Location: Europe

#AcademicsStandWithUkraine

Posted on March, 2022 | News

20220301 Ukraine support

The Forum for Research on Eastern Europe and Emerging Economies (FREE Network) stands for peace, security and democracy and condemns Russia’s invasion of the independent and democratic nation of Ukraine and violation of international law.

The FREE Network has an extensive history of building networks and partnerships with leading academic experts on economic issues in Central and Eastern Europe and emerging markets.

The FREE Network invites academics from the region and beyond to express their solidarity with the Ukrainian people, academics, educators, and students suffering from Russia’s invasion into the democratic nation of Ukraine.

To speak out on Russia’s aggression against Ukraine, please use the hashtag #AcademicsStandWithUkraine.

Donations for humanitarian aid are organized by the Kyiv School of Economics, a member of the FREE Network.

20220227 KSE fund raising

From East to West: A Paper Curtain in Swedish Foreign News Coverage?

Posted on February 7, 2022 | Policy Brief

Selective Focus Photography of Magazines representing Media Freedom Eastern Europe

How much a country is talked about in the media can determine its place in the public debate. In this brief, we collect data on the mentions of Eastern and Western European countries in the main Swedish newspapers over the past decades. We find consistently more coverage devoted to Western compared to Eastern Europe in the Swedish press. We investigate several factors that could explain this pattern. We find that while Eastern European countries are on average not more geographically distant from Sweden, Sweden tends to have closer trade links with Western European countries. Sweden is more culturally similar to the average Western European country in terms of language, religion and attitudes, cultural values and social norms. Trade relations and cultural proximity are associated with higher media coverage.

The media plays a vital role in modern societies by keeping the public informed and policymakers accountable. Whether and how events are covered by the news determines their relevance in the public debate. There is ample empirical evidence on the agenda-setting power of the news media. For example, Snyder and Strömberg (2010) show that local press coverage affects how informed US voters are about their representatives and in turn how much their politicians work in the interest of their constituencies. Eisensee and Strömberg (2007) find that news coverage affects how much disaster relief the US sends to foreign countries.

In this brief, we study the amount of news coverage devoted to European countries in the Swedish press. We document a systematic difference between Western and Eastern Europe and explore underlying factors that could be important in explaining this East-West divide.

The East-West Divide

We choose the four most widely read Swedish newspapers (Aftonbladet, Expressen, Dagens Nyheter, and Svenska Dagbladet) and use the newspaper database Retriever Research Media Archive to obtain statistics on the number of mentions of each country between 1995 and 2021. A country mention is an article in which the name of a country appears. Since two or more countries can be named in the same article, the total number of mentions does not correspond to the number of articles. As a percentage of all articles published by the four newspapers in 2021, roughly 20% mention at least one of these countries. While this simple measure of news coverage can be informative, it does not take into account many other aspects of a country’s prominence in the news, such as the length of articles, where articles appear, the tone of coverage, etc.

Figure 1 plots the sum of annual number of mentions by region over time. We see a clear difference in the amount of coverage devoted to Eastern and Western European countries. Over the entire time period, the 21 Western European countries were mentioned on average 2.7 times more than the 22 Eastern European countries.

While there does not appear to be a trend in relative coverage, there is considerable variation from year to year. The year when the relative difference in the number of mentions is smallest is 2014. The two most mentioned Eastern European countries in that year were Russia and Ukraine. Coverage likely increased due to the Crimean Crisis, when Russia invaded and annexed the Crimean Peninsula in Southern Ukraine. The relative difference was also low in 2008, coinciding with the Russo-Georgian war in August. In that year, other newsworthy events, such as the Global Financial Crisis or the UEFA European Football Championship, have a more ambiguous effect on relative media coverage.

Figure 1. Country mentions in Swedish newspapers

Note: Countries included in Eastern Europe: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Latvia, Lithuania, Moldova, Montenegro, North Macedonia, Poland, Russia, Serbia, Slovakia, Slovenia, Ukraine. Countries included in Western Europe: Andorra, Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, Norway, Portugal, San Marino, Spain, Switzerland, United Kingdom.

What Explains This Discrepancy Between East and West?

There are a number of potential reasons why some countries systematically receive more attention in the press. In this section, we correlate the mean annual mentions of each country between 2019 and 2021 with different aspects of that country’s relationship with Sweden.

Distance and Population

Figure 2 shows how news coverage of a country depends on its geographic distance to Sweden and its population size. Overall, the further a country is from Sweden, the less that country is covered in the Swedish press. On average, Eastern European countries (in yellow) are covered less than Western European countries (in blue), for a given distance to Sweden. For example, Poland and Germany are both around 1000km away from Sweden, but Germany is mentioned almost twice as often in the Swedish press. As we measure the distance between the most populous city of each country and Stockholm, some of this difference in coverage is driven by the fact that countries sharing a border with Sweden receive extensive coverage. For instance, Denmark, Finland, and Norway are on average covered more than six times as much as Latvia.

Population also plays a role, that is, larger countries (e.g., Germany, Russia, Spain, and Poland) receive more coverage than smaller countries (e.g., Lithuania, Ireland, and Estonia). As Eastern European countries have on average smaller populations than Western European countries, population can partly explain the East-West difference in news coverage. One counterexample is Russia, which has more than twice as many people as France or the UK, but receives less coverage in the Swedish press.

Figure 2. Geographical distance and population

Note: Geodesic distances are calculated between the latitudes and longitudes of the most populous city of each country and Stockholm. Marker sizes are weighted by population averaged over 2019-2021, and fitted line is unweighted. Source: CEPII’s GeoDist dataset (Mayer and Zignago, 2006) and the World Bank. See Figure 1 for a list of countries included.

Trade and GDP

Figure 3 shows that Sweden’s economic relationship with a country affects how much the country features in Swedish news. We find a strong positive correlation of 0.8 between a country’s total trade volume with Sweden and country mentions in Swedish newspapers. As Sweden’s largest trading partners tend to be in Western Europe, this partly explains the relative coverage of East and West. Another factor is the overall size of a country’s economy (as measured by its GDP). Swedish newspapers more commonly mention countries with higher GDP, and these are more likely to be in Western than Eastern Europe.

 Figure 3. Trade and GDP

Note: Trade data are from 2019. Marker sizes are weighted by national GDP, and fitted line is unweighted. GDP figures are averaged over 2019-2021 and measured in current prices, PPP adjusted, international dollars. Source: The World Bank’s WITS database and the IMF World Economic Outlook, October 2021. See Figure 1 for a list of included countries.

Culture

There is a large literature documenting the link between cultural factors and the economic relationship between nations. For instance, studies show that similarities in ancestry, language, religion, norms and values can influence bilateral trade (Melitz, 2008; Guiso et al., 2009) and the diffusion of technology (Spolaore et al., 2009). In this section, we show how the amount of press coverage correlates with differences in language, religion, and values and norms using cultural distance data from Spolaore and Wacziarg (2016).

Figure 4.a shows that Swedish newspapers are more prone to cover countries whose languages are similar to Swedish. The language similarity measure originally developed by Fearon (2003) is based on the prevalence of languages within a country and distance between languages. The distance measure is calculated using linguistic trees provided in Ethnologue. It ranges from 0 (close) to 1 (distant) and reflects the expected number of common linguistic nodes between two randomly chosen individuals from each country and takes into account that countries can be linguistically heterogeneous (for more details, see Fearon 2003). Norway and Denmark are linguistically closest to Sweden, however, these are also two neighboring countries with which Sweden conducts extensive trade. On average, Eastern European countries are more linguistically distant from Sweden, although some Western European countries (such as France and Spain) are as linguistically distant from Sweden as many of the Eastern European countries and receive considerably more press coverage.

The religious distance measure by Spolaore and Wacziarg (2016) is calculated analogously to the linguistic distance measurement. It is based on the prevalence of different religions within a country and the distance between religions. Figure 4.b shows that countries that are religiously different from Sweden receive less coverage in the Swedish media. With the exception of the three Scandinavian countries, Eastern and Western European countries have similar levels of religious distance to Sweden. Based solely on this metric, the Swedish press mentions Eastern European countries less (and Western European countries more) than their religious distance to Sweden would predict.

Figure 4.c shows an index of a country’s cultural proximity to Sweden, that is, its distance in terms of cultural values, attitudes and norms based on average responses to the World Value Surveys from 1981 to 2010 (see Spolaore and Wacziarg, 2016). This cultural proximity index aggregates the Euclidian distances in survey responses between each country and Sweden. The index is standardized so that 0 shows the average country’s cultural distance to Sweden and negative (positive) values indicate above (below) average cultural similarity. Western European countries are significantly closer to Sweden than Eastern European countries based on this measure. As Swedish press coverage is on average declining in a country’s cultural distance to Sweden, this difference in country’s values and attitudes can explain some of the East-West difference in media coverage.

 Figure 4. Cultural distance

Panel a. Linguistic distance

Note: We use the indicator of tree-based weighted linguistic distance from Spolaore and Wacziarg (2016) and originally developed in Fearon (2003). This measure is an estimate of the expected or weighted number of common linguistic nodes between two randomly chosen individuals from each country. The data on language prevalence is compiled from a number of different sources and assembled in Fearon (2003). Countries included in Eastern Europe: Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Latvia, Lithuania, Moldova, Poland, Russia, Slovakia, Slovenia, Ukraine. Countries included in Western Europe: Austria, Belgium, Denmark, Finland, France, Germany (average between East and West Germany), Ireland, Italy, Netherlands, Norway, Portugal, Spain, Switzerland, United Kingdom

Panel b. Religious distance

Note: We use the tree-based weighted religious distance from Spolaore and Wacziarg (2016). This measure is an estimate of the expected distance between the religions of two randomly chosen individuals from each country. See Figure 4.a for a list of included countries.

 Panel c. Distance in cultural values, attitudes, and norms

Note: We use the distance in cultural norms and values from Spolaore and Wacziarg (2016).  This measure is based on all value-related questions from the World Values Survey Integrated Questionnaire from 1981–2010. The mean distance across countries is standardized to zero. See Figure 4.a for a list of countries included.

Conclusion

As the public and policymakers primarily receive information from the mass media, news coverage can have profound effects on public debate and policy decisions. Using data on the content of the four most widely read Swedish newspapers over the past decades, we measure how much the Swedish press covers Eastern and Western European countries. We find that over the past 25 years, there have been 2.7 times more mentions of Western than Eastern European countries. We find that the Swedish press is more likely to mention countries that are geographically closer, more populous, have a larger GDP and more trade with Sweden. Cultural proximity (as measured by language, religion and values, attitudes and social norms) also correlates with higher coverage. These factors are of course not independent from each other. For instance, the other Scandinavian countries with whom Sweden shares a border and a history, are culturally similar to Sweden and some of Sweden’s most important trading partners. They are also some of the countries that are most covered by the Swedish press. Some of these factors, such as sharing similar values, appear to explain the gap in coverage between East and West, while others, such as geographic distance, do not. More recently, concerns over energy security in the EU (see e.g., Le Coq and Paltseva, 2022) and the rise in military tension between Russia and Ukraine illustrate how developments in Eastern Europe can directly affect life here in Sweden. Perhaps it is time for Sweden to pay more attention to her eastern neighbours?

References

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

Vaccination Progress and the Opening Up of Economies

Posted on July 5, 2021 | Policy Brief

20210622 Reopening Soon Webinar Image 01

In this brief, we report on the FREE network webinar on the state of vaccinations and the challenges ahead for opening up economies while containing the pandemic, held on June 22, 2021. The current state of the pandemic in each respective country was presented, suggesting that infection rates have gone down quite substantially recently in all countries of the network, except in Russia which is currently facing a surge in infections driven by the delta-version of the virus. Vaccination progress is very uneven, limited by lacking access to vaccines (primarily Ukraine and Georgia) and vaccine scepticism among the population (primarily in Russia and Belarus but for certain groups also in Latvia, Poland and to some extent Sweden). This also creates challenges for governments eager to open their societies to benefit their economies and ease the social consequences of the restrictions on mobility and social gatherings. Finally, the medium to long term consequences for labour markets reveal challenges but also potential opportunities through wider availability of work–from-home policies. 

