact on child poverty in female-headed families. The effect is small but significant (a 10 percent increase in the minimum wage decreases child poverty rates by 1.8 percentage points), controlling for other factors.

Ultimately, the effect of minimum wage on poverty among women or female-headed households is somewhat ambiguous. It depends on the poverty threshold used, other policy instruments (such as the EITC), existing incentives to enter employment and how, in the specific country of interest, labor laws may affect the employer’s cost of hiring (e.g. for France, see Laroque and Salanie, 2002).

The discussion is however relevant for countries like Georgia, where the wage gap between men and women is quite large, and where more women than men tend to work in low-wage and vulnerable jobs. While the overall poverty gap between men and women in Georgia is insignificant (mainly because poverty is measured at the household level), the gap becomes apparent when comparing female-headed households to male-headed ones. The poverty rates in the former case are nearly 2 percentage points higher in Georgia (20 percent vs. 18.3 percent in 2021). The poverty rates are the highest among households with only adult women (39.3 percent for all-female households vs. 20.1 percent overall in 2018).

A Simulation of a Minimum Wage Raise in Georgia

The Georgian minimum wage legislation dates back to 1999. The presidential decree N 351 from June 4, 1999 states that the minimum (monthly) wage that is to be set in Georgia is equal to 20 GEL (with some specific exceptions in the public sector). This is a non-binding threshold.  Therefore, one has to think carefully what consequences might arise from raising the minimum wage to a much higher level. In addition to previously discussed aspects, one issue to keep in mind is the different average wages across different regions in Georgia. For example, a national minimum wage increase might have more of an impact in poorer regions, where both wages and incomes are lower, while it may still be non-binding in Tbilisi.

The ISET-PI research team (Babych et al., 2022) use Georgian micro data from the Labor Force Survey (LFS) and the Household Integrated Expenditure Survey (HIES), to simulate the effect of instituting a nation-wide minimum wage on both employment and poverty rates in different regions of Georgia. One focus area of the study was to analyze the effects of a minimum wage increase on female poverty. As with any exercise using a simulation approach, this study is subject to limitations imposed by the assumptions used, e.g. how much labor demand would respond to changes in the minimum wage, etc. The study considered two hypothetical thresholds of the minimum wage; 250 and 350 GEL respectively.

Figure 1. Share of private sector employees earning below certain thresholds, by gender, 2021.

Source: Authors’ calculations based on the Labor Force Survey (Geostat, 2021).

The expected household income after the minimum wage increase was calculated and then compared to the poverty threshold (for each household in a standard way, using the “adult equivalence” scale). According to this methodology, any person who lives in a household which falls below the poverty threshold is considered to be poor. A “working poor” household is defined as a household below the poverty threshold where at least one adult is working.

Figure 1 shows that there is a substantial share of both men and women whose monthly wage income falls below the hypothetical minimum wage thresholds. In addition, women are more than two times as likely to be earning below these thresholds. However, the possible impact from an increased minimum wage on female vs. male poverty is not clear-cut. Since many women are part of larger households which include adult males, their possible income losses/gains may be counterbalanced by income gains/losses of male family members, leaving the overall effect on household income ambiguous.

In addition, poverty rates are not likely to be much affected by a minimum wage increase if most poor households are “non-working poor” (where adult family members are either unemployed or outside of the labor force), a consideration particularly relevant for Georgia. The share of poor individuals who live in “working poor” households (with at least one household member employed) is just 41 percent nationally (and 35 percent in rural areas), meaning that close to 60 percent of poor individuals nationwide (and 65 percent in rural areas) are not likely to be directly affected by minimum wage increases.

Female vs. Male Poverty: Scenarios Following a Minimum Wage Increase

As one can see in Figure 2, increased minimum wages tend to reduce poverty, but the impact is not larger than one percentage point. Not surprisingly, females benefit more than males (0.3 and 0.8 percentage points vs. 0.2 and 0.9 percentage points poverty reduction for men and women respectively, under different threshold scenarios).  The maximum positive impact on poverty reduction is observed under a higher minimum wage threshold.

Figure 2. Estimated impact on poverty rates, based on the national subsistence minimum.

Source: Authors’ calculations based on the Household Integrated Expenditure Survey (Geostat, 2021).

The impact of an increased minimum wage on the expected median consumption of households doesn’t exceed a few percentage points either, as illustrated in Figure 3.

Figure 3. Median monthly consumption per “equivalent adult” in the household under the status quo and minimum wage scenarios, 2021.

Source: Authors’ calculations based on the Household Integrated Expenditure Survey (Geostat, 2021).

The impact is greatest in urban areas other than Tbilisi (between a 2.5 percent and a 4.2 percent increase in median consumption relative to the status quo). The lower impact in Tbilisi is most likely driven by relatively higher wages, while the low impact in rural areas is likely driven by lower participation in wage employment.

Conclusions

In the hypothetical case of Georgia, an impact of a minimum wage increase on poverty rates is expected to be limited, in line with the literature. In our study this finding is mostly driven by the fact that only a relatively small share of poor individuals live in “working poor” households (about 40 percent, nationally). The remaining 60 percent of poor individuals will be unaffected by the reform.

The quantitative impact on female and male poverty is estimated to be low, although the female poverty rate reduction is somewhat larger than among males.

It is important to note that the analysis doesn’t consider possible differential impacts on different groups of vulnerable families, such as families with small children and single mothers with small children. Some reasons to why groups of households may or may not be affected by the hypothetical minimum wage increase, based on their employment status and other factors, have been discussed above.

Another important point is that our exercise should not be seen as an argument against an increase of the minimum wage in Georgia. Instead, it suggests that such a reform would not have much of an impact if done in isolation. Indeed, the existing literature on minimum wage seems to be in consensus on the fact that minimum wage policies would be more impactful if supplemented by the following measures:

  • Maintain and expand targeted social assistance to groups that do not benefit or that are losing jobs/incomes as a result of the minimum wage changes
  • Have job re-training programs in place to help laid-off workers
  • Have human capital investment programs in place to increase workers’ productivity, in particular for low-productivity sectors
  • Consider other support instruments targeted toward the most affected groups of the population such as single working mothers etc.

These recommendations should be incorporated in the policy making regarding minimum wages in Georgia.

Acknowledgement

We are grateful to Expertise France for financially supporting the original report (Babych et al., 2022), which features some of the results and points raised in this policy brief.

References

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.

What Can We Learn from Regional Patterns of Mortality During the Covid-19 Pandemic?

Doctor outside COVID-19 isolation center representing covid-19 pandemic mortality

Given the nature of the spread of the virus, strong regional patterns in fatal consequences of the Covid-19 pandemic are to be expected. This brief summarizes a detailed examination of the spatial correlation of deaths in the first year of the pandemic in two neighboring countries – Germany and Poland. Among high income European countries, these two seem particularly different in terms of the death toll associated with the pandemic, with many more excess deaths recorded in Poland as compared to Germany. Detailed spatial analysis of deaths at the regional level shows a consistent spatial pattern in deaths officially registered as related to Covid-19 in both countries. For excess deaths, however, we find a strong spatial correlation in Germany but little such evidence in Poland. These findings point towards important failures or neglect in the areas of healthcare and public health in Poland, which resulted in a massive loss of life.

Introduction

While almost all European countries currently refrain from imposing any Covid-19 related restrictions, the pandemic still takes a huge economic, health and social toll across societies worldwide. The regional variation of incidence and different consequences of the pandemic, observed over time, should be examined to draw lessons for ongoing challenges and future pandemics. This brief outlines a recently published paper by Myck et al. (2023) in which we take a closer look at two neighboring countries, Germany and Poland.  Within the pool of high-income countries, these are particularly different in terms of the death toll associated with the Covid-19 pandemic. In 2020 in Poland, the excess deaths rate (with reference to the 2016-2019 average) was as high as 194 per 100,000 inhabitants, over 3 times higher than the 62 deaths per 100,000 inhabitants in Germany (EUROSTAT, 2022a, 2022b). While, in relative terms, the death toll officially registered as resulting from Covid-19 infections in 2020 was also higher in Poland than in Germany, the difference was considerably lower (about 75 vs 61 deaths per 100,000 inhabitants, respectively) (Ministry of Health, 2022; RKI, 2021). Population-wise Germany is 2.2 times larger than Poland and, before the pandemic struck, the countries differed also in other relevant dimensions related to the socio-demographic structure of the population, healthcare and public health. The nature of Covid-19 and the high degree of regional variation between and within the two countries along some crucial dimensions thus make Germany and Poland an interesting international case for comparison of the pandemic’s consequences. We show that the differences in the spatial pattern of deaths between Germany and Poland may provide valuable insight to the reasons behind the dramatic differences in the aggregate numbers of fatalities (Myck et al., 2023).

