Location: Eastern Europe
An Environmental Perspective on Belarus’s Sustainable Development
In the last two decades, Belarus has performed better than other CIS countries in sustainable development. However, Belarus has in recent years seen a decline in its global environmental rankings, particularly in the areas of climate action and environmental performance. In 2023, the country’s standing worsened in the Sustainable Development Index, Climate Change Performance Index, and Environmental Performance Index compared to previous years and rankings. This policy brief analyzes Belarus’s performance across these indices and explores the potential causes of recent negative trends. It underscores the crucial role of political and civil engagement in ensuring long-term sustainability of environmental reforms in Belarus.
In recent years, political and economic turbulence has overtaken the public debate about the state of things in Belarus, while environmental issues have taken a back seat. However, tackling climate change is important in any political context, and in this policy brief, we delve into recent developments in Belarus along the environmental front.
Belarus has traditionally done relatively well in regard to sustainable development. For example, in the last two decades, it has consistently outperformed other CIS countries, as measured by the Sustainable Development Goals (SDG) Index, and has been on par with the Eastern European EU Member States (see Figure 1).
However, in the last few years, Belarus’s progress in this dimension has stagnated, and even partially reversed. This brief focuses on one of the drivers of this stagnation – recent developments in the environmental sphere. The brief shows that Belarus worsened its position in three major global indices measuring environmental performance and discusses which components of environmental performance have lagged the most. It proceeds to analyze the underlying causes for this stagnation. The brief concludes by discussing necessary policy measures to improve Belarus’s environmental sustainability.
Figure 1. SDG Index scores for selected countries, 2000-2023
Source: SDG Transformation Center.
Belarus in Global Environmental Rankings
Global environmental rankings are an essential tool for encouraging global efforts to tackle ecological challenges and promote sustainable development. The rankings aim to evaluate a country’s environmental policies and practices and provide a relative assessment of its sustainability efforts, pollution control, and conservation practices. We analyze the performance of Belarus with the help of three well-known indexes: the Sustainable Development Goals Index (SDG Index), the Climate Change Performance Index (CCPI), and the Environmental Performance Index (EPI).
The Sustainable Development Goals Index
The SDG Index measures the progress of countries towards accomplishing the 17 SDGs. Its score can be interpreted as a percentage of SDG achievement (Sachs et al., 2023). It is based on 97 indicators that are grouped by SDGs. The indicators are normalized on a 0-100 scale, and the scores are calculated as averaging across respective indicators. The SDG Index includes the total score and scores for individual goals (Sachs et al., 2023).
The SDG Index scores for Belarus improved significantly between 2000 and 2020, increasing by 8.31 points (see Figure 1). However, since 2020, the score has stagnated, and even declined slightly. In 2020, Belarus ranked 23rd out of more than 160 countries. In 2023, it dropped to 30th place, the lowest since 2001.
To a large part, the decline in Belarus’s SDG Index score is driven by a drop in the index for the 16th SDG ”Peace, justice and strong institutions”. However, Belarus has also faced stagnation in the SDGs that are explicitly related to the environment – such as the index for SDG 7: “Affordable and Clean Energy”, SDG12: ”Responsible Consumption and Production” and SDG13: “Climate Action” (see Figure 2).
Figure 2. Selected SDG Index components for Belarus, 2020-23
Source: SDG Transformation Center.
These developments reflect Belarus’s key challenges, including its excessive reliance on fossil fuels and insufficient focus on renewable energy; inefficient management of waste and emissions, including plastic and food waste; low priority of climate change issues in the country’s economic and social policies, high carbon intensity in the economy and low ambition when it comes to emission reductions. The Belarusian Civil Society Report on the Sustainable Development Goals’ implementation (2022) also refers to similar challenges.
As the SDG Index covers a broad range of sustainability aspects, it may be less precise when it comes to the specificities of developments in the environmental domain. To get a better grasp of these developments, it is useful to consider more refined indices addressing specifically environmental performance and climate change adaptation.
The Climate Change Performance Index
The CCPI is a tool to monitor the climate protection efforts of 63 countries and the EU, which together make up more than 90 percent of global greenhouse gas (GHG) emissions. This index was developed by Germanwatch in collaboration with the NewClimate Institute and the Climate Action Network. Published annually since 2005, the Climate Change Performance Index tracks countries’ efforts to combat climate change. As an independent monitoring tool, it aims to enhance transparency in international climate politics and to enable comparison of climate protection efforts and progress made by individual countries. The CCPI tracks climate protection performances in four areas: GHG emissions (40 percent of the overall score), renewable energy (20 percent), energy use (20 percent) and climate policy (20 percent) (Burck et al., 2024). The CCPI ranks countries’ efforts as very high, high, medium, low, and very low, with the actual scores normalized between 0 and 100.
The CCPI for Belarus has exhibited an uneven development. In most of the considered years, Belarus’s efforts to prevent climate change were ranked as low, except for 2010-2012 and 2018-2019 when they were characterized as medium or moderate. The lowest scores were recorded in 2017 and from 2020 to 2024, highlighting that climate protection has been less prioritized in Belarus in recent years compared to earlier periods.
The relative CCPI ranking for Belarus is similar to the SDG Index (Figure 1). In 2024, Belarus performed worse than the average for Eastern European countries that are part of the EU – their average CCPI score was 55.43. Still, Belarus performed better than some members of this group (Poland (44.4), Czechia (45.41) and Hungary (45.93)). At the same time, Belarus displayed the best results among CIS countries, as Russia scored 31.00, Kazakhstan 38.52 and Uzbekistan 46.68 in 2024, respectively.
While Belarus slightly improved its score in 2024, relative to 2023, it actually moved down the country ranking in all areas considered by the CCPI. The country still received a medium rating in the areas of GHG emissions and energy use. However, the 2024 efforts with respect to renewable energy and climate policy were once again rated as very low, resulting in a relatively low overall ranking in 2024. CCPI experts point to low diversification of imported energy resources, high reliance on fossil fuels, and delayed climate action as key underlying issues.
Figure 3. CCPI Scores for Belarus, 2008-2024
Source: Based on data from Climate Change Performance Index reports 2008-2024.
The Environmental Performance Index
The Environmental Performance Index ranks the performance of countries on environmental health, ecosystem vitality, and their efforts to prevent climate change (Block et al., 2024). It allows tracking of countries’ progress towards established environmental policy targets. The EPI was developed by Yale University in collaboration with Columbia University and is supported by the World Economic Forum and the European Commission. The EPI framework has been repeatedly changed over the years to incorporate more detailed accounting and further indicators. Thus, it is not possible to directly compare EPI levels for different years.
Instead, we look at the evolution of the EPI ranking for Belarus: in 2016 the country ranked 35th among 180 countries, in 2020 it ranked 49th, and in 2022 its position dropped to 55th place.
In 2022, the EPI score for Belarus amounted to 48.5, surpassing all other CIS countries, for which the average score was 39.79. However, Eastern-European EU members all outperformed Belarus, with an average score of 57.92.
It is worth pointing out how differently Belarus performs with respect to the three policy objectives of the EPI. The first component concerns environmental health – it reflects how well a country mitigates environmental risks that directly affect the health and safety of its population and includes issues such as air quality, sanitation and drinking water, heavy metals, and waste management. Belarus’s 2022 score for environmental health was 51.1 earning them a 52nd place. The second component of EPI is Ecosystem vitality – reflecting the performance in the domains of biodiversity and habitat, ecosystem services, fisheries, forests, climate change mitigation, agriculture, and water resources. Belarus’s ecosystem vitality performance was in 2022 substantially better with a score of 55.4, earning Belarus a 41st place. However, the last component of EPI – climate change mitigation efforts, were evaluated as insufficient for Belarus. The country scored only 39.6 in this regard, equivalent to a 94th place.
Reasons for Belarus’s Declining Rankings
The recent stagnation and negative trend observed for Belarus across these global environmental rankings warrant an inquiry into the causes of such developments. Plausibly, these are a combination of insufficient effort to address preexisting environmental challenges and consequences from more recent economic and institutional shocks.
Preexisting Environmental Challenges
One of the main examples of preexisting economic challenges is the continued dominance on imported fossil fuels in the energy sector, low diversification of energy suppliers, and only a marginal share of renewables. According to the National Statistical Committee of the Republic of Belarus, the country belongs to the top-20 most energy-dependent countries in the world. In 2020 the share of energy imports to gross consumption made up 83.7 percent, with around 85 percent of these resources imported from a single supplier: Russia (Internation Energy Agency, 2021). The share of primary energy production from renewable energy sources in the gross energy resources consumption continues to be low (7.8 percent in 2020 vs. 5.6 percent in 2015).
Another challenge has to do with the implementation and enforcement of environmental legislation. Belarus has recently developed and extended its legal framework in environmental sustainability. For instance The National strategy of sustainable development for the Republic of Belarus till 2035, was approved in 2020 and the National action plan for the development of a “green” economy in the Republic of Belarus for 2021-2025 was approved in 2021. The first document outlines the general plan for sustainable development in Belarus; the latter sets 11 priorities for the green economy in the country, including the promotion of green financing and creation of smart and energy-efficient cities, climate change mitigation and adaptation to climate change, education and social engagement.
However, the legislation falls short when it comes to practical implementation of the declared goals and mechanisms. For example, virtually no public financing has been allocated for these purposes and other sources of financing are not specified. Also, the National action plan contains only a general reference to the possibility of attracting extrabudgetary funds, foreign financial resources, or other sources.
Economic and Political Shocks
Recent political and economic crises have also had a negative impact on the environmental sustainability in Belarus.
One can begin by considering the substantial, though potentially unintended, adverse effects of sanctions – imposed in response to the widely contested validity of the 2020 elections and Belarus’s involvement in Russia’s war on Ukraine. While it wasn’t their main objective, the sanctions led to the suspension of green projects and initiatives, supported by international organizations such as the World Bank and other UN programs, the EU and the European Bank for Reconstruction and Development, IMF etc., as well as international investments into Belarus. Funding was suspended for several energy efficiency projects and other green initiatives in Belarus, and for projects promoting sustainable environmental practices, energy efficiency, and clean water access – aimed at reducing Belarus’s carbon footprint and enhancing renewable energy capacity.
The political crisis also led to Belarus’s withdrawal from the Aarhus Convention in 2022. The UNECE Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters of 1998 outlines every person’s right to a healthy and sustainable environment which includes access to justice, participation, and information. The Aarhus Convention guarantees legal protection to people exercising these rights. Belarus’s withdrawal from the Aarhus Convention has increased the likelihood of being prosecuted for environmental activism, thereby undermining civil society’s involvement in environmental decisions and practices. For example, the Belarusian Civil Society Report on Sustainable development goals implementation (2022) mentions the dangers of publicity and resulting loss of funding for local initiatives concerning sustainable consumption practices.
Another adverse consequence of the political crisis was the massive explicit liquidation of ecological NGOs in the country, accompanied by self-liquidations. This negatively impacted civil society engagement into ecological matters in Belarus.
Conclusion
In recent years, Belarus has worsened its position in three major global environmental rankings, the SDG index, the CCPI and the EPI.
In this policy brief, we have outlined these declines and highlighted how they are linked to a combination of preexisting dependencies and recent economic and political developments.
The continued reliance on fossil fuel imports, insufficient renewable energy integration, and problems with enforceability and implementation of green agendas have collectively contributed to these developments. Additionally, the suspension of international projects and investment in the environmental sphere as a result of sanctions, Belarus’s withdrawal from the Aarhus Convention and the massive, forced liquidation or self-liquidation of ecological NGOs has further aggravated the situation.
To enhance its sustainable development, Belarus should focus on boosting renewable energy use and diversify its energy supply. This includes enforcing stricter environmental laws and reconnecting with global environmental agreements (such as the Aarhus Convention). Additionally, Belarus should incentivize research in green technologies and encourage government and private sector collaboration on environmental initiatives. Well-funded, comprehensive climate action plans with clear targets for emission reductions and renewable energy adoption must be developed and implemented. It’s also vital to acknowledge and collaborate with environmental NGOs and actively involve the Belarusian community in sustainability decisions and initiatives.
References
- Belarusian Civil Society Report on Sustainable Development Goals Implementation: Trends since 2016. Vilnius: 2022 — 112 pages. https://library.fes.de/pdf-files/bueros/belarus/19382.pdf
- Block, S., Emerson, J. W., Esty, D. C., de Sherbinin, A., Wendling, Z. A. (2024). 2024 Environmental Performance Index. New Haven, CT: Yale Center for Environmental Law & Policy
- Burck, J., Uhlich, T., Bals, C., Höhne, N., Nascimento, L., Kumar, C.H., Bosse, J., Riebandt, M., Pradipta, G. (2023). ‘Monitoring Climate Mitigation Efforts of 63 Countries plus the EU – covering more than 90% of the Global Greenhouse Gas Emissions. Bonn: Germanwatch
- International Energy Agency. (2021). Belarus Energy Profile. Retrieved from: https://iea.blob.core.windows.net/assets/a9233b70-ee3e-4a0c-8cde-7a174760b3e2/BelarusEnergyProfile.pdf
- Sachs, J.D., Lafortune, G., Fuller, G., Drumm, E. (2023). Implementing the SDG Stimulus. Sustainable Development Report 2023. Paris: SDSN, Dublin: Dublin University Press, 2023. 10.25546/102924.
