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Belarus Under War Sanctions

Posted on October 17, 2022 | Policy Brief

Image of farm tractor loaded on a freight train representing Belarus Under War Sanctions

Numerous developed countries have imposed tough sanctions on Belarus, as the Belarusian regime has become part of the Russian aggression against Ukraine. At the same time, economic relations with Ukraine have been disrupted. These shocks have simultaneously disturbed the Belarusian economy and triggered a severe recession. Thanks to several positive effects from the external environment, some success from measures undertaken by the authorities to stabilize output, and some degree of resilience – all seasoned with a large portion of good luck – the situation of the Belarusian economy is however “not that bad”. Nonetheless, the Belarusian economy is experiencing its worst economic crisis since the mid-1990s, and the current path of the economy is highly unstable and associated with numerous risks and threats. In economic terms, it is likely the case that the full costs from the sanctions are yet to be paid.   

Sanctions, Multiple Shocks and Their Potential Implications

As the Belarusian regime has become part of the Russian war on Ukraine many developed countries have adopted tough sanctions against Belarus. These sanctions include an embargo on a large share of Belarusian exports and imports, prohibitions and restrictions on transportation of goods of Belarusian origin, restrictions on and/or blocking actions regarding financial operations and settlements, a freeze of parts of the Belarusian international reserves, and numerous restricting and blocking actions against banks, companies and individuals. Such sanctions, combined with a new external environment, cause powerful indirect effects with foreign companies exiting the Belarusian market and refusing business with Belarusian counterparts. Additionally, some Belarusian businesses and employees have left the country. On top of this, economic relations with Ukraine, formerly Belarus’s second largest trading partner, have been virtually reduced to zero.

In economic terms, the above mentioned may be treated as a bundle of simultaneous powerful shocks to the national economy, differing in direction, mechanics, size, and persistence. These shocks may be grouped into three clusters.

The first cluster covers demand shocks, and in particular export shocks. According to our assessments, the exogenous demand shock following the sanctions may reduce Belarusian exports (in physical terms) by 40 percent, compared to previous steady-state levels. This figure should however be seen as a potential lower bound which may be realized if no measures to mitigate the impact from the sanctions are undertaken. Belarusian authorities and businesses are however doing their best trying to find new buyers for the “vanishing” exports, bypass restrictions in order to connect to “old” buyers, and establish new logistic and financial chains. The extent to which these attempts may be successful depends on the global environment, the degree of the price competitiveness of Belarusian producers, and numerous non-economic factors. Additionally, all factors affecting exports are unstable and volatile. Exports under these new conditions are therefore less sustainable and may fluctuate in an extremely wide range. Shocks to consumption and investments stemming from weakened sentiment and expectations further amplify the demand shocks.

The second cluster of shocks relates to the supply side of the economy. It includes business closures, emigration that weakens labor supply, and production bottlenecks due to the inaccessibility of imports. Supply shocks are hard to quantify, but we perceive them as persistent and cumulative. Business closures and emigration have irrevocable effects on the national economy (at least in the medium-term), and a continuation of such drop-outs will likely amplify the size of the shock.

The third cluster combines different primarily nominal shocks: price, exchange rate, financial stability and fiscal ones. Such shocks have become permanent companions to the Belarusian economy under the sanctions, and they are volatile in terms of size. As a result, the corresponding economic indicators are likely to also become highly unstable.

This bundle of adverse shocks shifts the economy down from the previous, close to steady-state, trajectory. A new trajectory is however far from predetermined. Firstly, it depends on the effectiveness of the government in curbing the shocks stemming from the sanctions, as the actual path of the economy may be considerably affected by monetary or fiscal policy and other interventions. Secondly, some positive exogenous shocks may partially offset the effects from adverse ones. Lastly, the economy, at least for a while, may resist through exploitation of accumulated buffers (such as, international reserve assets, financial reserves of State-owned enterprises that were accumulated under favorable conditions in 2021 etc.).

Considering the worst possible assumptions regarding the above mentioned issues, our model-based simulations predict a severe recession of about 20 percent (as compared to the output peak in 2021-Q2). This recession is accompanied by a sharp increase in inflation (which in turn is highly likely to be supplemented by a full-fledged financial crisis). This simulation should however be regarded as the potential rock bottom. Whether it will become reality or not critically depends on the Belarusian government’s policies.

Policy Response by the Authorities

The root cause of the problem, namely the provision of Belarusian territory for the Russian army, has never been publicly discussed by Belarusian officials. Instead, the government has focused on strategies which treat the symptoms, rather than focusing on curing the disease itself. The main coping strategies that were publicly discussed include: 1) expected increase in Russian support and exports to Russia 2) re-orientation of exports towards Asian and developing markets 3) greater mobilization of domestic resources and 4) monetary, fiscal and other stimuli.

The Russia-related initiatives are often beyond convention and include some radical proposals. These are, for instance, accelerating the establishment of sea terminals in Russian ports, promoting exports to Russia, and requesting greater financial support from Russia linked to the so-called “deep integration” package (mainly in the form of energy subsidies, import substitution investments and direct subsidies). Adherence to these proposals would mean that Belarusian authorities de facto accept serving as a Russian protectorate and correspondingly take on the role of a puppet government.

Belarusian authorities have reached some success from choosing the “Russian track” as the debt payments to Russia were postponed, new cheap gas and oil prices were granted and export to Russia increased by 15 percent in the first 8 months of 2022. The Belarusian regime’s $7 billion compensation claim for incurred economic losses due to the war has however been rejected by Russia so far.

The coping strategy of export re-orientation serves primarily as a rhetoric intervention as China and other Asian countries considered by the government cannot fully replace the European market. For many Belarusian exports, the EU was a premium, high-margin market while re-orientation means at best lower margins. The success of re-orientation depends on the degree of price competitiveness, which can change greatly over time.  The only success from this strategy to date is the re-orientation of 10 percent of potash exports to China via railroad (incurring greater transportation costs).

The third strategy “greater mobilization of domestic resources” firstly assumes more interference with the business activity of State-owned enterprises (SOE). Despite severe demand shocks these are pressured by the government to maintain production and/or salaries, the latter in order to support output via sustained consumer demand. Further, a “discipline” component of the strategy is implemented through renewed catch-pay-and-release practices. In effect, businessmen are arrested based on anti-corruption or tax fraud criminal charges. They are then offered to pay certain amounts to the state and released if they choose to pay.

Since late spring, when direct financial shocks have been suppressed, the authorities have intensified stimulus measures to the economy. In the fiscal sphere, these are aimed at promoting exports and mainly provided on an individual or sectoral basis. To a large extent, these stimuli may be seen as partial compensation to SOEs for their output-supporting role. In the monetary sphere a specific environment in which the Russian ruble is appreciated vs. the US dollar, despite the worldwide strength of the latter, has allowed the authorities to implement a “magic” (but highly likely temporary) solution: The Belarusian national currency is manipulated to depreciate vs. the Russian ruble (both in nominal and real terms) but appreciate vs. the US dollar. The former leads to a great increase in price competitiveness (as Russia is today the dominant trading partner), while the latter serves as a buffer for fragile prices and provides financial stability. Moreover, the authorities have excessively softened monetary policy, trying to spur domestic credit. These measures lead to heightened inflation pressure, which is however somehow suppressed by reinvigorated direct price controls.

Current Situation and Future Implications

Until now, the Belarusian economy places far from the potential rock bottom. By the end of the second quarter in 2022, output losses (vs. the output peak in 2021-Q2) amounted to about 5.5 percent. By the end of 2022, they are however expected to increase to about 8.5 percent (vs. the 2021-Q2 output peak). The Belarusian economy is stuck in a heightened inflation environment – with the inflation being as high as 20 percent in annual terms. Although the inflation is considerably higher than in “normal times”, it is still not a disaster (considering the much higher projected level under the worst-case scenario and the background of 40-year peak in global inflation). Moreover, the current situation is still far from a full-fledged financial crisis, despite some financial turbulence.

The position of the economy as “not that bad”, is a result of existing buffers, positive effects from the external environment and some immediate efficiency from actions undertaken by the authorities to stabilize output – all seasoned with a large portion of good luck.  For instance, the jump in price competitiveness accounts for a large share of curbing efforts that counter the sanctions. This is, in turn, due to a combination of high global prices, low and frozen energy prices for Belarus, and a very specific and unstable stance on monetary policy underpinned by direct price controls. Some buffer savings that Belarusian SOEs succeeded to accumulate during the period of the so-called “foreign trade miracle” in late 2020 and 2021 also play an important role. Last but not least, the Belarusian authorities seem to have succeeded in the partial curbing of the export shock. Since the beginning of summer, there are some signs of recovery in exports which most likely reflects a partial recovery of exports within the most sensitive domains: oil products and potash fertilizers (corresponding statistics have been blocked out).

However, the “not that bad” position of the economy does not mean good. According to all standard metrics, Belarus is currently experiencing a severe economic crisis. The notion that it could be even more severe is bad news, not good ones. Moreover, the current situation is extremely unstable and fragile. The economy is facing numerous distortions, contradictions and risks, all of which can still shift the scenario of the crisis from the “not that bad” situation to the worst possible.

Conclusion

The Belarusian regime’s involvement in the Russian aggression against Ukraine have propelled Belarus into the most severe economic crisis since the mid-1990s. Until recently, fortunate external economic circumstances, a specific policy mix and a good portion of luck have allowed for a partial mitigation of the crisis. The situation is however extremely unstable and the full effects from the sanctions are likely yet to be realized.

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

The Cost of Climate Change Policy: The Case of Coal Miners

Posted on October 10, 2022 | Policy Brief

20221010 The Cost of Climate Change Image 01

The phasing out of coal is considered a key component of the upcoming energy transition. While environmentally appealing, this measure will have a devastating effect on those working in the coal industry. Using the dissolution of the UK coal industry under Margret Thatcher as a natural experiment, we estimate the long run costs of being displaced as a coal miner. We find that within the first year of displacement, earnings fall by 80-90 percent, relative to the earnings of a carefully matched blue-collar manufacturing worker, while the wages of miners who find alternative employment fall by 40 percent. The losses are persistent and remain significant fifteen years after displacement. Our results are considerably above the estimates provided by other studies in the job displacement literature and may serve as a guide for policy makers when aiming for a just energy transition.

The Coal Mining Industry and Global Warming

According to the recent IPCC report, limiting global warming to 2 degrees Celsius requires a near complete and rapid elimination of coal in the global use of energy. Such a drastic measure is bound to have devastating effects on anybody economically linked to and dependent on the coal industry. Our back-of-the-envelope calculation suggests that the closure of the currently 2300 active industrial coal mines would translate into more than 5 million displaced coal miners. In Figure 1 we plot the spatial distribution of coal mines, indicating the locations of the upcoming displacements globally.

Figure 1. Location of industrial coal mines. The seven biggest producers and exporters of coal are marked in green.

Source: SNL Energy Data Set produced by S&P Global.