Regional Variation in Pandemic-Related Mortality and Pre-Pandemic Characteristics

We examine three measures of mortality in the first year of the Covid-19 pandemic in 401 German and 380 Polish counties (Kreise and powiats, respectively): the officially recorded Covid-19 deaths, the total numbers of excessive deaths (measured as the difference in the number of total deaths in year 2020 and the 2015-2019 average) and the difference between the two measures. Figure 1 shows the regional distribution of these three measures calculated per 1000 county inhabitants. All examined indicators were generally much higher in Poland as compared to Germany. In Poland, deaths officially registered as caused by Covid-19 were concentrated in the central and south-eastern regions (łódzkie and lubelskie voivodeships), while in Germany they were concentrated in the east and the south (Sachsen and Bayern). Excess mortality was predominantly high in German regions with high numbers of Covid-19 deaths, but also in nearby regions. As a result, these same regions also show greater differences between excessive deaths and Covid-19 deaths. On the contrary, high excessive deaths can be noted throughout Poland, including the regions where the number of Covid-19 deaths were lower. In the case of Poland, spatial clusters are much less obvious for both excess deaths and the difference between excess and Covid-19 deaths. To further explore the degree of regional variation between and within countries with respect to the mortality outcomes, we link them to regional characteristics such as population, healthcare and economic conditions, which might be relevant for both the spread of the virus and the risk of death from Covid-19. In Figure 2 we illustrate the scope of regional disparities with examples of (a) age structure of the population, (b) the pattern of economic activity and (c) distribution of healthcare facilities in years prior to the pandemic.

Figure 1. Regional variation of death incidence in 2020: Germany and Poland.

Note: The panels share a common legend based on the quintile distribution of Covid-19 deaths, with two additional categories added at the top and bottom of the scale. County borders in white, regional borders in yellow and country border in grey. Source: Myck et al. (2023).

Figure 2. Pre-pandemic regional variation of socio-economic indicators: Germany and Poland.

Note: Two top and bottom categories in the legend cover 10% of observations each, the rest of categories cover 20% of observations each. County borders in white, regional borders in yellow and country border in grey. Source: Myck et al. (2023).

Shares of older population groups (aged 85+ years) are clearly substantially higher in Germany compared to Poland, and within both countries these shares are higher in the eastern regions. On the other hand, the proportion of labor force employed in agriculture is significantly higher in Poland and heavily concentrated in the eastern parts of the country. In Germany, this share is much lower and more evenly spread. This indicator illustrates that socio-economic conditions in 2020 were still substantially different between the two countries. The share of employed in agriculture is also important from the point of view of pandemic risks – it reflects lower levels of education, and specific working conditions that make it challenging to work remotely yet entail less personal contact and more outdoor labor. The distribution of hospital beds reflects the urban/rural divide in both countries. It is also a good proxy for detailing the differences in the overall quality of healthcare between the two countries, i.e. displaying significantly better healthcare infrastructure in German counties.

Uncovering the Spatial Nature of Excess Deaths in Germany and Poland

While spatial similarities among regions are present along many dimensions, they are particularly important when discussing such phenomena as pandemics, when infection spread affects nearby regions more than distant ones. With regard to the spatial nature of excess deaths in the first year of the pandemic, a natural hypothesis is thus that the pattern of these deaths should reflect the nature of contagion. This applies primarily to excess deaths directly caused by the pandemic (deaths resulting from infection with the virus). At the same time, some indirect consequences of Covid-19 such as limitations on the availability of hospital places and medical procedures, or lack of medical personnel to treat patients not affected by Covid-19, are also expected to be greater in regions with a higher incidence of Covid-19. On the other hand, spatial patterns are much less obvious in cases where excess deaths would result, for example, from externally or self-imposed restrictions such as access to primary health care, reduced contact with other people, diminished family support, or mental health problems due to isolation. While these should also be regarded as indirect consequences of the pandemic, as they would arguably not have realized in its absence, these consequences do not necessarily relate to the actual spread of the virus. Our in-depth analysis of the spatial distribution of the three examined mortality-related measures, therefore, allows us to make a crucial distinction in possible explanations for the dramatic differences in the observed death toll in the first year of the pandemic in Germany and Poland. We explore the degree of spatial correlation in the three mortality outcomes using multivariate spatial autoregressive models, controlling for a number of local characteristics (for more details see Myck et al., 2023).

We find that in Germany, all mortality measures show very strong spatial correlation. In Poland, we also confirm statistically significant spatial correlation of Covid-19 deaths. However, we find no evidence for such spatial pattern either in the total excess deaths or in the difference between excess deaths and Covid-19 deaths. In other words, in Poland, the deaths over and above the official Covid-19 deaths do not reflect the features to be expected during a pandemic. As the results of the spatial analysis show, these findings cannot be explained by the regional pre-pandemic characteristics but require alternative explanations. This suggests that a high proportion of deaths results from a combination of policy deficits and individual reactions to the pandemic in Poland. Firstly, during the pandemic, individuals in Poland may have principally withdrawn from various healthcare interventions as a result of fear of infection. Secondly, those with serious health conditions unrelated to the pandemic may have received insufficient care during the Covid-19 crisis in Poland, and, as a consequence, died prematurely. This may have been a result of lower effectiveness of online medical consultations, excessive limitations to hospital admissions – unjustified from the point of view of the spread of the virus, and/or worsened access to healthcare services as a result of country-wide lockdowns and mobility limitations. The deaths could also have resulted from reduced direct contact with other people (including family and friends as well as care personnel) and mental health deterioration as a consequence of (self)isolation. Our analysis does not allow us to differentiate between these hypotheses, but the aggregate excess deaths data suggests that a combination of the above reasons came at a massive cost in terms of loss of lives. The consequences reflect a very particular type of healthcare policy failure or policy neglect in the first year of the pandemic in Poland.

Our study also shows that a detailed analysis of country differences concerning the consequences of the ongoing pandemic can serve as a platform to set and test hypotheses about the effectiveness of policy responses to better tackle future global health crises.

Acknowledgement

The authors wish to acknowledge the support of the German Research Foundation (DFG, project no: BR 38.6816-1) and the Polish National Science Centre (NCN, project no: 2018/31/G/HS4/01511) in the joint international Beethoven Classic 3 funding scheme – project AGE-WELL. For the full list of acknowledgements see Myck et al. (2023).

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.

Climate Risk Perception and Green Behavior in Belarus

Toxic smoke stacks emitting carbon pollution and causing climate change and representing climate risk perception

Understanding how people perceive climate risks and what factors influence this perception is important for a shift towards more sustainable consumer behavior and thus a reduction of greenhouse gas emissions. This policy brief presents the results from a survey  on the attitudes to climate change and environmentally responsive behavior among the urban Belarusian population aged 18-75. The findings show that 72.7 percent of the respondents consider climate change as a threat to the country in the coming 20 years. This climate risk perception, however, does not fully result in more sustainable consumer behavior in Belarus. The survey also reveals that the mass media, with the exception of the Internet, have no influence on the formation of people’s attitudes toward climate change.

Global warming constitutes one of the major threats to humanity and an obstacle to achieving sustainable development. 72 percent of global greenhouse gas emissions are attributed to households (IPCC, 2022), underlining the importance of individual behavioral changes to tackle global warming.

Acknowledging climate change as a risk is a precondition to shift people’s behavior towards sustainable practices (Le Coq and Paltseva, 2021). Thus, the objective of the study underlying this brief is to analyze whether the population in Belarus considers climate change as a threat, and which factors and media channels might have an effect on such perceptions. Additionally, the brief will explore whether climate change risk perceptions actually translate into more environmentally sustainable consumer behavior.

Climate Change as a Threat

The online-survey was conducted in April, 2022 among the urban population in Belarus aged 18-75. The purpose of the survey was to collect individual data on environmentally responsible behaviors and climate change perceptions. The sample includes 1029 individuals and is representative by age, gender and region. According to the survey, 72.7 percent of the respondents consider climate change as a threat to the country in the coming 20 years.

To explore which demographic and socio-economic variables (e.g., education, age, gender, income, and mass media) influence the perception of climate change as a risk among the Belarusian population, we employ a logistic regression model. The results reveal that gender, personal experience of extreme weather events and exposure to climate change information on the Internet play an important role in forming climate change risk perceptions among Belarusians, as depicted in Table 1.

Table 1. Determinants of Climate Change Risk Perception

Note: Media channels are measured on a 5-point Likert scale where 0 denotes “Don’t use this media”; 1 “never” up until 4, “very often”, answering the question “How often do you come across the information about climate change, environmental problems or sustainable lifestyle on the following media?”. Standard errors are in parentheses, *** p<0.01, ** p<0.05 and * p<0.1

Women are 6.1 percent more likely to consider climate change as a threat than men. This could be due to a higher level of empathy exhibited by women, making them more worried about consequences of extreme weather events and environmental protection and more sensitive to the risk of environmental degradation (Milfont and Sibley, 2016). Respondents with personal experience from, or those who have close persons having suffered significant damage from severe weather events such as floods or violent storms in the past two years, are 25.2 percent more likely to perceive climate change as a risk. Thus, personal experience of severe weather events is one of the main factors that impact climate change risk perception. The literature also confirms that climate beliefs are linked to these experiences (see for instance Spence et al., 2011; Dai et al., 2015; Demski et al., 2017 and Bergquist et al., 2019).  Interestingly, out of all types of mass media included in the analysis (TV, newspapers, radio and the Internet), only exposure to environmental information on the Internet makes individuals 5.5 percent more likely to take climate change seriously. This indicates that nowadays people in Belarus get independent analytical and expert information on climate problems mainly from the Internet.

