Location: Asia
How to Undermine Russia’s War Capacity: Insights from Development Day 2023
As Russia’s full-scale invasion of Ukraine continues, the future of the country is challenged by wavering Western financial and military support and weak implementation of the sanction’s regime. At the same time, Russia fights an information war, affecting sentiments for Western powers and values across the world. With these challenges in mind, the Stockholm Institute for Transition Economics (SITE) invited researchers and stakeholders to the 2023 Development Day Conference to discuss how to undermine Russia’s capacity to wage war. This policy brief shortly summarizes the featured presentations and discussions.
Holes in the Net of Sanctions
In one of the conference’s initial presentations Aage Borchgrevink (see list at the end of the brief for all presenters’ titles and affiliations) painted a rather dark picture of the current sanctions’ situation. According to Borchgrevink, Europe continuously exports war-critical goods to Russia either via neighboring countries (through re-rerouting), or by tampering with goods’ declaration forms. This claim was supported by Benjamin Hilgenstock who not only showed that technology from multinational companies is found in Russian military equipment but also illustrated (Figure 1) the challenges to export control that come from lengthy production and logistics chains and the various jurisdictions this entails.
Figure 1. Trade flows of war-critical goods, Q1-Q3, 2023.
Offering a central Asian perspective, Eric Livny highlighted how several of the region’s economies have been booming since the enforcement of sanctions against Russia. According to Livny, European exports to Central Asian countries have in many cases skyrocketed (German exports to the Kyrgyzs Republic have for instance increased by 1000 percent since the invasion), just like exports from Central Asian countries to Russia. Further, most of the export increase from central Asian countries to Russia consists of manufactured goods (such as telephones and computers), machinery and transport equipment – some of which are critical for Russia’s war efforts. Russia has evidently made a major pivot towards Asia, Livny concluded.
This narrative was seconded by Michael Koch, Director at the Swedish National Board of Trade, who pointed to data indicating that several European countries have increased their trade with Russia’s neighboring countries in the wake of the decreased direct exports to Russia. It should be noted, though, that data presented by Borchgrevink showed that the increase in trade from neighboring countries to Russia was substantially smaller than the drop in direct trade with Russia from Europe. This suggests that sanctions still have a substantial impact, albeit smaller than its potential.
According to Koch, a key question is how to make companies more responsible for their business? This was a key theme in the discussion that followed. Offering a Swedish government perspective, Håkan Jevrell emphasized the upcoming adoption of a twelfth sanctions package in the EU, and the importance of previous adopted sanctions’ packages. Jevrell also continued by highlighting the urgency of deferring sanctions circumvention – including analyzing the effect of current sanctions. In the subsequent panel Jevrell, alongside Adrian Sadikovic, Anders Leissner, and Nataliia Shapoval keyed in on sanctions circumvention. The panel discussion brought up the challenges associated with typically complicated sanctions legislation and company ownership structures, urging for more streamlined regulation. Another aspect discussed related to the importance of enforcement of sanctions regulation and the fact that we are yet to see any rulings in relation to sanctions jurisdiction. The panelists agreed that the latter is crucial to deter sanctions violations and to legitimize sanctions and reduce Russian government revenues. Although sanctions have not yet worked as well as hoped for, they still have a bite, (for instance, oil sanctions have decreased Russian oil revenues by 30 percent).
Reducing Russia’s Government Revenues
As was emphasized throughout the conference, fossil fuel export revenues form the backbone of the Russian economy, ultimately allowing for the continuation of the war. Accounting for 40 percent of the federal budget, Russian fossil fuels are currently mainly exported to China and India. However, as presented by Petras Katinas, the EU has since the invasion on the 24th of February, paid 182 billion EUR to Russia for oil and gas imports despite the sanctions. In his presentation, Katinas also highlighted the fact that Liquified Natural Gas (LNG) imports for EU have in fact increased since the invasion – due to sanctions not being in place. The EU/G7 imposed price cap on Russian oil at $60 per barrel was initially effective in reducing Russian export revenues, but its effectiveness has over time being eroded through the emergence of a Russia controlled shadow fleet of tankers and sales documentation fraud. In order to further reduce the Russian government’s income from fossil fuels, Katinas concluded that the whitewashing of Russian oil (i.e., third countries import crude oil, refine it and sell it to sanctioning countries) must be halted, and the price cap on Russian oil needs to be lowered from the current $60 to $30 per barrel.
In his research presentation, Daniel Spiro also focused on oil sanctions targeted towards Russia – what he referred to as the “Energy-economic warfare”. According to Spiro, the sanctions regime should aim at minimizing Russia’s revenues, while at the same time minimizing sanctioning countries’ own costs, keeping in mind that the enemy (i.e. Russia) will act in the exact same way. The sanctions on Russian oil pushes Russia to sell oil to China and India and the effects from this are two-fold: firstly, selling to China and India rather than to the EU implies longer shipping routes and secondly, China and India both get a stronger bargaining position for the price they pay for the Russian oil. As such, the profit margins for Russia have decreased due to the price cap and the longer routes, while India and China are winners – buying at low prices. Considering the potential countermoves, Spiro – much like Katinas – emphasized the need to take control of the tanker market, including insurance, sales and repairs. While the oil price cap has proven potential to be an effective sanction, it has to be coupled with an embargo on LNG and preferrable halted access for Russian ships into European ports – potentially shutting down the Danish strait – Spiro concluded.