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.
About BEROC
BEROC promotes a market economy in Belarus through research, education, and public dialogue. It conducts academic and policy research, organizes educational programs, and fosters collaboration between Belarusian and international economists. BEROC is part of a research network including SITE (Stockholm), BICEPS (Riga), CEFIR (Moscow), CenEA (Szczecin) and KSE/KEI (Kiev).
To read more policy briefs published by BEROC, visit the Institute’s page on the FREE Network’s website.
Democratic Backsliding and Electoral Autocracies: Research Shared at the 2023 FROMDEE Conference
On October 13th, 2023, the Stockholm Institute of Transition Economics (SITE) and the Forum for Research on Media and Democracy in Eastern Europe (FROMDEE) hosted an academic conference on “Democratic Backsliding and Electoral Autocracies”. This brief provides a short summary of the keynote lecture and research presentations featured at the conference.
The most recent report by the V-Dem Institute concludes that “72 percent of the world’s population […] live in autocracies by 2022” and “the level of democracy enjoyed by the average global citizen in 2022 is down to 1986 levels” (V-Dem Institute, 2023). In Europe, these declines have manifested in the previous Polish government undermining judicial independence, in tightened political repression in Belarus, and most prominently in Putin’s invasion of Ukraine. But the rise of electoral autocracies and democratic backsliding are not confined to Europe – their strategies of propaganda, corruption, electoral manipulation, as well as attacks on judicial and media independence are a global phenomenon. The October 13th FROMDEE Conference gathered researchers from economics, law and political science to bring insight into why and where reversals are taking place, and what measures are needed to reverse the negative trend. This policy brief provides an overview of the research shared at the conference.
Populism and Autocracy – the Case of Russia
In the keynote lecture, Arturas Rozenas (New York University) focused on the roots of populism, challenging the common view of illiberal democracies as a mix between democracies and dictatorships. Rather, dictatorships evolve into populist dictatorships that then take one of two paths: either the path to democracy, or the path towards electoral autocracy, illiberal democracy, or totalitarianism. In this framework, populist dictatorships have historically made use of populist elements we recognize from modern times, i.e., democratic-seeming institutions misused for the ruler’s purposes.
In a populist dictatorship, Rozenas continued, there is a monopoly of power. Institutions such as elections and parliamentary representation, serve not to allocate power but to legitimise it. The transition from passive to active dictatorships coincided with a move away from the common notion of a king or similar leader deriving rightful power from God to rule the masses, to a reality built on the idea that the ruler’s legitimacy stems from the masses. This historic transformation should however not be interpreted as a transition to democracy. In fact, Rozenas showed that for most of recent history, the majority of elections and expansions of suffrage took place in dictatorships rather than in democracies. These seemingly populist institutions serve not only to legitimise governments, but also to coopt the population in a public display of the ruler’s strength. Rozenas argued, that in an active populist dictatorship, the ruler creates a setting which suppresses dissent and expectations of dissent, through institutionalised expressions of support (in the form of political participation, elections, large rallies etc.).
Turning to the Russian setting, the first thing to notice is the deep tradition of autocracy – from tsarism to Stalinism. In Russia, the words “society” and “the people” briefly blossomed during past revolutions or uprisings but have largely been absent in the Russian language and are once again on the decline under the rule of Putin. Further, the Russian population has time and again been exploited by its rulers during succession crises for displays of power and dominance. Examples of this are the mandatory elections held under Stalin two weeks after the invasion of the Baltic States in 1939 and more recently under Putin in the occupied territories of Luhansk and Donetsk in Ukraine in 2021. Such populist autocratic strategies are nothing new in Russia, concluded Rozenas – rather they derive from the internal logic of dictatorship that has played out throughout Russian history.
Continuing the notion of the “absent” Russian society, Olha Zadorozhna (Kozminski University) began her presentation by explaining that protests are infrequent in Russia and have surprisingly few attendees given the country’s large population. While there were mass protests in the run-up to the collapse of communism in the 1980’s and protests took place against corruption in 2017-2018, and in relation to the arrest of Alexey Navalny in 2021, protests in Russia are typically not motivated by an overarching ideology or broader political questions. Rallies in favor of authoritarianism and ethno-nationalism are a more common occurrence. Moreover, there are few indications that the invasion of Ukraine, sanctions and subsequent economic downturn have negatively affected the Russian population’s support for the regime. Still, literature has shown that war-related deaths can mobilize opposition against war participation (e.g., the U.S. participation in the Vietnam War). Considering this, Zadorozhna evaluates whether the deaths of Russian soldiers provoke a reaction among the Russian population. By combining social media data on fallen soldiers with protest activity for the first four months of the Russian invasion in 2022, the study find that casualties lead to an increase in protest activity, indicating that deaths can in fact mobilize public opposition in Russia.
Other populist strategies to ensure support for Putin in Russia relate to political participation and the judiciary. Nicholas James (University of Oxford) analysed electoral rule changes in the Russian Duma – from mixed member majoritarianism to proportional representation (PR) – by measuring their effect on floor participation. Applying a difference-in-differences framework, James found that deputies experiencing a change from PR included less words in their speeches following the switch (about 15-20 percent of an average speech). This effect should be understood in the political context of the ruling party’s (United Russia) increased influence during this time period (2010s). In fact, James concluded, the results point in the direction of the regime tampering with the Duma in an impromptu and reactionary manner with the overall goal of obtaining closer control and the appearance of support for the regime.
Yulia Khalikova’s (University of Hamburg) presentation gave further insight into how ostensibly democratic institutions can be exploited to make an authoritarian regime appear legitimate. In her work, Khalikova considers judicial references to international law that may be employed strategically, without necessarily adhering to the spirit or content of the law. Looking specifically at international law citations in 601 judgements made in the Russian Constitutional Court (RCC) between 2000 and 2021, Khalikova find evidence that the RCC has increasingly cited international courts when making judgements on topics related to politics and physical rights, indicating that state policy influences citation patterns. The change in citation patterns also points to the RCC currently using international law to support the regime and uphold its legitimacy, meaning that international law – adopted with the ambition of enhancing democratic values and ensuring human rights – is misused for undemocratic and repressive purposes.
Censorship and Propaganda
Information control is an important feature of autocratic regimes. Philine Widmer (ETH Zurich) considers the Chinese setting – where the regime controls the amount of foreign information available on the internet via a countrywide firewall. Research has shown that autocracies make use of censorship strategies to control their citizens, but these are associated with high reputational costs and can be overcome by tech-savvy citizens. Using a machine learning algorithm, Widmer first predicts a newspaper article’s alignment with the Chinese regime before comparing the placement of more/less aligned articles on news websites. Her results show that front-page news stories in Chinese newspapers are more aligned with the regime’s stance than other content. Front-page placement in turn matters for information uptake. Widmer ended the presentation by comparing the additional cost of finding less aligned articles to the technological costs required to access outside media (e.g. VPNs). For an autocracy to achieve its information control objectives, independent news may just need to be relatively harder to access. It does not need to make it impossible to access for all citizens.
Censorship is typically accompanied by, and complementary with, propaganda. Restricting other narratives allows autocratic regimes to spread their own. While propaganda is a common feature within autocracies, Jaakko Meriläinen’s (Stockholm School of Economics) presentation evaluated the effect of autocratic propaganda in a democratic setting.
Meriläinen’s study focuses on a rogue experiment in which some Finnish children in the 1970’s were taught history and social sciences using material from the Soviet Union – material which was in essence Soviet propaganda. By exploiting geographical and cohort variation, Meriläinen use a difference-in-differences approach to compare the 213 exposed children to children taught the regular Finnish curriculum. The long-term outcomes show that exposed children had lower incomes in adulthood, worked fewer months per year and were engaged in more left-leaning and publicly beneficial occupations (such as, nurses and firefighters).
Information and Accountability
The use of technological innovations to access otherwise restricted information was central to Arieda Muço’s (Central European University) presentation. She studies the spread of the Xerox photocopying machine in communist Hungary in the 1980’s – a setting characterised by limited freedom of speech and restrictions on the media. She reported that areas with early placement of Xerox machines are found to exhibit higher shares of pro-democratic voting. Muço ascribes these outcomes to the fact that the machines allowed for the spread of information and eased coordination of the opposition, suggesting that new technologies and information can act as key facilitators in the fall of autocratic regimes.
Providing citizens with information was also a key feature in Enrique Seira Bejarano’s (Michigan State University) presentation. He began by discussing two potentially related trends: in Latin America recent years have seen (i) increased levels of corruption and (ii) increased dissatisfaction with democracy among citizens. The number of corruption-related news articles have increased threefold in Spanish and doubled in English and the share of people perceiving corruption to be the greatest challenge to their country has doubled in the last decade. The study uses two empirical strategies to identify the effect of corruption on democratic values. Firstly, Seira Bejarano described an observational study, in which data on major corruption scandals were combined with Latinobarometer data on support for democracy. The authors find that corruption scandals increase corruption perceptions while decreasing stated support for democracy. Secondly, Seira Bejarano reported the results of a randomized controlled trial in which some respondents were shown videos of a politician accepting bribes. This had a negative effect on preferences for democracy and on trust more broadly. Both studies show that revelations of corruptions decrease the support for democracy, suggesting a potential tradeoff between the public’s belief in democratic institutions and increased transparency which is important for accountability but can also expose corruption.
Right-wing Populism
Yet another threat to democracy is the rise of right-wing populism – currently a reality in many well-established democracies across Europe. In Germany, the far-right party Alternative für Deutschland (AfD) enjoys around 21 percent of voters’ support according to recent polls. To understand their rise in popularity, Navid Sabet (Goethe University Frankfurt) builds on previous literature on cultural conflict as a driver for right-wing party support. The paper he presented examines the role of violent conflict in the form of terrorist acts. It evaluates whether acts of terror can alter the political landscape and shift support to the far-right. To avoid selection problems, the authors compare successful terror attacks to attacks that failed. Sabet reported that successful small-scale attacks (predominantly targeting migrants) increase AfD’s vote share by about 6 percentage points in state elections (in the time period 2013-2021). The acts of terror were found to increase voter turnout, by mobilizing otherwise idle voters, but also by gaining votes at the cost of other parties. Exploring the mechanisms behind these results, the authors study the language used by political parties and the way successful attacks were covered in the media. Relative to coverage of unsuccessful attacks, media coverage used a more negative tone, more words related to Islam and terror and fewer words related to right-wing populism. This suggests that media plays an important role in shaping the public’s response to acts of terror and that far right parties are able to exploit this dynamic.
Concluding Remarks
The 2023 FROMDEE Conference brought together academics from different fields to shed light on some of the main challenges to democracy today. In part, the research presented supported the prevailing narrative that democracies are backsliding in many parts of the world. However, by analysing how autocracies and populist leaders operate, the presenters also highlighted the vulnerability of dictatorships.
Arturas Rozenas cited the example of a rally in Bucharest in 1989, which was organised to display support for Ceauşescu’s regime and descended into an anti-government protest. Dictatorships can benefit by coopting the populist elements of democracy but, in doing so, they risk creating a vehicle for genuine democratic expression.
The audience learned about autocracies’ efforts to control the flow of information but also about citizens’ ability to circumvent restrictions whether in 1980s Hungary or present-day China. Several presentations focused on the extent of autocratic control in Russia but even in this setting, the death of soldiers in Ukraine motivates citizens to participate in protests.
Recent trends suggest that democratic institutions should not be taken for granted in any country. Societies can become more resilient to the threat of democratic backsliding, in part by better understanding how both democracies and autocracies operate and what makes them vulnerable. Researchers around the world are using innovative methods to expand our knowledge in this area, as reflected in the presentations at the 2023 FROMDEE Conference.
References
- V-Dem Institute. (2023). Defiance in the Face of Autocratization. Democracy Report 2023. University of Gothenburg. Varieties of Democracy Institute (V-Dem Institute). https://www.v-dem.net/publications/democracy-reports/
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.
Insights and Research Shared at the 2023 FREE Network Retreat
The 2023 FREE Network Retreat, an annual face-to-face event for members of the FREE Network, gathered its representatives to share and exchange research ideas and to discuss its institutes’ respective work and joint efforts within the Network. An academic session highlighted multiple overarching areas of interest and opportunities for research collaboration and included a plenary session on topics ranging from theoretical underpinning of Vladimir Putin’s regime to climate change beliefs and to consumer behaviour in credit markets. A session addressing the respective institute’s work during the last year also demonstrated the importance and relevance of the FREE Network’s joint initiatives on gender, democracy and media, and climate change and environment: FROGEE, FROMDEE and FREECE. This brief gives a short outline of the plenary session and an overview of some further topics covered during the conference.