Environmentally Responsible Behavior

The same survey data was used to analyze environmentally responsible behavior among the Belarusian population. Although more than 72 percent of the respondents consider environmental change as a threat, the climate risk perception does not fully project into more sustainable behaviors – even within this subgroup. As illustrated in Figure 1, this belief is very well translated into such environmentally responsible actions as water saving, energy saving, mobility and repairing. The share of people engaged in these activities on a regular basis account for 62-73 percent.  These behaviors are however financially beneficial to the practitioner, and may largely be because of economic reasons rather than an effort to minimize the impact on the environment. At the same time, the survey shows that people in Belarus less often engage in such environmentally friendly actions such as waste separation, reduced use of plastic bags or use of own bag when shopping (see Figure 1). These actions are not linked to any financial benefits and are often associated with higher time costs (e.g., waste separation) or loss of convenience (e.g., decreased plastics use). This suggests that environmentally responsible behavior among the Belarusian population is largely determined by external factors, rather than a product of intrinsic care of the environment.

Figure 1. Frequency of Environmentally Responsible Behaviors Among the Respondents who Consider Climate Change as a Risk

Note: Distribution of the answers to the question “Could you please evaluate on a scale from 1 (never) to 4 (always) how often you engage in these behaviors for environmental reasons?” Mobility represents walking, biking or using public transportation instead of a car. Repairing means choosing to reuse or repair something (e.g. clothes) rather than to throw it away.

Conclusion

Survey results show that the urban population in Belarus recognizes global warming as a serious problem, with 72.7 percent of the respondents seeing climate change as a threat to the country in the next 20 years. However, these beliefs have not yet fully projected into green consumption behavior.

With this in mind, efforts to shift Belarusians towards environmentally responsive behavior should be strengthened. Endeavors need to be made to raise public awareness of environmental issues and to promote a sustainable lifestyle among the Belarusian population. In particular, and in addition to the Internet, the role of mass media (such as television, radio and print media) to deliver the message on the need for more sustainable consumption and greater involvement in environmentally friendly actions, ought to be increased.

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.

Minimum Wage Spike and Income Underreporting

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The labor markets of many transition countries are characterized by two features: a spike at the minimum wage level in the wage distribution and widespread use of so-called envelope wages, i.e. non-declared cash payments in addition to the official wage. In this brief, we present a body of suggestive evidence showing that tax evaders are overrepresented among minimum wage earners in Latvia. 

Introduction

Labor markets in many transition and post-transition countries are characterized by the prevalence of payroll tax evasion in the form of envelope wages, i.e. non-declared cash in addition to the official wage (see for instance Putnins and Sauka (2015) for Latvia, Paulus (2015) and Kukk and Staehr (2014) for Estonia and  Bíró et al. (2022) and Elek et al. (2012) for Hungary).

Another defining characteristic of these transition economies is a very large peak at exactly the minimum wage in the wage distribution. To explain this phenomenon, Tonin (2011) argues that the mass of individuals at the minimum wage level is composed to a large extent of workers receiving envelope wages, where employers and employees collude and agree on reporting only the minimum wage to minimize tax liabilities while remaining under the radar of the tax authorities. In such a setup, the minimum wage policy becomes an enforcement tool for the fiscal administration, as it pushes non-compliant firms to convert part of the envelope wage into an official wage so that it reaches the new minimum wage.

However, only scarce concrete evidence shows that payroll tax evaders are overrepresented among minimum wage earners. Considering the regular minimum wage hikes in the region (e.g., a 95 percent increase in Latvia in 2010-2022 and a planned increase by another 24 percent in 2023), understanding the interaction between minimum wage policy and labor tax evasion is crucial.

In this brief, we present a body of suggestive evidence highlighting the prevalence of wage underreporting at exactly the minimum wage level in Latvia.

Data and Methodology

We use Latvian administrative employer-employee data for 2011 to 2015, covering the full Latvian employed population at a monthly rate. To identify tax evasion, we rely on the comparison between small and large firms. The literature studying tax evasion provides considerable evidence showing that small firms tend to evade more taxes than large firms. Kleven et al. (2016) provide a theoretical foundation for this result, showing that collusive evasion is more difficult to sustain in firms with more employees. Empirically, this effect has been documented in many countries (see for instance Putnins and Sauka (2015), Gavoille and Zasova (2021), and Benkovskis and Fadejeva (2022) for the results on Latvia, Bíró et al. (2022) for Hungary, Paulus (2015) for Estonia, and Kumler et al. (2020) for Mexico).

In this brief, we use a very broad definition for firm size categories and divide firms into firms employing 30 or fewer employees as small and firms with more than 30 employees as large. With such a crude definition, it is inevitable that firms below and above the threshold are highly heterogeneous, implying that some firms below the threshold are tax-compliant, while some firms above the threshold are tax-evading. For our purposes though, it is sufficient to assume that the share of evading employees in small firms is larger than that in the sample of large firms.

Results

We begin by plotting the distribution of wages in the private sector. Figure 1 plots monthly wages in the range of 0–1000 Euros in 2011. The right most dashed vertical line in the figure marks the minimum wage (284.57 Euros per month in 2011) and the left most dashed line marks 50 percent of the minimum wage. There are clear spikes at the minimum wage (and at half of the minimum wage). The minimum level wage spike in small firms (top graph) is much more pronounced than in large firms (bottom graph), which is consistent with the idea that the spike is driven by income underreporting.

Figure 1. Gross wage distribution in the private sector in small (< 30 empl.) and large (> 30 empl.) firms in 2011.

Note: Micro enterprises are excluded. Vertical lines depict the minimum wage (284.57 Euro) and half of the minimum wage (142.29 Euro) in 2011. Source: Authors’ calculations.

This explanation implies that employers and employees choose to declare employment and underdeclare earnings instead of staying completely informal, which is consistent with the available evidence. Staying completely informal involves much higher risks of detection if authorities perform regular inspections of workplaces, and in many Central European countries with prevalent income underreporting, completely informal employment is not very common (OECD, 2008). In Latvia, firms have to register employees in the electronic system of the State Revenue Service before they start to work, hence the probability that an unofficially employed person is detected during a workplace inspection is very high (State Labor Inspectorate, 2010). Existing empirical evidence on Latvia also suggests that income underreporting is much more widespread than completely informal employment, which is estimated at only 2–3.5 percent (European Commission, 2014; Hazans, 2012). Hence, we interpret the spikes as indicative of tax evaders bunching at the minimum wage.

Wage Growth Among Minimum Wage Earners

Wages are expected to grow with tenure, but if minimum wage earners receive part of their income in cash, their reported wage can remain unchanged even after years of employment within a firm (as any increase would arguably go through the non-declared cash). To examine if this is the case, we exploit a period when there were no changes in the Latvian minimum wage (January 2011–December 2013). We select employees who were employed by the same firm in all months of 2011–2013, assign them to wage bins according to their wage in 2011, and in each wage bin calculate the share of workers whose wage in 2013 was the same as in 2011. We assign workers to 10-Euro bins, with the exception of minimum wage earners, whom we assign to a bin of 1 Euro.

As evident from Figure 2 minimum wage earners clearly stand out from other employees. In small firms, almost 45 percent of employees earning the minimum wage in 2011 had the same reported wage in 2013. There is also a spike at the minimum wage in large firms (28 percent), but it is less pronounced than in small firms.

Figure 2. Proportion of continuously employed workers facing no wage growth between 2011 and 2013, by wage bins, in small (< 30 empl.) and large (> 30 empl.) firms.

Note: Micro enterprises and public sector firms are excluded. Source: Authors’ calculations.

An alternative explanation for the large share of minimum wage earners who experience no wage growth could be that, for many of them, the minimum wage is binding. To rule this out, we perform the same calculations on a sample of young employees (24 or younger in 2011). Workers in the early stages of their careers tend to have higher returns to experience and tenure; thus, young workers are less likely to have no wage growth after three years of employment with the same firm. Figure 3 plots the results for young workers. In large firms, the spike at the minimum wage is more than twice as small as for the full sample of workers (12 percent vs. 28 percent), but in small firms it remains very high (33 percent).

Figure 3. Proportion of continuously employed young workers (aged 24 or less in 2011) facing no wage growth between 2011 and 2013, by wage bins, in small (< 30 empl.) and large (> 30 empl.) firms.

Note: Micro enterprises and public sector firms are excluded. Source: Authors’ calculations.

Conclusion

This brief documents highly prevalent tax evasion among minimum wage earners in Latvia. In such a context, the minimum wage is a powerful fiscal instrument as a higher minimum wage pushes non-compliant firms to disclose a larger share of their employees’ true earnings. In addition, wage underreporting among minimum wage earners can act as a shock absorber and cushion the negative employment effects of a minimum wage hike in countries where a large share of workers officially receive the minimum wage.

These upsides however come at a cost. The results presented in this brief by no means imply that all minimum wage earners are tax evaders; a notable share of employees receiving the minimum wage on paper do honestly earn only the minimum wage. In our paper (Gavoille and Zasova, 2022), we show that the flip side of the positive fiscal effect of a minimum wage hike is job losses among genuine low-wage earners and closures of tax-compliant firms that are affected by the hikes.

Acknowledgement

This brief is based on a recent article published in the Journal of Comparative Economics (Gavoille and Zasova, 2022). The authors gratefully acknowledge funding from LZP FLPP research grant No.LZP-2018/2-0067 InTEL (Institutions and Tax Enforcement in Latvia).

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.