In a new paper (Rud et al., 2022), we estimate the average loss in the earnings of coal miners who have been displaced following one of the most notorious labor disputes of the 20th century: the dissolution of the coal sector in the UK. When Margaret Thatcher came into power many of the mines were unprofitable (Glyn, 1988). Considering the mines to be ripe for closures, the UK government publicly announced the closure of 20 mines in 1984. After additional information on further closures reached the press, the Union of Miners called for a general strike. The strike lasted for nearly a year and ended with a devastating defeat of the miners. From 1985 and onwards, the closure of mines proceeded at such an incredible pace that the dissolution of the UK coal industry is considered the most rapid in the history of the developed world (Beatty and Fothergill, 1996). As shown in Figure 2, the closures resulted in an equally rapid displacement of miners, from 250 000 employed miners in 1975 to less than 50 000 by 1995.

Figure 2. Coal Mining Employment in the UK 1975-2005

Note: The number on employed miners is collected from National Coal Board (1970-1993) and used in Aragon et al., (2018). The percent of employment shown on the right axis was calculated from the New Earnings Survey, the main data source used in this paper.

The Effects of UK Coal Mine Closures on Miners

At the heart of our empirical analysis is the New Earnings Survey, a longitudinal dataset covering 1 percent of the UK population since 1975. For the period 1979-1995 (marked in gray in Figure 2), among the 25-55 years old and those who were employed by the same mine for at least two consecutive years, we identify 2152 miners who experienced a final separation from a mine. In our baseline specification, these miners are matched to a single manufacturing worker using a large array of observables such as age, gender, hours worked, pre-separation employment and earnings, geographical administrative unit (county), as well as whether their respective wage was determined in a collective agreement. By the nature of the exercise we are unable to match on industry and instead match on detailed occupational information. A variety of other matching procedures suggest our results are robust.

In Figure 3 we plot the estimated differences in the evolution of earnings and wages for four years before, and fifteen years after displacement. The coefficients are estimated conditional on time and individual fixed effects. Due to the normalization of the dependent variable, the estimates should be interpreted as the percentage change relative to pre-displacement values. In Panel A of Figure 3 we show that hourly wages and weekly earnings conditional on employment drop by around 40 percent in the year after displacement and recover only slowly. It should be noted that the losses in earnings conditional on employment are not driven by changes in hours since the two series are close to identical.

In Panel B of Figure 3 we show the effect on earnings taking into account the losses of those who have not been successful in finding alternative employment in another industry. To get to these results we need to make some assumptions since the New Earnings Survey neither includes earnings information on the self-employed, nor on those who are active in the informal sector. Many other studies in the job displacement literature share similar data limitations, so we follow their approach in dealing with these. On the one hand, we assume zero individual earnings for periods without any observed labor earnings in the data, as assumed by Schmieder et al. (2022) and Bertheau et al. (2022). This assumption does not appear too strong since there is some evidence suggesting that ignoring the self-employed only marginally affects the results (Upward and Wright, 2017; Bertheau et al., 2022). On the other hand, we complement our results with an approach inspired by Jacobson (1993) where we keep only individuals who experience positive earnings within four years after displacement. The latter approach provides a more conservative estimate of displacement costs by assuming zero earnings only for individuals who eventually return to work.

Figure 3. The hourly wage and earnings conditional on employment (Panel A), and overall earnings costs of final displacement from a mine (Panel B).

Note: We plot the coefficients of the estimated panel data model with time and individual fixed effects and distributed leads and lags. ”Earnings: come back” refers to the treatment group where we only include those who have positive earnings at some point four years after job loss, and impute periods without employment as zeros. ”Earnings: all zeros” refers to the treatment in which we replace the earnings of any miner with a zero if the miner is not observed for any year, without restrictions.

Interpreting all periods of missing information as zeros, we find the initial losses to be around 90 percent of pre-displacement earnings within the first year after separation, while the more conservative estimates are only slightly lower at around 80 percent in the short run. In the long run, the losses are persistent and remain significantly depressed even fifteen years after displacement. Over the fifteen years after displacement these numbers amount to the miners losing on average between 4 to 6 times of their pre-displacement earnings. This implies that miners only receive 40-60 percent of the present discounted counterfactual earnings.

Our estimates are considerably above those provided by studies in the job displacement literature that focus on mass layoffs. Couch and Placzek (2010), for instance, report initial losses to amount to about 25-55 percent, while Schmeider et al. (2022) find initial earnings losses to be around 30-40 percent. Davis and Wachter (2012) estimate the long-run effects based on US data and find the present discounted earnings losses to be on average 1,7 times the workers’ pre-displacement earnings.

The large estimated individual costs to the displaced miners are likely due to a combination of at least two reasons. First, the complete collapse of the sector forces displaced miners to reallocate and search for another job in other industries, and likely other occupations. Since coal mining is a highly specialized occupation, this greatly reduces miners’ ability to transfer the accumulated human capital to another activity (Beatty and Fothergill, 1996; Samuel, 2016). Second, most coal miners are employed in remote and rural areas where mining is often the main employer, something which remains an issue for current miners around the world (see Figure 1). This feature reduces local economies’ capacity to absorb displaced miners after a mine closure and, due to the need to relocate, greatly increases workers’ job searching costs.

Conclusion

While it is important to globally transition away from the excessive use of fossil fuels, we should keep in mind the devastating effects such transition will end up having on some groups. And while coal miners are particularly vulnerable to the upcoming energy transition, the ramifications do not stop there. Individuals employed in industries linked to the coal industry are likely to also be affected by its dissolution. Moreover, individuals employed in industries providing local services, such as retail stores, restaurants and pubs are likely to experience a significant drop in demand. Thus, the impact of coal mine closures on coal dependent communities typically goes far beyond the displacement of miners (Aragon et al., 2018). The closure of mines will lead to spikes in local unemployment, often unregistered (“hidden”), as well as an exodus of the population. Estimating and accounting for these effects is important if we aim to provide a just energy transition for all.

Attempts have been made to foster economic recovery of affected communities. Regeneration policies have included re-training of local workers, support of small and medium-sized businesses, and investments in local infrastructure, among others. However, their success has been limited and former mining communities remain among the poorest in the UK (Beatty et al., 2007). Preparing a set of policies which will have the capacity to reduce the costs of the transition, as not to repeat the devastating experience of UK coal miners and their communities, is an important task ahead of current policy makers.

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.

Sanctions Enforcement and Money Laundering

Posted on October 3, 2022 | Policy Brief

US dollar hang out to dry representing Sanctions Enforcement and Money Laundering

With sanctions becoming an increasingly important tool in ostracising autocratic regimes from western markets, the need for effective enforcement of Anti-Money Laundering (AML) policies is increasing. The global AML regime will be the backbone in detecting evasion of sanctions. This regime has, however, been widely criticised as ineffective. In this brief, we discuss issues with the current AML regime and propose a reward scheme for whistleblowers to enable asset seizures. A powerful feature of our proposal is that it does not rely on the effectiveness of the AML regime.

Introduction

Before Russia’s invasion of Ukraine, we wrote a FREE Policy brief expressing concerns over the ability of the current Anti Money Laundering (AML) regime to keep money launderers out of the international financial system. In the brief, we concluded that “The ease with which criminals have evaded present detection methods should cause concern about the effectiveness of sanctions”. The issue has now received renewed attention as the current sanctions against Russia will only be effective if it is difficult or costly to circumvent them. Sanctions evasions have a lot of similarities with money laundering, and the methods for detecting both is very similar, such that the proposal we discuss in this brief is applicable to both.

While an initial shock due to unexpected sanctions may generate disruptions, prohibited goods can later be imported/exported through third-party intermediaries in non-sanctioned countries to circumvent the sanctions. False labelling of origin, misinvocing, etc., are likely to occur and may be very difficult to detect. Analogously, sanctioned individuals’ assets may shift hands, and be laundered through shell companies without known beneficial owners.

In this brief, we consider a way to enhance enforcement, as outlined in a recent paper (Nyreröd, Andreadakis, and Spagnolo, 2022). The approach builds upon the US Kleptocracy Asset Recovery Rewards Program which offers up to $5 million “for information leading to seizure, restraint, or forfeiture of assets linked to foreign government corruption” (US Treasury, 2022).

The AML Regime

To justify the enforcement mechanism we later propose, some background on the AML regime is necessary. The global standard-setter for AML is the Financial Action Taskforce (FATF), which has since 1989 issued recommendations to countries on how to combat money laundering and terrorist financing. While initially focusing on drug money, the regime expanded in the last decades and has now received increased attention as it will be an important tool in ensuring sanctions against Russian oligarchs are effective.

The regime imposes numerous obligations on financial and other entities as they must assess risks and conduct due diligence along various dimensions, collect documents, and send reports to the national Financial Intelligence Unit. This regime has been widely criticized. Widespread AML non-compliance within banks, lack of rigorous supervision and enforcement by national supervisors and high costs relative to verifiable benefits are some of the issues that have been identified (Spagnolo and Nyreröd 2021; Nyreröd, Andreadakis and Spagnolo, 2022). The World Bank estimates that between 2 and 5 percent of global GDP is laundered annually, and that only around 0.2 percent of the proceeds from crime, laundered via the financial system, are seized and frozen (UNODC, 2011). Researchers have also been critical – for example Pol (2020), cites 22 papers that have “identified gaps between the intentions and results of the modern anti-money laundering effort, including its core capacity to detect and prevent serious profit-motivated crime and terrorism” (p.103).

Recent responses by the European Commission and others have focused on ensuring compliance within covered entities. Yet, increasing compliance with current AML rules may be costly and non-sufficient to stem the flows of illicit money in the international system. Even if widespread compliance within covered entities is obtained, and the AML procedures are effective, this may not be enough – even minimal non-compliance rates may result in major damages. We have seen how Danske Bank Estonia, a relatively small branch, managed to transfer around $230 billions of suspicious funds within the span of a couple of years (Bruun and Hjejle, 2018).

Some have suggested providing whistleblower rewards to those who report significant violations of AML rules by covered institutions (Spagnolo and Nyreröd, 2021; Scarcella, 2021). Yet, such rewards are only desirable if the AML regime is effective in achieving its policy objectives, which is not a given (we elaborate on this in Nyreröd, Andreadakis and Spagnolo, 2022). Enhanced compliance with the AML regime does not necessarily entail increased detection and deterrence of e.g., money laundering.  Numerous laundering methods exist that circumvent the reporting rules required under AML. A better option may be to incentivize facilitators of money laundering to provide information leading directly to asset seizures, as they have the best information that can lead to such forfeitures.

Incentivizing Facilitators

Money laundering is a derivative crime and requires what is called a “predicate offense” (such as human trafficking, drug sales, or corruption) that generates illegal money whose source needs to be obscured. The EU Directive (2018/1673) stipulates 22 categories of criminal activities that constitute predicate offenses.

There is a large infrastructure facilitating money laundering including financial advisers, real estate agents, tax advisors, and lawyers – crucial to criminals seeking to launder money. Bill Browder, famous for his work on advocating the Magnitsky Act, describes how he was aided by Alexander Perepilichnyy, a financial adviser for individuals involved in a large tax theft in Russia. Perepilichnyy helped launder the money for those involved in the tax theft, but eventually turned whistleblower when he provided bank statements to Browder that led to the freezing of $11 million related to this fraud (Browder 2022, p. 39). His information provided a “road-map” to even be able to start investigating where the illegally stolen assets had ended up. Perepilichnyy later died while jogging near London in 2012, which some believe was a murder in retaliation for blowing the whistle. A reward scheme would aim at people like Perepilichnyy, persons who are unrelated to the predicate offense, yet have information on the source and location of illicit funds.

