Author: Elena Paltseva

Georgian Experience of Gender Biased Sex Selection

20181008 Georgian Experience Image 01

This policy brief presents the evidence on gender biased sex selection (GBSS) in Georgia, giving an overview of the so-called “sex ratio transition” process, and discussing the determinants of GBSS using a demand and supply-side approach. After its independence from the Soviet Union, Georgia started experiencing a significant rise of the sex ratio at birth (SRB) and in 2004 the country had reached one of the highest SRB rates in the world. A traditionally pronounced son preference was further strengthened by deteriorated economic conditions, decrease in fertility and relatively easy and cheap access to technologies for early sex determination and abortion. However, Georgia has managed to reverse and stabilize a skewed SRB rate. Among the factors that might have contributed are the strengthening of the social security system, improved economic conditions, a rise in fertility rates, economic empowerment of women, and the increased cultural influence of Western values. This trend reversal places Georgia in a unique position and may provide valuable insights for other countries who struggle with the same problem.

It is widely recognized that the Caucasus has traditionally been a “male-dominated region,” with a particularly strong son preference. However, before the dissolution of the Soviet Union in the early 1990s, sex ratios at birth in the Caucasus countries were very close to normal levels.

After independence from the Soviet Union, the SRB started rising immediately in Georgia, reaching 114.1 male births per 100 female births by 1999 (while the biologically normal SRB level is 105 male births per 100 female births). In the early 2000s, SRB peaked and stabilized between 112 and 115 male births per 100 female births for several years.  As Figure 1 shows, after reaching historically high levels in 2004, SRB started to decline and finally returned to a normal level by 2016.

Figure 1. Estimated sex ratio at birth in 1990-2016

Source: UNFPA, 2017.

The sex selection here is not discussed as “an archaic practice” in Georgia, but rather a modern reproductive behavior, a rational strategy responding to the surrounding environment – demand and supply factors. Demand-side factors include socio-economic and cultural factors that make having a boy more beneficial for a family and lower the value of girls – leading to son preference. The fertility rate is also accounted as a demand-side factor since low or decreasing fertility can increase incentives to perform selective abortions. As for the supply-side factors, they cover the ease of access to  technologies for early sex determination and selective abortion and its cost, as well as the content of the legislation regulating abortion.

Demand side factors

Factors increasing demand

Son preference and a patrilineal system. The traditional Georgian family is patrilineal. Patrilineality, also known as the male line, is a common kinship system in which an individual’s family membership derives from and is recorded through his or her father’s lineage. It generally involves the inheritance of property, rights, names, or titles by persons related through male kin. In such systems, women join their husbands’ families after marriage and are expected to care for their in-laws rather than their parents. Sons are expected to stay with their parents and take care of them. Thus, patrilineal systems make daughters less beneficial and desirable to their parents compared to sons. UNFPA (2017) concludes that the practice of post-marital co-residence with parents is still quite widespread in Georgian society, and this pattern is biased towards the male kin line, downplaying the role of women and their kin. The patrilocal residence (the situation in which a married couple resides with or near the husband’s parents) is more common in villages (more than 90%) than in urban areas (75%). The incidence of patrilocal residence is the lowest in Tbilisi (69%). In general, patrilocal residence decreases with improving economic conditions.

Demographic change – changes in fertility rates. Low or decreased fertility rates (when other factors favorable for GBSS are in place) mean that families are no longer able to ensure the birth of a son through repeated pregnancies. In societies characterized by strong son preference, and with increasing availability of sex detection technologies, couples start to opt for sex selection because they want to avoid additional births of girls, something that contraception cannot alone ensure. Therefore, low fertility acts as a “squeeze factor,” forcing parents to make choices ensuring the desired gender composition of their family.

An inverse relationship between fertility and SRB is observed in Georgia. The first decade of transition to market economy was severe for the country. Reducing household size was one strategy chosen by Georgian families to cope with increased rates of unemployment, deterioration of the social security system and deprivation of basic needs such as water and electricity. The decline of fertility during the years 1990-2003 coincided with increased SRB levels. When fertility started to rebound in 2003, the “squeeze factor” began to vanish, removing pressure on the SRB. At the same time, the SRB started to decline.

The low value of women. In Georgia, women are stereotypically perceived as natural caretakers, whose core responsibilities involve child care and household duties. They are also expected be obedient to their husbands and let them have leading positions in various activities (UNDP 2013). The majority of the population in the country thinks that men should be the ones who are the family’s decision-makers and that they should also be the main breadwinners. According to a 2010 study, 83% of respondents think that men should be the main breadwinners in the family, and 63% believe that they should also be the family’s decision-makers (CRRC, 2010). It is evident that such attitudes and values contribute to decrease the perceived value of girls in society, compared to boys, and add additional stimulus to GBSS.

Factors decreasing demand

The strengthening of state institutions and the social security system. Georgia has experienced a deep transformation of its social, economic and political systems in the last fifteen years. Reforms were carried out in all sectors. Most importantly, the country totally restructured its social security system, which was practically non-existent in Georgia at the beginning of the 1990’s. Currently, Georgian citizens are offered: a) universal pension system, above the subsistence minimum, which provides a flat rate benefit to all elderly; b) social assistance, which represents a monthly subsidy to poor families, is well targeted, and has contributed to reducing poverty (Kits et al. 2015), and (c) a universal health insurance system which covers all people who are uninsured by private companies and softens the burden of health care expenditures for households.

These changes, together with the improved general economic situation in the country, have decreased the role of the family as a buffer institution offering protection and stability (notably through sons), and provided more formal alternatives for social security, bank loans, contractual employment, etc. Due to this, the (large) intergenerational family is no longer perceived as the only strategy for coping with social and financial uncertainty.

New cultural influence of Western values. From the early 2000s, Georgia has been increasingly exposed to Western norms and culture through media, migration, increased tourism, and the process of economic integration with the European Union. According to experts, this process was accompanied by “media support and an enthusiastic, quasi-propagandistic hail. The general spirit was to promote an image of Georgia as a country open to the world with West-European views and lifestyles” (UNFPA 2017).

Supply side factors

While the availability of technologies for the early determination of sex and for abortion is not the root cause of GBSS, it constitutes a facilitating supply factor. Without prenatal diagnostics and accessibility of abortion, parents would not be able to resort to selective abortions even if they had a pronounced preference for boys.

Currently, Georgia is among the countries offering high-tech reproductive services. Private clinics, hospitals, and special reproductive medicine centers compete to supply reproductive services, and one can easily see the most recent ultrasound technologies in the great majority of the urban facilities. In addition, the cost of an ultrasound test is extremely low, depending on the service provider. This represents only 1.9%-4.8% of the average monthly incomes per Georgian household. In this context, the GBSS-related demand for prenatal diagnostics can easily be accommodated, when it arises.


Georgia has had a unique experience of “sex ratio transition” in the region, which was an integral part of its overall transformation process. The deteriorated social and economic conditions of households following the beginning of the transition process, coupled with easier and cheaper access to prenatal diagnostics were reflected in a skewed SRB and manifested son preference. Only when socio-economic conditions improved, and the country accelerated its institutional strengthening and modernization process, did the SRB returned to its normal level.

It is too early to conclusively state that Georgia is back to normal SRB levels for good. Birth masculinity still remains at a high level i) for third-order births, as the most of the couples are reluctant to have more than three children, and giving birth to a third child is the last chance for families to have a boy; ii) there is a significant urban-rural divide in the context of birth order. For three or higher order births, SRB is significantly distant from normal levels for almost all regions, reaching beyond 145, while in Tbilisi the bias remains moderate; iii) gender-biased sex selection remains high among poor people and ethnic minorities.

If Georgia is to minimize the incidence of GBSS in the future, it needs to act on several fronts: enhance gender equality through qualitative research and civic activism; increase the perceived value of girls and women in the society through policies and initiatives addressing cultural stereotypes, as well as by publicizing illuminated stories of success of girls and women that provide positive role models; monitor SRB trends; support advocacy actions and awareness-raising campaigns on GBSS and encourage the ethical use of sex detection technologies.


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

Is Cutting Russian Gas Imports Too Costly For The EU?

20140608 FREE Network Policy Brief

This brief addresses the economic costs of a potential Russian gas sanction considered by the EU. We discuss different replacement alternatives for Russian gas, and argue that complete banning is currently unrealistic. In turn, a partial reduction of Russian gas imports may lead to a loss of the EU bargaining power vis-à-vis Russia. We conclude that instead of cutting Russian gas imports, the EU should put an increasing effort towards building a unified EU-wide energy policy.