Chloé Le Coq presented work on Russian nuclear energy, another energy market where Russia is a dominant player. Russia is currently supplying 12 percent of the United States’ uranium, and accounting for as much as 70 percent on the European market. On top of this, several European countries have Russian-built reactors. While the nuclear-related revenues for Russia today are quite small, the associated political and economic influence is much more prominent. The Russian nuclear energy agency, Rosatom, is building reactors in several countries, locking in technology and offering loans (e.g., Bangladesh has a 20-year commitment in which Rosatom lends 70 percent of the production cost). In this way Russia exerts political influence on the rest of the world. Le Coq argued that energy sanctions should not only be about reducing today’s revenues but also about reducing Russian political and economic influence in the long run.
The notion of choke points for Russian vessels, for instance in the Danish strait, was discussed also in the following panel comprising of Yuliia Pavytska, Iikka Korhonen, Aage Borchgrevink, and Lars Schmidt. The panelists largely agreed that while choke points are potentially a good idea, the focus should be on ensuring that existing sanctions are enforced – noting that sanctions don’t work overnight and the need to avoid sanctions fatigue. Further, the panel discussed the fact that although fossil fuels account for a large chunk of federal revenues, a substantial part of the Russian budget come from profit taxes as well as windfall taxes on select companies, and that Russian state-owned companies should in some form be targeted by sanctions in the future. In line with the previous discussion, the panelists also emphasized the importance of getting banks and companies to cooperate when it comes to sanctions and stay out of the Russian market. Aage Borchgrevink highlighted that for companies to adhere to sanctions legislation they could potentially be criminally charged if they are found violating the sanctions, as it can accrue to human rights violations. For instance, if companies’ parts are used for war crimes, these companies may also be part of such war crimes. As such, sanctions can be regarded as a human rights instrument and companies committing sanctions violations can be prosecuted under criminal law.
Frozen Assets and Disinformation
The topic of Russian influence was discussed also in the conference’s last panel, composed of Anders Ahnlid, Kata Fredheim, Torbjörn Becker, Martin Kragh, and Andrii Plakhotniuk. The panelists discussed Russia’s strong presence on social media platforms and how Russia is posting propaganda at a speed unmet by legislators and left unchecked by tech companies. The strategic narrative televised by Russia claims that Ukraine is not a democracy, and that corruption is rampant – despite the major anti-corruption reforms undertaken since 2014. If the facts are not set straight, the propaganda risks undermining popular support for Ukraine, playing into the hands of Russia. Further, the panelists also discussed the aspect of frozen assets and how the these can be used for rebuilding Ukraine. Thinking long-term, the aim is to modify international law, allowing for confiscation, as there are currently about 200 billion EUR in Russian state-owned assets and about 20 billion EUR worth of private-owned assets, currently frozen.
The panel discussion resonated also in the presentation by Vladyslav Vlasiuk who gave an account of the Ukrainian government’s perspective of the situation. Vlasiuk, much like other speakers, pointed out sanctions as one of the main avenues to stop Russia’s continued war, while also emphasizing the need for research to ensure the implications from sanctions are analyzed and subsequently presented to the public and policy makers alike. Understanding the effects of the sanctions on both Russia’s and the sanctioning countries’ economies is crucial to ensure sustained support for the sanction’s regime, Vlasiuk emphasized.
Joining on video-link from Kyiv, Tymofiy Mylovanov, rounded off the conference by again emphasizing the need for continued pressure on Russia in forms of sanctions and sanctions compliance. According to Mylovanov, the Russian narrative off Ukraine struggling must be countered as the truth is rather that Ukraine is holding up with well-trained troops and high morale. However, Mylovanov continued, future funding of Ukraine’s efforts against Russia must be ensured – reminding the audience how Russia poses a threat not only to Ukraine, but to Europe and the world.
Concluding Remarks
The Russian attack on Ukraine is military and deadly, but the wider attack on the liberal world order, through cyber-attacks, migration flows, propaganda, and disinformation, must also be combatted. As discussed throughout the conference, sanctions have the potential for success, but it hinges on the beliefs and the compliance of citizens, companies, and governments around the world. To have sanctions deliver on their long-term potential it is key to include not only more countries but also the banking sector, and to instill a principled behavior among companies – having them refrain from trading with Russia. Varying degrees of enforcement undermine sanctions compliant countries and companies, ultimately making sanctions less effective. Thus, prosecuting those who breach or purposedly evade sanctions should be a top priority, as well as imposing control over the global tanker market, to regain the initial bite of the oil price cap. Lastly, it is crucial that the global community does not forget about Ukraine in the presence of other conflicts and competing agendas. And to ensure success for Ukraine we need to restrain the Russian war effort through stronger enforcement of sanctions, and by winning the information war.
List of Participants
Anders Ahnlid, Director General at the National Board of Trade
Aage Borchgrevink, Senior Advisor at The Norwegian Helsinki Committee
Torbjörn Becker, Director at the Stockholm Institute of Transition Economics
Chloé Le Coq, Professor of Economics, University of Paris-Panthéon-Assas, Economics and Law Research Center (CRED)
Benjamin Hilgenstock, Senior Economist at Kyiv School of Economics Institute
Håkan Jevrell, State Secretary to the Minister for International Development Cooperation and Foreign Trade
Michael Koch, Director at Swedish National Board of Trade
Iikka Korhonen, Head of the Bank of Finland Institute for Emerging Economies (BOFIT)
Martin Kragh, Deputy Centre Director at Stockholm Centre for Eastern European Studies (SCEEUS)
Eric Livny, Lead Regional Economist for Central Asia at European Bank for Reconstruction and Development (EBRD)
Anders Leissner, Lawyer and Expert on sanctions at Advokatfirman Vinge
Tymofiy Mylovanov, President of the Kyiv School of Economics
Vladyslav Vlasiuk, Sanctions Advisor to the Office of the President of Ukraine
Nataliia Shapoval, Chairman of the Kyiv School of Economics Institute
Yuliia Pavytska, Manager of the Sanctions Programme at KSE Institute
Andrii Plakhotniuk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the Kingdom of Sweden
Daniel Spiro, Associate Professor, Uppsala University
Adrian Sadikovic, Journalist at Dagens Nyheter
Kata Fredheim, Executive Vice President of Partnership and Strategy and Associate Professor at SSE Riga
Lars Schmidt, Director and Sanctions Coordinator at the Ministry for Foreign Affairs, Sweden
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.