The Academic Day
The Academic Day consisted partly of a plenary session and partly of an academic session. The academic session was outlined to demonstrate the wide spectrum of research interests within the network and to promote and highlight the opportunities for research collaboration. Designed as a series of poster sessions, each organized around a common research theme, it allowed for an exchange of ideas between presenting researchers and the audience while displaying the overlap of the various research interests across the institutes. At the same time, the poster session combined the broad range of topics within 10 overarching subjects (trade, gender, migration and education, public economics, energy, labor, political economy and development, macro, conflict, and theory and auctions).
The plenary session further illustrated the wide variety of topics the FREE Network researchers’ work on. During the plenary session, three distinguished presentations were held, summarized in what follows.
“Why Did Putin Invade Ukraine? – A Theory of Degenerate Autocracy”
Firstly, Konstantin Sonin, Professor at the University of Chicago Harris School of Public Policy, gave a presentation of his working paper (with Georgy Egorov, Northwestern University) in which the Russian full-scale invasion of Ukraine is explained through a theoretical framework on dictators’ decision-making in degenerate autocracies.
Sonin outlined how the beliefs about Ukraine in Kremlin, prior to the invasion, were factually wrong. For example, Kremlin believed that Ukraine, despite plenty of facts pointing in the opposite direction, lacked a stable government and had an incapable army. Further, it was believed that the US and Europe wouldn’t care about Ukraine and that Russian troops would be welcomed as liberators – the latter exemplified by the fact that Russia sent police and not the army during the first phase of the invasion. He also stressed that the decision to invade Ukraine is likely to have disastrous consequences for Vladimir Putin, his regime, and for Russia as a whole. This is, however, not the first example of a disastrous decision made by a leader of an autocratic regime, leading up to the question: What explains such choices that should not rationally have been made? And how can leaders make them in highly institutionalized environments where they are surrounded by councils and advisors who are supposed to possess the best expertise?
The model presented by Sonin assumes a leader in such highly institutionalized environment that wishes to stay in power and whose decisions are based on input from subordinates. The subordinates differ in level of their expertise and the leader thus chooses the quality of advice that he receives through his choice of subordinates. In turn, while giving advice to the leader, the subordinate considers two factors: the vulnerability of the leader and their own prospects should the leader fall. In equilibrium there is a tradeoff as competent subordinates are also less loyal (since a more competent person might know when to switch alliances and have better prospects if the regime changes).
The leader also has access to repression as an instrument. Repression decreases his changes to be overthrown but raises the stakes for a potential future power struggle, as a leader with a history of repression is more likely to be repressed by his successor.
This interaction creates a feedback loop. If a dictator chooses repression, he feels more endangered, and he then chooses a more loyal subordinate who is less likely to deceive him for personal gain under a potential new regime. However, this leads to the appointment of less competent subordinates whereafter the information that flows to the leader becomes less and less reliable – as illustrated by Kremlin’s beliefs about Ukraine prior to the war.
There are three types of paths in equilibrium, Sonin explained; 1. “stable autocracy”, with leaders altering in power and choosing peaceful paths without repressions 2. “degenerate autocracy” – where the incumbent and opponent first replace each other peacefully and then slide into the repression-based change of power (until one of them dies and the story repeats), and 3. “consecutive degenerate autocracy” – where each power struggle is followed by repression.
Concluding his presentation, Sonin highlighted that in a degenerate autocracy such as Russia, individual decisions by the leader are rarely crucial due to the high level of institutionalization. However, as shown by the model, the leader is inevitably faced with a situation where he is surrounded by incompetent loyalists feeding him bad intel and setting him up to make disastrous decisions – most recently displayed in Vladimir Putin’s decision to invade Ukraine.
“Facing the Hard Truth: Evidence from Climate Change Ignorance”
Pamela Campa, Associate Professor at Stockholm Institute of Transition Economics, gave the conference’s second presentation, which detailed her work (with Ferenc Szucz, Stockholm University) on climate change skepticism.
Campa opened her talk with the current paradox regarding climate change, where, in the scientific community there is a strong consensus about the existence of climate change, but in society at large, skepticism is largely prevalent. This can be exemplified by one quarter of the US population not believing in global warming in 2023, and Europeans not believing in the fact that humans are the main driver of climate change.
According to Campa, the key question to answer is therefore “Why does ignorance about climate change persist among the public – in spite of the overwhelming evidence?”. One possible explanation may be a deficit in comprehension; people simply don’t understand the complexity of climate change and thus follow biased media and/ or politicians more or less sponsored by lobbyists. However, research have shown scientifical literacy to be quite uncorrelated with climate change denial, contradicting the above explanation. The second hypothesis, and of focus in the study, instead revolve around the concept of information avoidance. To test the hypothesis that people actively avoid climate change information, the authors key in on coal mining communities in the US having been exposed to negative shocks in the form of layoffs. These communities are of interest given their strong sense of identity and the fact that they are directly affected by the green transition. Arguably, a layoff shock would negatively affect not only their economy, but also pose a threat to their perceived identity. Given the context, it can thus be assumed that these communities to a larger extent would avoid information on climate change and information post-shock to restore the threatened identity.
The authors consider US counties experiencing mass layoff (more than 30 percent of mining jobs lost between 2014 and 2017) as treated counties, finding that in these counties, learning about climate change is 30 to 40 percent lower than in counties having experienced no mass layoffs. To account for the fact that the layoff itself may cause changes in learning, the authors also consider an instrument variable analysis in which gas prices are exploited as instrument for the layoffs – once again displaying the fact that people in affected communities believe climate change to be caused by humans to a lesser extent, when compared to counties in which no mass layoffs had occurred.
Interestingly, when controlling with other industries with somewhat similar characteristics (such as metal mining), the drop in climate change learning disappears, feeding in the notion of “identity-based information avoidance”.
The lack of support for and consensus among the public of the ongoing climate change and its drivers might pose a threat for the green transition as well as reduce personal effort to reduce the carbon footprint, Campa concluded.
“Consumer Credit with Over-Optimistic Borrowers”
In the plenary session’s last presentation, Igor Livshits, Economic Advisor and Economist at the Federal Reserve Bank of Philadelphia, presented his working paper (with Florian Exler, University of Vienna, James MacGee, Bank of Canada and Michèle Tertilt, Mannheimer University) on consumer credit and borrower’s behaviour.
There has been much debate on whether and how to regulate consumer credit products to limit misuse of credit. In 2009/2010 several initiatives and regulations (such as the 2009 Credit Card Accountability Responsibility and Disclosure Act) were introduced with the aim of protecting consumers and borrowers from arguments that sellers of credit products exploit lack of information and cognitive capacity of borrowers. There is however a lack of evaluation of such arguments and subsequent regulations, which Livshits explained to be the motivation behind the paper.
The paper differentiates between over-optimistic borrowers (behaviour borrowers) and rational borrowers (rationalists). While both types face the same risks, behaviour borrowers are more prone to shocks and are at the same time unaware of these worse risks (i.e., they believe they are rationalists). Focusing on these types of borrowers, the paper introduces a model in which the lenders endogenously price credit based on beliefs about the borrower type. Households decide whether to spend or save and if to file for bankruptcy in an environment in which they are faced with earning shocks and expense shocks.
In this structural model of unsecured lending and default, Livshits finds that behavioral borrowers’ “risky” behaviour negatively affects rationalists since both types are pooled together and, thus rationalists are overpaying to cover for the behaviour borrowers. A calibration of the model also suggests that behavioral borrowers borrow too much and file for bankruptcy too little and too late.
Livshits argued that the model does not provide evidence of the notion that borrowers need protection from lenders, but rather that borrowers need to be protected from themselves. In fact, had behaviour borrowers been made aware of the fact that they are overly optimistic about the actual state of their future incomes, they would borrow 15 percent less.
To address the increased risks behaviour borrowers take at the cost of rationalists, policies such as default made easier, taxation on borrowing, financial literacy efforts and score-dependent borrowing limits could all be considered. Such policies may lower debt and reduce bankruptcy filings but as they may also reduce welfare and exhibit scaling difficulties.
Updates from the Institutes
During the Retreat, the respective institutes shared the previous year’s work, and updates within the FREE Network’s three joint projects were also presented. These go under the acronyms of FROMDEE (Forum for Research on Media and Democracy in Eastern Europe), FREECE (Forum for Research on Eastern Europe; Climate and the Environment) and FROGEE (Forum for Research on Gender Economics in Eastern Europe), and address areas of great relevance in Eastern Europe and the Caucasus. Researchers from all FREE Network institutes work on these topics, with the most recent policy paper written in coordination by SITE, KSE and CenEA (with expert Maja Bosnic, Niras International Consulting). The policy paper focuses on the gender dimension of the reconstruction of Ukraine – putting emphasis on the necessity of gender budgeting principles throughout the various parts of reconstruction. An upcoming joint research paper will consider the effects of gasoline price increase on household income across the Network’s countries, written under the FREECE umbrella.
The three themes of gender, media and democracy, and environment and climate are not only purely research topics within the institutes. They also reflect developments and challenges that the institutes to a various extent face in the respective contexts in which they operate. The work focusing on the reconstruction of Ukraine is an excellent example of an area that encompasses all three.
Another example of the relevance of the three themes features prominently in one of the institutes’ most tangible contribution to their respective societies: their education programs. Nataliia Shapoval, Vice President for Policy Research at Kyiv School of Economics (KSE), emphasized how KSE has – amid Russia’s war on Ukraine – managed to greatly expand. Over the past year, KSE has launched 8 new bachelor’s and master’s programs, some of which are directly targeted at ensuring postwar reconstruction competence. On a similar note, Lev Lvovskiy, Academic Director at the Belarusian Research and Outreach Center (BEROC) mentioned the likelihood of next year being able to offer students a bachelor’s program in economics and several business courses in Vilnius – BEROC’S new location. BEROC’s effort in providing quality education in economics to Belarus’ exile youth is considered a fundamental investment in the future of the country – providing a competent leading class capable of installing democracy and fair elections in Belarus once the current regime is gone. The emphasis on education was further highlighted by Salome Gelashvili, Practice Head, Agriculture & rural policy at the International School of Economics Policy Institute (ISET-PI) who not only mentioned the opening of a master’s program in Finance at ISET but also the fact that an increasing number of students who’ve recently graduated from PhD’s abroad are now returning to Georgia. Such investments into education are necessary to counter Russian propaganda in the region all three agreed, emphasizing the need to continually stem Russia’s negative influence in the region. This investment into education is also important to hinder countries from sliding away from democratic values – realized in Belarus and threatening in Georgia.
To further delve into the issues of democratic backsliding, a tendency that has been recently observed not only in the region but also more widely across the globe, FROMDEE will organize an academic conference in Stockholm on October 13th, 2023.
Concluding Remarks
The 2023 FREE Network Retreat provided a great opportunity for the Networks’ participants to jointly take part of new research and to share experiences, opportunities, and knowledge amongst each other. The Retreat also served as reminder of the importance of continuously supporting economic and democratic development, through research, policy work, and networking, in Eastern Europe and the Caucasus.
List of Presenters
- Konstantin Sonin, University of Chicago Harris School of Public Policy
- Pamela Campa, Stockholm Institute of Transition Economics
- Igor Livshits, Federal Reserve Bank of Philadelphia
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.
Democracy in the Eye of the Beholder?
There is growing concern that democratic institutions in Eastern Europe are fragile. This brief compares two perspectives on the state of democracy: expert assessments and surveys of the general population. We show that while experts’ perception of some countries’ institutions has worsened in recent years, voters are increasingly satisfied with their own democracies. This trend is broad-based, encompassing almost all new EU member states and all age groups. We provide evidence that over time, survey respondents’ assessment of democracy has become more closely tied to the outcome of elections rather than actual institutional change. Where governments have imposed restrictions on media freedom or judicial independence, their supporters continue to report high levels of satisfaction with the way democracy works.
“Across the world, democracy is backsliding”
UN’s Secretary-General António Guterres, 2022
In recent years, the prevailing narrative around democracy in Eastern Europe has been negative. The reform momentum that propelled countries towards EU membership has not been sustained after accession. Discussions of global democratic backsliding frequently cite countries from the region as examples (Grillo and Prato, 2023; Chiopris et al., 2021; Mechkova et al., 2017). Following restrictions on judicial independence and media freedom, some new EU members have seen their ratings slide on indices that measure the quality of democratic institutions based on expert opinions. This brief contrasts these expert assessments with a different perspective on the state of democracy: that of the voters themselves.
Data from Eurobarometer surveys show that satisfaction with ‘the way democracy works in our country’ has been increasing in the new EU member states. This upward trend is visible for all age groups and in almost all countries – including those where experts’ assessment of democracy has worsened. We document patterns in the data that may help to explain this divergence. Survey responses increasingly reflect an instrumentalist view of democracy; respondents who are aligned politically with the winning party are more likely to feel that democracy is working well. This trend can be observed across the EU, but it is most pronounced in the new EU member states where the governing parties are right-of-centre.
Perceptions of Democracy
Expert Assessments
The quality of democracy is hard to measure. A range of indices classify countries by regime type or provide numerical ratings of institutional quality (the Polity, V-Dem, and Freedom House measures are among the most prominent). These indices have somewhat different objectives and methodologies, but they all rely on subjective judgements by expert coders.