Soon after Russia stepped in Crimea, the question of whether and how the European Union could react to this event has been in the focus of political discussions. So far, the EU has mostly implemented sanctions on selected Russian and Ukrainian politicians, freezing their European assets and prohibiting their entry into the EU, but broader economic sanctions are intensively debated.

One such sanction high on the political agenda is an EU-wide ban on imports of Russian gas. Such a ban is often seen as one of the potentially most effective economic sanctions. Indeed the EU buys more than half of total Russian gas exports (BP 2013), and gas export revenues constitute around one fifth of the Russian federal budget (RossBusinessConsulting,2012 and our calculations). Thus, by banning Russian gas the EU may indeed be able to exert strong economics pressure on Russia.

However, the feasibility of such sanction is questionable. Indeed, in 2012 Russia supplied around 110 bcm of natural gas to EU-28 (Eurostat), which constitutes 22.5% of total EU gas consumption. There are a number of alternatives to replace Russian gas, such as an increase in domestic production by investing in shale gas, or switching to other energy sources, such as nuclear, coal or renewables. However, many of the above alternatives, e.g. shale gas or nuclear power, involve large and time-consuming investments, and thus cannot be used in the short run (say, within a year). Others, such as wind energy, are subject to intermittency problem, which again requires investments into a backup technology. The list of alternatives implementable within a short horizon is effectively down to replacing Russian gas by gas from other sources and/or switching to coal for electricity generation. Below, we argue that even if such a replacement is feasible, it is likely to be very costly for the EU, both economically and environmentally.

Notice that any replacement option will be automatically associated with a significant increase in economic costs. This is due to the fact that a substantial part of Russian gas exports to Europe (e.g., according to Financial Times, 2014 – up to 75%) are done under long-term “take-or-pay” contracts. These contracts assume that the customer shall pay for the gas even if it does not consume it. In other words, by switching away from Russian gas, the EU would not only incur the costs of replacing it, but also incur high financial or legal (or both) costs of terminating the existing contracts with Russia, with the latter estimated to be around USD 50 billion (Chazan and Crooks, Financial Times, 2014).

Due to this contract clause, own costs of replacement alternatives become of crucial importance. The coal alternative is currently relatively cheap. However, a massive use of coal for power generation is associated with a strong environmental damage and is definitely not in line with the EU green policy.

What about the cost of reverting to alternative sources of gas? First, in utilizing this option, the EU is bound to rely on external and potentially new gas suppliers. Indeed, the estimates of potential contribution within the EU – by its largest gas producer, the Netherlands – are in the range of additional 20 bcm (here and below see Zachmann 2014 and Economist 2014). Another 15-25 bcm can be supplied by current external gas suppliers: some 10-20 bcm from Norway, and 5 bcm from Algeria and Libya. This volume is not sufficient for replacement, and is not likely to be cheaper than Russian gas.

This implies that the majority of the missing gas would need to be replaced through purchases of Liquefied Natural Gas (LNG) on the world market, in particular, from the US. This option may first look very appealing. Indeed, the current gas price at Henry Hub, the main US natural gas distribution hub, is 4.68 USD/mmBTU (IMF Commodity Statistics, 2014). Even with the costs of liquefaction, transport and gasification – which are estimated to be around 4.7 USD/mmBTU (Henderson 2012) – this is way lower than the current price of Russian gas at the German border (10.79 USD/mmBTU, IMF).

However, this option is not going to be cheap. A substantial increase in the demand for LNG is likely to lead to an LNG price hike. Notice that, at the abovementioned prices, US LNG starts losing its competitive edge in Europe already at a 15% price increase. Just for a very rough comparison, the 2011 Fukushima disaster lead to 18% LNG price increase in Japan in one month after disaster. Some experts are expecting the price of LNG in Europe to rise as much as two times in these circumstances (Shiryaevskaya and Strzelecki, Bloomberg, 2014).

Moreover, it is not very likely that there will be sufficient supply of LNG, even at increased prices. For example, in the US, which is the main ”hope” provider of LNG replacement for Russian gas, only one out of more than 20 liquefaction projects currently has full regulatory approval for imports to the EU. This project, Cheniere Energy’s Sabine Pass LNG terminal, is planned to start export operations no earlier than in the 4th quarter of 2015 with a capacity of just above 12bcma (World LNG Report, 2013). Of course, there are other US and Canada gas liquefaction projects currently undergoing regulatory approval process, but none of them is going to be exporting in the next year or two. Another potential complication is that two thirds of the world LNG trade is covered by long-term oil-linked contracts (World LNG Report, 2014), which significantly restricts the flexibility of short-term supply reaction, contributing to a price increase. All in all, LNG is unlikely to be a magical solution for Russian gas replacement.

All of the above discussion suggests that it may be prohibitively expensive for the EU to do completely without Russian gas. Maybe the adequate solution is partial? That is, shall the EU cut down on its imports of natural gas from Russia, by, say, a half, instead of completely eliminating it?

On one hand, this may indeed lower the costs outlined above, such as part of take-or-pay contract fines, or costs associated with an LNG price increase. On the other hand, cutting down on Russian gas imports may lead to an important additional problem, loss of buyer power by the EU.

Indeed, the dependence on the gas deal is currently mutual – as outlined above, not only Russian gas is important for the EU energy portfolio; the EU also represents the largest (external) consumer of Russian gas, with its 55% share of the total Russian gas exports. In other words, the EU as a whole possesses a substantial market power in gas trade between Russia and the EU, and this buyer power could be and should be exercised to achieve certain concessions, such as advantageous terms of trade from the seller etc.

However, the ability to have buyer power and to exercise it depends crucially on whether the EU acts as a whole to exercise a credible pressure on Russia. That is, the EU Member States may be much better off by coordinating their energy policies rather than diluting the EU buyer power by diversifying gas supply away from Russia. This coordination may be a challenge given the Member States’ different energy profiles and environmental concerns. Also, such coordination requires a stronger internal energy market that will allow for better flow of the gas between the Member States. While demanding any of these measures would be double beneficial: they will improve the internal gas market’s efficiency, and at the same time reinforce the EU’s buyer power vis-à-vis Russia.

To sum up, the EU completely banning Russian gas imports does not seem a feasible option in the short run. In turn, half-measures are not necessarily better due to the loss of the EU’s buyer power. Thereby, the best short-term reaction by the EU may be to put the effort into working up a strong unified energy policy, and to place “gas at the very back end of the sanctions list” for Russia as suggested by the EU energy chief Gunther Oettinger (quoted by Shiryaevskaya and Almeida, Bloomberg, 2014).



The Arab Spring Logic of the Ukrainian Revolution

20140331 The Arab spring logic of the Ukrainian revolution Image 01

Motivated by the unusual patterns and dynamics of the Arab Spring, we construct a model explaining the vulnerability of the newly established incumbent to popular unrest. Using this model for the case of similar protests in Ukraine, we find that the current combination of availability of information, military capacity of the incumbent and his radicalization, together with the opportunity costs of participation in a protest, are likely to result in the formation of new government that is also vulnerable to popular protests. The persistence of the protests after the formation of a temporal government in Ukraine supports this hypothesis. Additionally, as the policy position of Viktor Yanukovych was relatively mild, his potential successor might be more radical. Exponential growth of social media users, reduction of military capacity, relatively high unemployment and the possible radicalization of the Ukrainian President might put the country into an “instability zone” with recurrent protests.

On the night of 21 November 2013 spontaneous protests erupted in Kiev, the capital of Ukraine, after the Ukrainian government suspended preparations for signing an Association Agreement and a Free Trade Agreement with the European Union in favor of agreements with Russia. The movement concentrated on Independence Square (Maidan Naseljenosti) soon took on the name “Euromaidan”. Soon the protest spread to other cities in the country. The initial agenda of closer relations with the EU was soon encompassed in the wider protest against Viktor Yanukovych, elected President in 2010. He fled the country on February 21 under the pressure of popular protests, exacerbating the leadership crisis. Temporary leadership was taken up by the Speaker of the Supreme Rada – Oleksander Turchinov, while new elections were scheduled to take place on May 25.