Covid-19 in LDCs: Assessing Resilience and Understanding How to Help
Poor and developing countries are now starting to be affected by the Covid-19 pandemic. Important differences in the setting need to be considered when thinking about their prospects, and the role richer countries may play in helping them face the challenge.
Introduction
Most of the focus in current analyses of the policy response to the Covid-19 crisis center on Western and East Asian countries that were hit first and hardest. Some initiatives are tracking the situation in transition countries of Eastern Europe (e.g., the FREE Network initiative and the Vienna Institute for International Economic Studies tracker).
However, poor and developing countries start also being affected by the pandemic, and richer countries have an important role in helping them face the challenge. Besides the moral obligation, in the presence of a global externality it would be extremely myopic not to do so. When thinking about this, it is important to reflect on the differences that will be relevant in these settings.
What is Happening? The Spread of the Virus
Currently, the spread of the contagion is still at substantially lower levels in low income countries (LIC) as compared to high income countries (HIC). There is not enough evidence yet to either support or reject the hypothesis that a lower spread could be due to differences in climatic zones (warmer temperatures and humidity). Younger populations might account for both a lower (observed) spread and lower mortality, but on the other hand the denser and multigenerational living arrangements with poorer hygienic conditions should be pushing in the opposite direction. Observing lower spread and lower mortality could also be put down to lower testing (and more generally, data availability and quality of information systems). Finally, we can’t exclude that this is simply a matter of timing. Many LIC are relatively less connected to global routes, and moreover were fast to close their borders: many opted for early lockdown. If this is the case, they are merely postponing the sharp increases in infections and fatalities observed in other countries. (At the time of writing, worrisome reports of a severe outbreak in Somalia are emerging.)
Figure 1: Total confirmed Covid-19 deaths.
Figure 2: Total Covid-19 tests per 1,000 vs. GDP per capita.
A number of factors related to the demographic structure as well as the public health systems are relevant as a base for our expectations on how the situation is going to evolve in these countries. Since age plays an important role on how severely Covid-19 patients are affected by symptoms, the demographic structure of the population has consequences for the demands that will be placed on the health care system by an outbreak. This plays in favor of LICs, where only 3% of the population is above 65 years of age on average. The corresponding share is 18% in OECD countries. The state of the health care system is intuitively crucial once there is an outbreak. In Table 1, the Global Health Security Index (GHS) “Health Security Score” paints a dismal picture in terms of overall capacity “to treat the sick and protect health”, where the group of LICs (as defined by the World Bank) scores an average of 14,5 out of 100 (HIC average is 51,9).
Table 1: Public health.
This is clearly related to how wealthy a country is. The wealthier countries have better health care systems in general, and will do better if they experience an outbreak, while the poorer countries will do worse. Even if the average 6% of GDP devoted to health care spending in LICs looks comparable to the HIC average share (8,8%), these translate into very different figures in terms of per capita dollar spending: 40 USD per capita in the first group, to be compared to over 4,000 USD in the second. Even if costs do differ as well, a ventilator is unlikely to be two orders of magnitudes cheaper in Liberia than in Italy. Nevertheless, the “Health security – response capability” index, which includes things as emergency response plans and existing links between health and security authorities, averages 30,9 in LICs against 45,8 for HICs. The difference across income levels is much smaller in this case, reflecting both the more general lack of preparedness in this particular domain, but also the familiarity and experience of poorer countries with infectious diseases outbreaks, which might give an edge in an emergency. The World Health Organization reports over one hundred “public health events of varying magnitude and socio-economic effects” annually in Africa, for example. After the 2014-15 Ebola outbreak, an Africa Centre for Disease Control and Prevention was set up in 2017, which might have contributed to an upgrade in the index. The Centre has been quick to react in the present case, as discussed later in the policy response section.
What is Happening? Economic Impacts
It is hard for HIC to put numbers on forecasts of economic activity. For LIC, the challenge of forecasting is further compounded by the normally poor array of statistical systems and the larger informal sectors. Better indicators of economic activity and income distribution normally rely on surveys, and while surveys are still being conducted these days (see for example the relentless work of IPA affiliates the focus at the moment is naturally on the health emergency and related behavior, rather than incomes and investments.
Even without exact numbers, we can nevertheless expect that LICs’ economies are going to be hit harder, for two main reasons:
- They are more sensitive to the global shock(s), through commodity prices and exports, and also because of the limited access to international financial markets
- They start from worse structural conditions, in terms of fiscal capacity and governance capacity, which makes them less resilient.