Background

In many countries in Europe, citizens and governments are starting to see an end to the most intense impact of the Covid-19 pandemic on their societies. Infection and death rates are coming down and governments are starting to put in place policies for a gradual opening up of societies, as reflected in the Covid-19 stringency index developed by Oxford University. These developments are partially seasonal, but also largely a function of the progress of vaccination programs reaching an increasing share of the adult population. These developments, though, are taking place to different degrees and at different pace across countries.  This is very evident at a global level, but also within Europe and among the countries represented in the FREE network. This has implications for the development within Europe as a whole, but also for the persistent inequalities we see across countries.   

Short overview of the current situation

The current epidemiological situation in Latvia, Sweden, Ukraine, and Georgia looks pretty similar in terms of Covid-19 cases and deaths but when it comes to the vaccination status there is substantial variation.

Latvia experienced a somewhat weaker third wave in the spring of 2021 after being hit badly in the second wave during the fall and winter of 2020 (see Figure 1). The Latvian government started vaccinating at the beginning of 2021, and by early June, 26% of the Latvian population had been fully vaccinated.

Sweden, that chose a somewhat controversial strategy to the pandemic built on individual responsibility, had reached almost 15 thousand Covid-19 deaths by the end of June of 2021, the second highest among the FREE network member countries relative to population size. The spread of the pandemic has slowed down substantially, though, during the early summer, and the percentage of fully vaccinated is about to reach 30% of the population.

Figure 1. Cumulative Covid-19 deaths 

Source: Aggregated data sources from the COVID-19 Data Repository by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University, compiled by Our World in Data.

Following a severe second wave, the number of infected in Ukraine started to go down in the winter of 2020, with the total deaths settling at about 27 thousand in the month of February. Then the third wave hit in the spring, but the number of new daily cases has decreased again and is currently three times lower than at the beginning of the lastwave. However, a large part of the reduction is likely not thanks to successful epidemiological policies but rather due to low detection rates and seasonal variation. 

In June 2021, Georgia faces a similar situation as Ukraine and Latvia, with the number of cumulative Covid-19 deaths per million inhabitants reaching around 1300 (in total 2500 people) following a rather detrimental spring 2021 wave. At the moment, both Georgia and Ukraine have very low vaccination coverage relative to other countries in the region(see Figure 5).

In contrast to the above countries, Russia started vaccinating early. Unfortunately, the country is now experiencing an increase in the number of cases (as can be seen in Figure 2), contrary to most other countries in the region. This negative development is likely due to the fact that the new Covid-19 delta variant is spreading in the country, particularly in Moscow and St. Petersburg. Despite the early start to vaccinations, though, the total number of vaccinated people remains low, only reaching 10.5% of the population.

Figure 2. New Covid-19 cases

Source: Aggregated data sources from the COVID-19 Data Repository by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University, compiled by Our World in Data.

In some ways similar to Sweden, the government of Belarus did not impose any formal restrictions on individuals’ mobility. According to the official statistics, in the month of June, the rise in the cumulative number of covid-19 deaths and new daily infections has declined rapidly and reached about 400 deceased and 800 infections per one million inhabitants, respectively. Vaccination goes slowly, and by now, around 8% of the population has gotten the first dose and 5% have received the second.

There were two major waves in Poland during the autumn 2020 and spring 2021. In the latter period, the country experienced a vast number of deaths.  As can be seen in Figure 3, the excess mortality P-score – the percentage difference between the weekly number of deaths in 2020-2021 and the average number of deaths over the years 2015-2019 – peaked in November 2020, reaching approximately 115%. The excess deaths numbers in Poland were also the highest among the FREE Network countries in the Spring of 2021, culminating at about 70% higher compared to the baseline. By mid-June, the number of deaths and cases have steeply declined and 36% of the country’s population is fully vaccinated.

Figure 3. Excess deaths

Turning to the economy, after a devastating year, almost all countries are expected to bounce back by the end of 2021 according to the IMF (see Figure 4). Much of these predictions build on the expectations that governments across the region will lift Covid-19 restrictions. These forecasts may not be unrealistic for the countries where vaccinations have come relatively far and restrictions have started to ease. However, for countries where vaccination rates remain low and new variations of the virus is spreading, the downside risk is still very present, and forecasts contain much uncertainty.

 Figure 4. GDP-growth

Vaccination challenges

Since immunization plays such a central role in re-opening the economy and society going back to normal, issues related to vaccinations were an important and recurring topic at the event. The variation in progress and speed is substantial across the countries, though.

Ukraine and Georgia are still facing big challenges with vaccine availability and have fully vaccinated only 1.3% and 2.3% of the population by the end of June, respectively. Vaccination rates have in the recent month started to pick up, but both countries face an uphill battle before reaching levels close to the more successful countries.

Figure 5. Percent fully vaccinated

Other countries a bit further ahead in the vaccine race are still facing difficulties in increasing the vaccination coverage, though not so much due to lack of availability but instead because of vaccine skepticism. In Belarus, a country that initially had bottleneck issues similar to Ukraine and Georgia, all citizens have the opportunity to get vaccinated. However, Lev Lvovskiy, Senior Research Fellow at BEROC in Belarus, argued that vaccination rates are still low largely because many Belarusians feel reluctant towards the vaccine at offer (Sputnik V).

This vaccination scepticism turns out to be a common theme in many countries. According to different survey results presented by the participants at the webinar, the percentage of people willing or planning to get vaccinated is 30% in Belarus and 44% in Russia. In Latvia, this number also varies significantly across different groups as vaccination rates are significantly lower among older age cohorts and in regions with a higher share of Russian-speaking residents, according to Sergejs Gubins, Research Fellow at BICEPS in Latvia.

Webinar participants discussed potential solutions to these issues. First, there seemed to be consensus that offering people the opportunity to choose which vaccine they get will likely be effective in increasing the uptake rate. Second, governments need to improve their communication regarding the benefits of vaccinations to the public. Several countries in the region, such as Poland and Belarus, have had statements made by officials that deviate from one another, potentially harming the government’s credibility with regards to vaccine recommendations. In Belarus, there have even been government sponsored disinformation campaigns against particular vaccines. In Latvia, the main problem is rather the need to reach and convince groups who are generally more reluctant to get vaccinated. Iurii Ganychenko, Senior Researcher at KSE in Ukraine, exemplified how Ukraine has attempted to overcome this problem by launching campaigns specifically designed to persuade certain age cohorts to get vaccinated. Natalya Volchkova, Director of CEFIR at NES in Russia, argued that new, more modern channels of information, such as professional influencers, need to be explored and that the current model of information delivery is not working.

Giorgi Papava, Lead Economist at ISET PI in Georgia, suggested that researchers can contribute to solving vaccine uptake issues by studying incentive mechanisms such as monetary rewards for those taking the vaccine, for instance in the form of lottery tickets. 

Labour markets looking forward

Participants at the webinar also discussed how the pandemic has affected labour markets and whether its consequences will bring about any long-term changes.

Regarding unemployment statistics, Michal Myck, the Director of CenEA in Poland, made the important point that some of the relatively low unemployment numbers that we have seen in the region during this pandemic are misleading. This is because the traditional definition of being unemployed implies that an individual is actively searching for work, and lockdowns and other mobility restrictions have limited this possibility. Official data on unemployment thus underestimates the drop in employment that has happened, as those losing their jobs in many cases have left the labour market altogether. We thus need to see how labor markets will develop in the next couple of months as economies open up to give a more precise verdict.

Jesper Roine, Professor at SITE in Sweden, stressed that unemployment will be the biggest challenge for Sweden since its economy depends on high labor force participation and high employment rates. He explained that the pandemic and economic crisis has disproportionately affected the labor market status of certain groups. Foreign-born and young people, two groups with relatively high unemployment rates already prior to the pandemic, have become unemployed to an even greater extent. Many are worried that these groups will face issues with re-entering the labour market as in particular long-term unemployment has increased. At the same time, there have been more positive discussions about structural changes to the labour market following the pandemic. Particularly how more employers will allow for distance work, a step already confirmed by several large Swedish firms for instance.

In Russia, a country with a labour market that allowed for very little distance work before the pandemic, similar discussions are now taking place. Natalya Volchkova reported that, in Russia, the number of vacancies which assumed distance-work increased by 10% each month starting from last year, according to one of Russia’s leading job-search platforms HeadHunter. These developments could be particularly beneficial for the regional development in Russia, as firms in more remote regions can hire workers living in other parts of the country.

Concluding Remarks

It has been over a year since the Covid-19 virus was declared a pandemic by the World Health Organization. This webinar highlighted that, though vaccination campaigns in principle have been rolled out across the region, their reach varies greatly, and countries are facing different challenges of re-opening and recovering from the pandemic recession. Ukraine and Georgia have gotten a very slow start to their vaccination effort due to a combination of lack of access to vaccines and vaccine skepticism. Countries like Belarus and Latvia have had better access to vaccines but are suffering from widespread vaccine skepticism, in particular in some segments of the population and to certain vaccines. Russia, which is also dealing with a broad reluctance towards vaccines, is on top of that dealing with a surge in infections caused by the delta-version of the virus.

IMF Economic Outlook suggests that most economies in the region are expected to bounce back in their GDP growth in 2021. While this positive prognosis is encouraging, the webinar reminded us that there is a great deal of uncertainty remaining not only from an epidemiological perspective but also in terms of the medium to long-term economic consequences of the pandemic.

Participants

  • Iurii Ganychenko, Senior Researcher at Kyiv School of Economics (KSE/Ukraine)
  • Sergejs Gubins, Research Fellow at the Baltic International Centre for Economic Policy Studies (BICEPS/ Latvia)
  • Natalya Volchkova, Director of the Centre for Economic and Financial Research at New Economic School (CEFIR at NES/ Russia)
  • Giorgi Papava, Lead Economist at the ISET Policy Institute (ISET PI/ Georgia)
  • Lev Lvovskiy, Senior Research Fellow at the Belarusian Economic Research and Outreach Center (BEROC/ Belarus)
  • Jesper Roine, Professor at the Stockholm Institute of Transition Economics (SITE / Sweden)
  • Michal Myck, Director of the Centre for Economic Analysis (CenEA / Poland)
  • Anders Olofsgård, Deputy Director of SITE and Associate Professor at the Stockholm School of Economics (SITE / Sweden)

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

Green Concerns and Salience of Environmental Issues in Eastern Europe

Posted on June 7, 2021 | Policy Brief

Flooded street in Germany representing climate change risk perceptions

Changes in individual behavior are an essential component of the planet’s effort to reduce carbon emissions. But such changes would not be possible without individuals acknowledging the threat of anthropogenic climate change. This brief discusses the climate change risk perceptions across Europe. We show that people in Eastern Europe are, on average, less concerned about climate change than those in Western Europe. Using detailed survey data, we find evidence that the personal experience of extreme weather events is a key driver of green concern, and even more so in the non-EU Eastern part of Europe. We argue that this association might be explained by the relatively low quality and informativeness of public messages concerning global warming in this part of Europe. If information is scarce or perceived as biased, personal experience will resonate more.

Introduction

Climate change is one of the main threats to humanity. Tackling it entails a combined effort from all parts of society, from regulatory changes and industries adopting new greener business models to consumers adjusting their behavior. While an individual’s contribution to climate change may appear insignificant, research shows that the aggregate effect of mobilizing already known changes in consumer behavior may allow the European Union (EU) to reduce its carbon footprint by about 25% (Moran et al., 2020).