Despite the successful removal of Victor Yanukovich from power and a promise of new elections in May, the protests on Maidan did not cease. The major factor of uncertainty comes from the very nature of the protests. For many months, it ran without organizers or formal leadership so that the future course of action remains unclear. It is hard to comply with the demands of Maidan, as no clear set of demands are formulated. Though five figures of Maidan: Tymoshenko, Klitschko, Tyagnybok, Yatsenuk and Yarosh remain the most visible, none of them has sufficient support of Maidan. Whichever course prevails – resumed Eurointegration or an alliance with Russia (which became a less likely option)– the number of people who oppose the new course is likely to be enough to fill a new Maidan.

The swift happenings in Maidan are highly reminiscent of the events of the Arab Spring at its crux: it also was a leaderless protest, coordinated mainly with social media, and encompasses people of vastly different socio-economic, political and demographic characteristics.

Using social media technologies, Euromaidan has created an interactive map of logistics ( that provides detailed information on and locations of where to eat, makeshift hospitals, information booths, and the barricades. Clicking on the icons of the map, one discovers not only the locations of the facilities but also their needs, which enables coordination of protesters’ efforts to contribute to the common cause. However, just as in case of Tahrir Square or the Tunisian unrest, the common cause is poorly defined: aside from dissatisfaction with Viktor Yanukovych, the protesters exhibited very different preferences for the future course of action, and the three most prominent figures of the protest – Klitschko, Tyagnybok and Yatsenuk – were shunned as they spoke about the common agenda.

The aftermath of the Arab Spring remains unclear for both protesters and the world. The Syrian social unrest has resulted in ongoing violent conflict, while Libyan society still experiences serious problems with the formation of a new government after the murder of Kaddafi and the end of civil war. Tunisia and Egypt were able to choose new Presidents and form new governments. The latter were themselves dismissed soon after they came to power: the first elected post-Mubarak government collapsed in mid-2013 after a year of almost uninterrupted protests. These two cases are especially interesting as constitutional exits of leaders who were in autocratic office for less than one year were generally caused by coups and not protests between 1945 and 2002 (Svolik, 2009).

Nevertheless, we can apply the knowledge acquired there to the new Ukrainian protest we observed on Maidan and try to predict its development by the means of stylized models suggested in Dagaev, Lamberova, Sobolev and Sonin (2013).

Our approach relies on four simple parameters that drive the dynamics of the protests. First, we consider the costs of collective action – the opportunity costs of spending time on Maidan. The second parameter is the military capacity of the incumbent that can be devoted to the suspension of the protest. The higher it is, the more numerous should the protest be to succeed. The third parameter we use is the degree of the radicalization of the incumbent (the difference between his position and the preferred policy of the majority of the population). Finally, we use an information availability parameter (how many people are aware of the place and time of the occurrence of the protest).

With the electric telegraph, a communication tool of the 19th century, information availability was low and many of those who would have been glad to pay the costs of collective actions to replace the incumbent stay at home as they are not aware of the protest taking place. With Facebook and Twitter, the availability of information is much higher. According to our findings, the crucial role in dynamics of contemporary mass actions is played by the ratio of military capacity to the information availability rather than their values per se.

Our framework assumes that each citizen’s decision of whether to participate in the protest or not is based on the difference between her position and the preferred policy of the incumbent. According to this decision, all citizens can be classified into two groups – those who participate in a protest against the incumbent, and those who do not. We define a person, who has the median position among the protesters, as the expected new incumbent. So if the elections were held among the protesters, he would receive the widest support. If the number of citizens participating in the protest is sufficient to overcome the military capacity of the current incumbent, the protest becomes successful, and the expected new incumbent of the protest becomes the new incumbent. The combination of military capacity, opportunity costs and costs of coordination determine the size of the stability zone – a segment of policy space where the incumbent is not vulnerable to mass protest.

The model allows us to predict the dynamics of the protests that is generated by different combinations of the parameters. For illustrative purposes, the availability of information about the protest is proxied by data on Facebook penetration and military capacity is described by the number of military personnel per capita in 2009 collected by the International Institute for Strategic Studies (Hackett, 2010). The incumbent policy position is proxied by the Legitimacy Index from Polity IV, where a higher index corresponds to lower legitimacy of the incumbent and his regime. Finally, the costs of participation in a protest are proxied by the employment rate. A recent study by Campante and Chor stresses unemployment as important determinants of opportunity costs of taking to the streets during Arab Spring (Campante & Chor, 2012). As unemployed individuals have fewer options of how to spend their time, one should expect that a substantial number of unemployed people corresponds to a relative ease of sparking unrest.

Using these parameters, we can explain success or failure of the protest, and predict some proprieties of its aftermath.

For example, high military capacity, opportunity costs and costs of coordination generate a broad stability zone, so that even a radical incumbent would not face a threat of revolution. The decline of any of three parameters can narrow the zone of stability and make the autocrat vulnerable to mass protest. As the incumbent is highly radical, a significant part of the population takes to the streets. As a result, the new incumbent’s position is sufficiently close to the one of the median voter and is, thus, inside the stability zone. An example of such a scenario is the overturn of Slobodan Milosevic after the fall of communism, when there were eight failed and one successful attempts to form a wide coalition of opposition parties (Spoerri, 2008). The process of finding a common ground started in 1990 with the emergence of the coalition of six parties, the Associated Opposition of Serbia, which broke shortly after a series of power struggles, policy disagreements, and personality clashes. It was only ten years later that the protest which facilitated Milosevic’s downfall took place, as the leader of the united opposition, the Democratic Opposition of Serbia, was able to ensure the non-involvement of the crucial military unit on behalf of Milosevic (Bujosevic & Radanovic, 2003).

In contrast, the events of the Arab Spring had different political dynamics. Low military capacity and high unemployment of Egypt and Tunisia determined a narrow stability zone ex ante. The absence of protests of these long-lived regimes can be explained by the relatively moderate position of the incumbent. In 2010, the Egyptian and Tunisian regimes had scores of 5 and 4 (out of 12) of Political Legitimacy from Polity IV, respectively. However the emergence of social media that enabled the users to coordinate their actions easily narrowed the relatively small stability zone. As the incumbent was less radical, fewer citizens benefit from its replacement and take to the streets. Thus, the new incumbent is defined by protesters, her policy position is more radical and now is out of the stability zone. The new incumbent immediately faces the new social unrest.

Table 1 presents the stylized results of our study. Locating the combination of parameters of the country in the table allows us to make the prediction about the dynamics of the protest. There are several possible courses of events: the protest can be weak and die out soon, with the incumbent staying in place; it can be significant, but yet not large enough to overthrow the incumbent; it can lead to the replacement of the incumbent, followed by the period of stability; and, finally, it can result in the replacement of the incumbent, but not cessation of the protest.

Table 1. Protest Outcome as a Function of Parameters

What do our findings tell us about Ukraine? The previously used proxy for the information index there is not a good choice, as the majority of users prefer the Russian version of Facebook – Vkontakte – as the major social network of the country. Thus, we rely on the Vkontakte penetration data (as of 2013, 18.5 million of people in Ukraine were using the network, constituting 40.6% of the population, see report of Ukranian IT-news agency AIN.UA:

The military parameter, that reduces the likelihood of successful protest, is low, compared to the countries of Arab Spring and constitutes 2.8 active military per 1000 people (see the Ukrainian law “Armed Forces of Ukraine for 2013”,, which is half of the one in Egypt at the beginning of the protests. The unemployment parameter fell to 8.6 during the incumbency of Victor Yanukovych, which corresponds to the pre-protest unemployment in Egypt in 2010.

The legitimacy measure presents a difficulty for comparison with the Arab Spring cases, as the Legitimacy Index has not yet been updated. However, the harsh actions of Victor Yanukovych during the 2013-2014 protests (including the suppression of the protest and the passage of laws denying freedom of assembly and freedom of expression, as well as the refusal to repeal his earlier changes of the constitution towards more presidential form of government) suggest that his legitimacy level fell by approximately 50% (and was about 20% right before he was ousted from power), which is corroborated by polls (“Ukraine’s future in peril under President Yanukovych”, The Washington Post, 2 December, 2013). Thus, the conservative estimate is that his legitimacy index shifted from 3 to 4 or 5, as shown on Figure 1.