Reward Programs in AML

The US has used whistleblower reward schemes in several regulatory areas including tax, procurement fraud, and securities fraud. These programs offer 10-30 percent of the recoveries or fines to whistleblowers that bring information crucial to issue the fines or recover public funds. Rewards to whistleblowers are therefore paid by the wrongdoing party, not the taxpayer.

These programs have received increased attention as several studies have found that they are effective at uncovering and deterring wrongdoing (Dyck, 2010; Wiedman and Zhu, 2018; Raleigh, 2020; Leder-Luis, 2020; Dey et al., 2021; Berger and Lee, 2022, see Nyreröd and Spagnolo, 2021 for a review). Agencies managing these programs have widely praised them, and studies show they are highly cost effective. More countries are also starting to experiment with offering rewards for information.

A salient feature of the US programs is that some degree of culpability in the wrongdoing does not disqualify an individual from an award. In 2012, Bradley Birkenfeld received $104 million under the Internal Revenue Service’s reward program despite serving a jail sentence for his involvement in facilitating tax evasion. In fact, when one of the most effective and famous whistleblower laws was enacted, the US Senator who tabled the bill argued that the bill aimed at “setting a rogue to catch a rogue” which “is the safest and most expeditious way I have ever discovered of bringing rogues to justice” (Howard, 1863).

Motivated by these experiences, we propose that AML should incorporate a whistleblower reward scheme, targeting those facilitating money laundry, with three central pillars:

Witness protection: aim at shielding whistleblowers and their families from negative consequences, if there are concerns that they might become victims of retaliation, harassment, or mistreatment of any kind. If the whistleblower is based in a hostile country, guaranteed asylum should be granted.

Leniency: offer immunity for any reported offense related to money laundering, but not for any other crime. Without immunity, a whistleblower will have no incentive to turn to authorities as they would immediately incriminate themselves and risk jailtime for money laundering.

Large, scaling, and mandatory rewards:  offer large, mandatory rewards that scale with the level of recoveries. As noted above, successful US programs pay 10-30 percent of the recoveries to whistleblowers. In the money laundering case, this percentage range may be lowered. Also, similarly to whistleblowers’ rewards in other cases, AML rewards would come from confiscated funds.

Numerous other design dimensions are important, but due to space limitations we refer the reader to other lengthier pieces that go into further detail (Nyreröd, Andreadakis and Spagnolo, 2022; Spagnolo and Nyreröd, 2021; Nyreröd and Spagnolo, 2021; Engstrom 2018).

Conclusion

The Russian aggression against Ukraine and the subsequent sanctions have put increased emphasis on the ability and effectiveness of the current AML regime to detect money laundering. Justified concerns about this regime have been raised, and its performance record is still under question. Programs offering whistleblowers witness protection, leniency, and large rewards could be an effective complement to this regime.

References

  • Berger, P. and Lee, H. (2022), “Did the Dodd-Frank Whistleblower Provision Deter Accounting Fraud?”, Journal of Accounting Research, early view, available at: https://doi.org/10.1111/1475-679X.12421
  • Browder, B. (2022b). Freezing Order, Simon & Schuster, New York, NY.
  • Bruun and Hjejle. (2018). “Report on the Non-Resident Portfolio at Danske Bank’s Estonian Branch”. Danske Bank.
  • Dey, A., Heese, J. and G. Pérez-Cavazos. (2021). “Cash-for-Information Whistleblower Programs: Effects on Whistleblowing and Consequences for Whistleblowers”, Journal of Accounting Research, Vol. 59, No.5, pp.1689-1740.
  • Dyck, A., Morse, A. and Zingales, L. (2010). “Who Blows the Whistle on Corporate Fraud?”, The Journal of Finance, Vol. 65, No.6, pp.2213-2253.
  • Engstrom, D. (2018). “Bounty Regimes.” In Arlen, J. (ed.) Research Handbook on Corporate Crime and Financial Misdealing, Edward Elgar.
  • Howard, J.M. (1863). Congressional Globe, Senate, 37th Congress, 3rd Session, pp. 955-956.
  • Leder-Luis, J. (2020). “Whistleblowers, Private Enforcement, and Medicare Fraud”, Working Paper, Massachusetts Institute of Technology, available at: https://sites.bu.edu/jetson/files/2020/07/False-Claims-Act-Paper.pdf.
  • Nyreröd, T. and Spagnolo, G. (2021). “Myths and numbers on whistleblower rewards”, Regulation and Governance, Vol. 15, No.1, pp.82-97.
  • Nyreröd, T., Andreadakis, S. and Spagnolo, G. (2022). “Money laundering and sanctions enforcement: large rewards, leniency, and witness protection for whistleblowers”, The Journal of Money Laundering Control, early view available at: https://www.emerald.com/insight/content/doi/10.1108/JMLC-05-2022-0068/full/html
  • Pol, R. (2020). “Responses to money laundering scandal: evidence-informed or perception-driven?”, Journal of Money Laundering Control, Vol.23, No.1, pp.103-121.
  • Raleigh, J. (2020). “The Deterrent Effect of Whistleblowing on Insider Trading”, University of Minnesota Working Paper, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3672026.
  • Scarcella, G. (2021). “Qui Tam and the Bank Secrecy Act: A Public-Private Enforcement Model to Improve Anti-Money Laundering Efforts”, Fordham Law Review, Vol. 90, No.3, pp.1359- 1395.
  • Spagnolo, G. and Nyreröd, T. (2021). “Financial Incentives to whistleblowers: a short survey”, Sokol, D. and van Rooij, B. (Ed.), Cambridge Handbook of Compliance, Cambridge University Press, Cambridge UK, pp.341-351.
  • Spagnolo, G. and Nyreröd, T. (2021a). “Money Laundering and Whistleblowers”, report written for Centre for Business and Policy Studies (SNS), available at: https://snsse.cdn.triggerfish.cloud/uploads/2021/11/money-laundering-and-whistleblowers.pdf.
  • UNODC. (2011). “Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crimes”, Research Report, United Nations Office on Drugs and Crime, available at: https://www.unodc.org/documents/data-and-analysis/Studies/Illicit-financial-flows_31Aug11.pdf.
  • US Treasury. (2022). “U.S. Departments of Treasury and Justice Launch Multilateral Russian Oligarch Task Force”, March 16, available at: https://home.treasury.gov/news/press-releases/jy0659.
  • Wiedman, C. and Zhu, C. (2018). “Do the SEC Whistleblower Provisions of Dodd-Frank Deter Aggressive Financial Reporting?”, 2018 Canadian Academic Accounting Association Annual Conference, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3105521.

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

Higher Education and Research in times of War and Peace: Key Insights from the 2022 FREE Network Conference

Posted on September 26, 2022 | Policy Brief

20220925 Higher Education and Research Image 02

More than thirty years after the collapse of the Soviet Union, Europe is struck with war following the Russian aggression on Ukraine. Russia’s war on Ukraine entails lost human capital, both in actual lives lost and due to major disruptions to key functions of the society, such as education and research. In light of this, the FREE Network, together with the Centre for Economic Analysis (CenEA) and the Stockholm Institute of Transition Economics (SITE), hosted the public conference “Higher Education and Research in War and Peace“ in Warsaw on the 10th of September 2022. This policy brief is based on the presentations and panel discussions held during the conference.

The large-scale Russian invasion of Ukraine has disrupted an entire society, including the education system, with Ukrainian schools just recently partially welcoming back students to the classrooms for the first time since the 25th of February 2022. Closing schools has severe impacts on a population, as highlighted by the recent Covid-19 pandemic. The lockdown and closure of schools around the world following the virus have had and will continue to have massively negative consequences globally, with severe losses in human capital due to lost years of education. This is especially in countries where access to online education is limited or of poor quality. Inequalities also rise following the closure of schools and girls return to school in fewer numbers than their male counterparts. The disruption to the Ukrainian education system will result in lost human capital and lowered levels of knowledge among the population. The war has further restricted access to relevant information for many Ukrainians but also for Russians, making people susceptible to the increased Russian propaganda and misinformation about the war on Ukraine depicted within and outside of Russia.

In light of this, the FREE Network gathered representatives from its affiliated institutions and other relevant actors in the region to discuss the relevance and necessity of continued support for higher education and research within social sciences in Ukraine, and more broadly in Eastern Europe and post-Soviet countries. The conference and the overarching theme related back not only to the original ambition of the FREE Network, namely to support outstanding academia within economics and relate it to policy work but also to the current situation in Europe and the existing threat from Russia to this objective.

This brief will initially cover the work carried out by the Kyiv School of Economics (KSE) in response to the Russian aggression, followed by thoughts on Russia’s role in the evolution of knowledge and human capital in the region. The brief continues by covering the benefits and positive outcomes of investments into education and research and lastly concludes with reflections on the role of the FREE Network.

The Kyiv School of Economics’ Response to the Russian Aggression

The war on Ukraine put the spotlight on the importance of high-quality academic institutions as a safety net for the government to maintain vital functions to society. The Vice President for Policy Research at KSE, Nataliia Shapoval, gave a brief overview of how KSE’s work has changed since the Russian war on Ukraine and its implications. Shapoval initially painted a picture of the disruption to the Ukrainian society caused by the Russian aggression, explaining how KSE stepped up during the first months of the war, in some areas doing the work of ministries. While the government has mainly taken back some duties, the KSE is still providing policy advice in areas related to the effects of sanctions, estimates of damages, and food security among others. KSE is also highly active within the areas of education and health, working with Ukrainian schools through the KSE Charitable Foundation (KSE CF) to ensure students can safely return to the classrooms.

Another important aspect of the work carried out by KSE concerns spreading knowledge about and shedding light on the situation in Ukraine. Through the various networks, by talking to colleagues within academia but also to the media, KSE is trying to explain what has happened and is still happening in Ukraine. According to Shapoval, there is a need for delivering correct information and to keep attention fixed on the situation in Ukraine such that people are kept aware of what is going on in the region.

Shapoval also regularly returned to the role of education and research for the present and future Ukraine. According to Shapoval, avoiding brain drain and ensuring Ukrainians are equipped with the necessary knowledge is key to rebuilding a future Ukraine founded on well-functioning democratic institutions. To facilitate this, the KSE is offering two programs, Memory and Conflict Studies (a multidisciplinary field concerned with how the past can be understood and remembered, and how it might impact the present transformation of societies) and Urban Studies, both aimed at covering the future need for competence within these fields. Further mentioned by Shapoval is the fact that, due to the war, many Ukrainians have left the country and are being educated elsewhere. While this partially ensures intellectual human capital is not lost, these students must be kept anchored to Ukraine through networks to ensure they will return back to help rebuild Ukraine. This is especially important in order to counter the ongoing evolution in Russia.