Again, a number of fiscal and macro factors are relevant for our expectations on how the situation is going to evolve, such as the trade and fiscal balance, and the composition of exports. Besides concerns for long-term growth prospects, the most immediate threat is that to people’s livelihoods, in particular poor people’s, due to the slowdown of economic activity. While this can’t be fully avoided due to the dependence on international linkages, it is made radically worse in case of domestic lockdown. The combination of large populations living below or at the margin of the poverty threshold and the slim fiscal capacity for compensation and redistribution results in much sharper trade-offs associated to different policy measures.
Some of these countries, heavily dependent on external trade and in particular on commodity exports, are at the moment facing a double shock, due to the collapse of commodity prices and the disruptions to global value chains, on top of the epidemic itself. This is dramatically reducing the fiscal space for response, which was already limited to start with. Therefore, even though a number of LICs have formulated response plans, as will be discussed in the next section, the question remains how to finance them.
Table 2: Macro factors.
What is Happening? Policy Response
With few exceptions, most countries in this group were quick to react in at least two dimensions: closing borders and closing schools. While the first was probably a very wise choice and might have delayed significantly the entry of the virus in the countries, not enough thought has been given to the consequences of school closures. Less than one in four countries is providing some form of distance learning; and even where this is available, access will be very unequal, for a number of reasons: access to internet and suitable devices, need to compensate for parent’s lost income, responsibility for younger siblings are just some of the factors, in addition to the inequality in parental socioeconomic and educational background which is common also to HICs. Based on experiences from the Ebola epidemic in 2014-15 in West Africa, the protracted lack of schooling is liable to leave deep long-lasting consequences.
A quarter of the countries (8 out of 31) entered lockdown or very strict social distancing. Few of them, with help from the international community, support the enforcement of a lockdown with food distribution (for example Liberia and Uganda). This is not possible everywhere, due to financing and logistic issues, and in its absence, livelihoods are put at risk. Because of this, in many areas people defy the rules, in some cases notwithstanding enforcement by the military. Another quarter of countries opted for curfews rather than lockdown, to limit the frequency of interactions without halting completely economic activity. Very few countries explicitly chose much more limited interventions in terms of social distancing (Burundi, Mozambique, Tanzania), while most of the rest do not have the governance capacity for intervention, in some cases due to other preexisting crises (Yemen, Mali, Guinea-Bissau).
The quality of the country’s health care system and the resources that can be invested in testing will determine for how long containment measures will be needed. Two thirds of the countries have already enacted emergency interventions in the health sector, meant to strengthen the general capacity for care and in particular the infrastructure for testing. All in all, though, half of the countries have opted for either strict public order measures or fiscal interventions. Most of the remaining half have neither, while very few have both. In most cases, the health-related emergency measures are financed by small reallocations of current spending that amount to few per-mille points of GDP. With fewer resources to cure and test, countries will need to maintain longer containment measures to avoid the spread, once the contagion reaches them. However, as mentioned above, the cost of lockdown is very different in these countries, where almost half of the population (48% on average) lives below the international poverty line. Stricter and longer lockdowns will call for broader fiscal interventions in support of households’ (food) consumption and SMEs. The few countries that planned such interventions, and/or to increase health sector spending by more than 1% of GDP, are counting on donor financing. At the same time, all are suffering contractions in their fiscal space, as noticed above, and the same can be said of most donor countries too. The question of how to finance this gap looms therefore large.
A Role for Rich Countries
In normal times, the relative importance of different financial flows entering developing countries could be phrased as follows: foreign aid is small, remittances bigger, trade and investments biggest. ODA receipt accounts for 12% of GDP in the average LIC. While almost all donor countries fall short of the pledge to give 0,7% of their annual GDP, even if they did, thus trebling the current aid bill (152,8 billion USD in 2019), this would still not reach the level of remittances flows, estimated at 551 billion USD in 2019. The FDI flows, estimated at 671 billion USD (in 2018) are more important in the aggregate, although their distributional implications are very different. The importance of trade is also substantial, as shown in Table 2.
Given the situation, though, with a global recession looming, we can expect substantial contractions in trade and FDIs at least in the short run, but more likely for a protracted period. The limitations to international mobility will also imply severe reductions in remittances flows, as migrant workers have either returned to their countries, or are more likely to lose employment in the host countries even if they stay. Clearly this implies a continued role for international support.
Without going in the merit of an optimal policy mix recommendation to developing country governments, which others have done (for example, the International Growth Centre COVID-19 guidance note), rich countries that want to play a role in this should keep in mind a few points. Aid budgets should at the very minimum not be reduced, notwithstanding the domestic fiscal squeezes. More than ever, the same amount of money has a much larger life-saving potential in a poor country than domestically. Besides quantity, the type of support will be important. During the health crisis, the priority needs to be to finance emergency expansion of health care spending, but for this to be sustainable it needs to be paired with a strong effort to limit the spread. This includes two elements: i) testing and tracing, or in absence of tests at least keeping track of the geographic spread of symptomatic outbreaks; and ii) supporting livelihoods to enable social distance or lockdown. The first includes, besides the medical material and infrastructure for the testing itself, which might not be the most cost-effective way of using resources, enabling safe and reliable public communication, which needs to go two-ways: from authorities to citizens, avoiding fake news and potential stigma attached to the contagion, and from citizens to the authorities to collect policy relevant data. Since internet is not widespread enough, and the radio only allows for one-way communication, the best shot at this is leveraging mobile telephone networks. Technical assistance in this could be valuable, as well as analytical capacity for the processing of the data.
It goes without saying that all the progress happening in rich countries, in terms of understanding of the virus spread, efficacy of different policies and behaviors, development of treatments and in due time vaccine should be promptly shared.