For the purpose of comparison, we plot the Arab Spring countries and Ukraine in the space of our variables in Figure 1. The X-axis shows the incumbent’s departure from the median population-preferred policy (proxied by the Legitimacy Index from Polity IV). We use the value of the index in the year prior to the start of unrest, and the index value in 2010 for countries with no protests (Morocco, Oman, Djibouti). The Y-axis corresponds to the employment level. The size of the bubble corresponds to the ratio of military capacity and Facebook (or Vkontakte) penetration (data from the Arab Spring Social Media Report).

The shading of the bubble reflects the type that country belongs to: striped (no significant protest), light gray (continuing protest), and dark grey (multiple protests). Syria is excluded from the classification and is marked white, because of the civil war and international intervention.

Figure 1. Legitimacy index (X-axis), Employment (Y-axis), Military capacity / Social media penetration (size of the bubble) in Arab Spring countries and UkraineFigure 1

Figure 1 illustrates that countries appear in tight clusters in line with our theoretical predictions. The countries with continuing protests that did not lead to the downfall of the incumbent are divided into two groups. The first group (Kuwait, Jordan, Lebanon, and Bahrain) has relatively a moderate incumbent policy position and extremely high level of development of new media. The reasons why these countries are not «striped» is high military capacity of the government that could be employed against protesters, combined with high opportunity costs of protesting (low unemployment rates).

The second group of countries (Syria, Algeria, Iraq, Yemen, and Mauritania) has more radical incumbents and higher unemployment rates (so the incentives to protests are higher there), but is poor in terms of IT development. The ratio of military capacity and Facebook (Vkontakte) penetration is high, which is reflected by the size of bubbles that are much larger than in the first groups. That is why in a country with a small military capacity (such as Yemen), the protests did not lead to the incumbent’s replacement.

Two Arab Spring countries belong to the “multiple protests” group. Both Egypt and Tunisia had relatively mild incumbents in the pre-protest era, with Tunisia’s Bashar al-Assad being the milder of the two. Both countries had relatively high unemployment rates and wide Facebook coverage, both factors alleviating the problem of organizing a collective action. Despite the fact that before the start of the protests Facebook coverage in Egypt had close to average values among the countries of Arab Spring, they grew at exponential rates and Egypt attained leading positions in the region in usage of new media several months later. Moreover, low rates of military capacity made protest activity less risky in both Tunisia and Egypt. The remaining differences in Facebook coverage and employment rates in Egypt and Tunisia account for the different structure of recurrent protests, predicted by our model.

Comparison of the Arab Spring countries data with the Ukrainian case shows that high military capacity, new media penetration and unemployment generate even more narrow stability zones than one observes in the cases of Egypt and Tunisia. The reason why the incumbent was not vulnerable to mass protests can be explained by the political legitimacy of Yanukovych as the winner of relatively free elections in 2010.

But if the Arab Spring protests were triggered by rapid growth of new (cheap) communication technologies, the successful protest against Yanukovych can be explained by his radicalization. The radicalization took the form of parliamentary acts that put significant constraints on political rights and civil liberties and violent suppression of dissident actions.

Employing the proposed approach and contrasting the Ukrainian case with the countries of the Arab Spring allows us to draw several conclusions.

Firstly, the current combination of availability of information, military capacity of the incumbent and his radicalization, together with the opportunity costs of staying on Maidan, are likely to result in successful and recurrent protest. The persistence of the protests after the formation of a temporal government supports this hypothesis.
Secondly, it is worthwhile to note that as the policy position of Viktor Yanukovych was relatively mild, his potential successor might be more radical.

Thirdly, the exponential growth of social media, the reduction of military capacity and relatively high unemployment puts Ukraine into an “instability zone”. This implies that the 2004 scenario of the Orange Revolution is unlikely to repeat. The protest of 2004 resulted in a general election, and the elected president Viktor Yushchenko served his term without interruption. The protests of 2013 are more likely to result in a rapid change of incumbents and a period of instability.

One factor can strengthen the possible incumbent’s vulnerability. The external pressure of the Russian government reduces costs of collective resistance to the new Ukrainian authorities among pro-Russian citizens, while the promise of Western countries to support fast EU integration can incentivize politicians to accelerate reforms opposed by significant parts of the population.


  • Bujosevic, D., & Radanovic, I. (2003). The fall of Milosevic: the October 5th revolution. Palgrave Macmillan.
  • Campante, F. R., & Chor, D. (2012). Why was the Arab world poised for revolution? Schooling, economic opportunities, and the Arab Spring. The Journal of Economic Perspectives, 167–187.
  • Dagaev, D., Lamberova, N., Sobolev, A., & Sonin, K. (2013). Technological Foundations of Political Instability. Centre for Economic Policy Research Working Paper Series
  • Hackett, J. (2010). The Military Balance 2010: The Annual Assessment of Global Military Capabilities and Defense E conomics. London: The International Institute for Strategic Studies.
  • Spoerri, M. (2008). Uniting the opposition in the run – up to electoral revolution – Lessons from Serbia 1990 – 2000. Totalitarismus Und Demokratie, 5(2005), 67–85.
  • Svolik, M. (2009). Power sharing and leadership dynamics in authoritarian regimes. American Journal of Political Science, 53(2), 477–494

Liquidity and Monetary Policy in Belarus

20191231 Default Image 04

High inflation and devaluation expectations after the 2011 currency crisis force Belarusian monetary authorities to seek non-conventional policy measures. Instead of using the refinancing rate as an instrument on the money and credit markets, the National Bank of Belarus resorts to liquidity squeezes, which drive up the rouble interbank rates. The banks have to raise deposit and loan rates in response. As a result, households continue to keep savings in the national currency deposits, while firms struggle to keep up with the payments. This situation, however, will have to end soon.

Belarusian economy is characterized by state ownership domination and various (including political) constraints. This often makes it tempting for the Belarusian authorities to resort to untraditional policy measures, or use the conventional policies in unexpected ways. A good example is Belarusian monetary policy in 2012-2013. In 2011 Belarus experienced a severe currency crisis: the exchange rate of the Belarusian rouble (BYR) crumbled from 3011 BYR per USD in January 2011 to 8470 BYR in December 2011. Prices followed the currency and doubled: in 2011 the inflation rate was 108%. Due to high government influence on the labor market and competition from the Russian labor market, real incomes quickly recuperated (Bornukova, 2012). But the owners of the deposits in Belarusian roubles took a hit – their savings lost almost a half of real value. More and more people converted their deposits into USD or other foreign currency. Inflation and devaluation expectations were soaring (Kruk, 2012).

The National Bank of Belarus clearly realized that the proper response would be to increase the interest rates: this policy measure would partially compensate the losses of rouble deposit holders, make rouble deposits attractive again and curb the growth in lending, one of the major causes of the currency crisis.

However, there is a catch. Formally, the main monetary instrument of the National bank is the refinancing rate. Yet, despite the name, this is not the rate at which the National bank is refinancing the commercial banks. Officially, it is only a “basis for setting interest rates on the operations involving liquidity provision to banks”. The problem is that most of the floating rates, especially those on concessional loans, have the refinancing rate as its basis rate. Very high refinancing rate would hurt debt-financed organizations, in particular in agriculture and construction. And the National bank found a compromise: the refinancing rate would remain relatively low; but the National bank would regulate the money market through liquidity squeezes: it would offer liquidity to the commercial banks only at a much higher collateral loan and overnight rates. The lack of liquidity due to a squeeze would drive up the interest rates on the interbank market.

Figure 1: Main interest rates in Belarus in 2012-2014
Source: The National Bank of the Republic of Belarus.

Figure 1 shows the main interest rates in Belarus in 2012-2014. The refinancing rate was steadily decreasing throughout the whole period. The overnight rate (which moves together with the collateral loan rate), also set by the National bank, for some period was almost two times higher than the refinancing rate, reaching 70 percent  at  its peak. The overnight rates mostly exceeded the rate set in the interbank market. The interbank rate reflects the market price of liquidity. The National bank influences this rate by offering (or not) liquidity to the state-owned commercial banks.

The National bank has successfully used liquidity squeezes as an instrument of stabilization on the currency market. As Figure 2 shows, the two major spikes in the interbank rate coincided with the higher rates of currency devaluation. The first major devaluation episode began in the autumn of 2012. At that time the market reacted to the increased lending and the news about the ban on the exports of “solvents”, which meant Belarus would have to pay back to Russia the customs duties on oil. On the other hand, the periods of high liquidity and low interbank rates were usually followed by devaluation episodes.

Figure 2: Changes in the exchange rate and the interbank rate, 2012-2014
Source: The National Bank of the Republic of Belarus.