How to Sustain Support for Ukraine and Overcome Financial and Political Challenges | SITE Development Day 2022

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This policy brief explores how Europe and global partners can sustain support for Ukraine’s reconstruction following Russia’s invasion. Drawing from expert discussions at SITE Development Day 2022, it highlights strategies for rebuilding Ukraine’s economy, democracy, and energy infrastructure.

Introduction

The Russian war on Ukraine has turmoiled Europe into its first war in decades and while the effects of the war are harshly felt in Ukraine with lives lost and damages amounting, Europe and the rest of the world are also being severely affected. This policy brief shortly summarizes the presentations and discussions at the SITE Development Day Conference, held on December 6, 2022. The main focus of the conference was how to maintain and organize support for Ukraine in the short and long run, with the current situation in Belarus and the region and the ongoing energy crisis in Europe, also being addressed. 

War in Ukraine, Oppression in Belarus

Starting off the conference, Sviatlana Tsikhanouskaya, Leader of the Belarusian Democratic Forces, delivered a powerful speech on the necessity of understanding the role of Belarus in the ongoing war in Ukraine. Tsikhanouskaya argued that Putin’s war on Ukraine was partly a result of the failed Belarusian revolution of 2020. The following oppression, torture, and mass arrestations of Belarusians is a consequence of Lukashenka’s and Putin’s fear of a free Belarus, a Belarus that is no longer in the hands of Putin – who sees not only Belarus but also Ukraine as colonies in his Russian empire. Amidst the fight for Ukraine, we must also fight for a free Belarus, Tsikhanouskaya added. Not only Belarusians fighting alongside Ukrainians against Russia in Ukraine, but also other parts of the Belarusian opposition need support from the free and democratic world and the EU. The massive crackdowns on opponents of the Belarusian regime today and the war on Ukraine are not only acts of violence, but they are also acts against democracy and freedom. The world must therefore continue to give support to those fighting in both Belarus and Ukraine. Ukraine will never be free unless Belarus is free, Tsikhanouskaya concluded.

Johan Forssell, Minister of Foreign Trade and International Development Cooperation continued Tsikhanouskaya’s words on how the Russian attack must be seen and treated as a war on democracy and the free world. Belarus, Moldova and especially Ukraine will receive further support from Sweden, Forssell continued, adding that the Swedish support to Ukraine has more than doubled since the invasion in February 2022. Support must however not be given only in economic terms and consequently Sweden fully supports Ukraine on its path to EU-membership, which will be especially emphasized during Sweden’s upcoming EU-presidency.  Support for the rule of law, democracy and freedom will continue to be essential and, in the forthcoming reconstruction of Ukraine, these aspects – alongside long term sustainable and green solutions – must be integrated, Forssell continued. Forssell also mentioned the importance of reducing the global spillover effects from the war. In particular, Forssell mentioned how the war has struck countries on the African continent, already hit with drought, especially hard with increased food prices and increased inflation, displaying the vital role Ukrainian grain exports play.

Andrij Plachotnjuk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the Kingdom of Sweden, further talked about the need for rebuilding a better Ukraine, emphasizing the importance of involvement from Kiyv School of Economics (KSE) and other intellectuals and businesses in this process. Plachotnjuk also pinpointed what many others would come to repeat during the day; that resources, time and efforts devoted to supporting Ukraine must be maintained and persevered in the longer perspective.

Economic Impacts From the War and How the EU and Sweden Can Provide Support

During the first half of the conference, the Ukrainian economy and how it can be supported by the European Union was also discussed. On link from Kiyv, Tymofiy Mylovanov, President of the Kyiv School of Economics, shared the experiences of the University during wartime and presented the work KSE has undertaken so far – and how this contributes to an understanding of the damages and associated costs. Since the invasion, KSE has supported the government in three key areas; 1) Monitoring the Russian economy, 2) Analyzing what sanctions are relevant and effective, and 3) Estimating the cost of damages from the war. For the latter, KSE is collaborating with the World Bank using established methods of damage assessment including crowd sourced information on damages complemented with images taken by satellites and drones. According to Mylovanov, the damage assessment is crucial in order to counter Russia’s claims of a small conflict and to remind the international community of the high price Ukraine is paying to hold off Russia.

The economic impact from the war was further accentuated during the presentation by Yulia Markuts, Head of the Centre of Public Finance and Governance Analysis at the Kyiv School of Economics. Markuts explained how the Ukrainian national budget as of today is a “wartime budget”. Since February 2022, the budget has been reoriented with defense and security spending having increased 9 times compared to 2021, whereas only the most pressing social expenditures have been implemented. This in a situation where the Ukrainian GDP has simultaneously decreased by 30 percent. Although there has been a substantial inflow of foreign aid, in the form of grants and loans, the Ukrainian budget deficit for 2023 is estimated to 21 percent. Part of the uncertainty surrounding the Ukrainian budget stems from the fact that the inflow from the donor community is irregular, prompting the government to cover budget deficits through the National Bank which fuels inflation and undermines the exchange rate. Apart from the large budget posts concerning military spending, major infrastructural damages are putting further pressure on the Ukrainian budget in the year to come, Markuts continued. As of November 2022, the damages caused by Russia to infrastructure in Ukraine amounted to 135,9 billion US Dollars, with the largest damages having occurred in the Kiyv and Donetsk regions, as depicted in Figure 1.

Figure 1. Ukrainian regions most affected by war damages, as of November 2022.

Map showing the ten most affected regions in Ukraine from destruction and damage to housing stock as of November 2022, highlighting areas like Donetsk, Luhansk, and Kharkiv — essential data for reconstruction support Ukraine.

Source: Kiyv School of Economics

The infrastructural damages constitute a large part of the estimated needed recovery support for Ukraine, together with losses to the state and businesses amounting to over one trillion US Dollars. However, such estimates do not cover the suffering the Ukrainian people have encountered from the war.

The large need for steady support was discussed by Fredrik Löjdquist, Centre Director of the Stockholm Centre for Eastern European Studies (SCEEUS), who argued the money needs to be seen as an investment rather than a cost, and that we at all times need to keep in mind what the consequences would be if the support for Ukraine were to fizzle out. Löjdquist, together with Cecilia Thorfinn, Team leader of the Communications Unit at the Representation of the European Commission in Sweden, also emphasized how the reconstruction should be tailored to fit the standards within the European Union, given Ukraine’s candidacy status. Thorfinn further stressed that the reconstruction must be a collective effort from the international community, although led by Ukraine. The EU is today to a large extent providing their financial support to Ukraine through the European Investment Bank (EIB). Jean-Erik de Zagon, Head of the Representation to Ukraine at the EIB, briefly presented their efforts thus far in Ukraine, efforts that have mainly been aimed at rebuilding key infrastructure. Since the war, the EIB has deployed an emergency package of 668 million Euro and 1,59 billion for the infrastructure financing gap. While all member states need to come together to ensure continued support for Ukraine, the EIB is ready to continue playing a key role in the rebuilding of Ukraine and to provide technical assistance in the upcoming reconstruction, de Zagon said. This can be especially fruitful as the EIB already has ample knowledge on how to carry out projects in Ukraine.

During a panel discussion on how Swedish support has, can and should continuously be deployed, Jan Ruth, Deputy Head of the Unit for Europe and Latin America at Sida, explained Sida’s engagement in Ukraine and the agency’s ambition to implement a solid waste management project. The project, in line with the need for a green and environmentally friendly rebuild, is today especially urgent given the massive destructions to Ukrainian buildings which has generated large amounts of construction waste. Karin Kronhöffer, Director of Strategy and Communication at Swedfund, also accentuated the need for sustainability in the rebuild. Swedfund invests within the three sectors of energy and climate, financial inclusion, and sustainable enterprises, and hash previously invested within the energy sector in Ukraine. Swedfund is also currently engaged in a pre-feasibility study in Ukraine which would allow for a national emergency response mechanism. Representing the business side, Andreas Flodström, CEO and founder of Beetroot, shared some experiences from founding and operating a tech company in Ukraine for the last 10 years. According to Flodström there will, apart from a huge need in investments in infrastructure, also be a large need for technical skills in the rebuild. Keeping this in mind, bootcamp style educations are a necessity as they provide Ukrainians with essential skills to rebuild their country.

A recurring theme in both panel discussions was how the reconstruction requires both public and private foreign investments. Early on, as the war continues, public investments will play the dominant part, but when the situation becomes more stable, initiatives to encourage private investments will be important. The potential of using public resources to facilitate private investments through credit guarantees and other risk mitigation strategies was brought up both at the European and the Swedish level, something which has also been emphasized by the new Swedish government.