Some academic research casts doubt on the prevailing narrative of a global phenomenon of democratic backsliding. For instance, Treisman (2023) and Lueders and Lust (2018) show that there is little consensus across indices, both in terms of individual countries and the global trend. A recent paper by Little and Meng (2023) contrasts subjective indices with more objective indicators of democratic health (e.g. the rate at which incumbents lose elections). The authors find no evidence for global democratic backsliding using the objective measures and suggest that the pessimistic narratives around democracy may have biased coders’ assessment.
There is less disagreement about the development of democracy in Eastern Europe. Treisman (2023) cites Hungary as the only example of a country that has recently been downgraded both from the status of “liberal democracy” by V-Dem and “free state“ by Freedom House. Little and Meng (2023) highlight three cases where both objective and subjective measures indicate backsliding: Hungary and Poland (as well as Venezuela). Further, Becker (2019) shows that downgrades to V-Dem democracy scores in Bulgaria, Czechia, Hungary, Poland, and Romania are relatively broad-based, driven by declines across multiple sub-categories including freedom of expression and constraints on the executive.
Surveys of Public Opinion
We use individual-level data from the Eurobarometer – a survey of public opinion in the EU Member States and candidate countries conducted by the European Commission. The surveys are conducted at an approximately monthly frequency and comprise of a representative sample (about 1000 face-to-face interviews) for each state. We combine data from 42 surveys, spanning 20 years (2002 to 2022), with a total of 1.3 million respondents. The main question we are interested in is: “On the whole are you very satisfied, rather satisfied, not very satisfied or not at all satisfied with the way democracy works in [our country]?”
At the beginning of the sample period in 2002, around a third of respondents in Eastern European EU countries were satisfied with their respective democracies compared to close to twice as many respondents in Western Europe (Figure 1). Over the past 20 years, the share of Eastern Europeans satisfied with their democracy has grown to around 50 percent, narrowing the gap with Western Europe. Figure 2 shows that this pattern is broad based across age groups. All cohorts of Eastern Europeans are more satisfied with democracy than earlier generations and among the youngest respondents, satisfaction is almost as high as in Western Europe.
Figure 1. Satisfaction with Democracy vs V-Dem Score.
Source: Eurobarometer, V-Dem and authors’ calculations.
Figure 2. Satisfaction with Democracy by Age Group.
Notes: Each point shows the sample mean for a single year cohort. 95 percent confidence intervals in grey.
Source: Eurobarometer, authors’ calculations.
Figure 1 also shows a stark divergence in expert assessment of the state of democracy in Eastern Europe compared to public opinion in the same countries. While the V-Dem democracy scores for Eastern Europe have declined rapidly since the mid-2010s, average satisfaction with the own country’s democracy has increased. A much smaller gap between these two measures has also started to open up in Western Europe over the past couple of years.
In Figure 3, we show the same patterns of satisfaction with democracy and expert opinions for individual countries. Satisfaction with one’s own democracy has increased in almost all Eastern European countries, including in Poland and Hungary which at the same time showed the largest declines in democracy scores.
Figure 3. Satisfaction with Democracy vs V-Dem Score by Country.
Source: Eurobarometer, V-Dem and authors’ calculations.
This divergence in individual survey responses and expert assessments is not altogether surprising. First, the Eurobarometer surveys a sample of the population in each country, while V-Dem (and most other similar democracy indices) relies on country experts. Another likely explanation for the difference is the interpretation of the question. Democracy ratings tend to emphasise institutional aspects of a democracy, for instance, the V-Dem liberal democracy index is designed to capture rule of law and checks on executive power (see, e.g., Becker, 2019). In contrast, the survey responses are likely to reflect both satisfaction with the state of democracy in a country, as well as the outcomes of that democracy.
Satisfaction with Democracy and Political Alignment
In this section, we investigate whether stated satisfaction with democracy depends on the outcomes of elections and the political ideology of the respondents. A common way of measuring political ideology is the placement on a right-left scale, where the right favours a free-market economy and traditional values while the left favours economic redistribution and socially progressive policies. We compare the right-left placement of each country’s governing party as coded by the Chapel Hill Expert Survey (CHES), with the self-identified right-left placement of Eurobarometer respondents. We calculate the ideological distance from the government as the absolute difference between these two scores.
Figure 4. Relationship Between Ideological Distance from Government and Satisfaction with Democracy.
Source: Eurobarometer, Döring, Huber and Manow (2022) and authors’ calculations.
Notes: Each point shows the coefficient from a separate regression of satisfaction with democracy on ideological distance from government, age, gender, year fixed effects and country fixed effects. 95 percent confidence intervals in grey. Coefficient estimates for Eastern and Western EU overlap on the chart for 2019 and 2020.
We find that people are on average less satisfied with their country’s democracy when they are ideologically further from the parties in government (Figure 4). This is consistent with prior evidence (Anderson and Guillory, 1997; Ezrow and Xezonakis, 2011). The alignment effect has become stronger over time – even when taking into account average satisfaction levels for each country and demographic characteristics of the respondents, such as their age and gender. In the past three years, political alignment with the government has become a major factor in explaining satisfaction with democracy, especially in Eastern Europe. Svolik (2019) suggests that voters trade off democratic principles and partisan interests. As political polarisation increases, voters become more willing to accept a government that undermines democratic institutions, as long as it is on ‘their side’ ideologically.
Figure 5. Satisfaction with Democracy and Political Ideology. Western Europe in the Left Panel and Eastern Europe in the Right Panel.
Source: Eurobarometer, Döring, Huber and Manow (2022) and authors’ calculations.
Notes: Respondents with the most left-leaning ideology are at the extreme left of the x-axis, those with the most right-leaning ideology are at the extreme right. The sample covers the period 2002 to 2022 and excludes observations where the government is coded as centrist (scores of 5-6 in the CHES data). 95 percent confidence intervals in grey.
In Figure 5, we break down the effect of political alignment on satisfaction with democracy according to individuals’ political leanings. On the x-axis is the respondents’ left-right placement and on the y-axis there are two series of dots showing satisfaction with democracy depending on whether the government is left of centre (lighter coloured dots) or right of centre (darker coloured dots). As before, being politically aligned with the government increases satisfaction, that is, to the left of the chart, the lighter coloured dots are placed higher than the darker coloured dots and vice versa for the right of the chart. The further from centre a person’s political leanings, the less satisfied they are with a government of the opposite ideology. There is also some evidence of asymmetry across the political spectrum in Eastern Europe, with respondents on the political right reporting much higher levels of satisfaction with right-wing governments compared to voters on the left under a left-wing government.
Conclusion
Over the past decade, there has been increasing concern over democratic backsliding in some of the Eastern European countries that are members of the EU. This is reflected in commonly used democracy indices whose country experts note the worrying trends in countries’ institutions – such as the reduction of freedom of expression, the strengthening of rule of law and constraints on the executive, all hallmarks of a liberal democracy. In this policy brief, we investigate whether this erosion of institutional safeguards affects people’s stated satisfaction with democracy in one’s respective country. We find a broad-based increase in satisfaction with democracy in the Eastern European EU countries, including in the countries that have seen some of the largest declines in liberal democracy ratings. We show that stated satisfaction with democracy reflects less the institutional changes in countries, but more the outcome of democratic elections. Voters who are politically aligned with their government are systematically more likely to report that they are satisfied with the state of democracy in their country. And this effect has become stronger in the most recent years, particularly in the Eastern European EU countries. We also find that this effect is not symmetric across the political spectrum. In the Eastern European EU countries, respondents on the political right are more satisfied with right-wing governments than those on the left are with left-wing governments.
The descriptive patterns outlined in this policy brief illustrate a worrying disconnect in the minds of many voters between institutions and outcomes of the democratic process. The threat of democratic backsliding in Europe and across the globe is predominantly not due to electoral democracies being replaced by autocratic regimes. Rather, genuinely popular (and often populist) governments are democratically elected and, once in power, proceed to undermine and dismantle liberal democratic institutions, such as a free press, an independent judiciary, and a fair electoral system. This process in turn makes it more difficult for opposition parties to win future elections, further cementing the power of the rulers of these illiberal democracies. While the electorate might support these governments now, voters need to be aware that these liberal institutions are designed to safeguard their democratic future.
References
- Anderson, C. J. and Guillory, C. A. (1997). Political institutions and satisfaction with democracy: A cross-national analysis of consensus and majoritarian systems. American Political Science Review, 91(1), pp.66-81.
- Becker, T. (2019). Liberal Democracy in Transition – The First 30 Years. FREE Policy Brief.
- Chiopris, C., Nalepa, M. and Vanberg, G. (2021). A wolf in sheep’s clothing: Citizen uncertainty and democratic backsliding. Working Paper.
- Döring, H., Huber, C. and Manow, P. (2022). ParlGov 2022 Release. Harvard Dataverse. https://doi.org/10.7910/DVN/UKILBE
- Eurobarometer (multiple waves: 2002-2022), European Commission. Brussels
- Ezrow, L. and Xezonakis, G. (2011). Citizen satisfaction with democracy and parties’ policy offerings. Comparative Political Studies, 44(9), pp.1152-1178.
- Grillo, E. and Prato, C. (2023). Reference points and democratic backsliding. American Journal of Political Science, 67(1), pp.71-88.
- Little, A. and Meng, A. (2023). Subjective and Objective Measurement of Democratic Backsliding. Available at SSRN 4327307.
- Lueders, H. and Lust, E. (2018). Multiple measurements, elusive agreement, and unstable outcomes in the study of regime change. The Journal of Politics, 80(2), pp.736-741.
- Mechkova, V., Luhrmann, A. and Lindberg, S. I. (2017). How much democratic backsliding?. Journal of. Democracy, 28, pp.162-169.
- Svolik, M. W. (2019). Polarization versus democracy. Journal of Democracy, 30(3), pp.20-32.
- Treisman, D. (2023). How great is the current danger to democracy? assessing the risk with historical data. Comparative Political Studies, https://doi.org/10.1177/00104140231168363.
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.
Energy Infrastructure Resilience and Sustainable Future
The Stockholm Institute of Transition Economics (SITE) and the Forum for Research on Eastern Europe: Climate and Environment (FREECE) would like to invite you to its 2023 SITE Energy Talk. This year it will focus on the opportunities and challenges that the energy infrastructure will face in the near future.
As we move towards sustainable, low-carbon energy systems, it is essential to guarantee the energy infrastructure’s resilience against various challenges, such as supply chain disruptions, network congestion, rising energy costs, and other potential threats. Valuable insights have been gained from recent shocks such as the Covid-19 pandemic, the energy crisis, and the ongoing Ukrainian war concerning the energy infrastructure’s resilience.
The next SITE Energy event will focus on the opportunities and challenges that the energy infrastructure will face in the near future.
Speakers
Ewa Lazarczyk Carlson
Associate Professor at Reykjavik University and also affiliated to Luleå University of Technology
Lazarczyk Carlson will focus on the Baltic Sea region’s energy security and the network dependency on Russia as an electricity power supplier.
Yuliya Markuts
Ph.D., Head of the Center of Public Finance and Governance at the Kyiv School of Economics, Associate Professor of Finance at the State University of Trade and Economics
Markuts will address the energy of Ukraine during the Russia full-scale invasion: resilience and future prospects for transformation.
Igor Piddubnyi
Analyst on Energy sector Damages and Losses, Researcher at the Center for Food and Land Use Research at Kyiv School of Economics
Piddbunyi addresses the question of Ukrainian energy infrastructure, its current status, and damage evaluations.
Mikael Toll
Senior Advisor at Ramboll Management Consulting
Toll will discuss how well-prepared the Nordic energy infrastructure is for the green transition from a security of energy supply perspective, in the light of recent and current energy crises.
Moderators
The seminar will be moderated by Chloé Le Coq, Professor of Economics at the University Paris-Panthéon-Assas (CRED) and Research Fellow at SITE, and Elena Paltseva, Associate Professor at SITE.
Registration
The event will take place in Terrasrummet at Holländargatan 32, 113 59 Stockholm (near the main building of SSE) and the registration opens at 11.45 near the entrance of Holländargatan.
The event will also be streamed online via Zoom for those who cannot join the event in person. Please register via the Trippus platform:
NOTE: A light lunch will be provided for those who will participate the event in person.
Please contact site@hhs.se if you have any questions regarding the event.
Minimum Wage Spike and Income Underreporting
The labor markets of many transition countries are characterized by two features: a spike at the minimum wage level in the wage distribution and widespread use of so-called envelope wages, i.e. non-declared cash payments in addition to the official wage. In this brief, we present a body of suggestive evidence showing that tax evaders are overrepresented among minimum wage earners in Latvia.
Introduction
Labor markets in many transition and post-transition countries are characterized by the prevalence of payroll tax evasion in the form of envelope wages, i.e. non-declared cash in addition to the official wage (see for instance Putnins and Sauka (2015) for Latvia, Paulus (2015) and Kukk and Staehr (2014) for Estonia and Bíró et al. (2022) and Elek et al. (2012) for Hungary).