In the summer 2013 devaluation speeded up once again, fueled by the potassium scandal. The National bank responded with lower liquidity and higher rates, which reached peak values of 50% and higher in September 2013.

Of course, this policy had other effects besides calming the currency market. As Figure 3 demonstrates, deposit and credit rates mainly reacted to the changes in the interbank rate, with peaks in the autumn of 2012 and summer-autumn of 2013. Enormously high deposit rates (often higher than 40 percent) delivered a hefty real rate of return given inflation of 22 percent in 2012 and 16 percent in 2013. Rouble deposits were growing throughout the period. But someone had to pay those rates.

Figure 3. Short-run deposit and loan rates for firms and individuals
Source: The National Bank of the Republic of Belarus.

High real rates became a burden for firms and households. The commercial banks had to stop many of their long-term individual lending programs (mainly those financing housing purchases). Instead, the banks put their efforts into the development and promotion of short-term consumer credit, which was virtually non-existent just a couple of years before.  Many firms switched to cheaper loans in U.S. dollar, but the National bank quickly shut down these practices by introducing restrictions on foreign currency loans. Credit growth slowed down, and did not decline only due to the government-sponsored lending programs and a boom in consumer credit.

High loan rates together with the growing wages and low sales suffocated the firms. Average profitability across the country is declining since summer 2012, reaching the record low profit margin and negative aggregate net profits in December 2013 (see Figure 4). The lack of liquidity lead to the crisis of payments: accounts receivable and accounts payable on the 1st of February 2014 were 24.7 and 31.6 percent higher than a year before.

Figure 4. Average profit margin in Belarus, 2012-2014
Source: The National Statistical Committee of the Republic of Belarus

Today Belarus experiences high pressure for devaluation. The international currency reserves are depleted; the current account balance is in the red for a long time. The exporting enterprises quickly lose competitiveness due to low productivity. For the first time since 2009 GDP growth is virtually non-existent (and even negative in the first months of 2014). Some of the main trading partners – Russia, Ukraine and Kazakhstan – have already devaluated their currencies and face uncertain prospects for growth. It looks like the successful practice of fighting devaluation with liquidity squeezes at the cost of the real economy will have to end soon.


The crisis in Ukraine and the Georgian economy

High office buildings facing sky representing Institutions and Services Trade

We analyze how the crisis in Ukraine will likely impact the Georgian economy and distinguish between short-run and long-run effects. We argue that the short-run effects are transmitted through trade and capital flows and that they are rather negative for Georgia and can hardly be bolstered. In the long-run, however, the crisis could improve the competitiveness of the Caucasus Transit Corridor, an important trading route between Europe and Central Asia Georgia participates in. We give recommendations how political decision makers could support such a development in the wake of an impairment of the northern Ukrainian transit routes.


When Ukrainian President Victor Yanukovich decided not to sign the association agreement with the European Union and instead opted for a Russian package of long-term economic support, many Ukrainians perceived this not to be a purely economic decision.  Rather, they feared this to be a renunciation of Western cultural and political values, and – to put it mildly – were not happy about this development.

The Russian political system, characterized by a prepotent president, constrained civil rights, and a government controlling important parts of the economy through its secret service, is not exactly the dream of young Ukrainians. Russia can offer economic carrots, but these do not count much against the soft power of Europe that comes in the form of political freedom, good governance, and economic development to the benefit of not just a small group of oligarchs.

Hence, it was all but surprising when many young Ukrainians took their anger about Yanukovich to the streets. After protests that lasted for nearly three months, President Yanukovich fled the country, a temporary government took over, and chaos broke out on the Crimean peninsula.

The dispute about the Crimea has the potential to impede the relations between Russia and the West for a long time to come, in particular if Russia enforces an annexation of the territory. Moreover, the tensions could quickly turn into a military conflict. The aircraft carrier USS George H.W. Bush was moved into an operational distance to the Crimea, accompanied by 20 smaller U.S. warships, and 12 additional fighter planes will be stationed in Poland. Yet even if there will be no direct confrontation between official Russian and U.S. forces, Ukraine could become the battleground of a proxy war, a kind of conflict that was common in the Cold War era. In this respect, one can already read the writing on the wall: the new Ukrainian government begs the U.S. for supplying arms and ammunition, and while the Obama administration is still reluctant to give in to such requests, the call is supported by hawkish U.S. congressmen who might finally prevail.

Ukraine is a country that is geographically close to Georgia and, like Georgia, has vital economic stakes in the Black Sea area. Georgia will not be unaffected by whatever happens in Kiev and Simferopol. In this policy brief, we will inform policy makers about the likely short-run and long-run economic consequences of the turmoil in Ukraine, discuss the challenges and opportunities that may arise, and derive some policy recommendations.

Short-run economic consequences

The crisis in Ukraine will almost instantaneously affect trade and capital flows between Georgia, Ukraine, and Russia. The effects will likely be negative and hit Georgia in a situation of economic recovery.

The Georgian real GDP growth rates were 6.3% in 2010, 7.2% in 2011, and 6.2% in 2012, and the real GDP per capita evolved from about 2,600 USD to about 3,500 USD in this time, but the upsurge discontinued in 2013 (if no other source is mentioned, figures presented in this policy brief (including those in the graphs) come from the Georgian statistical office GeoStat). ISET-PI, in its February 2014 report on the leading GDP indicators for Georgia, estimates the GDP in 2013 to be 2.6%, while GeoStat, the statistical office of Georgia, believes it to be 3.1%.

The unsatisfactory performance of the Georgian economy in 2013 was arguably caused by political uncertainties resulting from the government change that took place in late 2012, and as these uncertainties are largely overcome, most economists believe that Georgia will get back to its remarkable growth trajectory in 2014. The IMF, in its Economic Outlook, predicts a real GDP Growth of 6% in 2014, and the government of Georgia expects this number to be 5%. With an escalating crisis in Ukraine, it is questionable whether these rosy forecasts are still realistic.

Effects on imports

In 2013, Ukraine and Russia were the 3rd and the 4th largest importers to Georgia, respectively. Graph 1 shows the top five importers to Georgia, which together make up about 50% of total imports. The imports from Ukraine and Russia are mainly comprised of consumption goods: of all goods that were imported between 2009 and 2013 from Ukraine and Russia, about 30% were foodstuff. The ten main import goods in this time (in order of monetary volume) were cigarettes, sunflower oil, chocolate, bread, cakes, meat other than poultry, poultry, and sugar.

If the supply of these goods would be reduced through a breakdown of production and logistics, roadblocks, damaged infrastructure etc., the consequences for Georgia would not be utterly severe. From Ukraine and Russia, Georgia receives few goods that are (1) needed for investment projects and (2) cannot be produced domestically (an example of sophisticated investment goods that need to be imported would be ski lifts for tourism projects). Moreover, as Ukraine and Russia supply primarily standard goods that are produced almost everywhere, it is unlikely that a cutback in their imports would lead to sharp price rises in Georgia. Very quickly, increased imports from other countries would close any supply gaps. In addition, many imported consumption goods, like Ukrainian orange juice, are but luxury for ordinary Georgians, who buy their food in cheap domestic markets that sell almost exclusively local products.


Effects on exports

A small anecdote may illustrate the status of Georgian products in the Russian market. In the late 1940s and early 1950s, Stalin used to invite his comrades to his Kuntsevo dacha almost every night. At these occasions, he drank only semi-sweet Georgian red wine. His clique, usually preferring Russian vodka, adopted this habit out of fear to displease the dictator. Yet the real highlight of these nightly gatherings took place after midnight, when an opulent feast began, featuring all the delicacies of the Georgian cuisine. Through Stalin (and the fact that Georgia was a preferred destination of Soviet tourism), Georgian food obtained an excellent reputation in most countries of the former Soviet Union, and, to the dismay of Georgians, some younger Russians even do not know that Khinkali is not an originally Russian dish.

As can be seen in Graph 2, Russia and Ukraine are among the top 5 destinations for Georgian produce, together absorbing about 14% of total Georgian exports in 2013. In 2006, two Georgian products that are traditionally highly popular in Russia, namely wine and mineral water (the famous “Borjomi” brand), were banned from the Russian market. Yet in the wake of the diplomatic thaw that set in after the new government assumed power last year, this ban was lifted, and in 2013, the export of these goods regained momentum. In 2013, 68% of all wine exported from Georgia was sold in Russia and Ukraine (44 and 24 percentage points, respectively). In both countries, Georgian wines are sold at the higher end of the price range and are typically consumed by people with middle and high income. It is likely that these exports, in particular those to Ukraine, will be affected considerably by the crisis. This may happen through decreased demand for luxury foods and through a possible depreciation of the Ukrainian hryvna and the ruble vis-à-vis the Georgian lari.