Impacts From the War Outside of Ukraine – Energy Crisis and Other Consequences in the Region

The conference also covered the effects of the war outside of Ukraine, initially keying in on the consequences from the war on energy supply and prices in Europe. Chloé Le Coq, Professor of Economics, University Paris-Pantheon-Assas (CRED) & SITE, gave a presentation of the current situation and the short- and long-term implications. Le Coq explained that while the energy market is in fact functioning – displaying price increases in times of scarcity – the high prices might lead to some consumers being unable to pay while some energy producers are making unprecedented profits. The EU has successfully undertaken measures such as filling its gas storage to about 95 percent (goal of 80 percent), reducing electricity usage in its member countries, and by capping market revenues and introducing a windfall tax. While the EU is thus appearing to fare well in the short run, the reality is that EU has increased its coal dependency and paid eight times more in 2022 to fill its gas storage (primarily due to the imports of more costly Liquified Natural Gas, LNG). In the long run, these trends are concerning, given the negative environmental externalities from coal usage and the market uncertainty when it comes to the accessibility and pricing of LNG. Uncertainties and new regulations also hinder investments signals into new low-carbon technologies, Le Coq concluded. Bringing an industrial perspective to the topic, Pär Hermerèn, Senior advisor at Jernkontoret, highlighted how the energy crisis is amplified by the increased electricity demand due to the green transition. Given the double or triple upcoming demand for electricity, Hermerèn, referred back to the investment signals, saying Sweden might run the risk of losing market shares or even seeing investment opportunities leave Sweden. This aspect was also highlighted by Lars Andersson, Senior advisor at Swedenergy, who, like Hermerèn, also saw the Swedish government’s shift towards nuclear energy solutions. Andersson stated the short-term solution, from a Swedish perspective, to be investments into wind power, urging policy makers to be clear on their intentions in the wind power market.

Other major impacts from the war relate to migration, a deteriorating Belarusian economy and security concerns in Georgia. Regarding the latter, Yaroslava Babych, Lead economist at ISET Policy Institute, Georgia, shared the major developments in Georgia post the invasion. While the Georgian economic growth is very strong at 12 percent, it is mainly driven by the influx of Russian money following the migration of about 80 000 Russians to Georgia. This has led to a surge in living costs and an appreciation of the local currency (the Lari) of 12,6 percent which may negatively affect Georgian exports. Additionally, it may trigger tensions given the recent history between the countries and the generally negative attitudes towards Russians in Georgia. Michal Myck, Director at CenEa, Poland, also presented migration as a key challenge. While the in- and outflow of Ukrainian refugees to Poland is today balanced, the majority of those seeking refuge in Poland are women and children and typically not included in the workforce. To ensure successful integration and to avoid massive human capital losses for Ukraine, Myck argued education is key, pointing to the lower school enrollment rates among refugee children living closer to the Ukrainian border. Apart from the challenges posed by the large influx of Ukrainian in the last year, the Polish economy is also hit by high energy prices, fuel shortages and increasing inflation. Lev Lvovskiy, Research fellow at BEROC, Belarus, painted a similar but grimmer picture of the current economic situation in Belarus. Following the invasion, all trade with Ukraine has been cut off, while trade with Russia has increased. Belarus is facing sanctions not only following the war, but also from 2020, and the country is in recession with GDP levels dropping every month since the invasion. Given the political and economic situation, the IT sector has shrunk, companies oriented towards the EU has left the country and real salaries have decreased by 5 percent. At the same time, the policy response is to introduce price controls and press banknotes.

Consequences of War: An Academic Perspective

The later part of the afternoon was kicked off by a brief overview of the FREE Network’s research initiatives on the links between war and certain development indicators. Pamela Campa, Associate Professor at SITE, presented current knowledge on the connection between war and gender, with a focus on gender-based violence. Sexual violence is highly prevalent in armed conflict and has been reported from both sides in the Donetsk and Luhansk regions since 2014 and during the ongoing war, with nearly only Russian soldiers as perpetrators. Apart from the direct threats of sexual violence during ongoing conflict and fleeing women and children risking falling victims to trafficking, intimate partner violence (IPV) has been found to increase post conflict, following increased levels of trauma and post-traumatic stress disorder (PTSD). While Ukrainian policy reforms have so far strengthened the response to domestic violence there is still a need for more effective criminalization of domestic violence, as the current limit for prosecution is 6 months from the date crime is committed. An effective transitional justice system and expertise on how to support victims of sexual violence in conflict, alongside economic safety measures undertaken to support women and children fleeing, are key policy concepts Campa argued. Coming back to the broader topic of gender and war, Campa highlighted the need for involvement of women in peace talks and negotiations, something research suggests matter for both equality, representativeness, and efficiency.

Providing insights into the relationship between the environment and war, Julius Andersson, Assistant Professor at SITE, initially summarized how climate change may cause conflict along four channels: political instability and crime rates increasing as a consequence of higher temperatures, scarcity of natural resources and environmental migration. Conflict might however also cause environmental degradation in the form of loss of biodiversity, pollution and making land uninhabitable. As for the negative impact from the war in Ukraine, Andersson highlighted how fires from the war has caused deforestation affecting the ecosystems, that rivers in conflict struck areas in Ukraine and the Sea of Azov are being polluted from wrecked industries (including the Azovstal steelworks) and lastly that there is a real threat of radiation given the four major nuclear plants in Ukraine being targeted by Russian forces. Coming back to a topic mentioned earlier during the day, Andersson also emphasized potential conflict spillovers into other parts of the world due to the war’s impact on food and fertilizer prices.

Concluding the session, Jonathan Lehne, Assistant Professor at SITE, reviewed how war and democracy is tied to one another, highlighting that while studies have found that democracies per se are not necessarily less conflict prone, it is still the case that democratic countries almost never fight each other. As for the microlevel takeaways from previous research, it appears as if individuals and communities having experienced violence and casualties actually reap a democratic dividend in some respects, such as greater voting participation. On the other hand, while areas with a large refugee influx also experience an increased voter turnout, voting for right-wing parties also increase with politicians exploiting this in their communication.

Book Launch – Reconstruction of Ukraine: Principles and Policies

The Development Day was also guested by Ilona Sologoub, Scientific Editor at VoxUkraine, Tatyana Deryugina, Associate Professor of Finance at the University of Illinois at Urbana-Champaign, and Torbjörn Becker, Director of SITE, who presented their newly released book “Reconstruction of Ukraine: Principles and policies”. Sologoub started off by giving an overview of the mainly economic topics covered in the book and pointing out that the main purpose of the book is to inform policy makers about the present situation and to suggest needed reforms and investments. Becker outlined the four key principles recommended to stem corruption during reconstruction; 1) Remove opportunities for corruption and rent extraction, 2) Focus on transparency and monitoring of the whole reconstruction effort, 3) Make information and education an integral part of the anti-corruption effort, and 4) Set up legal institutions that are trusted when corruption does occur. Deryugina focused on the energy sector and related back to what had previously been discussed throughout the day, the need to “build-back-better”. Deryugina mentioned that Ukraine, previously heavily reliant on coal and gas imports from Russia, now have the opportunity to steer away from low energy efficiency and bottleneck issues, towards becoming a European natural gas hub. The book is available for free here. There will also be a book launch on the 11th of January 2023 at Handelshögskolan.

Concluding Remarks

Via link from Kyiv, Nataliia Shapoval, Head of KSE Institute and Vice President for Policy Research at Kyiv School of Economics closed the conference by emphasizing the urgency of continued education of Ukrainians in Ukraine and elsewhere to avoid loss of Ukrainian human capital. Shapoval also stressed how universities can act as thinktanks, support policy makers in Ukraine and Europe to come up with effective sanctions against Russia and provide a deeper understanding of the current situation – a situation which will linger and in which Ukraine needs continued full support.

This year’s SITE Development Day conference gave an opportunity to discuss the need for continued support for Ukraine and the implications from the war in a global, European, and Swedish perspective. Representatives from the political, public, private and academic sectors contributed with their insights into the challenges and possibilities at hand, providing greater understanding of how the support can be sustained, with the goal of a soon end to the war and a successful rebuild of Ukraine.

List of Participants in Order of Appearance

  • Anders Olofsgård, Deputy Director at SITE
  • Sviatlana Tsikhanouskaya, Leader of the Belarusian Democratic Forces
  • Johan Forssell, Minister of Foreign Trade and International Development Cooperation
  • Andrij Plachotnjuk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the Kingdom of Sweden
  • Tymofiy Mylovanov, President of the Kyiv School of Economics (on link from Kyiv)
  • Yuliya Markuts, Head of the Centre of Public Finance and Governance Analysis, Kyiv School of Economics
  • Jean-Erik de Zagon, Head of the Representation to Ukraine at the European Investment Bank
  • Cecilia Thorfinn, Team leader of the Communications Unit at the Representation of the European Commission in Sweden
  • Fredrik Löjdquist, Centre Director of the Stockholm Centre for Eastern European Studies (SCEEUS)
  • Jan Ruth, Deputy Head of the Unit for Europe and Latin America at Sida
  • Karin Kronhöffer, Director of Strategy and Communication at Swedfund
  • Andreas Flodström, CEO and founder of Beetroot
  • Chloé Le Coq, Professor of Economics, University Paris-Pantheon-Assas (CRED) & SITE
  • Lars Andersson, Senior advisor at Swedenergy
  • Pär Hermerèn, Senior advisor at Jernkontoret
  • Ilona Sologoub, VoxUkraine scientific editor (on link)
  • Tatyana Deryugina, Associate Professor of Finance at the University of Illinois at Urbana-Champaign (on link)
  • Torbjörn Becker, Director at SITE
  • Michal Myck, Director at CenEa, Poland
  • Yaroslava Babych, Lead economist at ISET Policy Institute, Georgia
  • Lev Lvovskiy, Research fellow at BEROC, Belarus
  • Pamela Campa, Associate Professor at SITE
  • Julius Andersson, Assistant Professor at SITE
  • Jonathan Lehne, Assistant Professor at SITE
  • Nataliia Shapoval, Head of KSE Institute and Vice President for Policy Research at Kyiv School of Economics (on link)

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.