When it comes to consumption support, it is debatable whether cash transfers or in-kind distributions should be the preferred option. This will of course vary depending on the situation: cash is logistically easier and more flexible – but it will not help if and where the markets shut down.
In the aftermath, it is important to keep in mind that poor countries will not be able to borrow (in particular, issue domestic public debt) to finance fiscal stimuli and other recovery measures. There will be again an important role for international lenders. At the same time, a swift recovery of global economic activity must be considered as the all-over superior solution.
References
- GHS Index, 2020. “Global Health Security Index, 2019”.
- Our World in Data, 2020. “Total confirmed Covid-19 cases by country”.
- The World Bank, 2020. “World Bank Open Data”.
- UNCTAD, 2020. “Commodity exports (as a share of total merchandise exports) in 2017”.
- WHO, 2017. “Acute Public Health Events Assessed by WHO Regional Offices for Africa, the Americas, and Europe under the International Health Regulations (2005) – 2017 Report”.
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.
Trade Induced Technological Change: Did Chinese Competition Increase Innovation in Europe?
The last 30 years has witnessed a shift of the world’s manufacturing core from Europe and North America to China. A key question is what impact this has had on manufacturing workers in other developed economies, and also on innovation, patenting, IT adoption, and productivity growth. While a rigorous data analysis on these variables for developing economies, particularly in Eastern Europe, is not yet available, this brief examines the impact of the rise of China on innovation in Western Europe, and also reviews the evidence on the impact of the rise of China generally. Recent research by Bloom, Draca, and Van Reenen (2016) found that Chinese competition induced a rise in patenting, IT adoption, and TFP by 30% of the total increase in Europe in the early 2000s. Yet, we find numerous problems with the Bloom et al. analysis, and, overall, we do not find convincing evidence that Chinese competition increased innovation in Europe.
Few events have inspired the ire of economists as much as Brexit and the rise of Donald Trump, two events seen as related as both were a seeming reaction to both globalization and slowing economic growth, particularly as some (such as Trump himself) saw the former as a key cause of the latter. Both Brexit and the trade war spawned by Trump do seem to have had negative economic effects – US equities have suffered every time the trade war has escalated, while anecdotal reports and more sophisticated economic analyses seem to suggest that Brexit has cost the UK jobs.
And yet, there is a need for policy makers and economists to hold two ideas in our heads simultaneously: Trump’s trade war and Brexit may be policy disasters, and yet globalization can create both winners and losers, even if it is clear that, generally speaking, the overall gains are likely positive and large. This is likely also true of the rise of China – one of the most dramatic events in international economics in the past 50 years. Figure 1 shows the increase in trade with China from the early 1980s to 2017, a period in which US imports from China grew from 7 to 476 billion dollars.
Figure 1. Chinese Imports (in logs, deflated)
Source: World Bank WITS
The academic literature tends to show that this impact, the rise of China, may have cost the US as much as 2.2 million jobs directly (Autor et al.), and as much as 3 million jobs once all input-output and local labor market effects are included. While approximate, these numbers are large enough for the China shock to have played a role in the initial onset of “secular stagnation” – the growth slowdown which began around 2000 for many advanced nations, including the US and Europe. In addition, Autor et al. (forthcoming) found that Chinese competition also resulted in a decline in patent growth. In the European context, however, other authors have found that although China did do some damage to certain sectors, overall, it does not appear to have been quite as damaging, particularly in Germany, which also benefitted from exporting increased machine tools to the Chinese manufacturing sector. And, in a seminal paper, Bloom, Draca, and Van Reenen (2016) find that Chinese competition actually led to an increase in patents, IT adoption, and productivity in Europe from 1996 to 2005, along accounting for nearly 30% of the increase. This is important, as it implies that without the rise of competition with China, the slowdown in European growth would have been even more pronounced than it was. It also implies that, far from being a source of stagnation, Chinese competition has been a source of strength. It also makes it more likely that the slowdown in growth since 2000 was caused by supply-side factors, such as new inventions becoming more difficult over time, as is perhaps the leading explanation among economists, notably Northwestern University business professor, Robert Gordon (2017), and also supported by others (see this VoxEU Ebook featuring a “who’s who?” among economists). It would also be evidence that contradicts the “Bernanke Hypothesis” that the former US Fed Chair first laid out in a 2005 speech at Jackson Hole, in which he suggested that international factors – particularly the savings glut and US trade deficit – were behind falling interest rates in the US. Since then, Ben Bernanke has followed up with a series of blog posts suggesting that these international factors were the cause of the initial onset of secular stagnation.
Figure 2. European Growth Relative to Trend
Source: World Bank WDI
In this brief, I present new research in which my coauthor and I test the robustness of the research finding that China had a positive impact on innovation in Europe (Campbell and Mau, 2019). We find that these findings are very sensitive to controls for time trends and other slight changes in specification. We also find that the number of patents matched to firms in the sample shrinks over the sample period (from 1996 to 2005). Overall, we conclude that, unfortunately, it is unlikely that the rise led to a significant increase in innovation in Europe, although more research is needed. Our research also sheds light on the so-called “replication crisis” currently gripping the social sciences, as researchers begin to realize that many published findings are not robust.
Trade-Induced Technical Change?