Thoughts on the Role of Russia in the Region

While the recent developments in Ukraine have of course disrupted education and research in more severe and tangible ways, the situation for independent researchers in Russia has also deteriorated. Torbjörn Becker, Director of SITE, emphasized how several Russian colleagues in exile still collaborate with the FREE Network on policy work and research. Becker also further stressed how they will be paramount once Ukraine wins the war, as will the role of partnerships for a future transformation of the Russian society. Acknowledging that there are many Russians (especially amongst academics in exile) who oppose the war, Shapoval however stressed the disturbing fact that many Russians do seem to support the Russian aggression and that the role of Russia as a destructive force in the region cannot be understated. This was seconded by Tamara Sulukhia, Director of the International School of Economics at Tbilisi State University (ISET). Sulukhia argued that Russian politics slow down and disturbs the free states within the region, and hampers organizations and countries from moving in the right direction in regard to democracy, economic evolution and integration toward Europe. Both Shapoval and Sulukhia reminded the audience that even with a Ukrainian victory, and this in a war which is defining the future of democracy in the region, Russia will persist. Russia has proven time and again, by effectively occupying 23 percent of Georgia as of 2008, with the occupation of Crimea in 2014 and with the most recent war on Ukraine, to be a real military threat to post-Soviet countries. Even though Russia losing the war would shift the power dynamics in the region, the ever-present threat of Russia is not only of a military character. Russia also attempts to impact education, research and knowledge more generally by promoting a Soviet-style education and by altering reality through propaganda and false information.

While discussing the current situation of higher education within economics in Belarus, Dzmitry Kruk, Deputy Academic Director of the Belarusian Economic Research and Outreach Center (BEROC), regularly came back to the negative impacts from Russia on the quality of education and research. Where the western style education is free but also differential, Soviet-style education is centred around learning how to fulfil instructions, according to Kruk. The Belarusian educational system is anchored to Russia and as a result Belarusians today have what Kruk referred to as a “spoilt mental map”. The necessity of free education and research outside the Russian alternative (which is mainly published in Russian and with a post-Marxist view of the world) is vital in order to equip people with the tools to respond to the new types of dictatorship evident in the region. Young people within academia who have experienced freedom and have had the opportunity of thinking for themselves will also be vital on the future path toward democracy. Kruk’s opinions were furthered by Shapoval stating how education must and should counter the risk of brainwashing in the region and in the world as a whole. Shapoval argued the necessity of countering propaganda with the help not only of education but also the legislation of media and social media and enforcement of international laws in general. The necessity of ensuring new values for intellectuals and students in times to come is of paramount value and, according to Shapoval, as important to halting the Russian imperialist visions today as it was some thirty years ago. Shapoval further argued that the threat from Russia’s ambitions should be met not only with education and research but also through installing a sense of hope and prosperity among young people.

Investments into Education and Research as a Safeguard and Development Driver

While countries within the turbulent region differ, not least in regard to overall political ambitions and structure, in most of them investments into education and research have been paying off. KSE’s expertise allowed it to work closely with the Ukrainian government, standing strong in their fight against Russia. The impact from investments into education and research in the region is also evident in both Georgia and Latvia.

Sulukhia argued ISET to be, and to have been, a key contributor to human capital among Georgians as well as others in the Caucasus region. Sulukhia argued this to be especially important when under occupation, mentioning how Georgia has, since the occupation of the two regions of Abkhazia and South Ossetia, in all ways possible tried to ensure that the human capital of internally displaced people is not lost. ISET have ten folded its intake of students and is today providing world-class education in the Georgian language, effectively counteracting brain drain. Post-graduates are working in major institutions providing relevant knowledge and competence in key areas of not only the Georgian society but also other countries in the Caucasus. A similar picture was painted by Anders Paalzow, Rector at Stockholm School of Economics in Riga (SSE Riga). Paalzow specifically pointed out how the investments in education made in Latvia in the 1990s have truly paid off, with graduates having been absorbed into relevant parts of the Latvian society and the Baltics for decades.

Having previous students in key positions in society to ensure sound policy work (such as good fiscal and audit control of the countries in question etc.) is however not the only benefit of investing in education and research within the region. As emphasized by Sulukhia, institutes within the FREE Network and other networks alike are strategically vital in the sense that they ensure knowledge and evidence for policy makers and as they convey evidence-based messages for the general public. This is especially important in a time when the message of the developmental direction for the countries within the region has to be reinforced in order to stand against Russian misinformation and propaganda as well as voices questioning the benefits of European integration. Sulukhia emphasized how it is of importance that the relevance of education and research is rooted among the people and not only within academia to evade the risk of preaching to the choir. Vlad Mykhnenko, Fellow at St. Peter’s College at the University of Oxford, further argued it is necessary for academia to be much more policy oriented than what is the reality today. Researchers should comment on political events and public policy to ensure the outreach of knowledge and information, not just to help the public have a greater understanding of complex issues but also to help inform experts. According to Myhnenko, other researchers are keen on getting context-relevant knowledge and insights from economists working within the region.

The necessity of communicating the outcomes from investments within economics education and research and more broadly within social sciences was a recurring theme during the conference. Presenting the University’s engagement in various programs such as Erasmus+, Horizon Europe, The European Strategy for Universities etc., Professor Agnieszka Chłoń-Domińczak from the Warsaw School of Economics (WSE) outlined the importance of funding from the EU. Chłoń-Domińczak highlighted how EU support has enabled greater partnerships and internationalization and pointed out that while the transfer of knowledge and internationalization of students and researchers are of the essence, there is a need for also ensuring capacity building among other staff when building sound institutions. Internationalization through the exchange as a hedge against brain drain and as a means of improving the quality of academia was further emphasized by Michal Myck, Director of CenEA.

Chłoń-Domińczak, alongside Paalzow and the Swedish Ambassador to Poland, Stefan Gullgren, further argued the necessity to bridge between business and academia. This, especially as investments in social sciences, as compared to investments in natural sciences or technology cannot be commercialized. Additionally, the former havs payoffs in the long run which lowers investment incentives for firms making it even more crucial to communicate the large benefits to society of investments into the sphere. Ensuring consistent and continued support requires not only a good connection to businesses but also proper legal structures in place. As argued by Gullgren, the Swedish model with private businesses funding about 70 percent of research and education in Sweden, is made possible largely thanks to the fact that many investments are funnelled through foundations that are exempt from taxation when set up to finance research grants and education. Thus, one should consider not only business, academia and investors when thinking about future funding for research and education, but the legislative framework as well, especially in contexts such as the future rebuild of Ukraine.

As for how the benefits from investments into social sciences best are communicated, opinions shifted among participants throughout the day. On the one hand, Becker’s argument of being visible not only in traditional media but on social media alike was met by Shapoval, highlighting the need for a regulatory framework for both platforms. On the other hand, Myhnenko’s argument for more policy oriented and outreaching research was met by Kruk claiming there is a risk of researchers within economics deviating too far from research within the field. Kruk also addressed the argument of being available on social media by countering that in his view, researchers should refrain from work based on what generates clicks or reads.

The Relevance of the FREE Network in times of War

Considering the evidence brought forth during the conference by colleagues within the FREE Network, be it the suppression of BEROC in their efforts of founding a School of Economics in Belarus, the effects on the KSE from the war on Ukraine, or the rise of anti-European expressions in Georgia, the necessity of the network was at the end of the day perhaps clearer than ever. As highlighted by virtually all speakers during the conference, internationalization through networks such as the FREE Network fosters open minds, allows for improvements within all aspects of academia, and enables the exchange of thoughts, ideas and experiences. Although the heterogeneity of the region should not be overlooked and investments made in accordance with this, the similarities between the countries within the FREE Network outnumber the differences. The immediate threat from Russia must be met with knowledge and fact-based information as well as high-quality education and research being made available among the population in the region as a whole. To ensure a continued transition within the region, the risk of brain drain must be evaded through continuous support to the social sciences, as these have the power to truly transform nations.

Concluding Remarks

The FREE Network public conference in Warsaw was the first in-person conference since the outbreak of the Covid-19 pandemic. The benefits of meeting in person were however overshadowed by the ongoing Russian aggression on Ukraine and ultimately on democratic ideals, including those of independent academia. We hope to welcome all FREE Network institutes to next year’s conference in Kyiv, to further discuss how outstanding education and research can help rebuild a sovereign Ukraine.

List of Participants

  • Torbjörn Becker, Director of SITE
  • Agnieszka Chłoń-Domińczak, Professor at WSE
  • Stefan Gullgren, Swedish Ambassador to Poland
  • Dzmitry Kruk, Deputy Academic Director, BEROC
  • Michal Myck, Director of CenEA
  • Vlad Mykhnenko, Fellow, St. Peter’s College, University of Oxford
  • Anders Paalzow, Rector SSE Riga
  • Nataliia Shapoval, Vice President for Policy Research at KSE
  • Tamara Sulukhia, Director of ISET

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

Foreign Aid to Ukraine: Lessons from the Literature on Strategic Foreign Aid

Posted on September 19, 2022 | Policy Brief

Image of the map of Ukraine representing Foreign Aid to Ukraine

Ukraine is currently receiving substantial inflows of foreign aid from western donors to help the country withstand the Russian aggression. The foreign aid flows partly reflect altruistic motives from the donor side, but also donor’s domestic strategic foreign policy objectives as the war is seen as part of a battle over the future world order. In this brief, I discuss the academic literature that has analysed the existence and consequences of strategic motivations behind aid flows more generally, and draw some preliminary insights for the case of Ukraine.

One of many consequences of the Russian war on Ukraine is that western countries have responded by providing substantial bilateral financial support to Ukraine. This support has taken the form of humanitarian, financial and military aid. As of August 3rd 2022, the US has provided the most support in absolute terms (44,5 billion euro), followed by EU institutions (16,2 billion euro) and the United Kingdom (6,5 billion euro). Relative to GDP, countries in Eastern Europe have however been the most generous, led by Estonia and Latvia (0,9 percent of GDP) and Poland (0,6 percent of GDP) (Antezza et al., 2022). Meanwhile, a discussion on the reconstruction of Ukraine has started, following the massive destruction of physical capital from the Russian aggression. The immense costs of this destruction increase every day, and the reconstruction effort for a future “Ukraine 2.0” will likely require thousands of billions of $US, mainly in the form of foreign aid (Becker at al., 2022).

Against this background, it is important to consider the academic and policy-oriented literature on aid effectiveness, i.e., to what extent aid impacts economic development and social welfare. Aid effectiveness involves many different dimensions such as issues of donor coordination, responsibility for reforms and investment choices of government and people (ownership), how to avoid corruption and so-called “white elephants” (expensive and useless investments), and how to effectively implement evaluation and evidence-based policy choices (e.g. OECD, 2008). In this brief, I will focus my attention on one such dimension, the underlying donor purpose of aid giving, and its implications for the contribution of aid inflows to human welfare in partner countries. More specifically I will discuss strategic aid, aid given primarily for the purpose of donor’s own broader foreign policy agendas. I will discuss what the literature has to say about the existence of such strategic aid, and what it has to say about its implications for aid flows and aid effectiveness. This will be done on basis of the existing literature, including a few of my own contributions. It is important to note that this literature focuses on development aid, defined by the OECD as “Official Development Assistance” (ODA). ODA does not include for instance military aid but is rather defined as official flows that explicitly target economic development and social welfare in the partner country. This literature is thus most relevant when talking about the reconstruction of Ukraine and to some extent the current financial and humanitarian aid given to the country.