However, the first step for people to adjust their consumption patterns is to acknowledge the threat of anthropogenic climate change. Public ignorance about climate change’s impacts remains high across the world. Furthermore, citizens of more polluting countries are often relatively less concerned about climate change. This lack of awareness is not well-understood, in part due to the multi-dimensional local factors affecting it (Farrell et al., 2019).

This brief discusses the potential drivers of climate risk perceptions, focusing on the differences between Western Europe, Eastern European states that are part of the EU, and non-EU Eastern European countries. We first present the climate change concerns across these regions. We then discuss to which extent the country’s pollution exposure measures and individuals’ socio-economic characteristics can explain these differences. We show that the personal experience of extreme weather events is a key driver of green concern, and even more so in the non-EU part of Eastern Europe. We relate this result to the relatively low salience and informativeness of public messages concerning climate in this part of Europe and discuss potential policy implications.

Green Concerns and Pollution Exposure Across Europe

Figure 1 compares, across Europe, the share of poll respondents who see climate change as a major threat, based on the data from the Lloyd’s Register Foundation World Risk Poll 2020.  While there is a significant variation in climate risk perception within each region, respondents in Eastern Europe are, on average, less concerned about climate change than those in Western Europe. We observe a similar pattern between the EU and non-EU parts of Eastern Europe. 

Exposure to pollution does not seem to clearly explain these differences. Moreover, the patterns of correlation between climate concern and pollution differ across regions and measures of pollution exposure. The left panel of Figure 2 presents averages across the regions for two pollution measures: carbon emissions (which is, perhaps, reflecting climate threat in general) and air quality (which is more directly associated with health risks). We can see that CO2 emissions are the highest in the non-EU part of Eastern Europe, the least environmentally concerned region. Still, the EU part of Eastern Europe has the lowest average emissions per capita across the three regions (this ranking likely results from the interaction between reliance on fossil fuels, industrial structure, and level of development across the three regions). At the same time, when it comes to the average air quality (measured as the percentage of population exposed to at least 10 micrograms of PM2.5/m3), the non-EU EasternEuropean region is doing better than its EU counterpart, which is more climate concerned. Here, better average air quality in the non-EU Eastern European region is due to its relatively low population density, and consequently, low PM2.5 exposure in large parts of Russia. (See, more on the air quality gap within the EU in Lehne, 2021).

Figure 1: Climate concerns in Eastern and Western Europe

Source: Authors’ calculations based on Lloyd’s Register Foundation World Risk Poll 2020, question 5 “Do you think that climate change is a very serious threat, a somewhat serious threat, or not a threat at all to the people in this country in the next 20 years?”. Averages are calculated with population-representative weights.

The right panel of Figure 2 shows correlations between (country-level) climate concerns and pollution. For CO2, the correlation is negative in all three regions, suggesting that, within each region, more emitting countries are less concerned. This negative correlation, however, is the strongest in the EU-part of Eastern Europe and almost absent in the non-EU part. The differences between the regions are even more striking for the correlation between climate concerns and air quality: both in Western Europe and in the EU part of Eastern Europe, citizens of countries with worse air quality are more concerned about climate change. However, in non-EU Eastern Europe, the relation is the exact opposite: lower concerns about climate change go hand-in-hand with worse quality of air.

Figure 2: Emissions vs. Climate concerns in Eastern and Western Europe, 2018

Source: Authors’ calculations based on www.climatewatchdata.org, OECD and World Risk Poll 2020. The climate concern variable is a country-level weighted average of answers “Very high risk” to the World Risk Poll 2020 question 5, see note to Figure 1.

Green Concerns and Socio-economic Characteristics

Lower climate concerns in EU-part of the Eastern bloc have been documented before; they are often explained by the Eastern-European economies’ high reliance on coal and other fossil fuels, low-income levels, and other immediate problems that lower the priority of climate issues (e.g., Lorenzoni and Pidgeon 2006, Poortinga et al., 2018, or Marquart-Pyatt et al., 2019). Additionally, the literature suggests that climate beliefs are linked to individuals’ socio-economic characteristics, such as level of education, income, or gender (see, e.g., Poortinga, 2019), which may be different across the regions.

However, the regional differences in climate beliefs also persist when we use individual-level data and control for respondents’ individual characteristics, as well as for country-level variables, such as GDP per capita, oil, gas, and coal dependence of the economies, and exposure to emissions (at the country level, as our individual data does not have this information). This is illustrated in Column 1 of Table 1.

Table 1: Climate change beliefs determinants, individual-level cross-section data.

Source: This is an outcome of logistic regression. Experience =1 if the respondent answered “yes” to the World Risk Poll 2020 question L8D “Have you or someone you personally know, experienced serious harm from severe weather events, such as floods or violent storms in the past TWO years?” Media Freedom is based on 2018 Freedom House data, and scores media between 0 (worst) and 4 (best). Controls include age, gender, education, personal feelings about household income, income quantile, urban/rural, size of household, number of children under 15, las well as log of GDP per capita, log of CO2 per capita, mean exposure to PM2.5, and oil, gas and coal rents as a share of GDP. Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1

In what follows, we explore another key driver, the personal experience of extreme weather events. While there is a sizable literature on the effect of experience on climate beliefs, that factor was never, to our knowledge, considered to understand the difference in climate risk perception between the EU- and non-EU parts of Eastern Europe.  

Green Concern and Salience of Environmental Issues

In line with the recent climate risk perceptions literature (e.g., Van der Linden, 2015), we show that personal experience increases the likelihood of considering climate change as a major threat across all three regions (see column 2 in Table 1). The association is stronger in the EU part of Eastern Europe and even more so in the non-EU part (even if the difference between the last two is not statistically significant). This finding is confirmed when we control for (observable and unobservable) country-specific effects, such as social norms, via the inclusion of country-level fixed effects. In this case, extreme weather events make respondents more climate-conscious within each country (Column 3 of Table 1). In this specification, the effect differs statistically between the two groups of Eastern-European countries, even if only at a 10% significance level. To put it differently, the impact of personal experience with extreme weather events seems to close a sizable part of the gap in climate risk perceptions across the regions and more so in the non-EU part of Eastern Europe.

Our preferred explanation for this finding is that personal experience resonates with the quality and informativeness of public messages concerning global warming. If information is scarce or perceived as biased, personal experience will resonate more. The low political salience of environmental issues in Eastern Europe, inherited from its Soviet past (McCright, 2015), and lower media quality in Eastern Europe (see e.g., Zuang, 2021) are likely to affect the quality of public discourse concerning the risks of climate change, and, consequently, the information available to individuals.

The climate-related legislative effort across Eastern Europe reflects the low political importance of climate change in the region. According to the data from Grantham Research Institute on Climate Change and the Environment, non-EU transition countries, on average, have adopted 8 climate-related laws and policies, while the corresponding figure is 11.5 for EU transition countries and 18 for the countries in Western Europe. Further, Figure 3 shows a positive correlation between climate change concerns and the number of climate-related laws for Western Europe and the EU-part of Eastern Europe but a negative one for the non-EU part of Eastern Europe and Caucasus countries. One possible interpretation of these differences is that climate change is relatively low on the political agenda of (populist) regimes in the non-EU part of Eastern Europe, as climate-related legislative activity (proxied by, admittedly rough, a measure of the number of laws) does not reflect the intensity of population climate preferences.

Figure 3: Climate concern vs. Climate legislation

Source: Authors’ calculations based on climate legislation data from Grantham Research Institute on Climate Change and the Environment, and World Risk Poll 2020

Regarding the influence of media quality, column (4) of Table 1 shows that the effect of personal experience on climate change concern is negatively correlated with media freedom. One interpretation could be that individuals in countries with freer media infer less from their extreme weather experience because more accurate media coverage about climate risks improves the population’s knowledge on the issue.

Of course, the causality of the climate belief-experience relationship could also go in the other direction – people who are more concerned about climate change could be more likely to interpret their personal experience as weather-related extreme events. It is impossible to distinguish with the data at hand. However, Myers et al. (2013) show that both channels are present in the US, and the former channel dominates for the people less engaged in the climate issue. Stretching this finding to the Eastern Europe case, we argue that more precise information on the importance of climate change may partially have the same effect as experience – i.e., it will increase people’s awareness and concern about the consequences of global warming.

Conclusion

This brief addresses the differences in climate change beliefs between Eastern and Western Europe, as well as within Eastern Europe. It discusses the determinants of these differences and stresses the importance of personal experience, especially in the non-EU part of Eastern Europe. It relates this finding to the relatively low accuracy of information and quality of public discourse about climate change in the region.

We know already that tackling climate change requires reliable and accurate sources of information. This is especially crucial given what we outline in this brief. This issue resonates with the current social science analysis of the diffusion of climate change denial (see e.g., Farell et al., 2019, on the significant organized effort in spreading misinformation about climate change). Such contrarian information that relays uncertainty and doubt regarding the severity of the global climate change threat could have a severe impact, especially in situations with low political salience of climate change, like in non-EU Eastern Europe. A significant effort of both governments and civil society is needed to provide adequate information and mobilize the population in our common fight against climate change.

References

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

Jurisdictional Competition for FDI in Developing and Developed Countries

Posted on May 31, 2021 | Policy Brief

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This brief is based on research studying jurisdictional competition between countries and its influence on the inflow of foreign direct investments (FDI). The study compares jurisdictional competition among the developing Central and Eastern European (CEE) countries with competition among developed EU countries. As instruments of jurisdictional competition for FDI, we consider governments’ efforts to improve the rule of law, corporate governance, and tax policies. The results suggest the presence of proactive jurisdictional competition via the quality of corporate governance regulation both in the CEE and the EU countries. The CEE states also attract FDI by competing in tax policies.

Introduction

The determinants of FDI inflows have been examined in numerous studies. A substantial number of them consider the influence of institutions, which are defined as particular organizational entities, procedural devices, and regulatory frameworks (IMF, 2003).

The quality of institutions is a particularly important FDI determinant for less-developed countries because the poor institutional quality and weak law enforcement increase the costs of running a business, create barriers for financial market efficiency, and increase the probability of foreign assets expropriation (Blonigen, 2005).

However, governments interested in attracting FDI to boost job creation, new technologies, and tax revenues to their countries are not only concerned about the internal institutional environment. They are also competing with other countries in attracting foreign investments, engaging in what is often referred to as “jurisdictional competition”. In a broad sense,  this can be thought of as governments’ efforts to outcompete one another in offering foreign companies more favorable institutional and fiscal conditions for capital placements.

This brief summarizes the results of a study on the jurisdictional competition for FDI among the developing CEE and among developed EU countries (Mazol and Mazol, 2021). The research explores the precondition for proactive jurisdictional competition between economies for FDI – namely, how the economic and institutional environment within a country impacts the inflow of FDI both domestically and to its neighboring states, – by using a spatial econometric approach. The brief emphasizes the difference in the FDI policy responses implemented by developing CEE and developed EU countries.

Data and Methodology

In our econometric analysis, we use the FDI inward stock (i.e., the value of capital and reserves in the economy attributable to a parent enterprise resident in a different economy) as the dependent variable. The explanatory variables indicating jurisdictional competition include quality of corporate governance, rule of law, political stability, and tax policy. We employ balanced panel datasets for 26 developing CEE countries and 15 developed EU countries for the period 2006-2018. The dataset is derived from the World Bank and UNCTAD databases.