Bloom, Draca, and Van Reenen (2016) – hereafter BDV – tried to isolate the impact of the rise of China on Europe using several methods, using firm-level data for Europe. They placed each firm in a 4-digit sector, where they measured imports from China over time. First, they just looked at changes in patents, IT, and total factor productivity (TFP) at the firm level for sectors in which Chinese imports increased a lot vs. other sectors. But, because economists are always weary of the difficulty of isolating a causal relationship from non-experimental data, the authors, worrying that the sectors which saw increases in Chinese imports might differ systematically from the others, the authors also used what is called an instrumental variable. That is, they used the fact that when China joined the WTO in 2001, they also negotiated a reduction in textile quotas. Thus, BDV reason that textile sectors which had tightly binding quotas prior to removal were likely to have had fast growth in Chinese imports after China’s accession to the WTO. Thus, they end up comparing textile sectors in which the quotas were binding to sectors in which they were not binding. We went back and compared the evolution of patents in these same groups (sectors with binding textile quotas vs. not binding) below in Figure 3.
Figure 3. Patent Growth in China-Competing Sectors (Quota Group) vs. Other Sectors
Notes: The vertical red lines are dates when textile quotas were removed. The blue line shows the evolution of patents in the sectors without binding quotas (non-competing sectors), and the red line is the evolution of patents in the China-competing sectors. The dotted lines are 2 standard deviation error bounds.
What is immediately obvious in Figure 3 is that patents are declining rapidly over the whole period in both groups. The overall level of patents was falling in both groups for the full period. There is a 95.8% decline in patenting for the China-competing group, vs. a 96.2% decline for firms in the non-competing (“No quota”) group. By 2005, average patents per firm are close to zero in both groups (.04 in the China-competing sectors vs. .11 in the others). However, in the “No quota” group, the initial level of patents – close to three per firm per year – was much larger than in the quota group. Since patents are falling rapidly in both groups but bounded by zero, the level of the fall in patents in the non-quota group is larger, but one can easily see that much of this decline happens before quotas are removed. If we control for simple time trends, the effect goes away. Also, given the tendency of patents to decline, we can also remove the correlation between Chinese competition and patent growth in some specifications by simply controlling for the lagged level of patents. The overall declining share of patents in the BDV data also raises questions about data selection issues, as patents granted in the BDV data in the later years were a smaller share of the total patents actually granted in reality.
BDV also look at the impact of the rise of China on IT adoption. However, here they proxied IT adoption by computers per worker, but they did not collect enough data to control for pre-trends properly in the data, so we cannot be sure whether this correlation is causal or not. (For what it is worth, on the data we do have, from 2000 to 2007, including trends in the data renders the apparent correlation between Chinese import growth and computers-per-worker insignificant.)
Lastly, BDV look at the impact of the rise of China on TFP growth. Here, unlike before, we find that their measure is robust across various estimation methodologies. However, when we look at changes in a commonly used alternative measure of productivity, value-added per worker, instead of TFP (as TFP needs to be calculated using strong assumptions about the functional form of technology), we find no impact (see Figure 4 below).
Figure 4. Value-Added per worker Growth: China-competing sectors vs. others
Figure 4 above compares the evolution of value-added per worker in the most China-competing sectors vs. the others. Trends look similar for firms in either group of sectors (China-competing or otherwise), and we do not find a correlation. We also do not find that Chinese competition led to an increase in profits, nor an increase in sales per worker (in fact, we found a significant decrease in most specifications).
Conclusion
All in all, we find that the BDV findings suggesting that the rise of China had a large impact on innovation in Europe is not robust. However, in most specifications, we also don’t find a negative impact as did Autor et al. (forthcoming) for the US. This might have to do with data quality, although it does seem to be closer to other work, such as Dauth et al. (2014), which suggests that the rise of China had a smaller impact in Germany than in the US.
We also felt it was a bit alarming that a simple plot of the trends in patents for China-competing and not-competing sectors was enough to seriously question the conclusions of BDV, as their paper was published in the Review of Economic Studies, a top 5 journal in academic economics. If influential articles published in the most fancy journals can exhibit such mistakes, this underscores the extent which the profession of economics may suffer from many published “false-positive” results. The reasons why this could be the case are obvious: researchers are under pressure to find significant results, as top journals don’t often publish null results, and replication is exceedingly rare in a field in which one needs to make friends to publish. However, there are signs that replication is becoming more mainstream, and as it does, we can certainly hope that voters around the world will turn back to science.
References
- Autor, D., D. Dorn, G. H. Hanson, G. Pisano, and P. Shu. Forthcoming. Foreign Competition and Domestic Innovation: Evidence from US Patents. Forthcoming: AEJ:Insights.
- Bloom, N., M. Draca, and J. Van Reenen. 2016. “Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity.” The Review of Economic Studies 83 (1): 87–117.
- Campbell, Douglas and Mau, Karsten. 2019.. Trade Induced Technological Change: Did Chinese Competition Increase Innovation in Europe?”, mimeo
- Dauth, W., S. Findeisen, and J. Suedekum. 2014. “The Rise of the East and the Far East: German Labor Markets and Trade Integration.” Journal of the European Economic Association 12 (6): 1643–1675.
- Gordon, R.J., 2017. The rise and fall of American growth: The US standard of living since the civil war (Vol. 70). Princeton University Press.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Gender in Economics: From Survival to Career Opportunities
Gender inequality goes beyond discrimination and sexism. It is also a matter of efficiency and development, and therefore, the socioeconomic losses that result from such inequality must be acknowledged and tackled. This policy brief summarizes the presentations held during the 6th SITE Academic Conference at the Stockholm School of Economics on December 17-18 2018. The event brought together scholars from around the world to examine existing forms of gender inequality, its causes, consequences, and policy interventions through a series of keynote speeches, research presentations and panel discussions.