Another sector that may be affected by the situation in Ukraine is the car re-export business. Georgia imports huge numbers of used cars from the U.S., Europe, and Japan, and passes them on to countries in the region. While this business hardly yields potential for real economic progress, it accounts for roughly 25% of Georgian exports! Of these 25%, about 7 percentage points go to Russia and Ukraine. Moreover, many cars are imported to Georgia on the land route from Europe through Ukraine and Russia (often driven by private, small-scale importers). If it will become more difficult to cross the border between Russia and Ukraine, this business, providing income to many low-skilled Georgians, may be at risk.

It should also be noted that Ukrainians and Russians make up an ever-increasing share of the tourists coming to Georgia (though the biggest group of tourists are Israelis). Also through this channel, an economic downturn in Ukraine and Russia will have unpleasant consequences for Georgia.


Effects on capital flows

According to the National Bank of Georgia, in 2013 a total of 801 mln USD was flowing in from Russia (see Graph 3). Ukraine contributed 45 mln USD to the money inflows, still significant for an economy as small as Georgia’s. An economic downturn in Russia and Ukraine would hit many Georgian citizens, often pensioners and elderly people, who depend on remittances of their children and other family members sent from these countries. This may aggravate a trend that already exists: in January 2014, money inflows decreased by 4% from Russia and by 5% from Ukraine (compared to January 2013).


Long-run economic consequences

Most of the economic dynamics Georgia experienced since 2003 was “catch up growth”. A country permeated by corruption, with a dysfunctional police and judicial system, without protection of property rights and contract enforcement, will grow almost automatically when the government restarts to fulfill its basic functions. Yet once this phase of returning to normal economic circumstances is over (Georgia probably is already in this situation), high growth rates can hardly be achieved without a strong export orientation of the economy, in particular when an economy is as small as Georgia’s. Most economists concerned with Georgia are therefore struggling to identify economic sectors where Georgia is in a good position to develop export potential. The National Competitiveness Report for Georgia, written in 2013 by the ISET Policy Institute on behalf of USAID, therefore extensively discusses the question what Georgia can deliver to the world. Though not related to export in a classical sense, the report points out that one of the advantages Georgia has is its geographical location, providing for possibilities to transform Georgia into a logistics hub.

There are three main routes to transport goods from Europe to the Central Asian countries (e.g. from Hamburg to Taraz in Kazakhstan). One route goes via the Baltic ports of Klaipeda or Riga, and then through Ukraine and Russia, and another route goes overland through Ukraine. A third one, the so called Caucasian Transit Corridor, has the Georgian port city of Poti and Turkey as its Western connection points, then goes through Georgia, Azerbaijan, and the Caspian Sea, and further east it splits up into a Kazakhstan and a Turkmenistan branch.

According to the Almaty based company Comprehensive Logistics Solutions, the fastest and cheapest route is the one through the Baltic ports. The transport from Hamburg to Taraz takes around 33 days and costs 6,220 USD per standard container. The overland transport via Ukraine takes around 34 days and costs 7,474 USD. Finally, transport through the CTC currently takes the longest time, namely around 40 days, and costs 6,896 USD.

Unlike many other economic activities, competition for transportation is more or less a zero-sum game played by nations. If transport through Ukraine and Russia will be restrained due to closed borders and political and economic instability, the total transport volume will not change substantially. Rather, instead of going through the northern routes, the goods will flow through the CTC. A similar development could be observed when the embargo against Iran was tightened and shipping goods through Iranian ports became increasingly difficult for Armenia and Azerbaijan. As a result, Azerbaijan, traditionally importing through Iran and exporting through Poti, now facilitates both its imports and exports through Poti.

This is a great chance for Georgia if it wants to become serious about transforming into a logistics hub. In our policy recommendations, we will speak about how to utilize on this opportunity.

Policy recommendations

Georgia can do little to bolster the short-run effects that are transmitted through the trade and capital flow channels. Political decision makers should be aware of problems that might arise for particularly vulnerable groups in the population, like pensioners who lose income in case remittances from Russia and Ukraine run dry, and help out with social support if necessary.

Regarding the long-run impact, Georgia should use this opportunity for gaining ground in the competition with northern transit routes. The Caucasus Transit Corridor can become much faster and cheaper if (a) a deepwater port and modern port facilities with warehouses will be built in Poti, (b) the road and train infrastructure will be improved, and (c) it will be easier to bring cargo over the Caspian Sea. Regarding the latter point, it would be important to assist Azerbaijan in improving the port management at Baku (in particular reducing corruption), and in reforming the monopolistic Azerbaijani State Caspian Sea Shipping Company.

Azerbaijan invests 775 mln USD into the Georgian part of the Baku-Tbilisi-Kars railway, proving their serious interest to upgrade CTC. Given this impressive commitment of Azerbaijan, Georgia should not stand back.


The crisis in Ukraine yields short-run risks and long-run opportunities for the Georgian economy. While there is little that can be done about the risks, the opportunities call for courageous steps to improve the Caucasus Transit Corridor. If the countries that hold stakes in the CTC are now further reducing the cost of transportation and make the route faster and more customer-friendly, the CTC may establish itself as the main trading route connecting Europe and Central Asia. Once critical investments have taken place, CTC’s advantage could be sustained beyond the current crisis. It is a competitive route that simply needs upgrading, which can happen now as a fallout of the conflict between Ukraine and Russia.


The relationship between education and labor market opportunities: the case of Ukraine

Education and labour market policy brief image

Author: Hanna Vakhitova, KSE and Tom Coupe, KSE

This brief is based on a research project that analyses the extent to which the educational system in Ukraine contributes to better local employment opportunities, hence diminishing the outflows. According to the results, additional year of education increases the chance of finding a job by 2-3%. However, the effect of education on wages is small, especially when compared to other transition countries (1-5% wage premium for a year of education). In addition, while in 8 out of 10 countries education has zero or positive impact on the probability of starting a business, this impact is negative and significant in Ukraine. *)

Reputation for Quality and Entry in Procurement: Is there a Trade-Off?

20140224 Reputation for Quality and Entry Image 01

How much weight should be given to past performance indicators when selecting contractors? Does a large weight assigned to suppliers’ previous performance deter entry by new, innovative suppliers that have no track records for the very reason that they are new? If yes, how should we take this into account when designing procurements for firms or governments? This note describes recent research that sheds light on these questions crucial for every government and organization.


How should past performance be accounted for when selecting (public or private) contractors? On one hand, giving large weight to suppliers’ previous performance in assigning contracts may improve incentives in procurement; on the other hand, it may deter entry by new, innovative suppliers for the very reason that they are new. Are there ways to structure procurement rules and procedures to minimize or eliminate these costs? How can well performing suppliers be rewarded, but not at the expense of losing the most innovative start-ups, that could pose important positive externalities on the buyer and on society overall? These questions are important ones and every procurement manager, in the private and public sector, should know how to answer, or at least how to think about, them. Unfortunately, if one looks at the leading management and operations textbooks, or at public procurement textbooks, it is hard to find a line that could help in making these crucial decisions. The only procurement book that at least mentions these crucial questions, to our knowledge, is the Handbook of Procurement (2006; see Ch. 18, by Dellarocas et al.). However, even that handbook falls short in providing evidence-based or – more generally – research-based guidance for these questions. This is the case because there is practically no research dealing with these everyday problems. One recent exception is an experimental study recently undertaken by Butler, Carbone, Conzo and Spagnolo (2013) that will be discussed in depth in the reminder of this brief.

Public Policy Relevance  

Before getting into the results of this recent study, let me provide some background information that will give an idea of the relevance of these questions for public policy.

Public procurement currently accounts for between 15% and 20% of the GDP in developed countries (see  In 2011, the total public procurement market in the EU – i.e. the purchases of goods, services and public works by governments and public utilities – reached a size of approximately €2,500 billion, corresponding to 19 percent of GDP (see e.g. As Table 1 below shows, despite year-to-year fluctuations, there has been an overall increase in procurement expenditures relative to 2007 levels, both absolutely and proportionately. The increasing shift in focus in EU innovation policies, from “push-based” mechanisms like R&D subsidies/tax breaks towards demand-led “pull” mechanisms, like Pre-Commercial Procurement, is likely to further increase the volume of this market.