The analysis is based on a panel spatial Durbin error model (SDEM) with fixed effects (LeSage, 2014). Parameter estimates in the SDEM contain a range of information on the relationships between spatial units (in our case, countries). A change in a single observation associated with any given explanatory variable will affect the spatial unit itself (a direct effect) and potentially affect all other spatial units indirectly (a spillover effect) (Elhorst, 2014). The spatial spillover effect is viewed here as the impact of the change in the institutional or economic factor in one country on the performance of other economies (LeSage & Pace, 2009).

In our case, the direct effect is the effect on the FDI in country i of the changes in the studied instrument of jurisdictional competition in country i. The spillover effect is the change in FDI in country j following a change in the studied instrument of jurisdictional competition in country i.

Results

The results of our estimation are suggestive of a proactive jurisdictional competition in taxes among the CEE countries and in corporate governance quality both among the CEE and EU countries. Analyses of other factors (i.e., political stability and rule of law) show no significant interrelation between policy measures implemented by neighboring countries in order to attract FDI.

The precondition for the presence of proactive jurisdictional competition in a particular factor is to have statistical significance in both its direct and spillover effects (Elhorst and Freret, 2009). Such findings may indicate that policy measures in one economy trigger a policy response in a neighboring economy, which, in turn, influences the level of FDI in both countries.

Table 1. Estimation results of SDEM models – direct effects

Notes: *** – significance at 1% level, **  – significance at 5% level, *  – significance at 10% level. ln – denotes the logarithm of the underlying variable. lagt – denotes lagged underlying variable by one period (year) in time. Values of t statistics in parenthesis. CEE countries: Albania, Armenia, Azerbaijan, Belarus, Estonia, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Tajikistan, Ukraine, Uzbekistan. EU countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland. Source: Author’s estimates based on World Bank and UNCTAD databases.

Our results for the direct and indirect response to a tax policy in CEE countries illustrate this logic. Decreasing tax_rateincreases FDI to the CEE economy enacting this change (see Table 1), as well as to its neighboring countries (see Table 2). This finding is consistent with jurisdictional competition in taxes. That is, a reduction in domestic tax_rate may entail a decrease in the tax rate of a neighboring economy, resulting in a subsequent increase in FDI. (To explicitly confirm the suggested channel, further tax policy analysis would be needed). Interestingly, our results suggest that jurisdictional competition in taxes is only present among CEE economies, but not among EU countries.

In turn, an increase in corp_governance, a measure of corporate governance quality, increases FDI in neighboring countries both in the EU and in the CEE region (see Table 2).  A possible interpretation is that an increase in corp_governance in one country may entail an increase in corp_governance in its neighboring economies, resulting in a subsequent increase in FDI.  This result suggests proactive competition via corporate governance policy both among the EU countries and the CEE countries.

However, the direct effect differs between the regions. In the EU, an increase in corp_governance increases FDI to the EU economy in question, in line with common wisdom (see Table 1). At the same time, in the CEE region, an increase in corp_governance is followed by a decrease in FDI to that country.

Table 2. Estimation results of SDEM models – spillover effects

Notes: ***  – significance at 1% level, **  – significance at 5% level, *  – significance at 10% level. ln – denotes the logarithm of the underlying variable. Values of t statistics in parenthesis. lagt_lags – denotes spatially lagged underlying variable (multiplied by spatial weight matrix) lagged by one period (year) in time. Source: Author’s estimates based on World Bank and UNCTAD databases.

One potential explanation for the negative direct effect of corporate governance quality on FDI in the CEE economies is that improved corporate governance practices can block certain types of FDI, leaving behind foreign investors with a lower “threshold for corruption”. This may decrease FDI to the CEE country in question. However, once the jurisdictional competition results in an improvement of corporate governance across the region, it ultimately has a positive spillover effect.

The above explanation is in line with the theory of regulatory capture (Stigler, 1971), which suggests that the decisions made by public officials might be shaped and sometimes distorted by the efforts of rent-seeking interest groups to increase their influence.

Finally, the estimates do not indicate that the other studied institutional factors, rule of law and political stability, are applied as instruments of jurisdictional competition as neither groups of countries show significant spillover effects. The results, however, show that these factors influence the FDI inflow via the direct effect. More specifically, an increase in political_stability positively influences the FDI inflow to the economies in question, both in CEE and the EU, while rule_of_law is positive and significant only for the CEE countries. If investors are not as responsive to changes in rule_of_law when the initial level is high, the fact that EU countries typically have a higher rule_of_law value compared to CEE countries might explain why this estimate is insignificant for the EU countries.

Conclusion

This brief, first, presents new evidence on the relationship between different economic and institutional factors and FDI using a spatial econometric approach; second, it analyzes the possible existence of jurisdictional competition among developing CEE countries and developed EU countries as well as its effect on FDI.

The results suggest proactive jurisdictional competition in FDI determinants such as corporate governance quality and tax rates. CEE countries competing with one another use both these instruments of jurisdictional competition, while EU countries compete only via corporate governance quality. Furthermore, foreign investors are not sensitive to the quality of rule of law in the EU countries, while this instrument is more important for the FDI inflow to CEE economies.

Our results stress that officials responsible for the FDI policy implementation should pay more attention to the policies undertaken by neighboring governments as such external policies can make their own strategies to attract FDI to their economy less effective.

References

  • Blanton, S., and R. Blanton. (2007). What Attracts Foreign Investors? An Examination of Human Rights and Foreign Direct Investment. The Journal of Politics, 69(1), 143-155.
  • Blonigen, B. (2005). A Review of the Empirical Literature on FDI Determinants. Atlantic Economic Journal, 33(4), 383-403.
  • Elhorst, J. (2014). Spatial Econometrics from Cross-Sectional Data to Spatial Panels. Berlin: Springer.
  • Elhorst, J., and S. Freret. (2009). Evidence of Political Yardstick Competition in France Using a Two-Regime Spatial Durbin Model with Fixed Effects December. Journal of Regional Science, 49(5), 931-951.
  • IMF (2003). World Economic Outlook 2003. International Monetary Fund: Washington DC.
  • LeSage, J. (2014). What Regional Scientists Need to Know About Spatial Econometrics? Working Paper, Texas State University-San Marcos, San Marcos.
  • LeSage, J., and R. Pace. (2009). Introduction to Spatial Econometrics. Boca Raton, FL: CRC Press, Taylor and Francis Group.
  • Mazol, A., and S. Mazol. (2021). Competition of Jurisdictions for FDI: Does Developing and Developed Countries Response Different to Economic Challenges? BEROC Working Paper Series, WP no. 73.
  • Stigler, G. (1971). The Theory of Economic Regulation. Bell Journal of Economic and Management Science, 2, 3-21.

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.

Carbon Tax Regressivity and Income Inequality

Posted on May 17, 2021 | Policy Brief

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A common presumption in economics is that a carbon tax is regressive – that the tax disproportionately burdens low-income households. However, this presumption originates from early research on carbon taxes that used US data, and little is known about the factors that determine the level of regressivity of carbon taxation across countries. In this policy brief, I explore how differences in income inequality may determine the distribution of carbon tax burden across households in Europe. The results indicate that carbon taxation will be regressive in high-income countries with relatively high levels of inequality, but closer to proportional in middle- and low-income countries and in countries with low levels of income inequality.

Introduction

Climate change is one of the main challenges facing us today. To reduce emissions of greenhouse gases, and thereby mitigate climate change, economists recommend the use of a carbon tax. The environmental and economic efficiency of carbon taxation is often highlighted, but the equity story is also of importance: who bears the burden of the tax?

How the burden from a carbon tax is shared across households is important since it affects the political acceptability of the tax. For instance, the “Yellow Vests” protests against the French carbon tax started due to concerns that the tax burden is disproportionately large on middle- and working-class households. Research in economics also shows that people prefer a progressive carbon tax (Brännlund and Persson, 2012).   

In this brief, I explore what we know about the distributional effects of carbon taxes and analyze the link between carbon tax regressivity and levels of income inequality in theory and in application to Sweden as well as other European countries.

Carbon Tax Burden Across Households

It is a common finding in the economics literature that carbon taxes are, or would be, regressive (Hassett et al., 2008; Grainger and Kolstad, 2010). However, most of the earlier literature is based on US data, and the US is unrepresentative of an average high-income country in terms of variables that are arguably important for carbon tax incidence. Compared to most countries in Europe, income in the US is high but unequally distributed, carbon dioxide emissions per capita are high, the gasoline tax rate is low, and the access to public transport is poor. If we want to understand the likely distributional effects of carbon taxes across Europe, we thus need to look beyond the US studies.

A recent study by Feindt et al. (2020) examines the consumer tax burden from a hypothetical EU-wide carbon tax. They find that the distributional effect at the EU-level is regressive, driven by the high carbon intensity of energy consumption in relatively low-income countries in Eastern Europe. At the national level, however, carbon taxation in Eastern European countries is slightly progressive due to car ownership and transport fuel being luxuries. Conversely, in high-income countries – where transport fuel is a necessity – carbon taxation is slightly regressive.

That the incidence of carbon and gasoline taxation varies across countries with different levels of income, has been found in numerous studies (Sterner, 2012; Sager, 2019). To understand the source of this variation, we need to identify the determinants of the incidence of carbon taxes.

The Role of Income Inequality

In a recent paper, I, together with Giles Atkinson at the London School of Economics, present a simple model where the variation in the carbon tax burden across countries and time can be determined by two parameters: the level of income inequality and the income elasticity of demand for the taxed goods (Andersson and Atkinson, 2020). The income elasticity specifies how the demand for a good, such as gasoline, responds to a change in income. If the budget share decreases as income increase, we refer to gasoline as a necessity. If the budget share increases with income, we refer to gasoline as a luxury good. Our model predicts that rising inequality increases the regressivity of a carbon tax on necessities. Similarly, we will see a more progressive incidence if inequality increases and the taxed good is a luxury.

To mitigate climate change, a carbon tax should be applied to goods responsible for the majority of greenhouse gas emissions: transport fuel, electricity, heating, and food. To estimate the distribution of carbon tax burden, we must then first establish if these goods are necessities or luxuries, respectively. Gasoline is typically found to be a luxury good in low-income countries but a necessity in high-income countries (Dahl, 2012). Food, in the aggregate, is consistently found to be a necessity. A carbon tax on food would, however, mainly increase the price of red meat – beef has a magnitude larger carbon footprint than all other food groups – and red meat is generally a luxury good, even in high-income countries (Gallet, 2010). Lastly, electricity and heating are necessities, with little variation across countries in the level of income elasticities.  A broad carbon tax would thus likely be regressive in high-income countries, but more proportional, maybe even progressive, in low-income countries. The overall effect in low-income countries depends on the relative budget shares of transport fuel and meat (luxuries) versus electricity and heating (necessities). A narrow carbon tax on transport fuel has a less ambiguous incidence: it will be regressive in high-income countries where the good is a necessity and proportional to progressive in low-income countries where the good is a luxury.  

The income elasticities of demand, however, only provide half of the picture. To understand the degree of regressivity from carbon taxation, we also need to take into account the level of income inequality in a country. Our model predicts that a carbon tax on necessities will be more regressive in countries with relatively high levels of inequality. And increases in inequality over time may turn a proportional tax incidence into a regressive one.

To test our model’s prediction, we analyze the distributional effects of the Swedish carbon tax on transport fuel and examine previous studies of gasoline tax incidence across high-income countries. 

Empirical Evidence from Sweden

The Swedish carbon tax was implemented in 1991 at $30 per ton of carbon dioxide and the rate was subsequently increased rather rapidly between 2000-2004. Today, in 2021, the rate is above $130 per ton; the world’s highest carbon tax rate imposed on households. The full tax rate is mainly applied to transport fuel, with around 90 percent of the revenue today coming from gasoline and diesel consumption.

 Figure 1. Carbon tax incidence and income inequality in Sweden

Sources: Andersson and Atkinson (2020). Gini coefficients are provided by Statistics Sweden.