Gender and survival
The reality of gender inequality is diverse throughout the world. The extent to which women and men face different opportunities and reach different outcomes vary substantially across countries and regions, and the forms of inequality that women face also vary geographically.
While richer countries have mostly closed their gender gaps in health and education, in other parts of the globe women are still struggling to survive, to make their marriage and reproductive choices freely, and to achieve the same educational opportunities as men. This is exactly where modern economic research can facilitate the understanding of the roots of such inequalities in each society, as well as the most likely drivers of change.
Corno, Hildebrandt and Voena (2017) show that in Sub-Saharan Africa and India, the age of marriage is a result of short-term changes in economic conditions (such as a reduction in crop yields due to droughts). Therefore, through for instance insurance mechanisms and temporary transfers, economic policy can influence marriage markets and the age of marriage. Relatedly, according to Ashraf, Bau, Nunn and Voena (2018), a girl in Indonesia or Zambia has a higher probability of being educated if she belongs to a group practicing bride price, defined as the “price” paid by a groom or his family to the bride’s family. This means that marriage markets could be a driver of educational investment. Cousin marriage is another issue within this context. Edlund (2018) suggests that this system serves as a barrier for economic growth by favoring men over women, the old over the young, and the collective over the individual. In general, challenging these marriage systems and improving female economic opportunities require a deeper understanding of the economic role of traditional cultural norms and institutions.
Some groups of women struggle for survival even in the so called “developed world”, being victims of gender violence. Sex workers in the United States are a particularly vulnerable population in this matter. Cunningham, DeAngelo and Tripp (2017) point out that, given that prostitution in most cities of the US isn’t only illegal, but also very dangerous (recording the highest homicide rate of any female occupation), it is critical to improve sex workers’ safety. Craigslist Erotic Services (CES) seemed to have contributed to it, by reducing female homicide rates by 17.4%. Apparently, this was a result of street prostitutes moving indoors and being able to filter clients to be safer. It is, therefore, suggested that the closure of such a platform put sex workers in an even more vulnerable position. Similarly, when it comes to adult entertainment establishments and its relation to sex crimes, Ciacci and Sviatschi (2018) argue that this type of businesses helps decrease daily sex crimes between 7-13% in the precinct where they are located.
When discussing approaches to prostitution, the “Nordic Model” has been highly praised and adopted by several countries. The term refers to a reform initiated in Sweden that considers buying sex a criminal offense, while decriminalizing those who are prostituted. However, preliminary results from Perrotta Berlin, Spagnolo, Immordino and Russo (2018) suggest that intimate partner violence and violence against women might have increased because of its enactment in Sweden.
Gender violence, however, isn’t only domestic or affecting sex workers. Borker (2018) claims that, in India, female college students are willing to choose less prestigious universities, to make additional expenses and to spend more time on transportation than their male counterparts only to avoid harassment on the street or public transportation. Street harassment, therefore, perpetuates gender inequality in both education and potentially the labor market.
Challenging social norms
As already seen, even the most gender-equal countries still suffer from persistent forms of inequality that need to be acknowledged and tackled. Doing so will result both in fairer societies and in more efficient economies, because it will make full use of both halves of the world’s skills and knowledge.
Friebel, Auriol and Wilhelm (2018) state that, in Europe, it is harder for women to make a career in economics. The representation of women in academics is low, and the higher ranked the university, the lower is the representation. This could be a consequence of several issues, one of them being the “glass ceiling”.
The glass ceiling, according to Bertrand (2017), is the phenomenon by which women remain underrepresented in high-level occupations, and earn less. Even in countries such as Denmark and Sweden, women still receive less for the same jobs. There are many potential explanations for this. One of them refers to the gender differences in psychological attributes in work, such as the idea of women performing worse under pressure or being unwilling to compete. This interpretation ultimately falls under the nature vs nurture discussion and only accounts for up to 10% of the pay gap. Another reason states that women suffer the penalties associated with demanding more flexibility. Such demand comes from the need to perform non-market work, like domestic work and, especially, caring for children. This means that women, especially the more educated ones, are paying a disproportionate price in the labor market for raising a couple’s children. Giving women more flexibility won’t crack the glass ceiling, au contraire, it will backfire because flexibility is negatively priced in the market. Besides, it doesn’t address the earning gaps. A more compelling proposal is to shift the focus from increasing flexibility to changing social norms and gender role attitudes. Normalizing and encouraging paternal child care in workplaces, for example, could be a way to do so.
Social norms based on traditional gender stereotypes also seem to be the reason why in Sweden, promotions to top jobs dramatically increase women’s probability of divorce but do not affect men’s marriages, as reported by Folke and Rickne (2018). In this case, promoting norms and policies with a more gender-equal approach to couple formation could increase the share of women in top jobs.
Given the importance of social norms, understanding how they can change is crucial. In Saudi Arabia, two studies were conducted on the influence of misperceived social norms. Both showed that the low-cost intervention of simply providing information could make a big difference. In one case, Bursztyn, González and Yanagizawa-Drott (2018) have evidenced that most young married men privately support female labor force participation (FLFP) outside of home. Nevertheless, they tend to underestimate the level of support for FLFP by other men. When correcting those misperceptions, the men’s willingness to let their wives join the labor force increases. Comparably, Ganguli and Zafar (2018) have shown that there is an increased likelihood of working full-time for female students when they, along with their close circles, receive information about the labor market and the aspirations of other women peers.