Table 1: Total EU procurement expenditure on works, goods and services
In EUR billion











As a % of GDP











Source: DG MARKT. 2011. Public Procurement Indicators.

The enormous size of this market notwithstanding, we know relatively little about whether, when, and how buyers should use reputational indicators based on past performance in selecting among sellers, and whether the use of such indicators necessarily reduces the ability of new sellers—i.e., sellers with no history of past performance—to enter the market.

It is well known that reputational mechanisms that reward past performance are important governance tools that complement (and sometimes substitute for) contracts in private transactions (Calzolari and Spagnolo 2009). Private buyers, however, are typically only concerned about the price and quality of the good they buy. Regulators in charge of public procurement, instead, are usually also concerned that the public procurement process is transparent and open for obvious accountability reasons. The need to prevent favoritism and corruption has led lawmakers around the world to ensure that open and transparent auctions where bidders are treated equally—even when in some crucial dimensions they have very different track records—are used whenever possible.

The trend in the US

The costs of limiting discretion to ensure public buyers’ accountability – such as the possibly large cost of not allowing reputational forces to complement incomplete procurement contracts – were stressed by Kelman (1990), who pushed for a deep reform of the US procurement system when he was the head of public procurement during the Clinton administration. The reform was targeted at reducing the rigidity of procurement rules in the Federal Acquisition Regulations and allowing public buyers to adopt more flexible purchasing practices common in the private sector, including giving more weight to suppliers’ past performance. Since the Federal Acquisitions Streamlining Act of 1994, US federal departments and agencies are expected to record past contractors’ performance evaluations and share them through common platforms for use in future contractor selection.

However, the US Senate recently expressed the apparently widespread concern that past performance-based selection criteria could hinder new and small businesses’ ability to enter and compete effectively, leading to an intriguing, but inconclusive report by the General Accountability Office.

This is not to say that US regulators were not concerned with the ability of small and medium enterprises (SME) – sometimes the most innovative part of the economy – to enter public procurement markets. In the US, this long-held concern led to large programs like the Small Business Act, with its rules limiting the bundling of public demand in very large procurements and establishing the Small Business Agency, and the ‘set aside’ (procurement only open to SMEs) common in many types of procurement auctions. However, the worry that past-performance based selection may contribute to the exclusion of novel and smaller firms only arose in the last couple of years.

The (opposite) trend in the EU

The European Union has instead been moving precisely in the opposite direction. An important concern driving procurement regulation in Europe since the Treaty of Rome has been helping the process of common market integration by increasing cross-border procurement, i.e., the amount of goods and services each EU Member State buys from contractors based in other states. The EU Procurement Directives that coordinate public procurement regulation in the various European states have been limiting the use of past-performance information in the process of selecting among offers—a feature that came under broad attack during the 2011 consultation for the revision of the EU Directives (see Replies to the Consultation on the 2011 EU Green Book on Public Procurement regulation). The EU regulators appear to have been always convinced that using reputational indicators as a criteria for selecting contractors leads to manipulations in favour of local incumbents, at the expense of cross-border procurement and market integration.  (see e.g.,

Only very recently – now that the US is moving towards reconsidering the effects, and possibly limiting the use of past-performance indicators – has the EU started to move (again in the opposite direction to the US) towards leaving more space to these indicators, perhaps as a reaction to the comments they received in recent consultations.

Finally, to have an idea of the lack of research-based knowledge guiding policy in this field, note that in some cases EU regulation already acknowledges the crucial importance of past-performance based reputation for some types of procurement. For example, the European Research Council (ERC) provides funding to top researchers in Europe, who are selected through peer review, and the track record of the researchers is usually the main awarding criterion. ERC funding is distributed almost exclusively based on reputation criteria in order to support the best and the brightest. Other European instruments for the procurement of research, such as the FET-OPEN program, are based on a strictly enforced, completely anonymous evaluation instead, without obvious reasons justifying this opposite approach. On the dedicated homepage of these programs it states: “The anonymity policy applied to short proposals has changed and is strictly applied. The part B of a short STREP proposal may not include the name of any organization involved in the consortium nor any other information that could identify an applicant. Furthermore, strictly no bibliographic references are permitted.”

Reputation and Entry in Procurement

In a recent research paper (Butler, Carbone, Conzo and Spagnolo, 2013) we have been trying to fill at least part of this knowledge gap and offer some initial evidence-based guidelines for future policy.

The study

We build a simple model of repeated procurement with limited enforcement and potential entry and implement it in the laboratory. We focus on reputation as an incentive system to limit moral hazard in the quality dimension as well as on the effect of reputation on selection through entry. We assume that some costly-to-produce quality dimension of supply, although observable to the parties, is too costly to verify for a court to be governed through explicit contracting and is therefore left to reputational governance. We make the additional assumption that there is a potential entrant firm that is more efficient than all incumbent firms. In this context, we study how quality, price, entry and welfare change with the introduction of a simple and transparent reputational mechanism. This mechanism rewards an incumbent firm that chooses to provide (costly) high-quality production with a bid subsidy in the subsequent procurement auction, and may also award a bid subsidy (of varying size) to an entrant with no history of production.

Note that in the case of public procurement and of firms’ vendor rating systems, we are talking about reputational mechanisms based on public rules, known and accepted by suppliers. Formal mechanisms and rules give commitment power to the buyer and can be designed in many different ways. A common mistake is to assume that reputational mechanisms must be designed along the line of the eBay feedback system, in which new sellers start with “zero reputation”. However, a buyer with some commitment power concerning the rules for information aggregation and diffusion and for selecting suppliers may well award a positive rating to new entrants—e.g. the maximum possible rating, or the average rating in the market, putting entrants at less of a disadvantage—and ensure that this is taken into account by the scoring rule that selects the contractor, even if the contractor has never before interacted with the buyer. Indeed, private corporations often have vendor rating systems in which all suppliers start off with the same maximal reputational capital—a given number of points—and then lose points when performing poorly and are suspended for some time if their reputational capital falls below a certain low threshold. This type of vendor rating system creates an advantage for new suppliers, most likely stimulating rather than hindering entry, suggesting that it is possible to design a reputational mechanism in public procurement that simultaneously sustains quality and entry.

The results

First of all, the study shows that concerns about reputation-based selection hindering entry are justified: naively introducing a “standard” reputational mechanism in which only good past performance is rewarded with a bid subsidy in the following procurement auction increases quality provision, but it also significantly reduces entry.

In contrast to this first result, the study goes on to show that properly designed reputational mechanisms in which new entrants, with no history of past performance, are awarded a moderate or high reputation score—as is often done in the private sector—actually foster rather than hinder entry while, at the same time, delivering a substantial increase in high quality goods provision.

The third important result of this study is that the total cost to buyers (buyer’s transfer) does not increase when a reputational mechanism is introduced, even though (costly) quality provision increases. The introduction of bid subsidies for good past performance appears to benefit the buyer/taxpayer by increasing competition for incumbency, driving winning bids down sufficiently to offset the potential increase in procurement costs due to bid subsidies.


Considered together, the findings in Butler et al. (2013) suggest that there need not be a trade-off between reputation and entry in procurement, and that the debates both in the EU and the US are rather misplaced. The results suggest that the dual goals of providing incentives for quality provision and increasing entry and cross-border procurement – in the EU or elsewhere – are achievable through an appropriately designed reputational mechanism. Policy makers should therefore probably stop quarrelling about whether a generic past-performance based reputational mechanism should be introduced, and instead focus on how such a mechanism should be designed.


  • Butler Jeff, Carbone Enrica, Conzo Pierluigi and Giancarlo Spagnolo. 2013. “Reputation and Enty in Procurement.” CEPR Discussion Paper No. 9651.
  • Calzolari, Giacomo and Giancarlo Spagnolo. 2009. “Relational Contracts and Competitive Screening.”  CEPR Discussion paper No. 7434.
  • European Commission. 2011. Green Paper on the modernisation of EU public procurement policy Towards a more efficient European Procurement Market. Available at
  • European Commission. 2011. Green Paper on the modernisation of EU public procurement policy Towards a more efficient European Procurement Market. Synthesis of Replies.  Available at
  • Government Accountability Office. 2011. (GAO-12-102R, Oct. 18, 2011). Prior Experience and Past Performance as Evaluation Criteria in the Award of Federal Construction Contracts. Available at
  • Kelman, Steven. 1990.  Procurement and Public Management: The Fear of Discretion and the Quality of Government Performance: American Enterprise Institute Press.
  • Yukins, Christoher. 2008. “Are IDIQS Inefficient? Sharing Lessons with European Framework Contracting.” Public Contract Law Journal,  37(3): 545-568.