Identifying the Existence of Strategic Aid

In the quantitative literature, there are primarily two approaches to measuring the strategic incentives behind aid disbursements. The first approach looks at the distribution of foreign aid across partner countries with different levels of needs, institutional capacity to absorb aid inflows, commercial potential, historical ties to donors, and strategic importance. If aid was based only on altruistic motives we would expect aid allocation to strongly favour partner countries with low human development (measured by, e.g., GDP per capita levels, poverty headcount ratios and child mortality) and the capacity to turn aid inflows into social welfare (measured by e.g., indices of macroeconomic policies, democracy scores and corruption indicators). While the empirical literature suggests this is partly true, although more so for some donors than others, it is far from the whole picture. Many donors tend to favour former colonies or countries of commercial interest, observed by flows of trade and foreign direct investments (e.g., Neumayer, 2003; Berthelemy and Tichit, 2004). The same is true for strategic interests, although their importance varies substantially across donors (more so for the US and less for the Scandinavian countries, for instance). This is also true across a broad set of proxies for strategic relevance, all trying to capture foreign policy alliances or foreign policy importance, such as arms imports (Hess, 1989; Maizels, and Nissanke, 1984), arms expenditures (Schraeder et al., 1998), the correlation of voting records in the UN General Assembly (Alesina and Dollar, 2000), and dummies for Israel and Egypt (capturing the significance of the Israel-Palestine peace process).

In Frot, Olofsgård and Perrotta Berlin (2014), we take a closer look at the Central and Eastern Europe (CEEC) countries and the Commonwealth of Independent States (CIS) in the early years of their transition towards market economies. As these countries opened up a substantial amount of western aid became available, but the allocation of aid across countries varied substantially, as did needs, commercial potential and strategic significance to major donors. We argue that these motivations may have also played a different role at different times. In particular, there is a strategic advantage of early market access if aid flows are driven by commercial interests, suggesting that trade and investment relationships may play a more prominent role for aid allocation early on and less so as private partnerships have been [increasingly] established. Similarly, some strategic considerations were particularly salient early on, such as supporting nuclear disarmament and building a bulwark in Eastern Europe against the perceived remaining military threat of Russia. When disaggregating the data over time, we do indeed find that commercial interests played a much more prominent role in the first half of the 1990’s than in later years. Similarly, we find that countries with nuclear arms and countries located geographically closer to Brussels benefit particularly during these early years. As time went by, commercial interests became less important, needs variables gained more traction, and aid seems to rather have been used to reward countries undergoing deeper democratic reforms (Frot, Olofsgård and Perrotta Berlin, 2014).

The second approach is to focus on how aid flows are generally affected by changes to the strategic importance of a partner country, or partner countries, over time. In Boschini and Olofsgård (2007) we estimate the role of the intensity of the Cold War on aggregate levels of foreign aid from western donors. It is commonly argued that foreign aid was (partially) used as an instrument to gain political loyalty from leaders in the developing world during the Cold War and that the substantial drop in aggregate aid levels witnessed in the 1990’s can be explained by the disappearance of an important strategic motive behind foreign aid altogether (e.g. Lancaster, 2008). This had however not been tested in quantitative terms, and thus we collected data on military spending in the Eastern bloc to serve as a proxy for the intensity of the Cold War. We found that there was a positive correlation between military expenditures in the east and western development assistance during the period 1970-1990. After the Cold War, military expenditures in the east have no correlation with western development assistance. This suggests that development assistance was used as a complement to recipient’s domestic military spending in producing strategic security within donor countries. Once the Cold War ended though, the immediate need for such investments in security and loyalty abroad largely disappeared, ending the connection between military spending in the east and western development assistance and causing overall aid levels to drop. Kilby and Fleck (2010) find a similar but reverse effect of the war on terror following the 9/11 attack on the US in 2001. Overall aid flows increased, and the allocation across countries became biased in favour of countries of greater importance to the US in the War on Terror.

Another strand of literature has focused on what happens to aid inflows when a country becomes a temporary member of the UN Security Council (UNSC). This literature looks primarily at the impact on aid from multilateral aid agencies such as the World Bank and the International Monetary Fund (IMF). The rationale for the analysis is the notion that (western) permanent members on the UNSC have strategic interest in showcasing broad majority support for their resolutions at the council. This gives them an incentive to “buy support” from temporary members through influence over multilateral aid agencies.

Accordingly, Dreher et al. (2009a) find that partner countries receive a greater number of aid projects from the World Bank during years of UNSC membership than during the years before and after membership. Similarly, Dreher et al. (2009b) find that participation in IMF programs increases during membership years, and that agreements have fewer policy conditions.

In a recent paper (Berlin Perrotta, Desai and Olofsgård, 2022) we look at temporary UNSC membership and World Bank aid. Following the previous literature, we analyse whether temporary UNSC members receive more aid projects, but with a larger data set. Providing originality, we also test whether partner country governments are given more leeway to allocate aid projects regionally for political purposes during the years of UNSC membership. The argument is that donors can give partner country governments benefits not only in terms of the amount of aid, but also the extent to which they are free to spend resources based on political interests rather than needs. More specifically, we test whether birth region of political leaders, and regions dominated by co-ethnics of the political leader in question, receive a particular boost to aid inflows during membership years. We select these indicators of domestic political importance based on an existing literature which suggests governments at times favour such regions for public spending (e.g., Bommer et al., 2022; Briggs, 2014).

Consistent with earlier findings, we confirm that temporary members of the UNSC receive a greater number of World Bank projects during membership years than what they would otherwise receive.  We also find partial support for the hypothesis that partner country governments have greater leeway to redirect projects to politically favoured regions. More specifically, co-ethnic regions get a boost in the number of projects and total aid inflows during membership years, whereas we find no similar impact in the leader’s home regions. More detailed analysis reveals that our results are driven by countries that persistently vote in line with the US in the committee, further supporting the interpretation that this reflects a trade of favours (Berlin Perrotta, Desai and Olofsgård, 2022).

The Consequences of Strategic Aid

But does the underlying motive behind foreign aid matter? Development aid can of course benefit social and economic welfare in a partner country if invested in activities with positive social rates of return (e.g., schools, health care and infrastructure), irrespective of any underlying motivation. A strategic motivation can even be beneficial if it means that partner countries receive more aid than they would do in its absence. Consider the drop in total western aid budgets after the end of the Cold War, and the increase after the start of the War on Terror, as previously mentioned. Similarly, often referred to as the first example of foreign aid, the Marshall Plan to help rebuild Europe after the 2nd World War, was not only motivated by altruistic reasons. It was explicitly motivated by the need to maintain US national security and safeguard US access to European markets. Yet, the plan is hailed as a success, vital to the reconstruction of Europe after the war. It is also evident that popular support for aid to Ukraine in western donor countries partly depend on the conception of a threat to Europe and the free world, facilitating/enabling governments to be generous in their support.

There are however also examples of where strategic considerations have motivated aid with very limited or even negative impact on economic development and social welfare in partner countries. In particular during the Cold War, in order to gain loyalty in the ideological battle between the superpowers, western aid often went to highly corrupt regimes with low absorptive capacity (e.g., Easterly, 2006). A frequently mentioned example is the case of the Democratic Republic of Congo (DRC) during the regime of Mobutu Sese Seko. The US provided the country with more than a billion $US in development aid between 1962 and 1991, under a kleptocratic regime that impoverished the country (see here). This without doubt helped the regime stay in power, and the aid was thus not just a waste of resources but directly counterproductive.

Another argument at the global level is that there always exists an opportunity cost in the sense that strategic objectives reallocate limited aid resources from where the need is the greatest, to countries more politically salient. Burnside and Dollar (2000) run a simulation based on their empirical findings, changing the actual (partially donor interest based) allocation of aid across partner countries to an allocation based on need and absorptive capacity (which they associate with macroeconomic policies). Within their sample, they estimate such a reallocation to increase per capita growth by 0,2 to 0,3 percentage points, from a mean growth rate of 1,1 percent. Such calculations are of course rough estimates, yet they give a ballpark figure.

In the case of Ukraine however, the first of these arguments carry little weight. Aid is not sustaining a dysfunctional government with little interest in its own population, rather the opposite is true. On the other hand, the argument of allocative efficiency may carry some weight at a global scale. The needs and the human suffering in Ukraine are immense but unfortunately there are other places in the world with such extensive suffering (Ethiopia, Yemen, and Somalia to mention a few examples). There is thus concern within the donor community that the attention to Ukraine will negatively affect resources and attention to other places in need of support, in particular since the war has externalities in the form of increased food and energy prices in low-income countries. Such argument however relies on the assumption of crowding out resources from a budget of given size. While hard to prove, it is probably safe to say that the strategic interest in Ukraine has in fact increased the total budget available. As for now, it is therefore not entirely clear to what extent resources to other nations in need will be crowded out. Yet, the UN’s appeal for Ukraine is more than 80 percent funded for this year, whereas the UN’s response plan for Afghanistan is around 38 percent funded, Yemen’s is around 27 percent funded and Sudan’s is around 20 percent funded (see here).

A third lesson from the literature concern the (lack off) strings attached when aid is strategic. Continuous aid to the corrupt and violent regime of Mobutu Sese Seke in DRC is an extreme example of this phenomenon. But, as previously discussed, it’s also been shown that temporary UNSC membership comes with fewer conditions in IMF agreements (Dreher et al., 2009b) and with more leeway to partner governments to allocate inflows for domestic political purposes (Berlin Perrotta, Desai and Olofsgård, 2022), which has been shown to have efficiency consequences. Dreher et al. (2018) use a typical panel growth regression setting to compare the contribution of aid to economic growth during the period around UNSC membership to that same contribution in other time periods and for comparable countries that have never been temporary UNSC members. They find that aid is less effective during UNSC membership years, which they allude to the strategic use of aid under these special circumstances. The point is that donor oversight and monitoring may be weaker when aid is strategically motivated. Alignment of the partner country government to the goals of economic development and social welfare, therefore, becomes even more important. At a time of massive aid inflows in a setting with less than perfect institutional control and a history of corruption, as is the case of Ukraine, this may have a detrimental impact on aid effectiveness unless proper safeguards are in place.

Conclusion

Foreign aid from western donors to Ukraine is partly motivated on altruistic grounds but it also reflects wider foreign policy objectives of the donors. The Russian aggression is perceived not only as an attack on Ukraine but as an attack on the existing rules-based world order and as part of a broader conflict between liberal democracy and authoritarianism. More donor-oriented motives behind foreign aid are referred to as strategic in the academic literature, and in this brief, I have given a short and selective introduction to that literature. In terms of foreign aid to Ukraine, the good news is that the combination of altruistic and strategic motives can generate greater aid flows and that, irrespective of the underlying motivation, such inflows can be effective if the priorities of donors and partner country government align around initiatives spurring economic development and social welfare. A potential concern is that the literature suggests that donors are more accepting of abuse of such funds, so the need to evade corruption and mismanagement may become particularly acute. On a global scale, there is also a concern about crowding out of aid resources away from other places in need when attention is focused on Ukraine. The severity of such crowding out will be a function of the extent of additionality of support to Ukraine, to the existing total aid budgets. It is thus important that governments in donor countries manage to maintain support for Ukraine, without forgetting about the needs elsewhere. With tough economic times ahead in Europe, this may unfortunately become a challenge.

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.

Who Benefitted from the Gasoline Tax Cut in Sweden?