Using household-level data on transport fuel expenditures and annual income between 1999-2012, we find that the Swedish carbon tax is increasingly regressive over time, which is highly correlated with an increase in income inequality. Figure 1 shows the strong linear correlation between the incidence of the tax and the level of inequality across our sample period. The progressivity of the tax is measured using the Suits index (Suits, 1977), a summary measure of tax incidence that spans from +1 to -1. Positive (negative) numbers indicate that the tax is overall progressive (regressive) and a proportional tax is given an index of zero. The level of income inequality, in turn, is summarized by the Gini coefficient (0-100), with higher numbers indicating higher levels of inequality.

In 1991, when the Swedish carbon tax was implemented, income inequality was relatively low, with a Gini of 20.8. If we extrapolate, the results presented in Figure 1 indicate that the tax incidence in 1991 was proportional to slightly progressive. Since the early 1990s, however, Sweden has experienced a rise in inequality. Today, the Gini is around 28 and the carbon tax incidence is rather regressive. This can be a potential concern if people start to perceive the distribution of the tax burden as unfair and call for reductions in the tax rate.

Empirical Evidence Across High-Income Countries

Figure 2 presents the results of our analysis of previous studies of gasoline tax incidence across high-income countries. Again, we find a strong correlation with inequality; the higher the level of inequality, the more regressive are gasoline taxes.  In the bottom-right corner, we locate the results from studies on gasoline tax incidence that have used US data. The level of inequality in the US has been persistently high, and the widespread assumption that gasoline and carbon taxation is regressive is thus based to a large part on studies of one highly unequal country. Looking across Europe we find that the tax incidence is more varied, with close to a proportional outcome in the (relatively equal) Nordic countries of Denmark and Sweden.

Figure 2. Gasoline tax incidence and income inequality in OECD countries

Sources: Andersson and Atkinson (2020). Gini coefficients are from the SWIID database (Solt, 2019).

Conclusion

A carbon tax is economists’ preferred instrument to tackle climate change, but its distributional effect may undermine the political acceptability of the tax. This brief shows that to understand the likely distributional effects of carbon taxation we need to take into account the type of goods that are taxed – necessities or luxuries – and the level and direction of income inequality. Carbon taxation will be closer to proportional in European countries with low levels of inequality, whereas in countries with relatively high levels of inequality the carbon tax incidence will be regressive on necessities and progressive for luxury goods.

This insight may explain why we first saw the introduction of carbon taxes in the Nordic countries. Finland, Sweden, Denmark, and Norway all implemented carbon taxes between 1990-1992, and income inequality was relatively, and historically, low in this region at the time. Policymakers in the Nordic countries thus didn’t need to worry about possibly regressive effects. Looking across Europe today, many of the countries that have relatively low levels of inequality have either already implemented carbon taxes or, due to the size of their economies, have a low share of global emissions. In countries that are responsible for a larger share of global emissions – such as, the UK, Germany, and France – inequality is relatively high, and they may find it to be politically more difficult to implement carbon pricing as the equity argument becomes more salient and provides opportunities for opponents to attack the tax.

To increase the political acceptability and perceived fairness of carbon pricing, policymakers in Europe should consider a policy design that offsets regressive effects by returning the revenue back to households, either by lump-sum transfers or by reducing tax rates on labor income.   

References

  • Andersson, Julius and Giles Atkinson. 2020. “The Distributional Effects of a Carbon Tax: The Role of Income Inequality.” Grantham Research Institute on Climate Change and the Environment Working Paper 349. London School of Economics.  
  • Brännlund, Runar and Lars Persson. 2012. “To tax, or not to tax: preferences for climate policy attributes.” Climate Policy 12 (6): 704-721.
  • Dahl, Carol A. 2012. “Measuring global gasoline and diesel price and income elasticities.” Energy Policy 41: 2-13.
  • Feindt, Simon, et al. 2020. “Understanding Regressivity: Challenges and Opportunities of European Carbon Pricing.” SSRN 3703833.
  • Gallet, Craig A. 2010. “The income elasticity of meat: a meta-analysis.” Australian Journal of Agricultural and Resource Economics 54(4): 477-490.
  • Grainger, Corbett A and Charles D Kolstad. 2010. “Who pays a price on carbon?” Environmental and Resource Economics 46(3): 359-376.  
  • Hassett, Kevin A, Aparna Mathur, and Gilbert E Metcalf. 2009. “The consumer burden of a carbon tax on gasoline.” American Enterprise Institute, Working Paper.
  • Sager, Lutz. 2019. “The global consumer incidence of carbon pricing: evidence from trade.” Grantham Research Institute on Climate Change and the Environment Working Paper 320. London School of Economics.  
  • Thomas, Sterner. 2012. Fuel taxes and the poor: the distributional effects of gasoline taxation and their implications for climate policy. Routledge.
  • Suits, Daniel B. 1977. “Measurement of tax progressivity.” American Economic Review 67(4): 747-752.

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

On Corporate Wrongdoing in Europe and Its Enablers

Posted on April 13, 2021 | Policy Brief

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In the last two decades, several instances of prolonged and severe corporate wrongdoing by European companies have come to light: from Dieselgate to corruption, money laundering through large European banks, recidivist bid and price rigging, and most recently Wirecard. What allowed European firms to engage in so much wrongdoing? In this brief, we consider some important institutional drivers behind corporate wrongdoing, focusing on the European countries with the largest share of corporate infringers.

The Harm from and Extent of Corporate Wrongdoing in the EU

In June 2020, the German firm Wirecard AG’s stock price fell from €104 to below €2 in the span of nine days after the firm admitted it could not locate $2 billion missing from its accounts. The firm has since then been accused of a wide range of infringements including money laundering, corruption, and fraudulent inflation of profits and sales, with some allegations going back over a decade. The Germany financial supervisor BaFin has been criticized as allegations about fraud had been made several times in prior years. Yet, BaFin failed to identify the problem and even banned short-selling of the stock, as well as accused journalists who were critical of the firm of market manipulation.

This scandal occurred against a backdrop of several other prolonged corporate scandals and has led many to wonder how extensive corporate wrongdoing is and how to combat it more effectively.

Corporate wrongdoing has a range of negative effects in competitive markets that are frequently overlooked in the public debate. Beyond the immediate damages of corporate wrongdoing, such as the draining of public resources in the case of tax evasion, money laundering, corruption, air pollution and associated health harm in the case of environmental law violations, there are also more general negative effects of corporate wrongdoing.

It attracts investors to the worst part of the industry, as firms that engage in profitable wrongdoing often do better than their competitors. Also, it forces out honest competitors and increases market entry thresholds for new competitors. These effects become more pronounced when the wrongdoing is prolonged, so, in an ideal world, regulators need to act fast.

Instead, several recent cases of European corporate wrongdoing lasted for many years before being detected and sanctioned, and there is a worrying degree of recidivism in several regulatory areas, including financial regulation with several banks being recidivists, but also in antitrust (Marvão, 2016).

What are the drivers and enablers behind these many prolonged cases of wrongdoing, and why do firms feel emboldened to engage in recidivism?

One way to gain some insight is to identify European countries whose firms are most frequently fined for wrongdoing and review the legal, cultural, and political contexts of those countries.

We tackle this issue by using data from Violationtracker, a database with over 400 000 actions by US enforcement agencies and prosecutors (such as the Securities and Exchange Commission and the Department of Justice). Many of these sanctions are against firms with headquarters in EU countries. In Nyreröd and Spagnolo (2021a), we added the fines for firms with headquarters in all respective EU countries for the period 2000-2020. After excluding countries like Switzerland, well known as homes of extensive financial crime linked to their status of international tax havens and off-shore centers, we find that the United Kingdom is the gold medalist in corporate wrongdoing, with Germany coming in second place.

Table 1. Fines across the top six EU countries (2000-2020).

Note: Author’s calculation based on data retrieved from Violationtracker.org. Number of fines in parentheses.

Interestingly, the top of the ranking is preserved no matter which metrics we use. In Nyreröd and Spagnolo (2021a) we weigh the fines by population, GDP, and exports to the US, and the UK and Germany remain stable at the top, with the UK’s first position becoming more pronounced. Therefore, we focus on these two countries, although many of the problems we identify apply to a varying degree to most other EU countries.

Because of the recent headlines made by the Wirecard case we start with the runner-up, Germany.

Germany

The Wirecard case follows a long tradition of large “household” names such as Siemens, Deutsche bank, Thyssenkrupp, and Volkswagen that have engaged in systemic wrongdoing over extended periods of time and are responsible for most of the fines shown in Table 1.

In one of the largest corruption scandals in history, Siemens was fined $1.6 billion by the Department of Justice in 2008 for systematically paying bribes to government officials around the world, amounting to more than $1.4 billion since the mid-1990s. According to the Securities and Exchange Commission’s investigation, bribery at Siemens was “standard operating procedure” for decades, and the SEC concluded that “the company’s tone at the top […] created a corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company”(SEC, 2008).

In 2015 the Dieselgate scandal unraveled, where it was discovered that several car manufacturers had installed “defeat devices” to cheat emissions tests. Volkswagen had installed the device in 11 million vehicles, some of which emitted up to 40 times more than emissions standards allowed (Gates et al, 2017).

Germany’s largest lender Deutsche Bank has since 2000 paid a whopping $18 billion in fines in the US for alleged infringements ranging from facilitating money laundering and tax evasion, to concealing bribe payments and misleading investors (DoJ, 2021). This is by far the greatest amount paid by any EU bank in the period 2000 – 2020 (Violationtracker.org, 2021)..

Finally, there is the steel conglomerate ThyssenKrupp, which was handed a €479 million fine for bid-rigging by the European Commission in 2007, the highest EU bid-rigging fine ever at the time. The size of the fine was motivated by the fact that, in 2007, Thyssenkrupp was already a repeat offender. In 2019, Thyssenkrupp and three other steel manufacturers were fined $719 million for price-rigging between 2002 to 2016. The firm has also been accused of bribe payments on several occasions (see Nyreröd and Spagnolo 2021a for details).

In reviewing local factors that have enabled these incidents, we find that Germany appears to have a particularly lenient stance toward corporate wrongdoing and a notably hard one against whistleblowers disclosing it. With respect to corruption, for example, bribe payments could be deducted from tax in Germany up until 1999 if paid to foreign officials, and up until 2002 if paid to recipients in the business world (Berghoff, 2017). In October of 2003, the United Nations adopted the Convention Against Corruption. On average, European countries had ratified this treaty halfway through 2007, but Germany was one of the last to ratify the treaty, it did it only in 2014 (UNODC, 2020).

Perhaps more importantly, Germany’s institutional environment seems focused on punishing and deterring whistleblowers, rather than listening to their reports in order to fight corporate wrongdoing. This is likely a crucial enabler of the prolonged wrongdoing we discuss in more depth in Nyreröd and Spagnolo (2021a). It is well known that whistleblowers are essential to detecting corporate wrongdoing (ACFE, 2020). Yet, Germany has some of the worst whistleblower protection laws in the EU (Transparency International 2013, Wolfe et al 2014), and one of the worst records in Europe in terms of mistreating the (obviously few) whistleblowers that dared to denounce corporate wrongdoing (Worth 2020a).

The German opposition to the protection of(truth-telling) whistleblowers from employers’ retaliation was on full display when a public consultation was held on the new EU Directive on whistleblower protection (2019/1937). German industry representatives were particularly active in arguing against it, suggesting that whistleblower protection is not necessary and that the new regulations are a clear signal of mistrust towards companies (BDI, 2019). The German parliament discussed improving the poor whistleblower protections in 2013 but did not enact any improvement of whistleblower protection laws. There are several instances of retaliation against truth-telling whistleblowers where they had very little legal recourse (Worth 2020a; Nyreröd and Spagnolo, 2021a).