Green Energy: A Solution For Climate Change?

20140203 FREE Network Policy Brief Image

This brief discusses the economic and political problems of so called green energy, a topic discussed at the 7th Energy Day recently organized by SITE. Green energy may be the only credible and feasible way to reduce carbon dioxide emission in the near future. However, a shift to a “greener” energy mix poses economic and political challenges which may impair the needed investments. This problem is further exacerbated by free-riding mechanisms associated with green energy investment. We suggest that investing and consuming renewable energies at the local level may be a way to internalize some the costs of the green energy.

There is a pressing need to cut pollution and the emission of greenhouse gases in the face of climate change and environmental damage. Since 1950s, global greenhouse gas emissions grew more than 5 times, and per capita emissions more than doubled.

Figure 1: Global CO2 Emissions from Fossil-Fuel Burning, Cement Manufacture, and Gas Flaring.
GreenEnergy020214_figure1Source: Boden, T.A., G. Marland, and R.J. Andres. 2010. Global, Regional, and National Fossil-Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center, Oak Ridge

A substantial part of this growth in emissions, and associated global warming, is driven by human activity. In particular, the model experiments aimed at reproducing the dynamics of temperature change fail to consistently predict the recent years of temperature increase unless anthropogenic influence on the greenhouse emissions is taken into account.

Figure 2. Separating Human and Natural Influences on Climate.
The blue band shows how global average temperatures would have changed due to natural forces only, as simulated by climate models. The red band shows model projections of the effects of human and natural forces combined. The black line shows actual observed global average temperatures. Source: Global Climate Change Impacts in the United States, T. R. Karl, J. M. Melillo, and T. C. Peterson (eds.). Cambridge University Press, 2009.

With this perspective, it is not surprising that in the last decades investment in environmentally friendly energy has become one of the most common ways to address this issue around the world. However a shift to a “greener” energy mix is inevitably costly. The objective of this brief is to discuss economic as well as political costs of green energy. We do so by summarizing and extending the discussion that took place during the SITE 7th Energy Day which took place in November 2013 and was devoted to the challenges of green energy.

The Kaya Identity: Green energy, one of many possibilities

 A frequently used approach when analyzing drivers of emissions is the so called Kaya Identity, originally developed by energy economist Yoichi Kaya. It relates global carbon dioxide emissions (CO2) from human activity to the level of economic activity (GDP), total world population (Pop), the energy intensity of economic activity and the carbon intensity of that energy use. The relationship can be summarized as the following identity (see Bradshaw (2013) for a detailed discussion on this topic):

CO2 emission = carbon intensity (CO2/E) * energy intensity (E/GDP) *GDP per capita (GDP/Pop) * Pop

The impact of these “Kaya” factors on the world carbon dioxide emissions varies, both across factors and over time. Figure 3 gives the International Energy Agency’s estimates for the period 1990-2035.

Figure 3. Impacts of four Kaya factors on world carbon dioxide emissions, 1990-2035 (index: 2007 = 1.0).
Source: International Energy Outlook IEA 2010

As is evident from the Kaya identity, greener energy represents only one possible solution to tackle environmental damage. The decomposition of the different components shown in figure 3 suggests that most of the future growth of emissions is predicted to come from increased output per capita and an increasing population. But taking actions to reduce these are not on the policy agenda in most countries. The two remaining alternatives then seem to be reducing energy intensity or the carbon content of economic activity.

Reducing energy intensity is often prescribed as the key solution and it is easy to see why this would be a preferred alternative for policy makers. It suggests that we need not cut back on standard and at the same time we would not have to alter the energy mix because increased efficiency in energy use will take care the needed reductions. It does indeed seem plausible that energy efficiency will continue to develop, in particular based on technological innovation, but there are problems with relying on this solution alone. First, as can be seen in figure 3, projections already include an optimistic development for this factor. Second, reducing energy intensity requires changing consumer behavior. Research suggests both that inducing such change is surprisingly difficult and also that changed behavior has a tendency of not lasting in the longer term (see for example Hunt and Rogers, 2013).

Taken together this suggests that reducing carbon intensity, that is, investing in “green energy”, may be the most important change when trying to cut CO2 emissions in the near future. This solution may also bring additional benefits. For example, once up and running, renewable energy production would not require a supply of inputs, thereby ensuring long-term sustainability. Renewable energy would allow the countries to diversify their energy portfolio, positively contributing to their energy security. Finally, renewables are geographically more dispersed than carbon-based fuels. This could contribute to strengthening user countries’ energy security.

The multiple dimensions of the green energy costs

There are, however, various costs associated with green energy. These are direct and indirect as well as economic and political. An obvious direct cost comes from the installment of a new technology, and modification of the existing network. In addition, investing in green energy is usually considered riskier than investing in conventional energy. As a consequence, government subsidies or guaranties to attract private investors (such as a feed-in tariff for the wind energy providers) have to be (and have been) provided by the state. Another concern with many types of green energy, especially wind power, is that the power generation can be highly intermittent. As a result, such renewable power generation requires backup technologies (such as open-cycle gas generation which have high carbon emissions), to be on stand-by to real-time match demand and supply. All of this may contribute to an energy price increase for the final consumers. Another component of massive green energy promotion and subsidization by the state is that it lowers the market share of the traditional energy providers, leading to costly (and likely unpopular) reallocation of labor and capital.

All of the above suggests that costly green energy decisions are difficult to “sell” to voters who face substantial instantaneous costs of green energy transition, but do not (immediately) enjoy future benefits of cleaner environment. This, coupled with the potentially short horizon of politicians (as compared to the horizon for the green energy benefits), risks undermining the political incentives to invest in the green alternatives. Moreover, green-motivated politicians are likely to face resistance from significant counter-lobbying by affected energy-intensive industries as well as by incumbent energy providers, which further increases the direct political costs of green energy.

There are also some indirect costs, or negative externalities, associated with green energy, some of which are not immediately obvious. For example, due to electricity network interconnection across countries, the intermittency of wind power affects the energy supply security not only locally but also at the regional level. A local congestion problem may thus become a regional costly problem. Furthermore, it is not obvious that investing in greener energy in some parts of the world, such as EU, would reduce aggregate world carbon dioxide emissions. Indeed the reduced demand for “dirty” carbon energy in Europe would reduce its world price, making it more affordable for countries with weaker environmental standards, which may respond by increasing their “dirty” energy consumption. Last, but not least, adopting a green policy may also have indirect political costs at intergovernmental level. For example, recent research shows that being the first country to adopt green energy policy may weaken its position in case of a collective agreement to reduce pollution (see Harstad, 2012).

The local solution

Summing up, lowering carbon intensity seems like an important component in reducing CO2 emissions with large benefits in terms of being long-run sustainable and low cost once the initial investments have been made. But there are also clear costs to governments, especially in the short-run, and also technological constraints with integrating green alternatives into a centralized electricity grid. Some of these problems make it especially difficult to agree on governmental and intergovernmental levels.

An interesting alternative possibility comes from facilitating the introduction of green alternatives on a smaller scale and on a more local level. It may seem paradoxical but the easiest way of introducing green alternatives may be in places that for various reasons are not yet connected to a centralized system or where gradual, initially small scale, introduction is possible. There are several examples of successful projects of this type (e.g., at SITE 7th Energy Day such projects were discussed by Fredrik Svinhufvud, in case of Ukraine, and Grigory Dudarev, in case of Russia).

The main challenge seems to be how to deal with the unevenness of energy production from sources such as wind or solar. In general, development of storage capacity seems to be of crucial importance, but this does not necessarily need to rely on advancements of battery technology. There are other ingenious examples of green storage technologies that have successfully been tried out in small scale. One such solution is using excess capacity when conditions are good to pump water into an elevated basin that acts as a reserve hydro-source of energy when wind or solar do not produce enough. The extent of the impact of such local solutions on reducing CO2 emissions is yet to be investigated.