Posted on September 2, 2022 | Policy Brief

20220902 Who Benefitted from the Gasoline Tax Image 01

Against the background of fast rising gasoline and diesel prices in 2022, a number of European countries have reduced fuel tax rates, often in the form of temporary “gas tax holidays”. Sweden reduced its fuel tax rate by 1.81 SEK (€0.17) per litre on May 1st 2022, of which 1.31 SEK is a temporary reduction set to expire at the end of September. When the tax holiday was announced, Finance Minister Mikael Damberg commented “I am pragmatic, for me it is important that we can compensate households” (Davidsson and Nilsson, 2022). However, just one month after implementation, the pump price for gasoline rose to a new high, which gives rise to the question of how much of the tax cut has actually been passed through to the consumers. In this policy brief, we analyse the tax incidence by comparing the gasoline price development in Sweden to that in Denmark, where the fuel tax rate remained unchanged. We find that the tax reduction was fully reflected in consumer prices, with a pass-through rate of around 100 percent. Nevertheless, we argue that spill-over effects pushing up gasoline prices outside of Sweden are likely biasing our estimate. Based on economic theory, we conclude that our estimate of the pass-through rate needs to be corrected downwards, meaning that only a part of the tax cut benefit was passed along to Swedish consumers.

Introduction to Tax Incidence

In standard economic theory, the pass-through rate to consumers from a change in gasoline tax rates is determined by the equation:

20220902 Equation

where p is the tax inclusive price, t is the tax, and η and ε are the price elasticities of supply and demand, respectively. The price elasticities give us the percentage change in quantity when the price changes by one percent. It follows from this equation that the relatively inelastic side of the market bears most of the tax burden from a tax increase – or most of the benefit from a tax reduction. Under normal circumstances, short-run demand for gasoline is highly inelastic in Sweden, with ε close to zero (Gren and Tirkaso, 2020; Dahl, 2012). In contrast, short-run supply is considered relatively elastic due to the competitive nature of the industry. Thus, changes in gasoline tax rates in Sweden are usually passed through fully to the consumers (Andersson, 2019). This implies that consumers bear the entire burden in the case of a tax increase but reap all the benefits in the case of a tax reduction.

Using Denmark as a Counterfactual

The problem is that existing price elasticity estimates – computed using historical price data – do not capture the temporary supply restrictions in the context of the war in Ukraine or the supply and demand shocks from the Covid-19 pandemic. In the lack of reliable estimates of current price elasticities, we revert to analysing the tax incidence using a quasi-experimental and empirical approach. This requires a counterfactual – a comparison unit that captures the evolution of gasoline prices in Sweden had the tax cut never been implemented. Denmark is well suited for this purpose given that it is geographically close, socio-economically comparable, and has similar levels of gasoline tax rates as Sweden. More importantly, Denmark has not made any recent fuel tax rates changes.

Figure 1. Gasoline pump price in 2022

Figure 1. Gasoline pump price in 2022

Source: Gasoline prices in Sweden and Denmark are provided by CirkleK (2022). Daily exchange rates are provided by Riksbanken (2022).

Figure 1 shows that the gasoline price in Sweden and Denmark track each other closely, displaying parallel trends in the time period leading up to the announcement of the tax cut on March 14. This reassures us that Denmark is a credible comparison unit for Sweden. Gasoline prices start diverging in the interim period of around 7 weeks between the announcement and the implementation of the policy. The fact that the gasoline price in Sweden is slightly higher during this period than in Denmark provides some speculative evidence that suppliers in Sweden intentionally raised prices in anticipation of the tax cut, allowing them to capture parts of the benefit. As soon as the tax cut enters into effect, the gasoline price is notably lower in Sweden compared to Denmark, although prices continue to rise until June.

Figure 2. Gap plot of price difference

Figure 2. Gap plot of price difference

Note: The figure plots the difference between the Swedish and Danish gasoline prices from Figure 1.

It can be observed graphically from the gap plot in Figure 2 that most of the tax cut of 1.81 SEK was immediately passed through to Swedish consumers on May 1. Furthermore, there are no obvious signs of the effect wearing off over time; the pass-through rate remains fairly constant over the three months following the tax cut.

In order to obtain estimates of the pass-through rate, we run a simple difference-in-differences regression – comparing the average difference in gasoline price between Sweden and Denmark both before and after the tax cut. The price reduction after the introduction of the tax holiday is estimated at -1.89 SEK per litre compared to the price level before the introduction. This estimate is statistically significant and indicates a pass-through rate slightly above 100 percent. But since the price development in the interim period raises concerns about strategic price setting, it appears more appropriate to use the price level before the announcement as a baseline. By doing that, we find a relative reduction in the Swedish gasoline price of -1.82 SEK per litre, matching the size of the tax cut almost exactly, with a pass-through rate of 101 percent.

The Estimated Pass-through Rate Is Biased

Our finding is in line with recent work on the German counterpart – known as the “Tankrabatt“. On June 1st 2022, the German Government lowered taxes on fuels for a duration of three months, amounting to a total tax relief of around 35 cent for gasoline and 17 cent for diesel, respectively. A number of studies find a full or close to full pass-through rate from the Tankrabatt, with estimates ranging between 85 and 102 percent (Fuest et al., 2022; Dovern et al., 2022; Montag and Schnitzer, 2022). Analogous to our approach, these studies rely on a comparison with a counterfactual unit, either France or a weighted average of Germany’s neighbouring countries.

Yet, by focusing on the pass-through rate at the national level only, we risk not capturing the full tax incidence. The supply of gasoline is more inelastic at the EU level than at the national level. As Sweden cuts the tax on gasoline, the after-tax price falls and this leads to an increase in demand; supply adjusts as more gasoline comes in from neighbouring countries. At the aggregate level however, supply is more constrained, so the tax cut in Sweden results in a marginal increase in gasoline prices across countries in the EU. This marginal increase in prices amplifies as more countries implement their own tax cuts. Indeed, Sweden and Germany are not the only countries to have implemented tax cuts in response to increasing oil prices, but are part of a larger group of countries to have done so, including Belgium, Italy and Poland (Sgaravatti, Tagliapietra, and Zachmann, 2022).

The spill-over effect from the tax cuts onto gasoline prices in “untreated” countries has two important implications for our analysis. First, our estimated pass-through rate to consumers in Sweden is biased upwards. The gasoline price development in Denmark can only act as a credible counterfactual for that in Sweden in the absence of the tax cut provided that it is not affected by the tax cut itself. But this condition is not fulfilled as the tax cuts employed in Sweden and elsewhere can be suspected to have led the gasoline price in Denmark to increase more than it would have otherwise. Estimates of pass-through rates near 100 percent thus appear overstated and consumers likely benefit less from the tax relief in reality. Second, the benefit to consumers in countries that implement gasoline tax cuts comes at the expense of consumers in countries without such measures in place. An analysis of tax incidence at the national level may find that most of the benefit from the tax cut is captured by consumers, whereas an analysis at the EU level as a whole would instead find that a much larger share of the benefit is actually captured by the supply side – in and outside of Sweden. This demonstrates that the national incidence of the tax cut is different from an international one.

The Swedish Tax Cut Benefits Producers and Richer Households

The prevalence of spill-over effects makes it difficult to conduct causal inference analysis and estimate the true effect of transport fuel tax cuts empirically. Still, the previously outlined theoretical framework on tax incidence can help provide valuable insights. As discussed, gasoline demand is much more inelastic than supply in normal times, so we could expect the tax cut to be passed through to consumers at fairly high rates. However, gasoline supply today is likely more inelastic than usual in light of the repercussions from the economic fallout of the Covid-19 pandemic and the Russian invasion of Ukraine: with oil companies unable to ramp up production in the short term because of underinvestment into existing and new fields during the pandemic (Ashraf et al., 2022). In Europe, Russia accounts for more than 20 percent of the oil supply but production in Russia has gone down since the launch of the war in Ukraine. Many European companies had started to engage in self-sanctioning by cutting ties with the Russian energy sector even before the European Council agreed to embargo most oil imports from Russia by the end of the year 2022 (Adolfsen et al., 2022). Furthermore, the refining industry is facing capacity constraints due to shutdowns that took place in the course of the Covid-19 pandemic as well as high prices for gas powering its operations. All of these factors together illustrate why gasoline supply at the EU level has become more inelastic in the past weeks and months. As a consequence, the relative elasticity of gasoline supply and demand is distorted towards benefitting the producers more than usual. Hence, we can infer from economic theory that not all of the benefit from the gasoline tax cut went to Swedish consumers, but that producers in Sweden and abroad captured some of it.

Apart from this, the tax cut does not benefit all households equally. Among the 20 percent of households with the lowest disposable income in Sweden, only about half have a direct expenditure on transport fuel. But among the 20 percent of richest households, around 95 percent have positive transport fuel expenditures (Statistics Sweden, 2020). A cut in transport fuel tax rates therefore disproportionately benefits high-income households in Sweden.

Finally, it is important to keep in mind that the transport fuel tax cuts employed in various countries do not come without a price tag – they represent a cost to the state budget and ultimately its citizens in the form of foregone tax revenues. In the case of Sweden, this amounts to 6.2 billion SEK in 2022, or around $60 per person (Swedish Government, 2022; Ministry of Finance, 2022). A broader evaluation of the welfare effect of the tax cut needs to take into consideration what the tax revenue would have been spent on had the tax cut not been implemented.

Conclusion

In mid-August, a report published by Konjunkturinstitutet (National Institute of Economic Research) stirred up the public debate on the gasoline tax holiday in Sweden. According to their report, considering what they call a notification and a pick-up effect (Konjunkturinstitutet, 2022), only 62 percent of the tax reduction on gasoline was passed on to Swedish consumers. The authors claim that sellers of gasoline exploited their market power through charging higher prices in the weeks leading up to the introduction of the tax reduction – the notification effect – and again shortly after the introduction – the pick-up effect. In this policy brief, we obtain a considerably higher estimate of the pass through rate of around 100 percent. In addition, we only find evidence for a weak notification effect and do not share the view that a pick-up effect has taken place.  Even though our studies have in common that we consider Denmark as a counterfactual, we see several advantages in our empirical methodology that may explain the different results: The data we use for both Sweden and Denmark come from the same gasoline company, which improves the comparability of prices. The time period we study after the tax cut covers three months instead of only one, and our finding is robust to the inclusion of a time trend, whereas the main results in the report by Konjunkturinstitutet (2022) rely heavily on the addition of such variable in their model.

What we would like to emphasise in the present case is that any methodology based on counterfactuals is prone to bias. If you shift the level of analysis from a single country in isolation to the whole of the European Union, it becomes clear that the Swedish gasoline tax cut brings about a marginal increase in gasoline prices outside of Sweden. This is why our estimates are likely biased upwards, revealing a flaw in both this study and the report by Konjunkturinstitutet (2022). In order to pin down the true pass-through rate to a precise number, a more comprehensive analysis is needed, although this may prove difficult. Without reliable empirical results, we should trust economic theory until now. The conclusions we can already draw are the following:

  • Firstly, some of the benefits from the tax reduction is passed through to Swedish consumers but a full pass-through is an overstatement. It is important to note that even if gasoline companies only capture a small percentage of the benefit, this can still amount to large profits in absolute terms.
  • Secondly, the gain from the tax reduction in Sweden produces losses for consumers in countries that have not lowered their tax rates.
  • Thirdly, the policy favours high-income groups as the gains are not distributed equally among consumers within Sweden.
  • Lastly, the corresponding loss in government revenue could potentially reduce welfare where expenditure is cut.