Further Reading on Support for Ukraine’s Reconstruction and Post-Conflict Recovery

Additional analyses related to Ukraine’s reconstruction, European security, and post-conflict policy are available in the following reports and policy briefs:

Related publications addressing European policy toward Eastern Europe, post-conflict recovery economics, and the energy crisis in Europe further contribute to understanding the broader geopolitical and economic dimensions of the war’s impact. For comprehensive research and expert insights on Ukraine’s reconstruction, European aid, and post-war recovery, explore the FREE Network policy briefs under the Ukraine and Russo-Ukrainian War categories.

The Belarusian Currency Market During War in Ukraine: Hidden Problems and New Trends

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Belarus has faced unprecedented sanctions during the last year and the new economic conditions have led to a GDP decline and inflation growth. At the same time, the situation on the currency market has been stable since April 2022. The Belarusian Ruble demonstrated a gradual appreciation to the US Dollar and the Euro and a decline to the Russian Ruble. The appreciation of the Belarusian Ruble against the US Dollar has given households the illusion that the economic situation is not that bad. This brief analyses the main factors of the current situation on the currency market as well as describes the challenges which might destabilise the market. The importance of changing selected currencies in the currency basket and the start of a reorientation of the Belarusian economy from Western to Eastern partnerships, are also described.

The National Bank of the Republic of Belarus’ Policy on the Currency Market

In Belarus, currency has always played an important role as an indicator of economic stability. Household’s reactions to sharp fluctuations of the Belarusian Ruble have been expressed in an immediate demand growth for foreign currency (US Dollar and Euro mostly). After the war in Ukraine started and the exchange rate of the Belarusian Ruble began declining, people tried to make currency deposits from banks and buy foreign currency. In contrast to the Central Bank of Russia, the National Bank of the Republic of Belarus (NBRB) introduced no restrictions on the currency market. However, Belarusian financial institutions imposed their own limits on carrying out non-cash exchange operations, cash withdrawals from ATMs and from bank accounts. Financial institutions also limited the availability of currencies in exchange offices and imposed limits on payment transactions by credit card outside of Belarus. All these processes took place under the condition of a sharp devaluation of the Russian Ruble.

The dynamics in the Russian Ruble have affected the Belarusian Ruble fluctuation (see Figure 1). The correlation between the currencies was strong even before the war, given that the Russian Federation is a dominant economic partner for Belarus, and has since become stronger.

The share of Russian Ruble in the Belarusian currency basket is at 50 percent. Moreover, in Q1-Q3 2022 the Belarusian dependency on the Russian economy increased in the aftermath of losing the Ukrainian market and facing European export shortages. Between January and August 2022, the share of export of goods to CIS countries (where the main share of exports goes to Russia) was 65,7 percent, as compared to 58,4 percent for the corresponding months in 2021. The same tendencies are apparent when considering the import of goods. The share of import from CIS countries reached 64,7 percent between January and August in 2022, as compared to 61,3 percent for January-August in 2021 (BSCBR, 2022).

Figure 1. The weighted average exchange rate of the Belarusian Ruble, in Belarusian Rubles.

Source: Statistical Bulletin #9 (279) 2022.

Sanctions and the Russian Central Bank’s policy have led to a stabilisation on the Russian currency market. The Central Bank of Russia has introduced restrictions on capital outflow from the country, limited cash withdrawals from bank accounts and foreign currency purchases in exchange offices (Tinkoff, 2022). The cancelation of budget rule has further supported the Russian Ruble exchange rate. But the main reason for the Russian currency exchange rate reversal post March 2022, relates to the situation regarding foreign trade. Due to sanctions, imports had significantly decreased. At the same time, high energy prices allowed for export growth. Between January and June 2022 Russia displayed a high positive trade balance (169,62 billion USD), the largest in the last 7 years (CBR, 2022). As a result of sanctions, the Central Bank of Russia started to prepare the market to work with currencies of friendly countries.

Similar tendencies can be seen in Belarus. NBRB has changed the composition of the foreign currency trade to turn the Belarusian economy from a Western to an Eastern direction regarding economic cooperation. In July 2022 the Chinese Yen was included in the currency basket. At the same time the share of Russian Ruble was at 50 percent, the US Dollar at 30 percent, the Euro at 10 percent and the Chinese Yen at 10 percent. In August 2022, the NBRB began to define daily exchange rates for the Vietnamese Dong, Brazilian Real, Indian Rupee and UAE Dirham. Finally, since October 2022, the exchange rate for the Qatari Riyal has been defined on a monthly basis (The National Bank of Belarus, 2022). These changes are indicators of ongoing and planned structural changes to the economy to accommodate increased cooperation with the Eastern economies.

Currency Market Stabilisation and Current Risks

The Belarusian Ruble has not repeated the fluctuation of the Russian currency. It did however copy its tendency to appreciate to the US Dollar and the Euro, as of April 2022. Besides the appreciation of the Russian Ruble and personal bank’s restrictions on national currency markets, the stabilisation of the Belarusian Ruble can be explained by the positive trade balance. In contrast to Russia, the growth of net export in Belarus was due to a faster decline of imports than exports. There are several reasons why this can be a problem for currency market stabilisation in the future.

First, Belarus’ foreign trade has become more and more oriented toward the Russian market. If the main trade partner experiences difficulties (for example, oil price caps) this could lead to a devaluation of the Russian Ruble and, as a result, declining competitiveness of Belarusian goods on the Russian market.

Second, reorientation of Belarusian exports from Western to Eastern countries require time and additional financial resources and exports are not always profitable due to high logistical costs. Any additional sanctions may further limit such opportunities.

Third, main export-oriented services, such as the Transport and ICT sectors, are affected by sanctions and their consequences. In Q3 2022, the transport turnover was equal to 68,3 percent, as compared to the same period 2021. The ICT sector is still having a positive impact on GDP growth. However, in January-September 2021 the positive contribution from this sector to the Belarusian GDP was 0,9 percent, while it between January and September 2022 was only 0,2 percent.

Recent success in foreign trade is mostly due to the continuation of selling potash, nitrogen fertilisers and other products on the global market, a strong Russian Ruble and Russian market openness towards Belarusian companies, low levels of Belarusian imports, and cheap Russian gas (the special price for Belarus is 128 US Dollars for 1000 cubic meters). If the terms of trade with Russia worsen and key export-oriented industries suffer from sanctions and reputational risks, the currency market could however be destabilised.

Another problem for the Belarusian Ruble stability in the middle and long term is related to household behaviour. In January-August 2022 Belarusians sold more foreign currency than they bought. Despite the Ruble fluctuation, the high levels of net sales in March was due to bank restrictions. In June, the net purchase was related to seasonal factors (see Figure 2). For the other months of the period the net selling can be explained by a stable situation on the currency market and real incomes declining. People sold currency in an attempt to maintain their previous standards of living.

Figure 2. Balance of purchase and sale of foreign currency by households (+ “net purchase”, – “net sale”), mln. USD.

Source: Based on data from the National Bank of Belarus.

In September-October 2022 Belarusian households bought more than (an equivalent of) 300 mln. USD on net basis, primarily in USD or Euro, which is very unusual for the Belarusian market situation. There are several possible explanations for such behaviour:

  1. Despite difficulties with obtaining visas Belarusians are going to Poland and other European countries to shop. Because of sanctions, retaliatory sanctions as well as a high price control on the domestic market, the range of goods has shrunk, and prices have risen. In European countries Belarusians can purchase much cheaper goods both for personal use and for resale.
  2. Partial mobilisation in Russia has increased the uncertainty of further political steps in Belarus. Households thus purchase foreign currency to establish an extra safety cushion.
  3. In Q3 2022 there was a net cash outflow on international remittances, for the first time since 2017. Traditionally, Belarus has seen a net inflow of foreign remittances. In 2022 Belarusian banks were switched off from the SWIFT system which incurred problems with operations in foreign currencies for banks under sanctions. As a result, cash inflow has declined (see Figure 3). Cash outflows however remained on the same level as in previous years. This can be explained by high-level specialists and people employed within ICT leaving the country. During relocation people have sold apartments and cars and exchanged accumulated incomes from Belarusian Rubles to US Dollars or Euros and sent to foreign bank accounts (even under the conditions of facing difficulties with conducting money transfers).

Figure 3. Net cash inflow (+)/ outflow (-) for international remittances, USD mln.

Source: Based on data from the National Bank of Belarus.

Maintaining the trend of net currency purchase together with possible trade balance deterioration may exacerbate the situation on the domestic currency market. Another risk to the currency market stability is posed by the insufficient size of FX reserves (in the amount of less than 3 months of import). Moreover, the 900 mln. US Dollars in reserves, given by the IMF in 2021 as support to fight Covid-19, can’t be used as this financial support is given in the form of SDR (Special Drawing Rights), and the exchange of SDR to US Dollars or other currencies is challenging due to sanctions (Congress, 2022).

At the same time, the Government’s decision to make external debt payments in Belarusian Rubles supports the FX reserves level. It has also been decided that payments on Eurobonds to the Nordic Investment Bank, the European Bank of Reconstruction and Development and the International Bank of Reconstruction and Development are to be paid in Rubles. These decisions have decreased the country’s long-term rating on foreign liabilities to the Restricted Default level. In that sense, short-term gains can lead to significant financial losses in the long term. In the future it will be necessary not only to pay outstanding debts but also to improve Belarus’ reputation on the international financial market. Today, the Russian Federation is the main investor in the Belarusian economy. But since its support is limited, it is likely to be insufficient for the safe functioning of the Belarusian economy.