Another defining characteristic of these transition economies is a very large peak at exactly the minimum wage in the wage distribution. To explain this phenomenon, Tonin (2011) argues that the mass of individuals at the minimum wage level is composed to a large extent of workers receiving envelope wages, where employers and employees collude and agree on reporting only the minimum wage to minimize tax liabilities while remaining under the radar of the tax authorities. In such a setup, the minimum wage policy becomes an enforcement tool for the fiscal administration, as it pushes non-compliant firms to convert part of the envelope wage into an official wage so that it reaches the new minimum wage.
However, only scarce concrete evidence shows that payroll tax evaders are overrepresented among minimum wage earners. Considering the regular minimum wage hikes in the region (e.g., a 95 percent increase in Latvia in 2010-2022 and a planned increase by another 24 percent in 2023), understanding the interaction between minimum wage policy and labor tax evasion is crucial.
In this brief, we present a body of suggestive evidence highlighting the prevalence of wage underreporting at exactly the minimum wage level in Latvia.
Data and Methodology
We use Latvian administrative employer-employee data for 2011 to 2015, covering the full Latvian employed population at a monthly rate. To identify tax evasion, we rely on the comparison between small and large firms. The literature studying tax evasion provides considerable evidence showing that small firms tend to evade more taxes than large firms. Kleven et al. (2016) provide a theoretical foundation for this result, showing that collusive evasion is more difficult to sustain in firms with more employees. Empirically, this effect has been documented in many countries (see for instance Putnins and Sauka (2015), Gavoille and Zasova (2021), and Benkovskis and Fadejeva (2022) for the results on Latvia, Bíró et al. (2022) for Hungary, Paulus (2015) for Estonia, and Kumler et al. (2020) for Mexico).
In this brief, we use a very broad definition for firm size categories and divide firms into firms employing 30 or fewer employees as small and firms with more than 30 employees as large. With such a crude definition, it is inevitable that firms below and above the threshold are highly heterogeneous, implying that some firms below the threshold are tax-compliant, while some firms above the threshold are tax-evading. For our purposes though, it is sufficient to assume that the share of evading employees in small firms is larger than that in the sample of large firms.
Results
We begin by plotting the distribution of wages in the private sector. Figure 1 plots monthly wages in the range of 0–1000 Euros in 2011. The right most dashed vertical line in the figure marks the minimum wage (284.57 Euros per month in 2011) and the left most dashed line marks 50 percent of the minimum wage. There are clear spikes at the minimum wage (and at half of the minimum wage). The minimum level wage spike in small firms (top graph) is much more pronounced than in large firms (bottom graph), which is consistent with the idea that the spike is driven by income underreporting.
Figure 1. Gross wage distribution in the private sector in small (< 30 empl.) and large (> 30 empl.) firms in 2011.
Note: Micro enterprises are excluded. Vertical lines depict the minimum wage (284.57 Euro) and half of the minimum wage (142.29 Euro) in 2011. Source: Authors’ calculations.
This explanation implies that employers and employees choose to declare employment and underdeclare earnings instead of staying completely informal, which is consistent with the available evidence. Staying completely informal involves much higher risks of detection if authorities perform regular inspections of workplaces, and in many Central European countries with prevalent income underreporting, completely informal employment is not very common (OECD, 2008). In Latvia, firms have to register employees in the electronic system of the State Revenue Service before they start to work, hence the probability that an unofficially employed person is detected during a workplace inspection is very high (State Labor Inspectorate, 2010). Existing empirical evidence on Latvia also suggests that income underreporting is much more widespread than completely informal employment, which is estimated at only 2–3.5 percent (European Commission, 2014; Hazans, 2012). Hence, we interpret the spikes as indicative of tax evaders bunching at the minimum wage.
Wage Growth Among Minimum Wage Earners
Wages are expected to grow with tenure, but if minimum wage earners receive part of their income in cash, their reported wage can remain unchanged even after years of employment within a firm (as any increase would arguably go through the non-declared cash). To examine if this is the case, we exploit a period when there were no changes in the Latvian minimum wage (January 2011–December 2013). We select employees who were employed by the same firm in all months of 2011–2013, assign them to wage bins according to their wage in 2011, and in each wage bin calculate the share of workers whose wage in 2013 was the same as in 2011. We assign workers to 10-Euro bins, with the exception of minimum wage earners, whom we assign to a bin of 1 Euro.
As evident from Figure 2 minimum wage earners clearly stand out from other employees. In small firms, almost 45 percent of employees earning the minimum wage in 2011 had the same reported wage in 2013. There is also a spike at the minimum wage in large firms (28 percent), but it is less pronounced than in small firms.
Figure 2. Proportion of continuously employed workers facing no wage growth between 2011 and 2013, by wage bins, in small (< 30 empl.) and large (> 30 empl.) firms.
Note: Micro enterprises and public sector firms are excluded. Source: Authors’ calculations.
An alternative explanation for the large share of minimum wage earners who experience no wage growth could be that, for many of them, the minimum wage is binding. To rule this out, we perform the same calculations on a sample of young employees (24 or younger in 2011). Workers in the early stages of their careers tend to have higher returns to experience and tenure; thus, young workers are less likely to have no wage growth after three years of employment with the same firm. Figure 3 plots the results for young workers. In large firms, the spike at the minimum wage is more than twice as small as for the full sample of workers (12 percent vs. 28 percent), but in small firms it remains very high (33 percent).
Figure 3. Proportion of continuously employed young workers (aged 24 or less in 2011) facing no wage growth between 2011 and 2013, by wage bins, in small (< 30 empl.) and large (> 30 empl.) firms.
Note: Micro enterprises and public sector firms are excluded. Source: Authors’ calculations.
Conclusion
This brief documents highly prevalent tax evasion among minimum wage earners in Latvia. In such a context, the minimum wage is a powerful fiscal instrument as a higher minimum wage pushes non-compliant firms to disclose a larger share of their employees’ true earnings. In addition, wage underreporting among minimum wage earners can act as a shock absorber and cushion the negative employment effects of a minimum wage hike in countries where a large share of workers officially receive the minimum wage.
These upsides however come at a cost. The results presented in this brief by no means imply that all minimum wage earners are tax evaders; a notable share of employees receiving the minimum wage on paper do honestly earn only the minimum wage. In our paper (Gavoille and Zasova, 2022), we show that the flip side of the positive fiscal effect of a minimum wage hike is job losses among genuine low-wage earners and closures of tax-compliant firms that are affected by the hikes.
Acknowledgement
This brief is based on a recent article published in the Journal of Comparative Economics (Gavoille and Zasova, 2022). The authors gratefully acknowledge funding from LZP FLPP research grant No.LZP-2018/2-0067 InTEL (Institutions and Tax Enforcement in Latvia).
References
- Benkovskis, Konstantins; and Ludmila Fedejeva, 2022. “Chasing the Shadow: the Evaluation of Unreported Wage Payments in Latvia“. Latvijas Banka, Working Paper Nr. 1/2022.
- Bíró , Anikó; Dániel Prinz, and László Sándor, 2022. “The minimum wage, informal pay, and tax enforcement“. Journal of Public Economics, 215, 104728.
- Elek, Péter; János Köllő, Balázs Reizer, and Péter A. Szabó, 2012. “Chapter 4 Detecting Wage Under-Reporting Using a Double-Hurdle Model“. Emerald Group Publishing Limited, Rochester, NY, pp. 135–166.
- European Commission, 2014. “Undeclared Work in the European Union“, Special EUROBAROMETER 284.
- Gavoille, Nicolas; and Anna Zasova, 2022. “Minimum wage spike and income underreporting: A back-of-the-envelope-wage analysis“, Journal of Comparative Economics, forthcoming.
- Gavoille, Nicolas; and Anna Zasova, 2021. “What we pay in the shadow: Labor tax evasion, minimum wage hike and employment“. SSE Riga/BICEPS Research paper No.6.
- Hazans, Mihails, 2012. “How many people are working without a contract in Latvia and neighboring countries?”. Technical Report, University of Latvia.
- Kumler, Todd; Eric Verhoogen, and Judith Frías, 2020. “Enlisting Employees in Improving Payroll Tax Compliance: Evidence from Mexico“. The Review of Economics and Statistics, 102 (5), 881–896.
- Kukk, Merike; and Karsten Staehr, 2014. “Income underreporting by households with business income: evidence from Estonia“. Post-Communist Economies, 26(2), 257-276.
- OECD, 2008. “Declaring Work or Staying Underground“. OECD employment outlook 2008.
- Paulus, Alari, 2015. “Tax Evasion and Measurement Error: an Econometric Analysis of Survey Data Linked with Tax Records“. Working Paper 2015-10. ISER Working Paper Series.
- Putnins, Talis; and Arnis Sauka, 2015. “Measuring the shadow economy using company managers“, Journal of Comparative Economics, 43(2), 471-490.
- State Labor Inspectorate, 2010. “Latvia: Annual Report 2010”
- Tonin, Mirco, 2011. “Minimum wage and tax evasion: Theory and evidence“. Journal of Public Economics, 95(11-12), 1635-1651.
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.
Intergenerational Occupational Mobility in Belarus
This brief presents an analysis of the magnitude of the intergenerational occupational mobility in Belarus, taking into account a differentiated gender effect. The analysis considers movements along the occupational scale for individuals with respect to their parents, both through an aggregate magnitude (using transition matrices and mobility rates) and in detail (using a multinomial logit model), using data from the 2017 Generations and Gender Survey for Belarus. The findings show, firstly, that the downward intergenerational changes of occupational status have a strong gender bias: downward mobility is higher for men than for women. Secondly, the probability of moving up the social ladder is higher for women than for men in Belarus. Additionally, the results verify the important role of education as a mechanism towards reaching a society with more equal opportunities. In particular, the effect is more intense for individuals with higher education.
Introduction
Intergenerational social mobility is defined as the movement of individuals from the social class of the family in which they lived when they were young (the origin class) into their current class position (the destination class), where social class is determined by as decided by income, occupation, education etc. (Ritzer, 2007; Scott and Marshall, 2009).
One of the main results from the economic literature on intergenerational social mobility shows that the degree of social mobility depends on the characteristics of an individual’s family background. These characteristics include an individual’s choice to acquire human capital and corresponding type of education, innate and acquired abilities, gender differences, or the knowledge people acquire through lifelong learning or work experience (Behrman & Taubman, 1990; Dutta, Sefton & Weale, 1999).
However, such characteristics may encourage children to work in the same occupations as their parents, slowing down intergenerational change. Research on intergenerational mobility can help identify and remove barriers to mobility which could improve the effective distribution of human skills and talents, in turn increasing productivity and promoting competitiveness and economic growth.
This brief summarizes the results of the first research focused on intergenerational occupational mobility in Belarus (Mazol, 2022). The research attempts to obtain new empirical evidence on intergenerational social mobility in Belarus by examining the movements of individuals along the occupational scale in relation to their parents, while taking into account other relevant factors such as gender differences and educational background of the individuals. Two specific gender dimensions are introduced: on the one hand, this study analyzes whether mobility in occupational categories differs for men and women; on the other hand, it examines whether there is a difference in the transmission of occupational categories from fathers to sons in comparison to mothers to daughters.
Data and Methodology
The study makes use of data from the Generations and Gender Survey (GGS) conducted in Belarus in 2017 by the United Nations Population Fund (UNFPA) and the United Nations Children’s Fund (UNICEF) within the framework of the Generations and Gender Program of the United Nations Economic Commission for Europe. The survey provides information on a range of individual characteristics (age, gender, marital status, educational attainment, employment status, hours worked, wages earned, etc.) as well as household-level characteristics (household size and composition, religion, land ownership, location, asset ownership, etc.).
The research considers the subsample of respondents between 25-79 years old and utilizes the information on occupation of the respondent and his/her parents. In order to evaluate the intergenerational occupational mobility, occupations are ranked by their position in the occupational ladder according to the National Classification of Occupations, based on the International Standard Classification of Occupations (ISCO-08) This defines a ranking of occupations based on the performance area and qualification required to carry out the occupation, from armed forces occupations (ranking the highest), through a manager, a professional, a technician or professional associate, a clerk, a sales worker, a skilled agricultural worker, a craft worker a plant and machine operator, ending with an elementary occupation ranking the lowest. The influence from the father’s/mother’s occupation on that of the son’s/daughter’s is then estimated.
The analysis is carried out partly by estimation of transition matrices and mobility rates, and partly by the use of a multinomial logit model that aims to analyze the impact of a set of covariates on intergenerational occupational mobility. The explanatory variables are: the highest degree of education an individual has achieved (educational attainment), gender, potential labor experience (calculated as the number of years an individual has regularly worked), status in the labor market (full-time or part-time), and region of residence. The choice of these independent variables relies on channels identified from relevant sociological and economic literature.
Figure 1. Intergenerational occupational transitions in percent, by gender lines
Source: Author’s estimates based on GGS.
The intergenerational transmission of occupational immobility is almost equal for men and women (31 percent and 30,1 percent respectively). Occupational upward mobility is far more common as compared to downward mobility. 39.7 percent of men, compared to their father’s, and 50.6 percent of women, compared to their mother’s, have better occupations. The gender differences may be explained by the high proportion of women with higher educational levels in Belarus.