Challenging social norms isn’t only beneficial when discussing the glass ceiling and FLFP, it also has the potential to improve public health. In fact, Milazzo (2018) argues that women’s increased mortality rate in India can be an unintended consequence of son preference. Son preference induces women with a first-born daughter to adopt behaviors that increase the risk of maternal morbidity and mortality. Therefore, interventions to change deeply rooted social norms such as the boy preference could significantly reduce maternal mortality risk.
Bridging research and policy
In Malawi, research by Perrotta Berlin, Bonnier and Olofsgård (2017) on aid project location suggests that proximity to aid has a positive effect on the lives of women and children. Likewise, Goldstein (2018) reports that the World Bank’s Empowerment and Livelihoods for Adolescents (ELA) program in Uganda has also led to positive reproductive outcomes and income effects. These results illustrate the importance of reducing the divide between research and policy. Research has the potential of serving as an instrument for informed policy-making and aid intervention.
The Organization for Economic Cooperation and Development (OECD), for instance, applies research to create tools that help improve economic and social well-being. Two of those tools are the Social Institutions and Gender Index (SIGI) and the Development Assistance Committee (DAC) Gender Equality Policy Markers. On one hand, Missika (2018) explains that the SIGI is a cross-country measure of discriminatory social institutions against women and girls. Though the progress is slow (it might take around 200 years to close the gender gaps), its use gradually promotes the creation of locally designed solutions that, combined with adequate legislation, could enhance gender equality. On the other hand, Williams (2018) states that the DAC Gender Equality Policy Markers are meant to ensure that women have access to and benefit from finance.
Consistently , for the Swedish International Development Agency (SIDA), which works on behalf of the Swedish government, gender equality is a priority that permeates its interventions. In this context, the Feminist Foreign Policy has strengthened Sweden’s commitment in the topic.
Prior to finalizing the conference, representatives of the FROGEE Network (Forum for Research on Gender Economics in Eastern Europe and Emerging Economies) made a short presentation about the key challenges for achieving gender equality in their countries and the research opportunities available.
Conference material, including presentations, can be found here.
Speakers at the conference
Marianne Bertrand, University of Chicago
Alessandra Voena, University of Chicago
Alessandra González, University of Chicago
Anders Olofsgård, SITE
Annamaria Milazzo, World Bank
Bathylle Missika, OECD Development Centre
Eva Johansson, SIDA
Girija Borker, World Bank
Guido Friebel, Goethe University Frankfurt
Ina Ganguli, University of Massachusetts
Amherst Johanna Rickne, Stockholm University
Lena Edlund, Columbia University
Lisa Williams-Katz, OECD
Maria Perrotta Berlin, SITE
Markus Goldstein, World Bank
Michal Myck, CenEA
Riccardo Ciacci, The University Loyola Andalucía
Scott Cunningham, Baylor University
References
- Ashraf, Nava; Natalie Bau, Nathan Nunn, and Alessandra Voena. 2018. “Bride Price and Female Education”. The National Bureau of Economic Research Working Paper No. 22417.
- Bertrand, Marianne. 2017. “The Glass Ceiling”. Becker Friedman Institute for Research in Economics Working Paper No. 2018-38.
- Borker, Girija. 2018. “Safety First: Perceived Risk of Street Harassment and Educational Choices of Women”. Job market paper.
- Bursztyn, Leonardo; Alessandra González, and David Yanagizawa-Drott. 2018. “Misperceived Social Norms: Female Labor Force Participation in Saudi Arabia”.
- Ciacci, Riccardo; and Maria Micaela Sviatschi. 2018. “The Effect of Adult Entertainment Establishments on Sex Crime: Evidence from New York City”.
- Corno, Lucia; Nicole Hildebrandt, and Alessandra Voena. 2017. “Age of Marriage, Weather Shocks, and the Direction of Marriage Payments”. The National Bureau of Economic Research Working Paper No. 23604.
- Cunningham, Scott; Gregory DeAngelo, and John Tripp. 2017. “Craigslist’s Effect on Violence Against Women”.
- Edlund, Lena. 2018. “Cousin Marriage Is Not Choice: Muslim Marriage and Underdevelopment”. American Economic Association Papers and Proceedings, Volume 108, pages 353- 57.
- Folke, Olle; and Johanna Rickne. 2018. “All the Single Ladies: Job Promotions and the Durability of Marriage”.
- Friebel, Guido; Emmanuelle Auriol, and Sascha Wilhelm. 2018. “Women in Europen Economics”. [Mimeo]
- Ganguli, Ina; and Basit Zafar. 2018. “Information and Social Norms: Experimental Evidence on Labor Market Aspirations of Saudi Women”. [Mimeo]
- Goldstein, Markus. 2018. “Evidence on adolescent empowerment programs from four countries”. [Mimeo]
- Milazzo, Annamaria. 2018. “Why are adult women missing? Son preference and maternal survival in India”. Journal of Development Economics, Volume 134, pages 467-484.
- Missika, Bathylle. 2018. “Are laws and social norms still an obstacle to gender equality? Lessons from the SIGI 2019”. [Mimeo]
- Perrotta Berlin, Maria; Evelina Bonnier, and Anders Olofsgård. 2017. “The donor footprint and gender gaps”. WIDER Working Paper 2017/130, United Nations University World Institute for Development Economics Research.
- Perrotta Berlin, Maria; Giancarlo Spagnolo, Giovanni Immordino, and Francesco Flaviano Russo. 2018. “Prostitution and Violence: Empirical Evidence from Sweden”. [Mimeo]
- Williams, Lisa E. 2018. “Financing for gender equality beyong ODA”. [Mimeo]
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.