Conclusion

The stability of the Belarusian currency market is not the result of economic success, but rather a reflection of the tightening of the economy. The appreciation of the Belarusian Ruble to the US Dollar and Euro has taken place during an accelerated reduction in Belarusian imports. At the same time the weakness of the Belarusian currency to the Russian Ruble entails competitiveness of Belarusian products on the Russian market. Foreign exchange reserves, although insufficient, have maintained in size due to the low demand for foreign currency and foreign debt payments in Belarusian Rubles. Disruptions to economic and political relations with Western countries stimulates the Belarusian authorities to reorient the economy towards Eastern partners, which has led to a modification of the currency basket composition. In the long run, the current stability of the Belarusian currency can quickly disappear in case one or several risks are realised. If the Russian Ruble devaluates or trade balance deteriorates and demand for foreign currency increases, the stability of the Belarusian Ruble exchange rate can be ruined.

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.

Can the Baltic States Do Without Russian Electricity?

20221130 Can the Baltic States Do Without Russian Electricity Image 01

Although much smaller than Russian exports of other energy commodities, Russian electricity exports to Europe have been a part of the European electricity systems. There are several connection points between the Russian and EU markets, but the Baltic States are the most exposed to Russian influence in the electricity sector. This brief discusses the Baltics’ dependency on Russian electricity, which currently accounts for 10 percent of the total Baltic electricity consumption. We argue that, while the Baltic states have some resilience (partly due to their connection to the Nordic countries), they are not immune to a complete halt to the Russian electricity trade, at least not in the short run.

The continuing military conflict in Ukraine and cut-offs of Russian gas to Europe are driving energy prices to unprecedented levels and creating concern about energy security all over Europe. The reliance on the Russian gas supply and the consequences of this has been profoundly discussed (for an overview, see e.g., Le Coq and Paltseva, 2022). At the same time, the topic of Russian electricity delivered to the EU has been largely left out of the current conversation.

Russia is exporting electricity directly to Europe, although at a much smaller scale than it has been exporting other energy commodities. There are several transmission connection points between the Russian and EU markets, but the situation of the Baltic States is the most precarious. They consume Russian electricity (about 10 percent of their needs) and their grids are still synchronised with Russia and Belarus. Therefore, they are exposed to some supply disruption and a desynchronization threat from Russia, potentially resulting in high market prices, severe congestion and even blackouts. Because the Baltics are connected to the leading power market in Europe, Nord Pool, any unexpected shocks may have consequences beyond the Baltic region.

Understanding how the Baltic States depend on Russia for their power consumption is an important element of the European energy security debate. This brief discusses the severity of the Baltics’ reliance on Russian electricity. We initially discuss the effect of a sudden halt to the Russian electricity trade in May 2022. We then address the potential consequences of the abrupt exclusion from the Russia-controlled transmission network. Finally, we discuss the future energy mix thought to replace Russian electricity in the Baltics.

The Baltic States’ Exposure to Indirect Imports of Russian Electricity

The Baltics’ exposure is analysed by examining the impact of a sudden stop of imports of Russian electricity to the EU in May 2022, which affected Nord Pool (https://www.nordpoolgroup.com/en/) prices as well as congestion in the Baltic States. This event cannot be qualified as an external shock, required for a rigorous empirical analysis. Nonetheless, it helps us assess the Baltics’ exposure.

On May 15th 2022, Russia broke off its electricity trade with Finland. This event is relevant to consider as Finland is increasingly a primary import source for the Baltic States. Any electricity supply disruption affecting Finland may therefore impact the Baltics’ energy system balance. To assess how the event impacted the Baltic electricity market, we compare the congestion occurrences in 2021 and 2022.

A standard way to assess the misfunctioning of a power market is to look at congestion episodes. The Nord Pool market, to which the Baltic states are connected, has several bidding areas. Prices between zones may differ in case of transmission bottlenecks. When transmission lines are saturated, no more electricity can, in that period, be transported from the cheap to the expensive areas to alleviate prices, referred to as congestion.

In the graphs below, we illustrate the congestion in the Baltics in 2021 as compared to 2022. Looking at the 2021 data for Estonia and Latvia, the countries belonged to the same price area most of the year; some price differences were observed in the summer months, but only 10 percent of the hours within those months were congested. In 2022 the price differences between the two countries grew substantially, since May reaching 20 percent, with more congested hours (Figure 1). In 2022 price differences also increased between Lithuania and Southern Sweden (region SE 4) as depicted in Figure 2.

Figure 1. Congestion between Estonia and Latvia (as percentage of congested hours out of all hours within a given month).

Source: Own calculations based on NordPool data.

Figure 2. Congestion between Lithuania and Sweden (SE4) (as percentage of congested hours out of all hours within a given month).

Source: Own calculations based on NordPool data.

Our aim is not to show a causal effect of the withdrawal of Russia from commercial electricity trading with the Baltic States region, but to describe some general, coincidental trends in congestion. Note that the congestion might be a result of the extreme prices observed in the Baltics – on August 17th 2022, prices reached the Nord Pool cap of 4000€/MW, the highest ever level in the region (Lazarczyk Carlson and Le Coq, 2022a).

To conclude, halting the electricity trade between Russia and Finland appears to have had some impact on the congestion in the Baltic States. Still, the consequences were not severe as the Baltics were already curtailing commercial exchanges with Russia and Belarus. Additionally, the Finnish yearly imports from Russia constituted at most 10 percent of the annual Finnish consumption.

The Baltic States’ Exposure to a Desynchronization Threat

The Baltics belong to the Moscow-controlled synchronous electrical power grid, BRELL, which connects power systems of Belarus, Russia, Estonia, Latvia and Lithuania. This grid dependency makes it virtually impossible for the Baltic States to completely stop Russian and Belarussian power from floating into the Baltics´ territory. A desynchronization from the BRELL network is currently not feasible. Although the Baltics have invested heavily in grid extensions and upgrade, the connection to the European grid is scheduled only for 2024/2025. Therefore, even though the Baltic States have been limiting commercial trading with Russia and Belarus on the Nordic electricity market, they are still receiving Russian/Belarusian electricity.

The Baltics’ dependency on the BRELL network creates a potential threat to the Baltic electricity supply security in case Russia should decide to weaponize its electricity supply further and disconnect the Baltic States from the network ahead of the planned exit in 2024/2025 (Lazarczyk Carlson and Le Coq, 2022a). Such premature disconnection could result in severe blackouts, and immediate reactions would be required to keep the system operational. In such scenario, strong support from the Nordic countries via Finland and/or Sweden would be needed. It is however important to keep in mind that a sudden disconnection from BRELL also could harm Kaliningrad – the Russian enclave between Lithuania and Poland, on the shores of the Baltic Sea. Although Russia has invested heavily in expanding Kaliningrad generation capacities and its energy self-sufficiency, it is not clear whether the region is to this day prepared to operate in island mode without the support of the BRELL and neighbouring countries. Up to date, three successful operating exercises in island mode have been conducted in Kaliningrad, the longest lasting for 72 hours. However, the two tests scheduled for 2022 have been cancelled.

The future re-initialization of electricity trading with Russia is uncertain at this point and the role of Russian electricity has diminished over the years. The Baltics are not planning to maintain any transmission connection with Russia and Belarus after synchronising with the European power grid. However, the Finnish standpoint needs to be clarified. If the Finnish-Russian electrical power trade exchange is re-established in the future, Russian electricity might once again flow into the Baltics´ transmission grid as imports from Finland are forecasted to increase in the coming years due to a third interconnector, which should become operational in 2035.

The Baltics’ (Future) Energy Mix Without Russian Electricity

The alternatives to Russian electricity depend on the Baltics’ energy mix and transmission system. In 2021 the demand for electric power in the Baltics was 27 TWh, with Latvia representing 26 percent, Estonia 30 percent, and Lithuania 44 percent of the total demand. Consumption is forecasted to grow by 60-65 percent by 2050, due to the electrification of the economy and increasing needs within industries, housing, transportation, etc. (Nordic Energy Research, 2022).

All Baltic States are today net importers of electricity. The main import sources are Finland and, to a lesser extent, Sweden, which have jointly exported 45 TWh of electric power to the region over the years 2016-2021. Finland is itself a net importer of electricity mainly importing power from Sweden. Until May 2022, Finland’s second import source was Russia.

The Baltics are heavily dependent on fossil fuels in their electricity mix as illustrated in Table 1.

Table 1. Energy mix for electricity production (MW) in the Baltics, 2022.

Source: ENTSO-E Transparency platform.

The region is now trying to limit the use of fossil-fuel energy and expand its green energy potential, as extensively discussed in Lazarczyk Carlson E. and Le Coq C. (2022b). The actual installed capacity for the onshore wind is however insufficient, with 326 MW in Estonia, 87 MW in Latvia, and 671 MW in Lithuania. The current offshore wind’s capacity is non-existent. There are some plans to develop 4.5 GW in Lithuania, 7 GW in Estonia, and 14.5 GW in Latvia by 2050, but this will require substantial investments (European Commission, 2019).