The estimates of the marginal effects obtained by the multinomial logit model indicate that social occupational mobility in Belarus depends on personal and labor characteristics. Three possible states are considered in relation to father-son and mother-daughter gender lines: the individual experiences downward intergenerational occupational mobility as compared to their parent of the same gender (Y = 0); they remain in the same occupation (immobility) (Y = 1) or they experience upward intergenerational occupational mobility (Y = 2) (see Table 1).
Table 1. Estimates of the marginal effects corresponding to the multinomial logit model
Notes: Estimates reflect weighted data. Standard errors in square brackets. Significance: *** – 1% level, ** – 5% level, * – 10% level. OV – omitted variable. Source: Author’s estimates based on GGS.
As evident from Table 1, gender is an important determinant of intergenerational occupational mobility. In particular, the results show that women are more likely to move up the social ladder than their male counterparts, as men are 10 percentage points less likely to have upward occupational mobility than women with similar (on average) socio-economic characteristics, with all coefficients being statistically significant.
In terms of educational attainment, the findings show that, on the one hand, higher educational attainment has a positive and significant influence on upward occupational mobility, with the highest values displayed for higher education. The probability of moving up to the occupational ladder is around 27 percentage points higher for an individual within this educational group than for an individual with primary studies and similar (on average) socio-economic characteristics. On the other hand, higher education has a negative and significant influence on downward occupational mobility, indicating that the probability of moving down the occupational ladder is around 13 percentage points lower for a highly educated individual compared to an individual with primary education.
Considering human capital, there is a positive impact of potential labor experience on upward intergenerational occupational mobility. Specifically, the probability of moving up along the occupational ladder increases on average by about 0.3 percentage points for every additional year of labor experience.
Finally, the results show that full-time workers are more likely to move up the social ladder than their part-time counterparts. Full-time workers are about 12 percentage points more likely to experience upward occupational mobility and 11 percentage points less likely to face downward occupational mobility compared to their part-time working counterparts.
Conclusion
This brief summarizes the findings for the first study on intergenerational occupational mobility in Belarus.
Firstly, the findings indicate, from a gender perspective, that the probability of moving up the social ladder is higher for women than for men in Belarus.
Secondly, the research results verify the important role of education as a mechanism to reach a society with more equal opportunities. In particular, the effect is more intense for individuals with higher educational attainments.
Thirdly, potential labor experience positively influences the upward intergenerational occupational mobility. This may reveal an underlying effect from training (however an unobservable variable given the data provided by the GGS).
Lastly, the impact of employment status on intergenerational occupational mobility in Belarus depends on the stability of labor relations, where possessing a part-time job worsens one’s probability of accomplishing a social class advancement.
References
- Behrman, J., and P. Taubman. (1990). The Intergenerational Correlation between Children’s Adult Earnings and Their Parents’ Income: Results from the Michigan Panel Survey of Income Dynamics. Review of Income and Wealth, 36(2), pp. 115-127.
- Dutta, J., Sefton, J., and M. Weale. (1999). Education and Public Policy. Fiscal Studies, 20(4), pp. 351-386.
- Mazol, A. (2022). Intergenerational Occupational Mobility: Evidence from Belarus. BEROC Working Paper Series, WP no. 79.
- Ritzer, G. (2007). The Blackwell Encyclopedia of Sociology. Malden: Blackwell Publishing Ltd.
- Scott, J., and G. Marshall. (2009). A Dictionary of Sociology. Oxford: Oxford 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.
Belarus Under War Sanctions
Numerous developed countries have imposed tough sanctions on Belarus, as the Belarusian regime has become part of the Russian aggression against Ukraine. At the same time, economic relations with Ukraine have been disrupted. These shocks have simultaneously disturbed the Belarusian economy and triggered a severe recession. Thanks to several positive effects from the external environment, some success from measures undertaken by the authorities to stabilize output, and some degree of resilience – all seasoned with a large portion of good luck – the situation of the Belarusian economy is however “not that bad”. Nonetheless, the Belarusian economy is experiencing its worst economic crisis since the mid-1990s, and the current path of the economy is highly unstable and associated with numerous risks and threats. In economic terms, it is likely the case that the full costs from the sanctions are yet to be paid.
Sanctions, Multiple Shocks and Their Potential Implications
As the Belarusian regime has become part of the Russian war on Ukraine many developed countries have adopted tough sanctions against Belarus. These sanctions include an embargo on a large share of Belarusian exports and imports, prohibitions and restrictions on transportation of goods of Belarusian origin, restrictions on and/or blocking actions regarding financial operations and settlements, a freeze of parts of the Belarusian international reserves, and numerous restricting and blocking actions against banks, companies and individuals. Such sanctions, combined with a new external environment, cause powerful indirect effects with foreign companies exiting the Belarusian market and refusing business with Belarusian counterparts. Additionally, some Belarusian businesses and employees have left the country. On top of this, economic relations with Ukraine, formerly Belarus’s second largest trading partner, have been virtually reduced to zero.
In economic terms, the above mentioned may be treated as a bundle of simultaneous powerful shocks to the national economy, differing in direction, mechanics, size, and persistence. These shocks may be grouped into three clusters.
The first cluster covers demand shocks, and in particular export shocks. According to our assessments, the exogenous demand shock following the sanctions may reduce Belarusian exports (in physical terms) by 40 percent, compared to previous steady-state levels. This figure should however be seen as a potential lower bound which may be realized if no measures to mitigate the impact from the sanctions are undertaken. Belarusian authorities and businesses are however doing their best trying to find new buyers for the “vanishing” exports, bypass restrictions in order to connect to “old” buyers, and establish new logistic and financial chains. The extent to which these attempts may be successful depends on the global environment, the degree of the price competitiveness of Belarusian producers, and numerous non-economic factors. Additionally, all factors affecting exports are unstable and volatile. Exports under these new conditions are therefore less sustainable and may fluctuate in an extremely wide range. Shocks to consumption and investments stemming from weakened sentiment and expectations further amplify the demand shocks.
The second cluster of shocks relates to the supply side of the economy. It includes business closures, emigration that weakens labor supply, and production bottlenecks due to the inaccessibility of imports. Supply shocks are hard to quantify, but we perceive them as persistent and cumulative. Business closures and emigration have irrevocable effects on the national economy (at least in the medium-term), and a continuation of such drop-outs will likely amplify the size of the shock.
The third cluster combines different primarily nominal shocks: price, exchange rate, financial stability and fiscal ones. Such shocks have become permanent companions to the Belarusian economy under the sanctions, and they are volatile in terms of size. As a result, the corresponding economic indicators are likely to also become highly unstable.
This bundle of adverse shocks shifts the economy down from the previous, close to steady-state, trajectory. A new trajectory is however far from predetermined. Firstly, it depends on the effectiveness of the government in curbing the shocks stemming from the sanctions, as the actual path of the economy may be considerably affected by monetary or fiscal policy and other interventions. Secondly, some positive exogenous shocks may partially offset the effects from adverse ones. Lastly, the economy, at least for a while, may resist through exploitation of accumulated buffers (such as, international reserve assets, financial reserves of State-owned enterprises that were accumulated under favorable conditions in 2021 etc.).
Considering the worst possible assumptions regarding the above mentioned issues, our model-based simulations predict a severe recession of about 20 percent (as compared to the output peak in 2021-Q2). This recession is accompanied by a sharp increase in inflation (which in turn is highly likely to be supplemented by a full-fledged financial crisis). This simulation should however be regarded as the potential rock bottom. Whether it will become reality or not critically depends on the Belarusian government’s policies.
Policy Response by the Authorities
The root cause of the problem, namely the provision of Belarusian territory for the Russian army, has never been publicly discussed by Belarusian officials. Instead, the government has focused on strategies which treat the symptoms, rather than focusing on curing the disease itself. The main coping strategies that were publicly discussed include: 1) expected increase in Russian support and exports to Russia 2) re-orientation of exports towards Asian and developing markets 3) greater mobilization of domestic resources and 4) monetary, fiscal and other stimuli.
The Russia-related initiatives are often beyond convention and include some radical proposals. These are, for instance, accelerating the establishment of sea terminals in Russian ports, promoting exports to Russia, and requesting greater financial support from Russia linked to the so-called “deep integration” package (mainly in the form of energy subsidies, import substitution investments and direct subsidies). Adherence to these proposals would mean that Belarusian authorities de facto accept serving as a Russian protectorate and correspondingly take on the role of a puppet government.
Belarusian authorities have reached some success from choosing the “Russian track” as the debt payments to Russia were postponed, new cheap gas and oil prices were granted and export to Russia increased by 15 percent in the first 8 months of 2022. The Belarusian regime’s $7 billion compensation claim for incurred economic losses due to the war has however been rejected by Russia so far.
The coping strategy of export re-orientation serves primarily as a rhetoric intervention as China and other Asian countries considered by the government cannot fully replace the European market. For many Belarusian exports, the EU was a premium, high-margin market while re-orientation means at best lower margins. The success of re-orientation depends on the degree of price competitiveness, which can change greatly over time. The only success from this strategy to date is the re-orientation of 10 percent of potash exports to China via railroad (incurring greater transportation costs).
The third strategy “greater mobilization of domestic resources” firstly assumes more interference with the business activity of State-owned enterprises (SOE). Despite severe demand shocks these are pressured by the government to maintain production and/or salaries, the latter in order to support output via sustained consumer demand. Further, a “discipline” component of the strategy is implemented through renewed catch-pay-and-release practices. In effect, businessmen are arrested based on anti-corruption or tax fraud criminal charges. They are then offered to pay certain amounts to the state and released if they choose to pay.
Since late spring, when direct financial shocks have been suppressed, the authorities have intensified stimulus measures to the economy. In the fiscal sphere, these are aimed at promoting exports and mainly provided on an individual or sectoral basis. To a large extent, these stimuli may be seen as partial compensation to SOEs for their output-supporting role. In the monetary sphere a specific environment in which the Russian ruble is appreciated vs. the US dollar, despite the worldwide strength of the latter, has allowed the authorities to implement a “magic” (but highly likely temporary) solution: The Belarusian national currency is manipulated to depreciate vs. the Russian ruble (both in nominal and real terms) but appreciate vs. the US dollar. The former leads to a great increase in price competitiveness (as Russia is today the dominant trading partner), while the latter serves as a buffer for fragile prices and provides financial stability. Moreover, the authorities have excessively softened monetary policy, trying to spur domestic credit. These measures lead to heightened inflation pressure, which is however somehow suppressed by reinvigorated direct price controls.
Current Situation and Future Implications
Until now, the Belarusian economy places far from the potential rock bottom. By the end of the second quarter in 2022, output losses (vs. the output peak in 2021-Q2) amounted to about 5.5 percent. By the end of 2022, they are however expected to increase to about 8.5 percent (vs. the 2021-Q2 output peak). The Belarusian economy is stuck in a heightened inflation environment – with the inflation being as high as 20 percent in annual terms. Although the inflation is considerably higher than in “normal times”, it is still not a disaster (considering the much higher projected level under the worst-case scenario and the background of 40-year peak in global inflation). Moreover, the current situation is still far from a full-fledged financial crisis, despite some financial turbulence.
The position of the economy as “not that bad”, is a result of existing buffers, positive effects from the external environment and some immediate efficiency from actions undertaken by the authorities to stabilize output – all seasoned with a large portion of good luck. For instance, the jump in price competitiveness accounts for a large share of curbing efforts that counter the sanctions. This is, in turn, due to a combination of high global prices, low and frozen energy prices for Belarus, and a very specific and unstable stance on monetary policy underpinned by direct price controls. Some buffer savings that Belarusian SOEs succeeded to accumulate during the period of the so-called “foreign trade miracle” in late 2020 and 2021 also play an important role. Last but not least, the Belarusian authorities seem to have succeeded in the partial curbing of the export shock. Since the beginning of summer, there are some signs of recovery in exports which most likely reflects a partial recovery of exports within the most sensitive domains: oil products and potash fertilizers (corresponding statistics have been blocked out).
However, the “not that bad” position of the economy does not mean good. According to all standard metrics, Belarus is currently experiencing a severe economic crisis. The notion that it could be even more severe is bad news, not good ones. Moreover, the current situation is extremely unstable and fragile. The economy is facing numerous distortions, contradictions and risks, all of which can still shift the scenario of the crisis from the “not that bad” situation to the worst possible.
Conclusion
The Belarusian regime’s involvement in the Russian aggression against Ukraine have propelled Belarus into the most severe economic crisis since the mid-1990s. Until recently, fortunate external economic circumstances, a specific policy mix and a good portion of luck have allowed for a partial mitigation of the crisis. The situation is however extremely unstable and the full effects from the sanctions are likely yet to be realized.
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.
Higher Education and Research in times of War and Peace: Key Insights from the 2022 FREE Network Conference
More than thirty years after the collapse of the Soviet Union, Europe is struck with war following the Russian aggression on Ukraine. Russia’s war on Ukraine entails lost human capital, both in actual lives lost and due to major disruptions to key functions of the society, such as education and research. In light of this, the FREE Network, together with the Centre for Economic Analysis (CenEA) and the Stockholm Institute of Transition Economics (SITE), hosted the public conference “Higher Education and Research in War and Peace“ in Warsaw on the 10th of September 2022. This policy brief is based on the presentations and panel discussions held during the conference.