The hostile regulatory and political environment to whistleblowers is likely a main factor that has enabled so many German corporations to engage in such prolonged wrongdoing with no records of employees reporting it.

The United Kingdom

We now turn to the winner of our contest, the UK. Over $26 billion of the total fines paid by UK firms in Table 1 is accounted for by the British Petroleum’s (BP) Deep Horizon oil spill in 2010 in the Mexican Gulf. It is estimated that 5 million barrels of oil were released into the ocean, a spill regarded as one of the largest environmental disasters in history.

Internal investigations at BP during the decade preceding this spill had warned senior BP managers that the company repeatedly disregarded safety and environmental rules and risked a serious accident if it did not change its ways. A 2004 inquiry found a pattern of intimidating workers who raised safety or environmental concerns (Lustgarten and Knutson, 2010). The company allegedly flouted safety standards by neglecting aging equipment, delayed inspections to cut production costs, and falsified inspection records. Even before the 2010 spill, officials at the US Environmental Protection Agency had considered debarring BP from receiving government contracts (Lustgarten, 2012). Since 2000, BP has been fined 158 times for environment-related offenses in the US, and again over 60 times since the oil spill in 2010.

Then there is the UK banking sector, with many large banks continuously engaging in wrongdoing, and seemingly more so than elsewhere. CASS (2020: 6) shows how, since 2011, the conduct costs of UK banks have far exceeded that of banks based in the US and Euro area when compared to GDP. In 2017, conduct costs for UK banks represented 0.88% of the UK’s annual GDP, while conduct costs for US and Euro area banks represented around 0.10% or less. In 2018, the conduct costs for UK banks shrank and constituted around 0.55% of the UK’s annual GDP.

In 2010, it was discovered that HSBC had systematically laundered money for some of the bloodiest drug cartels in history through its Mexican subsidiary. Despite numerous internal warnings, complaints from regulators, and internal flags, HSBC Mexico continued laundering money for organizations like the Sinaloa cartel, who not only flood the US with illegal drugs but is considered responsible for the gruesome killings of tens of thousands of people, often innocent civilian casualties at home. The UK’s then-chief financial minister, George Osborne, pleaded with the US Treasury Secretary and others that they do not impose criminal sanctions on HSBC (US Congress 2016).

Another major scandal involving UK banks that have cost regular people billions of pounds was the misselling of “payment protection insurance”. This aggressively marketed insurance had profitability of approximately 90% (Laris, 2020). Several barriers were created to inhibit people from claiming the insurance, such as contract exclusions or administrative barriers, and many people who bought these insurances either did not need them or were unsuitable. As of January 2011, UK banks and financial institutions had paid out £37.5 billion in compensation to customers who were wrongly sold the insurance (Coppola, 2019).

One of the main drivers of corporate wrongdoing in the UK appears to have been the lack of effective corporate sanctions. The “identification principle” requires the identification of a directing mind and will of the company (typically a director), and then proving criminal liability through this person’s conduct and state of mind. This principle has been singled out by several experts as making it “impossibly difficulty” for prosecutors to find companies guilty of serious crimes, especially crimes in large companies with devolved business structures (The Law Commission, 2015: 15). Several UK institutions, such as the UK’s Serious Fraud Office and the Crown Prosecution Service, have also pointed to the identification principle as a central hurdle to their ability to bring corporate prosecutions (Corruption Watch, 2019).

Moreover, effective business lobbying and close connection between politicians, regulators and the financial sector have been prevalent in the UK for a long time and may have exacerbated the already accommodating regulatory environment. Several well-known high-level politicians that affected financial regulation and its implementation for years ended up being hired with handsome pay by financial institutions afterwards (see Nyreröd and Spagnolo 2021a for details).

Regarding regulators, Miller & Dinan (2009: 29) notes that of the 36 people that served on the board of the Financial Services Authority (FSA) between 2000 and 2009, 26 of the members had connections at board or senior level with the banking and finance industry either before or after their term of office, whilst nine continued to hold appointments in financial corporations while they were at the FSA”.

The UK also has an outdated and ineffective whistleblower protection law, the “public interest disclosure act” of 1988 (see e.g., Lewis 2008, Thomas Reuter Foundation and Blueprint for Free Speech 2016, All Parliamentary Committee 2020). At the same time, important UK regulatory agencies have been proactive in neglecting the mounting independent academic research highlighting the effectiveness of the US whistleblowers rewards programs (see Nyreröd and Spagnolo 2021b).

Conclusion

Corporate wrongdoing appears widespread in Europe, and recent cases have been prolonged, severe, and sometimes industry-wide.

The UK and Germany stand out, but other EU countries are no angels. In the case of Germany, an acute aversion to whistleblowers by government institutions appears as a central driver that has enabled corporate wrongdoing. With respect to the UK, ineffective corporate sanctions laws, regulatory/political capture, and a lack of whistleblowers, appear to have driven or enabled firms to engage in prolonged corporate wrongdoing. Similar enablers and drivers are likely present in other EU countries to varying degrees.

There is now an EU Directive on whistleblowing, requiring all member states to put in place retaliation protections for those reporting on corporate wrongdoing. But protections have proven insufficient in a variety of ways and are unlikely to be a game-changer in terms of combating corporate wrongdoing (see e.g., GAP and IBA, 2021).

In the light of the strong independent evidence on the effectiveness of whistleblower reward programs at increasing detection and deterring wrongdoing (see, e.g., Nyreröd and Spagnolo 2021b for a survey), EU Member States seriously concerned about corporate wrongdoing should consider introducing them in a wide variety of regulatory areas.

References

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

Combating Misuse of Public Funds in COVID-19 Emergency Procurement

Posted on September 28, 2020 | Policy Brief

Image of two medical workers with face shields representing COVID-19 procurement

The Covid-19 pandemic has revealed substantial shortcomings in central governments’ and municipalities’ ability to procure items needed in the fight against Covid-19, and corruption has been rampant partially due to the increased discretion of procurement staff to award contracts. We argue that suspension of ex ante rules safeguarding accountability is essential for disaster relief, but must be compensated for by better ex post monitoring. Such monitoring can be greatly strengthened by increasing transparency of all awarded contracts and providing incentives to whistleblowers to come forward to report fraud and corruption.

Corruption in Covid-19 Procurement

The disastrous Covid-19 pandemic has revealed weaknesses in global supply chains and in national public procurement systems’ ability to secure essential Personal Protective Equipment (PPE), ICU material, and Covid tests. Several countries have been and are experiencing issues like poor quality of procured goods, extremely high prices, scams, and a general inability to source.

Examples of quality under-provision abound. The Spanish government discovered that out of 340,000 tests purchased from a Chinese manufacturer, 60,000 of them did not test accurately for Covid-19 [1], and the Dutch ministry of health issued a recall of 600,000 face masks from a Chinese supplier due to poor quality [2]. Analogous problems were common in the UK [3, 4]. Several countries have also had difficulties to procure at all, for example in terms of their desired number of tests [5, 6], or the reagents used to analyze the tests [7], as well as swabs [8].

Reports on price gouging – selling at extremely high prices – are also widespread. Examples of price gouging and investigations by competition authorities can be found throughout Europe and the US, but also in developing countries like Indonesia, Brazil, Thailand, Kenya, and South Africa (OECD 2020a), and in Ecuador and Paraguay, with corruption as the alleged cause [9].

While many reasons lie behind these procurement failures, several of them are directly traceable to the abuse of the increased discretion granted by emergency procurement rules to urgently source material and bypass time-consuming public procurement processes and legal frameworks. This important and necessary increase in discretion can easily be abused to hand out contracts to friends and/or political allies or to cash bribes.

Again, examples in the press abound. In the UK, a clearly non-urgent contract was awarded without competition to a firm owned by two long term associates of Michael Gove and Dominic Cummings [10]. In Slovenia, a gambling mogul with no public record of healthcare experience appears to have received millions in an emergency contract related to Covid-19 [11]. In Bosnia, a raspberry farm was apparently granted a contract to import 100 ventilators,paying $55,000 for each ventilator, while their price was around $7,000 to $30,000 on the international market in the relevant period [12]. In India, a Mumbai Realtor with no previous healthcare experience got a contract to supply things such as oxygen cylinder and medical beds [13]. The health minister in Bolivia was arrested in May after the country bought 179 ventilators at $27,683 each while it later was revealed that the manufacturers were offering ventilators at approximately half that price [14]. In Bangladesh, Transparency International issued a study suggesting widespread corruption in the country during Covid-19, including the purchase of substandard medical supplies at five to ten times the market price [15].

The Covid-19 crisis has exacerbated an already significant problem: according to Transparency International (2020), up to 25% of all global healthcare procurement spending is lost to corruption.

Historically, Fraud Increases During Emergencies

Disaster related fraud is frequently a problem in the western world as well. In September of 2005, in the aftermath of Hurricane Katrina in the US, the Hurricane Katrina Fraud Task Force was set up to go after frauds related to recovery funds. By August 30th, 2007, the task force had prosecuted 768 individuals for Katrina-related fraud, and additional state and local prosecutions for disaster-related fraud had been brought (DoJ 2007). The National Center for Disaster Fraud was also created within the justice department in the aftermath of several devastating hurricanes in the US, and currently houses over 80 employees.

Organizations and academics warned the public early about the risk of increased corruption in public procurement during the Covid-19 pandemic (Khasiani et al 2020, OECD 2020b). Indeed, emergency procurement and disaster relief has historically been linked to increases in corruption (Leeson and Sobel, 2008), especially where institutions are weaker (Barone and Mocetti 2014). The problems often highlighted in this context, such as using emergency authority when it is not required/warranted or using it beyond the time it is required, abuse of discretionary authority, drawing up specifications to suit the firm desired to win the contract, restricting the number of bids, and caving in to political influences (Schultz and Søreide 2008: 523), have also been on display during the Covid-19 crisis.

There are of course compelling reasons to relax stringent procurement rules in emergencies to allow for a fast response proportional to the population´s needs. But such a lessening of oversight and ex ante checks must be compensated for by much more extensive ex post checks, that should be advertised widely to deter public officials from abusing discretion. Broadly, there are two main ways of strengthening ex post checks/monitoring.

Two Ways of Ex-post Monitoring

The first is to have complete and transparent documentation of all the contracts awarded and the related documents, a “keep the receipt” mentality and practice, and making these records publicly available as soon as possible. Several countries have been moving in this direction as a response to the crisis, often with the help of NGOs like the Open Contracting Partnership (The Economist 2020). Examples include Ukraine, that require the submission of a report for each contract within a day of its conclusion, which is then made publicly available on an internet platform; and as of 2016 a third of government contracts in Colombia were published on an e-procurement platform where they can then be scrutinized by the public. In the US, the user-friendly website USAspending.govprovide data on federal contracts, with advanced search functions including tags specific to Covid-19 contracting.

The organization Open Contracting Partnerships provide a list of suggestions for any government that is looking to increase transparency in procurement; it includes the timely publication of contracts, licenses, concessions, permits, grants, as well as related pre-studies and bid documents. A full list of best practices, which can be implemented at a low cost, can be found on their website (Open Contracting Partnerships 2020).

The second is to protect and incentivize whistleblowers. Adequate protection of whistleblowers is a first step, but protection is always partial and imperfect, and may therefore be insufficient to induce those close to frauds to come forward, given the terrible consequences they typically face (see e.g. Rothschild and Miethe 1999, Nyreröd and Spagnolo 2020c).

In the U.S., the False Claims Act (FCA), first enacted by President Lincoln to curb fraud on military supplies during the civil war, and strengthened in 1986, has gone one step further by providing whistleblowers with substantial monetary rewards when they report on procurement fraud. Building on the success of the FCA, the US has introduced similar programs in several areas, most prominently with respect to tax evasion (in 2006) and securities fraud (in 2011).