At the bottom line, the above economic reasoning suggests that the pass-through of the gasoline tax reduction to Swedish consumers is limited. And while we arrive at a similar conclusion as the report by Konjunkturinstitutet (2022), we follow a different line of argument. In our view, the reason for the imperfect pass-through to consumers does not necessarily lie exclusively in strategic price setting on the part of gasoline companies, but in the dynamics of the global market.

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.

Hedging EU’s “Winter Risk” by Curbing Gas Demand: Solidarity, Nudge, and Market Solutions

Posted on July 27, 2022 | Policy Brief

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The concern of Russian gas supply disruption and its implications has never been as serious. Experts agree that supply-side measures would not be enough to cover the shortage. Demand cuts are needed. The EC has just proposed a solidarity-based plan of 15% gas demand reduction across the EU Member states. However, getting all EU countries to commit to this plan has been challenging due to asymmetries in their exposure to the Russian gas crisis. As a result, the EU approved a compromise plan with numerous exemptions. This brief argues that market-based solutions may improve participation incentives helping the EU to coordinate decreasing gas demand.  Nudging energy consumers to lower their demand may be an efficient complementary solution. All member states should adopt this latter strategy now, as it takes time to trigger behavior changes in energy consumption. Acting now should strengthen resilience in the coming winter.

Background

Since the beginning of the conflict between Ukraine and Russia, both politicians and analysts have expressed concerns about cuts in Russian gas supply and their implications for the European economy. These concerns have only deepened as the crisis has unfolded. First, Russia stopped gas deliveries to five EU member states in April 2022 following their refusal to pay for gas in rubles. Then, Gazprom cut the capacity of the NordStream pipeline, initially by 40% and then by another 20% in June 2022, claiming technical problems originating from sanctions (i.e., a sanction-driven late return of a gas turbine repaired in Canada).

Gazprom’s July 18th announcement of its inability to deliver contracted gas amounts due to “force majeure” further added to the concern. Meanwhile the EU has dismissed the alleged technical failure stressing political reasons. According to EC President Ursula von der Leyen, the delivery stop reflects a “use of energy as a weapon”.
The panic somewhat settled on July 21, 2022, when Russian gas shipments via Nord Stream resumed at 40% of its original capacity, i.e., the mid-June level. However, Gazprom just announced another cut to 20% of the original capacity from July 27th. Overall, Russian gas exports to the EU are unprecedently low, see Figure 1.

Figure 1. Russian gas exports 2021 vs. 2022

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Source: McWilliams, B., G. Sgaravatti, G. Zachmann (2021) ‘European natural gas imports’, Bruegel Dataset, based on Entsog

Whether Russian gas supplies are likely to be stopped completely in a very close future is unclear. In similar vein, the IEA Executive Director, Dr Fatih Birol, warns that “…it would be unwise to exclude the possibility that Russia could decide to forgo the revenue it gets from exporting gas to Europe in order to gain political leverage”. Regardless of this risk, large-scale adjustments are necessary even under the more optimistic scenario with Russian gas supplies kept at the current level.

The most direct way to tackle the shortage of Russian gas is from the supply side. It can be done via three main channels: diversification of gas suppliers, replacement by alternative fuels, or use of storage. Multiple sources have studied these options extensively (see, e.g., SITE (2022) for an overview of earlier assessments, as well as Di Bella et al. (2022) for more recent estimates and a literature overview). Despite different shortage estimates across reports, experts agree that supply adjustment will not be enough to compensate for ‘the missing Russian gas. This suggests that curbing demand will be a substantial part of gas crisis management.

Most of the demand-linked measures decided by the EU member states have been to counteract the sky-rocking gas prices and subsidize gas consumption by setting a price cap or providing an energy check (see von der Fehr et al. 2022 for an overview). While such measures may protect consumers against increased energy bills in the short run, they foster energy consumption rather than curb it. However, on July 20th, the European Commission issued a plan for the EU nations to cut their gas consumption by 15% between August 2022 and March 2023. This move is part of a wider EU strategy to respond to the gas crisis by pushing for a solidarity mechanism between the member states, including pooling (i.e., sharing) of economic losses. While the targets in this plan would be voluntary, the restrictions could become binding in an emergency. The main demand restrictions would apply to the industrial consumers, but countries are also expected to facilitate households’ demand adjustments. This plan faced resistance from a range of EU Member states, claiming unfairness of 15% cut for their countries, or objecting binding demand cuts for their countries. The resulting compromise agreement, accepted by the EU states on July 26th, incorporated numerous exemptions for both countries and industries.

This brief focuses on the current options in the EU to curb energy demand. We discuss the feasibility of a solidarity mechanism in this context and offer economic mechanisms that may improve its functionality. We also stress the important policy features in incentivizing consumer response.

Solidarity Rule and Market Mechanism

Solidarity and coordination between Member states constitute a crucial part of EU’s response to the current gas crisis. Implementing these rules would limit the direct (gas shortage) and indirect (price-driven) shocks through, e.g., mutual backing-up and buyer power (see, e.g., Le Coq and Paltseva, 2012, 2022 or IEA, 2022).

The solidarity approach was discussed long before the current gas crisis, at least since 2006 (EC, 2006). However, its implementation has proven challenging because of the energy-related asymmetries between Member states in terms of import dependency, diversification of suppliers, energy portfolio, etc. These asymmetries undermine a “one size fits all” policy approach and make some countries consistently benefit more from solidarity mechanisms than others. The solidarity mechanism may also create moral hazard problems (Le Coq and Paltseva, 2008). As a result, the EU could never fully adopt a common energy policy approach.

The recent EU call to cut energy demand by 15% is subject to the same shortcomings. The EU countries are unequally affected by the current gas crisis due to differences in their exposure to Russian gas, access to storage or alternative fuels, gas transportation bottlenecks, etc. These differences undermine countries’ willingness to coordinate as witnessed by Portugal’s and Spain’s explicit opposition to the call on the ground that their energy reduction would be unfair given their energy portfolio with almost no Russian gas. Poland, whose gas storage is full, and Hungary, whose government imposed an export ban on gas earlier in July, have also objected the deal.

There are several ways to improve coordination: one could provide part-taking incentives via a monetary transfer scheme, incorporate demand-side energy cuts into a larger political agenda so that the (asymmetric) losses in one area are compensated by gains in another one (Le Coq and Paltseva, 2008). However, both solutions are likely unfeasible in the current, relatively short-run context, as they require the collection of large volumes of information to determine the correct transfer size. Additionally, the incentives for EU countries to correctly report such details might be low. One can also design a mutual support scheme with country-specific participation requirements/exemptions. This solution, while also informationally demanding, may be easier to achieve. It is likely to improve participation incentives, but the effects of solidarity may be weaker than under a plan without exemptions.

The EU decided to follow this latter route: On July 26th, the EU managed to reach an agreement on a softer plan with multiple exemptions from the 15% cut, accounting for countries’ energy market asymmetries (as well as much more demanding procedure to make the demand cut binding). While this agreement is definitely a step forward, it is currently uncertain whether it would be sufficient to meet the gas demand challenges in the coming winter.

A number of market solutions can potentially improve on the situation. For example, one could establish a market for energy demand reduction quotas in line with the cap-and-trade program designed for CO2 emissions. Alternatively, an emergency gas auction (like the one discussed in Germany for industrial firms) could allow gas savings to be offered in an auction. The winning, cheapest bid would get a market-price level compensation. Of course, such market mechanisms are likely to imply (at least some) consumers will face surging gas prices, but this appears inevitable in view of the difficulties to implement rationing mechanisms to cope with the reduced gas supply.

Market solutions could also be implemented at member state level. However, such an implementation would likely limit solidarity between member states and increase the costs associated with reduced gas consumption. Indeed, purely national solutions (almost by definition) lack solidarity mechanisms between member states and in addition inhibit that the gas reductions take place where they are the least costly.

Nudging and Information Campaign

Given the gas crisis and implementation frictions, the EU should benefit from complementing the regulatory and market solutions (mainly targeting the industry) by incentivizing the demand-cutting behavior of private consumers. There are many ways to trigger behavioral change, from changing legislation to nudging consumers to persuade them to lower their gas (and energy) consumption. Some nudging policies have been successful in the past. One example is Japan’s “setsuden” (electricity-saving) campaign, run after the 2011 Fukushima nuclear plant disaster. It started as an unofficial movement and continued into regulatory restrictions for large firms and voluntary but highly encouraged household targets. The information campaign stressed how close the country was to blackout and successfully prevented blackouts.

In the current crisis the EU states’ policies towards consumers were concentrating on shielding them from high energy prices (see von der Fehr et al, 2022 for an overview). Nudging and energy-saving information campaigns in the EU are yet to gain momentum. Some of the larger EU members are leading the movement. For example, in France, the president called for an immediate “energy sobriety” on the last National Day. Businesses and public buildings were asked to switch off the light at night and anticipate a lower winter heating consumption. While fines for infringement are under discussion, the French government is hoping for a nudging effect. Similarly, Germany has started an intense information campaign to convince individuals to reduce their electricity consumption by taking fewer showers and turning down the air conditioning. However, much broader, intensive energy-saving campaigning is urgently needed to lower energy demand effectively.

Several results from the experimental economic literature motivate such campaigns. The first point concerns the usefulness of nudging in the energy context. The evidence on the effect of incentivizing consumers’ energy saving behavior via monetary or non-monetary interventions is mixed (see Andor and Fels, 2018 and Lingyun Mi et al., 2022 for an overview). However, a recent meta-study combining the results from 112 field trials between 1976 and 2021 (Lingyun Mi et al., 2022) supports the effectiveness of non-monetary incentives (such as nudging by providing information or offering social comparisons) in creating energy-saving behavior. Moreover, it finds that non-monetary incentives are also more effective and longer lasting in promoting energy conservation than the monetary ones. One possible reason for this finding is that non-monetary incentives may affect individual’s values and their intrinsic motivation to save energy. This result implies that information campaigns, target-setting, and providing social comparisons can be an effective and relatively cost-efficient way to lower energy demand.

The second question concerns the timing of such intervention. Again, while there is no clear-cut evidence concerning the long-term impact of nudging, some literature documents effects lasting months and even years after the intervention stopped (Andor and Fels, 2018 overview a few such studies). Further, the same meta-study by Lingyun Mi et al., 2022 found that interventions lasting 1–6 months were the most effective. A combination of antecedent (before actual behavior, such as goal setting) and consequence (when the incentives to act are affected by the results of the action) nudge-based interventions produced the best energy-saving effect. These findings suggest that campaigns should start now to be ready for the winter 2022-23 season.

Last but not least, there is evidence that energy conservation goal-setting is effective only when the goals are realistic. For example, in Harding and Hsiaw (2014), a moderate energy saving goal set by a household led to a sizable consumption reduction, and the effect lasted for one and a half years. With more ambitious goals the initial strong response quickly vanished. Finally, there is no consumption adjustment pattern with unrealistically high goals. One possible, even if somewhat stretched, interpretation of these results could be that a drastic change in consumption may be more challenging to incentivize through nudging than a series of more minor adjustments. This consideration provides another rationale for the early start of nudging policies, suggesting a meager initial consumption reduction, and gradually increasing the threshold.