The large-scale Russian invasion of Ukraine has disrupted an entire society, including the education system, with Ukrainian schools just recently partially welcoming back students to the classrooms for the first time since the 25th of February 2022. Closing schools has severe impacts on a population, as highlighted by the recent Covid-19 pandemic. The lockdown and closure of schools around the world following the virus have had and will continue to have massively negative consequences globally, with severe losses in human capital due to lost years of education. This is especially in countries where access to online education is limited or of poor quality. Inequalities also rise following the closure of schools and girls return to school in fewer numbers than their male counterparts. The disruption to the Ukrainian education system will result in lost human capital and lowered levels of knowledge among the population. The war has further restricted access to relevant information for many Ukrainians but also for Russians, making people susceptible to the increased Russian propaganda and misinformation about the war on Ukraine depicted within and outside of Russia.
In light of this, the FREE Network gathered representatives from its affiliated institutions and other relevant actors in the region to discuss the relevance and necessity of continued support for higher education and research within social sciences in Ukraine, and more broadly in Eastern Europe and post-Soviet countries. The conference and the overarching theme related back not only to the original ambition of the FREE Network, namely to support outstanding academia within economics and relate it to policy work but also to the current situation in Europe and the existing threat from Russia to this objective.
This brief will initially cover the work carried out by the Kyiv School of Economics (KSE) in response to the Russian aggression, followed by thoughts on Russia’s role in the evolution of knowledge and human capital in the region. The brief continues by covering the benefits and positive outcomes of investments into education and research and lastly concludes with reflections on the role of the FREE Network.
The Kyiv School of Economics’ Response to the Russian Aggression
The war on Ukraine put the spotlight on the importance of high-quality academic institutions as a safety net for the government to maintain vital functions to society. The Vice President for Policy Research at KSE, Nataliia Shapoval, gave a brief overview of how KSE’s work has changed since the Russian war on Ukraine and its implications. Shapoval initially painted a picture of the disruption to the Ukrainian society caused by the Russian aggression, explaining how KSE stepped up during the first months of the war, in some areas doing the work of ministries. While the government has mainly taken back some duties, the KSE is still providing policy advice in areas related to the effects of sanctions, estimates of damages, and food security among others. KSE is also highly active within the areas of education and health, working with Ukrainian schools through the KSE Charitable Foundation (KSE CF) to ensure students can safely return to the classrooms.
Another important aspect of the work carried out by KSE concerns spreading knowledge about and shedding light on the situation in Ukraine. Through the various networks, by talking to colleagues within academia but also to the media, KSE is trying to explain what has happened and is still happening in Ukraine. According to Shapoval, there is a need for delivering correct information and to keep attention fixed on the situation in Ukraine such that people are kept aware of what is going on in the region.
Shapoval also regularly returned to the role of education and research for the present and future Ukraine. According to Shapoval, avoiding brain drain and ensuring Ukrainians are equipped with the necessary knowledge is key to rebuilding a future Ukraine founded on well-functioning democratic institutions. To facilitate this, the KSE is offering two programs, Memory and Conflict Studies (a multidisciplinary field concerned with how the past can be understood and remembered, and how it might impact the present transformation of societies) and Urban Studies, both aimed at covering the future need for competence within these fields. Further mentioned by Shapoval is the fact that, due to the war, many Ukrainians have left the country and are being educated elsewhere. While this partially ensures intellectual human capital is not lost, these students must be kept anchored to Ukraine through networks to ensure they will return back to help rebuild Ukraine. This is especially important in order to counter the ongoing evolution in Russia.
Thoughts on the Role of Russia in the Region
While the recent developments in Ukraine have of course disrupted education and research in more severe and tangible ways, the situation for independent researchers in Russia has also deteriorated. Torbjörn Becker, Director of SITE, emphasized how several Russian colleagues in exile still collaborate with the FREE Network on policy work and research. Becker also further stressed how they will be paramount once Ukraine wins the war, as will the role of partnerships for a future transformation of the Russian society. Acknowledging that there are many Russians (especially amongst academics in exile) who oppose the war, Shapoval however stressed the disturbing fact that many Russians do seem to support the Russian aggression and that the role of Russia as a destructive force in the region cannot be understated. This was seconded by Tamara Sulukhia, Director of the International School of Economics at Tbilisi State University (ISET). Sulukhia argued that Russian politics slow down and disturbs the free states within the region, and hampers organizations and countries from moving in the right direction in regard to democracy, economic evolution and integration toward Europe. Both Shapoval and Sulukhia reminded the audience that even with a Ukrainian victory, and this in a war which is defining the future of democracy in the region, Russia will persist. Russia has proven time and again, by effectively occupying 23 percent of Georgia as of 2008, with the occupation of Crimea in 2014 and with the most recent war on Ukraine, to be a real military threat to post-Soviet countries. Even though Russia losing the war would shift the power dynamics in the region, the ever-present threat of Russia is not only of a military character. Russia also attempts to impact education, research and knowledge more generally by promoting a Soviet-style education and by altering reality through propaganda and false information.
While discussing the current situation of higher education within economics in Belarus, Dzmitry Kruk, Deputy Academic Director of the Belarusian Economic Research and Outreach Center (BEROC), regularly came back to the negative impacts from Russia on the quality of education and research. Where the western style education is free but also differential, Soviet-style education is centred around learning how to fulfil instructions, according to Kruk. The Belarusian educational system is anchored to Russia and as a result Belarusians today have what Kruk referred to as a “spoilt mental map”. The necessity of free education and research outside the Russian alternative (which is mainly published in Russian and with a post-Marxist view of the world) is vital in order to equip people with the tools to respond to the new types of dictatorship evident in the region. Young people within academia who have experienced freedom and have had the opportunity of thinking for themselves will also be vital on the future path toward democracy. Kruk’s opinions were furthered by Shapoval stating how education must and should counter the risk of brainwashing in the region and in the world as a whole. Shapoval argued the necessity of countering propaganda with the help not only of education but also the legislation of media and social media and enforcement of international laws in general. The necessity of ensuring new values for intellectuals and students in times to come is of paramount value and, according to Shapoval, as important to halting the Russian imperialist visions today as it was some thirty years ago. Shapoval further argued that the threat from Russia’s ambitions should be met not only with education and research but also through installing a sense of hope and prosperity among young people.
Investments into Education and Research as a Safeguard and Development Driver
While countries within the turbulent region differ, not least in regard to overall political ambitions and structure, in most of them investments into education and research have been paying off. KSE’s expertise allowed it to work closely with the Ukrainian government, standing strong in their fight against Russia. The impact from investments into education and research in the region is also evident in both Georgia and Latvia.
Sulukhia argued ISET to be, and to have been, a key contributor to human capital among Georgians as well as others in the Caucasus region. Sulukhia argued this to be especially important when under occupation, mentioning how Georgia has, since the occupation of the two regions of Abkhazia and South Ossetia, in all ways possible tried to ensure that the human capital of internally displaced people is not lost. ISET have ten folded its intake of students and is today providing world-class education in the Georgian language, effectively counteracting brain drain. Post-graduates are working in major institutions providing relevant knowledge and competence in key areas of not only the Georgian society but also other countries in the Caucasus. A similar picture was painted by Anders Paalzow, Rector at Stockholm School of Economics in Riga (SSE Riga). Paalzow specifically pointed out how the investments in education made in Latvia in the 1990s have truly paid off, with graduates having been absorbed into relevant parts of the Latvian society and the Baltics for decades.
Having previous students in key positions in society to ensure sound policy work (such as good fiscal and audit control of the countries in question etc.) is however not the only benefit of investing in education and research within the region. As emphasized by Sulukhia, institutes within the FREE Network and other networks alike are strategically vital in the sense that they ensure knowledge and evidence for policy makers and as they convey evidence-based messages for the general public. This is especially important in a time when the message of the developmental direction for the countries within the region has to be reinforced in order to stand against Russian misinformation and propaganda as well as voices questioning the benefits of European integration. Sulukhia emphasized how it is of importance that the relevance of education and research is rooted among the people and not only within academia to evade the risk of preaching to the choir. Vlad Mykhnenko, Fellow at St. Peter’s College at the University of Oxford, further argued it is necessary for academia to be much more policy oriented than what is the reality today. Researchers should comment on political events and public policy to ensure the outreach of knowledge and information, not just to help the public have a greater understanding of complex issues but also to help inform experts. According to Myhnenko, other researchers are keen on getting context-relevant knowledge and insights from economists working within the region.
The necessity of communicating the outcomes from investments within economics education and research and more broadly within social sciences was a recurring theme during the conference. Presenting the University’s engagement in various programs such as Erasmus+, Horizon Europe, The European Strategy for Universities etc., Professor Agnieszka Chłoń-Domińczak from the Warsaw School of Economics (WSE) outlined the importance of funding from the EU. Chłoń-Domińczak highlighted how EU support has enabled greater partnerships and internationalization and pointed out that while the transfer of knowledge and internationalization of students and researchers are of the essence, there is a need for also ensuring capacity building among other staff when building sound institutions. Internationalization through the exchange as a hedge against brain drain and as a means of improving the quality of academia was further emphasized by Michal Myck, Director of CenEA.
Chłoń-Domińczak, alongside Paalzow and the Swedish Ambassador to Poland, Stefan Gullgren, further argued the necessity to bridge between business and academia. This, especially as investments in social sciences, as compared to investments in natural sciences or technology cannot be commercialized. Additionally, the former havs payoffs in the long run which lowers investment incentives for firms making it even more crucial to communicate the large benefits to society of investments into the sphere. Ensuring consistent and continued support requires not only a good connection to businesses but also proper legal structures in place. As argued by Gullgren, the Swedish model with private businesses funding about 70 percent of research and education in Sweden, is made possible largely thanks to the fact that many investments are funnelled through foundations that are exempt from taxation when set up to finance research grants and education. Thus, one should consider not only business, academia and investors when thinking about future funding for research and education, but the legislative framework as well, especially in contexts such as the future rebuild of Ukraine.
As for how the benefits from investments into social sciences best are communicated, opinions shifted among participants throughout the day. On the one hand, Becker’s argument of being visible not only in traditional media but on social media alike was met by Shapoval, highlighting the need for a regulatory framework for both platforms. On the other hand, Myhnenko’s argument for more policy oriented and outreaching research was met by Kruk claiming there is a risk of researchers within economics deviating too far from research within the field. Kruk also addressed the argument of being available on social media by countering that in his view, researchers should refrain from work based on what generates clicks or reads.
The Relevance of the FREE Network in times of War
Considering the evidence brought forth during the conference by colleagues within the FREE Network, be it the suppression of BEROC in their efforts of founding a School of Economics in Belarus, the effects on the KSE from the war on Ukraine, or the rise of anti-European expressions in Georgia, the necessity of the network was at the end of the day perhaps clearer than ever. As highlighted by virtually all speakers during the conference, internationalization through networks such as the FREE Network fosters open minds, allows for improvements within all aspects of academia, and enables the exchange of thoughts, ideas and experiences. Although the heterogeneity of the region should not be overlooked and investments made in accordance with this, the similarities between the countries within the FREE Network outnumber the differences. The immediate threat from Russia must be met with knowledge and fact-based information as well as high-quality education and research being made available among the population in the region as a whole. To ensure a continued transition within the region, the risk of brain drain must be evaded through continuous support to the social sciences, as these have the power to truly transform nations.
Concluding Remarks
The FREE Network public conference in Warsaw was the first in-person conference since the outbreak of the Covid-19 pandemic. The benefits of meeting in person were however overshadowed by the ongoing Russian aggression on Ukraine and ultimately on democratic ideals, including those of independent academia. We hope to welcome all FREE Network institutes to next year’s conference in Kyiv, to further discuss how outstanding education and research can help rebuild a sovereign Ukraine.
List of Participants
- Torbjörn Becker, Director of SITE
- Agnieszka Chłoń-Domińczak, Professor at WSE
- Stefan Gullgren, Swedish Ambassador to Poland
- Dzmitry Kruk, Deputy Academic Director, BEROC
- Michal Myck, Director of CenEA
- Vlad Mykhnenko, Fellow, St. Peter’s College, University of Oxford
- Anders Paalzow, Rector SSE Riga
- Nataliia Shapoval, Vice President for Policy Research at KSE
- Tamara Sulukhia, Director of ISET
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.
Hedging EU’s “Winter Risk” by Curbing Gas Demand: Solidarity, Nudge, and Market Solutions
The concern of Russian gas supply disruption and its implications has never been as serious. Experts agree that supply-side measures would not be enough to cover the shortage. Demand cuts are needed. The EC has just proposed a solidarity-based plan of 15% gas demand reduction across the EU Member states. However, getting all EU countries to commit to this plan has been challenging due to asymmetries in their exposure to the Russian gas crisis. As a result, the EU approved a compromise plan with numerous exemptions. This brief argues that market-based solutions may improve participation incentives helping the EU to coordinate decreasing gas demand. Nudging energy consumers to lower their demand may be an efficient complementary solution. All member states should adopt this latter strategy now, as it takes time to trigger behavior changes in energy consumption. Acting now should strengthen resilience in the coming winter.