Providing meaningful monetary incentives to whistleblowers who report on particularly egregious frauds and corruption can have a substantial deterrent effect on potential fraudsters as several studies show (see e.g.  Wilde 2017, Johannesen and Stolper 2017, Wiedman and Zhu 2018, Amir et al. 2018, Leder-Lewis 2020; see Nyreröd and Spagnolo 2020a for a review of the earlier literature). Simple cost-benefit analysis shows that a well-designed and implemented whistleblower incentives scheme can be a highly cost-effective continuous monitoring tool for enforcement agencies and public prosecutors (see e.g. Nyreröd and Spagnolo 2020b).

As for the EU, it is conspicuously lagging behind. Even prior to the Covid-19 crisis there was a need for increased monitoring evidenced by a 2019 European Court of Auditors (ECA) report entitled “Fighting fraud in EU spending: action needed.” A central emphasis of this report is that the Commission lacks insight into the scale, nature, causes, and level of fraud, as well as the level of undetected fraud. In 2018 the EU adopted a Directive that would harmonize and strengthen whistleblower protection in the EU. While the new EU Directive on whistleblowing is a step in the right direction, it failed to provide a framework for whistleblower rewards.

This may have been a mistake, as standard detection methods, including whistleblower protections, have often proven inadequate. The recent Wirecard scandal is a testament to the failure of standard fraud detection methods. In June of 2020, the stock price of Wirecard dropped from €100 to sub €2 in less than nine days after it was revealed to be an Enron-level accounting fraud. The firm has also allegedly laundered money for mobsters and was involved in a range of shady practices. Since 2008, fraud accusations have been leveled several times against the firm and Wirecard´s response was to label their critics “market manipulators”. The German financial supervisors, instead of investigating Wirecard, went after those who correctly claimed that the firm was a fraud, including reporters at the Financial Times. This fraud went undetected for at least 12 years, costing investors millions and undermining trust in financial markets. Moreover, those correctly accusing Wirecard of fraud allege they were subject to harassment campaigns, including phishing attacks by hackers and intimidating surveillance outside their homes and offices [16]. This is perhaps not surprising given that Germany is a country with some of the worst protections for whistleblower [17].

The shortcomings of traditional methods of fraud detection may turn out to be especially costly and ineffective during the Covid-19 pandemic.

Conclusions

With increased public spending being a cornerstone of the response to this crisis, adequate monitoring of abuse of public funds will become more urgent. Some EU institution, such as the European Public Prosecutor’s Office, or the European Anti-Fraud Office, could be suitable for a whistleblower reward program, as investigators are likely stuck looking for needles in haystacks, or lack the necessary information to bring/recommend actions to recover funds. Irrespective of the lost opportunity of the Directive, evidence shows it is time to introduce serious (high stakes) whistleblower rewards programs in Europe, unless of course Europeans are not able to manage them, or are more interested in hiding rather than airing their dirty laundry.

References

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

Whistleblowers During the Covid-19 Pandemic

Posted on June 15, 2020 | Policy Brief

Image with people standing in a building representing whistleblowers During the Covid-19 Pandemic

Numerous stories have emerged about whistleblowers being silenced and retaliated against during the Covid-19 pandemic. In this policy brief we consider some cases of retaliation against whistleblowers and cases illustrating the significance of the information they bring forward. Two facts about Covid-19 and whistleblowers become salient. First, it is hard to externally monitor behavior within care homes due to the risk of contagion (auditor-patient/patient-auditor). Second, it is hard to infer from outcomes (e.g. number of deaths) that management misbehaved, due to the high uncertainty and the many possible factors involved in the spread of Covid-19. Adequate whistleblower protections and confidential reporting channels are therefore essential to ensure transparency, compliance with safety rules, and more generally public accountability in the management of this crisis.

Whistleblowers are Silenced and Suffer Retaliation

The Covid-19 crisis has created pressure on governments, hospitals and secondary health institutions – in particular elderly care homes – to control the narrative on the spread of the virus and their response to it. As a result, we have already seen several whistleblowers being silenced and retaliated against.

The most (in)famous case is probably that of Li Wenliang, the Chinese doctor at Wuhan Central Hospital who warned his colleagues about a new SARS-like virus to on the 30th of December 2019. Four days later he was summoned to the Public Security Bureau where he was ordered to sign a letter in which he was accused of “making false comments” and “severely disturbed the social order”. Another seven persons were also arrested on suspicion of “spreading rumors”.

China is perhaps not the first country that comes to mind when considering adequate whistleblower protections, but the problem is a broad one.

In the US, several doctors and nurses have been fired and disciplined for expressing worries about their work conditions, also in relation to a lack of personal protective equipment (PPE). Nor is the issue of retaliation against whistleblowers localized to healthcare. The Vice President of Amazon’s cloud computing arm, Tim Brady, quit his job “in dismay at Amazon firing whistleblowers who were making noise about warehouse employees frightened of Covid-19”. Nine US senators also sent Amazon a request to explain its policy for firing workers after several employees who had expressed concerns over working conditions were laid off.

In Russia three doctors, two of which had protested their working conditions during the crisis suspiciously fell out of hospital windows, allegedly due to excessive work pressure. Two of the doctors died, and one doctor was threatened with criminal charges for spreading “fake news” about Covid-19. We do not know whether these cases were accidents, suicides, or retaliation for speaking up, but an investigation is currently ongoing.

The problem has been particularly severe in residential elderly care homes, where in many countries there have been extreme rates of contagion and deaths.

In Italy, complaints from caring personnel about lack of PPE and safety procedures in terms of restrictions in visits of relatives from ‘red zones’ and transfer of personnel and patients across departments, emerged already in the end of February. At the private elderly care home Trivulzio in Milan, caretakers claim that their early complaints were ignored by management, who allegedly also harassed those wearing face masks on the ground that they would scare guests. An investigation is currently ongoing, but if the allegations turn out to be true, numerous deaths in Lombardy could potentially be attributed to this negligence and could have been avoided.

In the UK, a country that had much more time than others to prepare for the arrival of the virus, a recent report by the whistleblower hotline Compassion in Care registers a dramatic increase in calls to their hotline: over 170 since the Covid-19 outbreak, while they normally receive no more than 30 cases per month. These whistleblowers at residential care homes, care agencies, and nursing homes continue to detail a widespread lack of protective equipment, and retaliation for raising these concerns. Five lost their jobs and are considering taking legal action.

In some countries there is instead a noticeable absence of whistleblowers at nursing homes and the like. Germany is one example. While this can be due to the country’s fast and apparently adequate response to Covid-19, the country also has an infamous history of mistreating whistleblowers, and the country´s protections are some of the weakest in the EU, which may have deterred potential whistleblower from reporting. A well-known example related exactly to nursing homes is the case of Heinisch vs. Germany, where a nurse was fired for reporting improper working conditions in 2005, and then lost her case for reinstatement at all levels of German labor courts, even though it was recognized that her claims were correct. She had to turn to the European Court of Human Rights to be vindicated, only after six years of legal hassle, though.

These are just some examples of the systemic issue of silencing and retaliation that is now emerging. Watchdog organizations are warning about a widespread and extensive mistreatment of whistleblowers worldwide during this pandemic. The Government Accountability Project details several cases of maltreatment of whistleblowers, describing the situation created by the Covid-19 crisis as “the largest attack on whistleblowers in the world”.

Other cases of whistleblowing, absent retaliation, further illustrate the crucial value of the information they bring forward. In Sweden for example, a country that should have been particularly careful given its softer approach to contain the virus, whistleblowers still reported a lack of PPE and poor safety routines in elderly care institutions. At one home, employees detailed how they went from caring for Covid-19 patients to caring for non-Covid patients while wearing inadequate safety protections. At that same home, it is estimated that more than 35 persons died from Covid-19: over a third of all residents.

Fighting Misinformation and Uncovering Wrongdoing

Protecting whistleblowers is also crucial to fight misinformation and fraud related to Covid-19. For example, a whistleblower recently alleged that the founder of JetBlue, who previously had argued against lockdowns, helped fund an influential yet controversial study which found that the infection rate in Santa Clara County, California, was 85 times higher than believed – which would have driven down the local fatality rate to flu levels at 0.12% – 0.2%. The whistleblower complaint also contained emails suggesting the authors of the study disregarded warnings raised by two other Stanford professors who attempted to verify the accuracy of the antibody tests used in the study.

Worries about abuse and fraud related to stimulus packages linked to Covid-19 have also been mounting. And indeed, the US Securities and Exchange Commission has seen a 35% increase in whistleblower claims received between mid-March and mid-May compared to the previous year.

There is already strong public support for whistleblower protections with respect to important matters like healthcare and elderly care (Butler et al., 2019), and as we have argued elsewhere (Nyreröd and Spagnolo, 2020a, 2020b), whistleblowers are currently not adequately protected or incentivized in the EU: they do not speak up to the degree desirable from a law enforcement/public interest point of view. The negative consequences of speaking up are often significant: blacklisting from the industry, harassment, and social and economic uncertainty are frequently associated with whistleblowing. This is not different with Covid-19 whistleblowers.

What Can Be Done

The state of whistleblower protection in Europe has been rather poor and uneven (Wolfe et al., 2014). In 2013, Transparency International rated a disappointing four countries in Europe as having “advanced” legal protection for whistleblowers. In recent years, several countries have enacted legislation to remedy the issue. France enacted Sapin II in 2017, which prohibits retaliation against whistleblowers; Sweden improved its protection in 2016 (Proposition 2015/16:128); and since November 2017, whistleblower protection in Italy, which was previously limited to the public sector, has been extended to the private sector.

It is only now, however, with the new EU Directive on Whistleblowing that we will see even protection levels for whistleblowers throughout the EU. Among other things the Directive would require firms with more than 50 employees to establish confidential internal whistleblower channels. The deadline for transposing the directive (implementing it into national law) is December 17, 2021.

EU member states should try to transpose the directive as soon as possible, as whistleblower protections are not only needed at nursing homes, but also at firms who may choose to put employees at excessive risk of infection when faced with high cost of compliance with safety measures. This is important, because monitoring compliance with safety measures externally will likely be difficult and costly, while the new directive contains several articles that would improve the informational flow within organizations but also externally to supervisory agencies.

To conclude, the Covid-19 crisis has created pressure to silence whistleblowers to control reputational risks for governments and private firms. If whistleblowers are successfully silenced, we risk ending up with an incomplete picture of the spread of the virus, a lack of public accountability, unnecessary deaths, and several good faith whistleblowers being retaliated against without adequate protection. Hastening the implementation of the new Whistleblower Directive is one way to ensure some level of protection for whistleblowers throughout the EU.

References

Nyreröd, T; and G Spagnolo, 2020a. “Myths and Numbers on Whistleblower Reward”, Regulation and Governance, forthcoming.

Nyreröd, T; and G Spagnolo, 2020b. “Financial Incentives for Whistleblowers: A Short Survey”, forthcoming in Cambridge Handbook of Compliance. Sokol, D., van Rooij, B. (Eds). Cambridge University Press.

Butler, J; D Serra; G Spagnolo, 2019. ”Motivating Whistleblowers”, Management Science, 66(2), 605-621.

Wolfe, S; M Worth; S Dreyfu; A Brown, 2014. “Whistleblower Protection Laws in G20 Countries, Priorities for Action.” Blueprint for Free Speech, The University of Melbourne, Griffith University, Transparency International Australia.