The region also plans to expand solar power production, especially in Latvia and Lithuania, where the current capacity is 14 and 259 MW respectively. There are also plans to expand Latvian hydro production for storage and balancing needs; currently, Latvia has 1588 MW of installed run-of-the-river hydro capacity, the highest among the Baltic States.

Investing in nuclear power is another possibility which is currently being considered. As part of the EU accession process, Lithuania shut down its Ignalina Nuclear Power Plant, the first unit in 2004 and the second in 2009, turning the country from a net exporter into a net importer of electric power (IEA, 2021). A project of replacing the Ignalina Nuclear Power Plant (NPP) by a new Polish-Lithuanian Plant, the Visaginas NPP, was discussed but later abandoned. The Estonian company Fermi Energy, in collaboration with the Swedish firm Vattenfall, are currently looking into small modular reactor (SMR) technology to develop nuclear energy. This project is however in the initial phases of development.

Renewables and nuclear power are credible alternatives to limit fossil-fuel energy usage and dependency on Russian electricity. The alternatives might however not be easily implemented in the short run.

Conclusion

The Baltic States’ dependency on the Russian electricity supply is limited. Nevertheless, discontinuing Russian electricity deliveries is not innocuous for at least two reasons.

First, the Baltics are still part of the BRELL network, so they are still physically dependent on Russia, although they plan to desynchronize from this network in the longer run. However, a sudden desynchronization initiated by Russia may have severe consequences in the short run (e.g. blackouts).

Second, considering the forecasted future increase in the demand for electrical power in the Baltics and the Nordic countries, the Baltics will remain dependent on power imports. Today, the Baltics rely on Finland and Sweden, as all three Baltic States are net electricity importers. To limit any future dependence on Russian/Belarussian electricity, the Baltics plan to sever any transmission connections with Russia and Belarus after desynchronization, thus cutting the potential for future electricity trade with both countries. If, however, the Nordic countries re-establish commercial exchanges with Russia via Finland, it is nevertheless possible that Russian electricity will be flowing in the Baltics transmission system again.

Acknowledgement

This policy brief is based on a project funded by the Energiforsk research program.

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.

An Overview of the Georgian Wine Sector

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Georgia has an 8000-year-old winemaking tradition, making the country the first known location of grape winemaking in the world. In this policy brief we analyze and discuss major characteristics of the wine sector in Georgia, government policies regarding the sector and major outcomes of such policies. The brief provides recommendations on how to ensure sustainable development of the sector in a competitive, dynamic environment.

Introduction

The Georgian winemaking tradition is 8000 years old, making Georgia the world’s first known location of grape winemaking. There are many traditions associated with Georgian winemaking. One of them is ‘Rtveli’ – the grape harvest that usually starts in September and continues throughout the autumn season, accompanied with feasts and celebrations. According to data from the National Wine Agency, the annual production of grapes in Georgia is on average 223.6 thousand tones (for the last ten-years), with most grapes being processed into wine (see Figure 1).

Figure 1. Grape Processing (2013-2021)

Source: National Wine Agency, 2022. Note: Some producers do not participate In Rtveli and the total annual quantity of processed grape in the country might therefore be higher than the numbers presented in the figure.

Wine is one of the top export commodities for Georgia. It constituted 21 percent of the total Georgian agricultural export value in 2021 (Geostat, 2022). Since 2012 wine exports have, on average, grown 21 percent in quantitative terms, and by 22 percent in value (Figure 2). The average price per ton varies from 3 thousand USD to 3.9 thousand USD (Figure 2). Exports of still wine in containers holding 2 liters or less constitute, on average, 96 percent of the total export value.

Figure 2. Georgian Wine Exports (2012-2021)

Source: Geostat, 2022.

The main destination market for exporting Georgian wine is the Commonwealth of Independent States (CIS) countries which account for, on average, 78 percent of the export value (2012-2021). The corresponding share for EU countries is 10 percent. As of 2021, the top export destinations are Russia (55 percent), Ukraine (11 percent), China (7 percent), Belarus (5 percent), Poland (6 percent), and Kazakhstan (4 percent).  While Russia is still a top market for Georgian wine, Russia’s share of Georgian wine exports declined after Russia imposed an embargo on Georgian wines in 2006. The embargo forced market diversification and even after the reopening of the Russian market and Georgian wine exports shifting back towards Russia, its share declined from 87 percent in 2005 to 55 percent in 2021.

While there are more than 400 indigenous grape varieties in Georgia, only a few grape varieties are well commercialized as most of the exported wines are made of Rkatsiteli, Mtsvane, Kisi, and Saperavi grape varieties (Granik, 2019).

Government Policy in the Wine Sector

The Government of Georgia (GoG) actively supports the wine sector through the National Wine Agency, established in 2012 under the Ministry of Environmental Protection and Agriculture (MEPA). The National Wine Agency implements Georgia’s viticulture support programs through: i) control of wine production quality and certification procedures; ii) promotion and spread of knowledge of Georgian wine; iii) promotion of export potential growth; iv) research and development of Georgian wine and wine culture; v) creation of a national registry of vineyards; and vi) promotion of organized vintage (Rtveli) conduction (National Wine Agency, 2022).

During 2014-2016, the GoG’s spending on the wine sector (including grape subsidies, promotion of Georgian wine, and awareness increasing campaigns) amounted to 63 million GEL, or 22.8 million USD (As of November 1, 2022, 1 USD = 2.76 GEL according to the National Bank of Georgia). Out of the spending, illustrated in Figure 3, around 40-50 percent was allocated to grape subsidies implemented under the activities of iv) (as mentioned above).

There are two types of subsidies used by the GoG– direct and indirect. Direct subsidies imply cash payments to producers per kilogram of grapes. As for indirect subsidies, they entail state owned companies purchase grapes from farmers.

Starting from 2017, the GoG decided to abandon the subsidiary scheme and decrease its spending on of the wine sector.  The corresponding figure reached a minimum of 9.2 million GEL (3.3 million USD) in 2018. Meanwhile, the grape production has been increasing, reaching its highest level in 2020 (317 thousand tons). In 2020, the GoG resumed subsidizing grape harvests to support the wine sector as part of the crisis plan aimed at tackling economic challenges following the Covid-19 pandemic. The corresponding spending in the wine sector increased from 16.7 million GEL (around 6 million USD) in 2019 to 113.4 million GEL (41 million USD) in 2020, out of which the largest share (91 percent) went to grape subsidies. In 2021, the GoG continued its extensive support to the wine sector and the corresponding spending increased by 44 percent, compared to 2020. The largest share again went to grape subsidies (90 percent).

Figure 3. Grape Production and Government Spending on the Wine Sector (2014-2021)

Source: Ministry of Finance of Georgia, National Statistics Office of Georgia, Author’s Calculations, 2022.

In 2022, the GoG have continued subsidizing the grape harvest to help farmers and wine producers sell their products. During Rtveli 2022, wine companies are receiving a subsidy if they purchase and process at least 100 tons of green Rkatsiteli or Kakhuri grape varieties grown in the Kakheti region, and if the company pays at least 0.90 GEL per kilogram for the fruit. If these two conditions are satisfied, 0.35 GEL is subsidized from a total of 0.9 GEL per kilogram of grapes purchased (ISET Policy Institute, 2022). Moreover, the GoG provides a subsidy of 4 GEL per kilogram for Alksandrouli and Mujuretuli grapes (unique grape varieties from the Khvanchkara “micro-zone” of the north-western Racha-Lechkhumi and Kvemo Svaneti regions), if the buying company pays at least 7 GEL per kilogram for those varieties (Administration of the Government of Georgia, 2022). Overall, about 150 million GEL (54.2 million USD), has been allocated to grape subsidies in 2022.

Policy Recommendations

Although the National Wine Agency is supposed to implement support programs in various areas like quality control, market diversification, promotion and R&D, these areas lack funding, as most of the Agency’s funds are spent on subsidies. Given that the production and processing of grapes have increased over the years, subsidies have been playing a significant role in reviving the wine sector after the collapse of the Soviet Union (Mamardashvili et al., 2020).  However, since the sector is subsidized as of 2008, the grape market in Georgia is heavily distorted. Prices are formed, not on the bases of supply and demand but on subsidies, which help industries survive in critical moments, but overall prevent increases in quality and fair competition. They further lead to overproduction, inefficient distribution of state support and preferential treatment of industries (Desadze, Gelashvili, and Katsia, 2020). After years of subsidizing the sector, it is hard to remove the subsidy and face the social and political consequences of such action.

Nonetheless, in order to support the sustainable development of the sector, it is recommended to:

  1. Replace the direct state subsidy with a different type of support (if any), directed towards overcoming systemic challenges in the sector related to the research and development of indigenous grape varieties and their commercialization level.
  2. Further promote Georgian wine on international markets to diversify export destination markets and ensure low dependence on unstable markets like the Russian market. Although wine exporters have in recent years entered new markets, to further strengthen their positions at those markets, it is vital to:
    • ensure high quality production through producers’ adherence to food safety standards.
    • promote digitalization – e-certification for trade and distribution, block chain technology for easier traceability and contracting, e-labels providing extensive information about wine etc. – enabling producers to competitively operate in the dynamic environment (Tach, 2021)
    • identify niche markets (e.g. biodynamic wine) and support innovation within these sectors to ensure competitiveness of the wine sector in the long-term (Deisadze and Livny, 2016).

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.