Background
Since the beginning of the conflict between Ukraine and Russia, both politicians and analysts have expressed concerns about cuts in Russian gas supply and their implications for the European economy. These concerns have only deepened as the crisis has unfolded. First, Russia stopped gas deliveries to five EU member states in April 2022 following their refusal to pay for gas in rubles. Then, Gazprom cut the capacity of the NordStream pipeline, initially by 40% and then by another 20% in June 2022, claiming technical problems originating from sanctions (i.e., a sanction-driven late return of a gas turbine repaired in Canada).
Gazprom’s July 18th announcement of its inability to deliver contracted gas amounts due to “force majeure” further added to the concern. Meanwhile the EU has dismissed the alleged technical failure stressing political reasons. According to EC President Ursula von der Leyen, the delivery stop reflects a “use of energy as a weapon”.
The panic somewhat settled on July 21, 2022, when Russian gas shipments via Nord Stream resumed at 40% of its original capacity, i.e., the mid-June level. However, Gazprom just announced another cut to 20% of the original capacity from July 27th. Overall, Russian gas exports to the EU are unprecedently low, see Figure 1.
Figure 1. Russian gas exports 2021 vs. 2022
Source: McWilliams, B., G. Sgaravatti, G. Zachmann (2021) ‘European natural gas imports’, Bruegel Dataset, based on Entsog
Whether Russian gas supplies are likely to be stopped completely in a very close future is unclear. In similar vein, the IEA Executive Director, Dr Fatih Birol, warns that “…it would be unwise to exclude the possibility that Russia could decide to forgo the revenue it gets from exporting gas to Europe in order to gain political leverage”. Regardless of this risk, large-scale adjustments are necessary even under the more optimistic scenario with Russian gas supplies kept at the current level.
The most direct way to tackle the shortage of Russian gas is from the supply side. It can be done via three main channels: diversification of gas suppliers, replacement by alternative fuels, or use of storage. Multiple sources have studied these options extensively (see, e.g., SITE (2022) for an overview of earlier assessments, as well as Di Bella et al. (2022) for more recent estimates and a literature overview). Despite different shortage estimates across reports, experts agree that supply adjustment will not be enough to compensate for ‘the missing Russian gas. This suggests that curbing demand will be a substantial part of gas crisis management.
Most of the demand-linked measures decided by the EU member states have been to counteract the sky-rocking gas prices and subsidize gas consumption by setting a price cap or providing an energy check (see von der Fehr et al. 2022 for an overview). While such measures may protect consumers against increased energy bills in the short run, they foster energy consumption rather than curb it. However, on July 20th, the European Commission issued a plan for the EU nations to cut their gas consumption by 15% between August 2022 and March 2023. This move is part of a wider EU strategy to respond to the gas crisis by pushing for a solidarity mechanism between the member states, including pooling (i.e., sharing) of economic losses. While the targets in this plan would be voluntary, the restrictions could become binding in an emergency. The main demand restrictions would apply to the industrial consumers, but countries are also expected to facilitate households’ demand adjustments. This plan faced resistance from a range of EU Member states, claiming unfairness of 15% cut for their countries, or objecting binding demand cuts for their countries. The resulting compromise agreement, accepted by the EU states on July 26th, incorporated numerous exemptions for both countries and industries.
This brief focuses on the current options in the EU to curb energy demand. We discuss the feasibility of a solidarity mechanism in this context and offer economic mechanisms that may improve its functionality. We also stress the important policy features in incentivizing consumer response.
Solidarity Rule and Market Mechanism
Solidarity and coordination between Member states constitute a crucial part of EU’s response to the current gas crisis. Implementing these rules would limit the direct (gas shortage) and indirect (price-driven) shocks through, e.g., mutual backing-up and buyer power (see, e.g., Le Coq and Paltseva, 2012, 2022 or IEA, 2022).
The solidarity approach was discussed long before the current gas crisis, at least since 2006 (EC, 2006). However, its implementation has proven challenging because of the energy-related asymmetries between Member states in terms of import dependency, diversification of suppliers, energy portfolio, etc. These asymmetries undermine a “one size fits all” policy approach and make some countries consistently benefit more from solidarity mechanisms than others. The solidarity mechanism may also create moral hazard problems (Le Coq and Paltseva, 2008). As a result, the EU could never fully adopt a common energy policy approach.
The recent EU call to cut energy demand by 15% is subject to the same shortcomings. The EU countries are unequally affected by the current gas crisis due to differences in their exposure to Russian gas, access to storage or alternative fuels, gas transportation bottlenecks, etc. These differences undermine countries’ willingness to coordinate as witnessed by Portugal’s and Spain’s explicit opposition to the call on the ground that their energy reduction would be unfair given their energy portfolio with almost no Russian gas. Poland, whose gas storage is full, and Hungary, whose government imposed an export ban on gas earlier in July, have also objected the deal.
There are several ways to improve coordination: one could provide part-taking incentives via a monetary transfer scheme, incorporate demand-side energy cuts into a larger political agenda so that the (asymmetric) losses in one area are compensated by gains in another one (Le Coq and Paltseva, 2008). However, both solutions are likely unfeasible in the current, relatively short-run context, as they require the collection of large volumes of information to determine the correct transfer size. Additionally, the incentives for EU countries to correctly report such details might be low. One can also design a mutual support scheme with country-specific participation requirements/exemptions. This solution, while also informationally demanding, may be easier to achieve. It is likely to improve participation incentives, but the effects of solidarity may be weaker than under a plan without exemptions.
The EU decided to follow this latter route: On July 26th, the EU managed to reach an agreement on a softer plan with multiple exemptions from the 15% cut, accounting for countries’ energy market asymmetries (as well as much more demanding procedure to make the demand cut binding). While this agreement is definitely a step forward, it is currently uncertain whether it would be sufficient to meet the gas demand challenges in the coming winter.
A number of market solutions can potentially improve on the situation. For example, one could establish a market for energy demand reduction quotas in line with the cap-and-trade program designed for CO2 emissions. Alternatively, an emergency gas auction (like the one discussed in Germany for industrial firms) could allow gas savings to be offered in an auction. The winning, cheapest bid would get a market-price level compensation. Of course, such market mechanisms are likely to imply (at least some) consumers will face surging gas prices, but this appears inevitable in view of the difficulties to implement rationing mechanisms to cope with the reduced gas supply.
Market solutions could also be implemented at member state level. However, such an implementation would likely limit solidarity between member states and increase the costs associated with reduced gas consumption. Indeed, purely national solutions (almost by definition) lack solidarity mechanisms between member states and in addition inhibit that the gas reductions take place where they are the least costly.
Nudging and Information Campaign
Given the gas crisis and implementation frictions, the EU should benefit from complementing the regulatory and market solutions (mainly targeting the industry) by incentivizing the demand-cutting behavior of private consumers. There are many ways to trigger behavioral change, from changing legislation to nudging consumers to persuade them to lower their gas (and energy) consumption. Some nudging policies have been successful in the past. One example is Japan’s “setsuden” (electricity-saving) campaign, run after the 2011 Fukushima nuclear plant disaster. It started as an unofficial movement and continued into regulatory restrictions for large firms and voluntary but highly encouraged household targets. The information campaign stressed how close the country was to blackout and successfully prevented blackouts.
In the current crisis the EU states’ policies towards consumers were concentrating on shielding them from high energy prices (see von der Fehr et al, 2022 for an overview). Nudging and energy-saving information campaigns in the EU are yet to gain momentum. Some of the larger EU members are leading the movement. For example, in France, the president called for an immediate “energy sobriety” on the last National Day. Businesses and public buildings were asked to switch off the light at night and anticipate a lower winter heating consumption. While fines for infringement are under discussion, the French government is hoping for a nudging effect. Similarly, Germany has started an intense information campaign to convince individuals to reduce their electricity consumption by taking fewer showers and turning down the air conditioning. However, much broader, intensive energy-saving campaigning is urgently needed to lower energy demand effectively.
Several results from the experimental economic literature motivate such campaigns. The first point concerns the usefulness of nudging in the energy context. The evidence on the effect of incentivizing consumers’ energy saving behavior via monetary or non-monetary interventions is mixed (see Andor and Fels, 2018 and Lingyun Mi et al., 2022 for an overview). However, a recent meta-study combining the results from 112 field trials between 1976 and 2021 (Lingyun Mi et al., 2022) supports the effectiveness of non-monetary incentives (such as nudging by providing information or offering social comparisons) in creating energy-saving behavior. Moreover, it finds that non-monetary incentives are also more effective and longer lasting in promoting energy conservation than the monetary ones. One possible reason for this finding is that non-monetary incentives may affect individual’s values and their intrinsic motivation to save energy. This result implies that information campaigns, target-setting, and providing social comparisons can be an effective and relatively cost-efficient way to lower energy demand.
The second question concerns the timing of such intervention. Again, while there is no clear-cut evidence concerning the long-term impact of nudging, some literature documents effects lasting months and even years after the intervention stopped (Andor and Fels, 2018 overview a few such studies). Further, the same meta-study by Lingyun Mi et al., 2022 found that interventions lasting 1–6 months were the most effective. A combination of antecedent (before actual behavior, such as goal setting) and consequence (when the incentives to act are affected by the results of the action) nudge-based interventions produced the best energy-saving effect. These findings suggest that campaigns should start now to be ready for the winter 2022-23 season.
Last but not least, there is evidence that energy conservation goal-setting is effective only when the goals are realistic. For example, in Harding and Hsiaw (2014), a moderate energy saving goal set by a household led to a sizable consumption reduction, and the effect lasted for one and a half years. With more ambitious goals the initial strong response quickly vanished. Finally, there is no consumption adjustment pattern with unrealistically high goals. One possible, even if somewhat stretched, interpretation of these results could be that a drastic change in consumption may be more challenging to incentivize through nudging than a series of more minor adjustments. This consideration provides another rationale for the early start of nudging policies, suggesting a meager initial consumption reduction, and gradually increasing the threshold.
Conclusion
Cutbacks in gas consumption are essential to surviving the EU energy crisis, especially in case of a complete Russian gas halt. The EC has recently proposed a plan for the EU nations to decrease their gas consumption by 15% between August 2022 and March 2023. This plan is included in a wider solidarity approach to EU energy crisis management. However, approval of this plan by the EU nations faced difficulties due to asymmetries in exposure to Russian gas across EU member states and the resulting unwillingness to share the costs of the crisis. The resulting compromise plan features multiple exemptions from the 15% rule. Market solutions, such as trade in demand reduction quotas, may help to improve EU coordination on demand reduction. Another essential component of crisis management is the EU-wide nudging of private consumers encouraging energy saving behavior. Based on historical examples and the experimental literature such nudge-based policy may be effective and cost-efficient if started now.
References
- Andor, M. and K. Fels, 2018. “Behavioral Economics and Energy Conservation- A Systematic Review of Non-price Interventions and Their Causal Effects”, Ecological Economics, 148-C
- Di Bella, G., M. Flanagan, K. Foda, S. Maslova, A. Pienkowski, M. Stuermer and F. G. Toscani, 2022, “Natural Gas in Europe: The Potential Impact of Disruptions to Supply”, IMF Working Paper No. 2022/145
- Le Coq, C. and E. Paltseva, 2008. “Common Energy Policy in the EU: The Moral Hazard of the Security of External Supply”, SIEPS Report 2008:1
- Le Coq, C. and E. Paltseva, 2012. “Assessing Gas Transit Risks: Russia vs. the EU”, Energy Policy, 4: 642-650.
- Le Coq, C. and E. Paltseva, 2022. “What does the Gas Crisis Reveal About European Energy Security?” FREE Policy Brief
- European Commission, 2006. Green Paper “A European strategy for sustainable, competitive and secure energy“, COM (2006) 105.
- von der Fehr, N.-H., C. Banet, C. Le Coq, M. Pollitt and B. Willems, 2022. ”Retail Energy Markets under Stress – Lessons Learnt for the Future of Market Design”, CERRE report
- Harding, M. and A. Hsiaw, 2014. “Goal Setting and Energy Conservation”. Journal of Economic Behavior & Organization, 107
- IEA, 2022. “Coordinated actions across Europe are essential to prevent a major gas crunch: Here are 5 immediate measures”
- Mi, Lingyun, Gan, Xiaoli, Sun, Yuhuan, Lv, Tao, Qiao, Lijie and Xu, Ting, 2021. “Effects of monetary and nonmonetary interventions on energy conservation: A meta-analysis of experimental studies”. Renewable and Sustainable Energy Reviews. 149
- McWilliams, B., G. Sgaravatti, G. Zachmann, 2021. “European natural gas imports”, Bruegel Datasets, first published 29 Oct
- SITE, 2022. “The EU Import Bill and Russian Energy Sanctions”, FREE Policy Brief
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.