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

Covid-19: News for Europe’s Energy Security

Posted on May 7, 2020 | Policy Brief

Black and white image of natural gas processing plant representing Energy security Europe

While there has been a lot of attention on the effect of Covid-19-related developments in the oil market, the effect on the natural gas market has almost evaded media attention. For the EU, however, the gas market and especially the impact of the pandemic on the gas relationship with its largest gas supplier, Russia, is of high relevance. This brief discusses the potential implications of Covid-19 on this relationship both under the pandemic and during the expected slow economic recovery. We argue that, while in the short run the security of Russian gas supply is likely to improve, this is unlikely to be the case in the aftermath of the pandemic. To ensure gas supply security in post-pandemic markets, the EU may need to finally implement the long-awaited “speaking with one-voice” energy policy.

Introduction

The ongoing coronavirus pandemic will not only affect human lives, but also bring new economic and political challenges. The energy sector, and in particular the dramatic decrease of oil prices, has been in the news since the beginning of the Covid-19 crisis. But discussions have so far rarely touched the natural gas market, despite the pandemic taking its toll also on this market. As for oil, the demand and price have been negatively affected by the economic slowdown. While not as drastic as for oil, the price of natural gas in the EU has declined by approximately 40% since the beginning of 2020 (World Bank, 2020). However, the impact of the pandemic is likely to be quite different in oil and gas markets. There are multiple reasons for that; for example, oil and oil products are predominantly consumed by the transport sector while natural gas is mostly used in the power sector, the industry and households, and these sectors were differently affected by the Covid-19 pandemic.

Understanding the impact of the pandemic on the gas market is especially interesting from the European point of view, given that natural gas accounts for 25% of total energy consumption and two thirds of this gas is imported. The imports are also very concentrated, with the main supplier Russia providing around 40% of the gas, compared to 25% of the crude oil. This dependency, as well as a long history of tensions with third parties (Ukraine and Belarus) on the Russian gas transit routes, has made the EU’s concerns about the security of Russian gas supply much more pronounced than for oil (see Le Coq and Paltseva, 2012). The combination of these factors – i.e. the importance of natural gas for the EU and the long-standing concern about gas supply security warrant an analysis of the short and mid-term effect of the Covid-19 pandemic on the gas market, and, specifically, on the EU-Russia gas relationship. This brief discusses how the pandemic-driven decline in gas demand, and the potential shift in the balance of power between the parties may affect both the dependency on, and the transit of, Russian gas.

EU Dependency on Russian Gas Under the Covid-19 Pandemic

As is well known, Covid-19 and the associated lockdowns imposed by many EU Member States, have caused a slowdown in most economies and a decline in energy demand. However, for natural gas, the effect is likely to be significantly smaller than for oil. While we do not yet have statistics for the EU’s gas demand in recent months, the Norwegian energy consultancy Rystad Energy has predicted the decline of gas demand to be around 4% for March and April 2020. This forecast was given quite early in the course of the pandemic, and is very likely an underestimation; still, it is very different from the one for oil, with the demand drop estimated to be a whopping 34% in April.

One reason why we do not observe a sizable decrease in gas demand is that the natural gas is used in electricity generation, especially as a base-load fuel to compensate for the intermittency of green energy sources, such as sun and wind. With the reduced electricity demand, renewable power generation has become relatively more important in the electricity supply in many countries. Since mid-March 2020, the share of renewable power generation across the EU is 46%, nine percent higher than during the same period last year (Energy Transition Lab, 2020). Interestingly, in France, Germany, Belgium, the Netherlands, the Czech Republic, Poland and Hungary, the absolute volume of electricity generation by renewable sources even increased relative to the same period in 2019, despite declining energy demand. One potential channel, anecdotally recorded for Germany could be higher solar generation due to cleaner skies resulting from the decline in emissions because of lower fossil energy consumption. A higher volume of a renewable generation often requires more back-up power to maintain grid stability. While natural gas is not the only back-up source, this need might still limit the decline in gas demand (or even increase it like e.g. in the Czech Republic). Of course, cheaper gas prices may also play a role: for example, Slovakia and Romania experienced an increase in gas-based generation, but a drop in the renewable generation since mid-March 2020 relative to the same period in 2019. Finally, another reason for the moderate gas demand decline is its residential use – which is likely to be sustained due to the lockdown regime introduced by many countries.

When it comes to Russian gas imports, the official statistics since mid-March – roughly the beginning of lockdown policies across the EU – are not available yet. However, we can with some reservation look at the evolution of the volume of gas sales to the EU disclosed by Gazprom (2020). There was a very sizable decrease in Russian gas imports by the EU – of more than 21% – as compared to the same period last year but it started before the lockdown: January 2020 recorded a drop of 34% and February of 20%). This suggests that the current decrease in Russian gas imports is only marginally related to the pandemic, and more related to the overall gas market situation (such as relatively full gas storage in the EU in 2020, a warm winter, an increase in LNG imports, etc.).

It is, however, likely that the negative effect of the pandemic on Russian gas imports by the EU will be noticeably higher than it currently appears in the Gazprom data, thereby further decreasing the EU’s dependency on Russian gas. Moreover, since demand and prices decrease, substituting for Russian gas, were there a supply interruption, should be relatively easy and cheap with the current excess capacity of the natural gas market and the substantial storage in the EU.

Another reason for the improvement in the security of Russian gas supply to the EU is the observation that Russia’s dependency on oil and gas exports in combination with pandemic-associated factors may lead to a substantial economic downturn in Russia (Becker, 2020). In these dire circumstances, Russia is unlikely to further risk its gas export revenues by pursuing geopolitical goals through the means of gas supply and gas transit. For all these reasons, one may expect the security of Russian gas supply to the EU to improve during the pandemic.

However, the EU dependency on Russian gas may still be a concern due to medium-run effects of Covid-19. First of all, while the gas prices have been in decline for roughly a year now, the recent decrease in natural gas prices has accelerated the negative impact on the unconventional natural gas industry. For example, the US natural gas rig count has declined by 20% since mid-March 2020, which accounts for more than a third of the 54% year-to-year decline (Ycharts.com, 2020). Similarly, nearly 42% of Australian gas resources could be uneconomic under the current gas prices, according to Rystad Energy. While gas prices are unlikely to stay low forever, the industry will need time to recover even if/when the natural gas demand rises again. Moreover, the East-Asian markets are likely to be served first, as they are expected to recover from the pandemic shock before Europe. This dynamic, coupled with historically higher LNG prices in Asia may delay the LNG flows to Europe. A shortage of LNG in Europe, in turn, is likely to hinder any diversification strategy from Russian gas, weakening the EU’s bargaining power. The new Russia-China gas pipeline, “Power of Siberia”, operational since the end of 2019, will also be used to satisfy the post-Covid-19 Chinese gas demand which is likely to recover before demand picks up in the EU. Its use will then allow Russia to be less reliant on exporting gas to the EU, further contributing to the EU’s gas security concerns.

Transit of Russian Gas to the EU: Covid-19 Effect

The EU’s energy security also depends on the reliability of Russian gas transit to the EU. There are currently 5 transit routes connecting Russia to the EU (plus the routes that are serving the Baltic states and Finland without further transit), see Figure 1. Three onshore routes connect Russia to the EU via Ukraine and Belarus. There has been a history of gas transit disputes associated with these routes, at times threatening the Russian gas supply to the EU. Two newer offshore pipelines, Nord Stream 1 (in operation since 2011) and TurkStream (in operation since 2020) connect Russia directly to Germany, and to the South-East of Europe via Turkey. Further, one more offshore route to Germany, Nord Stream 2, is currently underway, with the operations announced to start in the first quarter of 2021. All three offshore projects are expected to not suffer from geopolitical transit issues.

In relation to the Covid-19 pandemic, there are likely to be two major effects on Russian gas transit. First, the inauguration of Nord Stream 2 is likely to be further delayed. Nord Stream 2 is 50% financed by Gazprom, and this financing scheme may be difficult to sustain after the fall in oil and gas prices and a significant decrease of Gazprom’s export revenues. Indeed, while the statistics for March and April 2020 are not yet available, the Russian customs statistics suggests that the USD value of gas exports from Russia in January-February 2020 has decreased by 45% relative to the same period last year. Because Nord Stream 2 could facilitate gas delivery to the EU in case of a transit conflicts, its expected delay may negatively impact the EU’s gas security.

Additionally, the Covid-19 related demand drop may impact the utilization of Russia-EU gas routes, driven by the current agreements between Russia and the transit countries. Russia and Ukraine have just signed a transit agreement for the next 5 years. This agreement was widely perceived as a diplomatic success of the EU (that facilitated the deal), given the historically difficult geopolitical relation between Ukraine and Russia. One of the new features of this agreement is of particular interest within the Covid-19 context. Unlike for previous deals, Russia agreed to prepay a fixed volume of gas transit, 178.1 mcm/day for 2020, and 110 mcm/day units for 2021-24 (Pirani et al., 2020). So, underutilization of this route is costly for Russia.

Figure 1. Gas supply Routes to the EU.

Source: Ukrainian Liaison Office in Brussels

With decreased demand due to Covid-19, warmer weather in the coming months and almost full gas storages in the EU, this contractual feature may affect how Russia allocates its gas exports across the routes. At least, in the short term, it may undermine Russian gas transit via the Belarus-Poland route. The concern about the utilization of this route in relation to the new Russia-Ukraine transit agreement has already been raised by Pirani et al. (2020). The Covid-19-associated decrease in gas demand is likely to make this concern much more real. Russia may use the Belarus-Poland pipeline sporadically, e.g. to adjust for the seasonal spikes in demand, without long-term capacity booking. Recent gas tensions between Russia and Poland (e.g. Poland winning in the arbitration court against Gazprom (RFE/RL, 2020), and Poland repeatedly expressing opinions and exercising legislative effort restricting the usage of Nord Stream 1 and construction of Nord Stream 2) may further exacerbate the issue.

In the medium term, however, when the EU gas demand has recovered but Nord Stream 2 is not yet in place, the Belarus-Poland route is likely to prove useful for Russia, at least starting from 2021 (when prepaid volumes of Russian gas transit via Ukraine will decline according to their agreement).

The transit contract between Russia and Poland is to be renewed in mid-May 2020, and as of now, it is unclear if, and how it will be written and whether the Belarus-Poland transit route will be used to a substantial degree or only marginally. If transit through the Belarus-Poland route is limited, it will imply poorer route diversification for a major part of European consumers of Russian gas, thereby lowering their security of Russian gas supply.   This may also put another strain on the bargaining power allocation within the EU and the EU’s intended common energy policy of “speaking with one voice” with external energy suppliers like Russia.

Conclusion

Summing up, the decrease in demand of natural gas, as well as other factors associated with the ongoing Covid-19 pandemic, such as economic recession and turbulence in stock markets, are likely to have noticeable implications for the security of Russian gas supplies to the EU in the short term. On the one hand, even if the current pandemic-associated decrease in demand of gas from Russia seems rather moderate, the ultimate negative effect on Russian gas imports by the EU is likely to be larger. Lower imports from Russia are likely to improve the security of supply, both through lower import dependency of the EU, and through improved market opportunities due to the current market’s overcapacity. On the other hand, in the medium run, lower demand also negatively affects the non-conventional gas industry, undermining the diversification opportunities to LNG, and, consequently, natural gas energy security. Further, a fall in the gas demand by the EU coupled with the newly signed transit agreement between Russia and Ukraine may potentially cause underusage of the Belarus-Poland transit route, thereby putting a strain on the diversification of Russian gas import routes to the EU and on the power balance within the EU.

Energy security might be even more of a concern in the post coronavirus period when the economy is slowly recovering, and cheap and guaranteed energy supply is crucial. To ensure this supply, national efforts combined with an EU-wide policy coordination would be required. The long-discussed “speaking with one voice” common energy policy may finally need to materialize in order to facilitate reliable access to natural gas.

References

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