Conclusion

Cutbacks in gas consumption are essential to surviving the EU energy crisis, especially in case of a complete Russian gas halt. The EC has recently proposed a plan for the EU nations to decrease their gas consumption by 15% between August 2022 and March 2023. This plan is included in a wider solidarity approach to EU energy crisis management. However, approval of this plan by the EU nations faced difficulties due to asymmetries in exposure to Russian gas across EU member states and the resulting unwillingness to share the costs of the crisis. The resulting compromise plan features multiple exemptions from the 15% rule. Market solutions, such as trade in demand reduction quotas, may help to improve EU coordination on demand reduction. Another essential component of crisis management is the EU-wide nudging of private consumers encouraging energy saving behavior. Based on historical examples and the experimental literature such nudge-based policy may be effective and cost-efficient if started now.

References

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.

Will Entrepreneurs Be Able to Reactivate the Belarusian Economy?

Posted on June 13, 2022 | Policy Brief

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Based on data from two recent waves of the Global Entrepreneurship Monitor (GEM), we demonstrate that the Coronacrisis gave birth to many new necessity-driven entrepreneurs who will likely alleviate the current challenges of unemployment and income losses in the short- and medium-term. The readiness and willingness of Belarusians to become entrepreneurs in a harsh business environment could be considered a good sign for the economy and society. However, such businesses may fail to deliver a positive long-term impact on the economy, while the detrimental consequences of the war in Ukraine undermine the potential and sustainability of growth-driving businesses with international and innovative orientation.

Crises and Entrepreneurial Activity in Belarus

During the past 15 years, the Belarusian economy and, in particular, Belarusian entrepreneurs have experienced several crises of different scopes, nature, and origins (in 2009, 2011, 2015-2016, 2020). During these periods, Belarusian private enterprises responded faster to both negative and positive trends in the economy compared to state-owned firms. This has for instance manifested itself in private sector firms being swifter in decreasing or increasing the size of the work force in recessions or recoveries (IMF, 2019).  Stagnating demand also led to deteriorating business opportunities that in turn incited a decrease in the number of both nascent and matured entrepreneurs. In line with Cowling et al. (2015), these circumstances suggest the presence of a procyclical trend in the entrepreneurship development in the country. In the same vein, the period of economic growth brought new entrepreneurs to the market to pursue business opportunities.

However, results from two waves of the Global Entrepreneurship Monitor (GEM), conducted in May-June 2019 and June-July 2021 demonstrate that notwithstanding the Coronacrisis, political unrest, and worsening business climate, the Belarusian economy experienced an influx of entrepreneurs (not necessarily officially registered as a firm or sole proprietor). These findings contribute to the discussion on the motivation, potential, and effectiveness of this wave of entrepreneurs for the economy.

Belarusian Context for Entrepreneurs in 2019-2021

After the 2015-2016 economic crisis, 2019 represented the third consecutive year of moderate economic growth in Belarus. The gradual liberalization of the economic activity, as well as the give-and-take relationship with Eastern-European neighbors and the West, fueled the enthusiasm of Belarusian entrepreneurs, especially in the medium- and high-tech sectors. The year 2019 was supposed to be highly conducive to entrepreneurship. These conditions were captured by the GEM Belarus 2019/2020 (2020).

However, as in most other countries, small businesses were more affected by the pandemic than large enterprises in Belarus. Moreover, many of them were left to fend for themselves in dealing with COVID-related challenges, as only a small portion of enterprises benefitted from state support measures (Marozau et al., 2021). The recovery period was abrupted by the political crisis that broke out after the presidential elections in August 2020. This political unrest resulted in increased pressure on the private sector and NGOs as well as tensions with EU countries and Ukraine. Many famous entrepreneurs were forced to immigrate and re-locate their businesses. Consequently, GEM Belarus 2021/2022 (2022) captured a new reality of the Belarusian entrepreneurial ecosystem.

How the Entrepreneurship Indicators Changed

According to the GEM 2021/22 survey, Belarus experienced an increase in the percentage of the adult population (18-64 years old) involved in all stages of the entrepreneurial process (Figure 1). Nevertheless, the level of the total early-stage entrepreneurial activity (which includes nascent entrepreneurs – up to 3 months old businesses and baby businesses – 4–42 months old) is still lower than one might predict based on the country’s level of economic development (Figure 2).

These positive changes are paradoxical because, according to the survey, Belarusians were not enthusiastic about the opportunities to start a business – respondents reported a high level of fear of business failure, and that the entrepreneurial framework conditions had deteriorated.

Figure 1. Percentage of the adult population involved in the entrepreneurial process

Source: GEM Belarus 2019/2020 & 2021/2022

Figure 2. Early-stage entrepreneurship rates and GDP per capita.

Source: GEM 2021/22 Global Report (Hill et al., 2022)

Moreover, the GEM survey reveals that the profile of early-stage entrepreneurs changed between 2019 and 2021 – the educational level of early-stage entrepreneurs increased, while their income level followed a negative trend. A plausible explanation for these changes could be that a relatively well-educated part of the population, employed in the sectors that were harshly hit by the pandemic (HoReCa, Sport & Leisure, etc), decided to start a business out of necessity due to wage shrinkages or layoffs. Therefore, neither a low level of opportunity perception nor an aggravating business climate kept them from starting an enterprise.

Support for this argument can be found if we examine the reasons why Belarusians started businesses in 2021 (Figure 3). The shares of both nascent entrepreneurs and owners of baby businesses that report ‘earning a living because jobs are scarce’ increased by about 20 percentage points. This phenomenon, when a depressive market reduces employment opportunities and forces individuals into becoming entrepreneurs, is regarded as necessity-driven entrepreneurship (Gonzalez-Peña et al., 2018).

Figure 3. Reasons to start a business

Source: GEM Belarus 2019/2020 & 2021/2022. Note: Respondents could strongly agree, somewhat agree, neither agree nor disagree, somewhat disagree, or strongly disagree with statements reflecting the reasons they were trying to start a business. Figure 3 provides the cumulative share of those who strongly agree and somewhat agree.

Keeping in mind that the unit of analysis in the GEM is on the individual and not the enterprise level, we can suggest a cautious hypothesis that the trend in entrepreneurship development in Belarus has changed from being pro-cyclical to countercyclical in the short term.

It is already obvious that the negative impact of the pandemic and political unrest on Belarusian businesses cannot be compared with the devastating effects of the Russian invasion of Ukraine. In this context, the countercyclical trend or, in other words, the readiness and willingness of Belarusians to become entrepreneurs against all odds, could be considered a good sign for the economy and society. However, such necessity-driven entrepreneurs are more focused on achieving a sufficient standard of living than on expansion and innovation. It is known that the growth and innovative orientations of businesses (product and process innovation, activity in technologically intensive sectors) are important predictors of technological change and total factor productivity (Erken et al, 2018). From this perspective, according to the GEM 2021/2022, Belarus is still doing relatively well in terms of impactful early-stage entrepreneurship (international and innovative orientation, growth expectations, and technological intensity). However, businesses with these characteristics are usually led by opportunity-driven entrepreneurs and are more sensitive to changes in the external environment. Therefore, the detrimental consequences of the Russian aggression against Ukraine (difficulties with payments and logistics, export/import restrictions, and tarnished reputation of Belarus) have already undermined the potential and sustainability of most such businesses and jeopardized the socioeconomic development of the country.

So, the answer to the question of whether Belarusian entrepreneurs will be able to reactivate the economy is rather ‘no’. Based on GEM 2021/2022 data, we argue that the augmented entrepreneurial activity rate will plausibly alleviate the problems of unemployment and income losses in the short- and medium-term, but may not have a strong and long-lasting effect on the economy as a whole.

Conclusion

The 2021 wave of the GEM survey has documented an increase in the share of the population involved in the different stages of the entrepreneurial process in Belarus. This, however, appears to be the outcome of the pandemic-related economic crisis, which manifests itself in income losses and layoffs. As a result, the crisis produced new necessity-driven entrepreneurs with vague prospects.

In this regard, policymakers should realize that stimulating self-employment and small-scale entrepreneurship may indeed be a temporary solution to unemployment issues. If this is the aim, the toolkit to support such businesses is well elaborated and accessible to the government (it includes educational & consulting services, easy access to finance, etc.).

As for impactful entrepreneurship, hardly anything can be done by the current government to retain innovative and international business in Belarus against the backdrop of the consequences and global reactions to the war in Ukraine.

References

  • Cowling, M., Liu, W., Ledger, A., & Zhang, N. (2015). “What really happens to small and medium sized enterprises in a global economic recession? UK evidence on sales and job dynamics”, International Small Business Journal, 33(5), 488-513.
  • Erken, H., Donselaar, P., & Thurik, R. (2018). “Total factor productivity and the role of entrepreneurship”. The Journal of Technology Transfer, 43(6), 1493-1521.
  • GEM Belarus 2019/2020, (2020). “Global Entrepreneurship Monitor Report GEM Belarus 2019/2020”.
  • GEM Belarus 2021/2022. (2022). “Global Entrepreneurship Monitor Report GEM Belarus 2021/2022”.
  • González-Pernía, J. L., Guerrero, M., Jung, A., & Pena-Legazkue, I. (2018). “Economic recession shake-out and entrepreneurship: Evidence from Spain”. BRQ Business Research Quarterly, 21(3), 153-167
  • Hill, S., Ionescu-Somers, A., Coduras, A., Guerrero, M., Roomi, M. A., Bosma, N., … & Shay, J. (2022). “Global Entrepreneurship Monitor 2021/2022 Global Report: Opportunity Amid Disruption”.
  • IMF. (2019). “Reassessing the Role of State-Owned Enterprises in Central, Eastern, and Southeastern Europe”, 19/11.
  • Marozau, R., Akulava, M., & Panasevich, V. (2021). “Did the Government Help Belarusian SMEs to Survive in 2020?” FREE Network Policy Brief Series.

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.

Economic and Social Context of Domestic Violence: Research Shared at the 2022 FROGEE Conference

Posted on June 7, 2022 | Policy Brief

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This brief summarizes the research papers presented at the 2022 FROGEE conference “Economic and Social Context of Domestic Violence”, which took place on May 11, 2022. It was organized by the Stockholm Institute of Transition Economics (SITE) together with the Centre for Economic Analysis (CenEA) and the FREE Network. Two additional briefs related to the conference are published on the FREE policy briefs website – a brief on gender-based violence in conflict based on the panel discussion, and another sharing preliminary results from the recent FROGEE survey.

While the concerns about domestic violence (DV) and intimate partner violence (IPV) have been gaining prominence since the start of the COVID-19 pandemic, they were further exacerbated by the devastating events happening in Ukraine. Times of crisis or conflict makes the issue more severe, however, gender-based violence is sadly prevalent at normal times too, and a major portion of it is DV and IPV. Limiting violence towards women requires understanding the determinants of DV and IPV and the channels through which they take effect. With this in mind, the Stockholm Institute of Transition Economics (SITE) together with the Centre for Economic Analysis (CenEA) and the FREE Network invited researchers to present their work relating to the economic and social context of domestic violence. This brief provides an account of what was shared at the conference.

Prevention of Domestic Violence: What Works and What Doesn’t?

Three presented studies geared toward evaluating policies aimed to limit violence against women.

Dick Durevall shared his findings on IPV and national policy programs in Colombia, focusing on the laws and policies implemented based on the UN campaign “UNiTE to End Violence Against Women” between 2010 and 2015. To evaluate the effect of these policies, he adopts a differences-in-differences design and compares provinces that had a gender policy before this renewed effort with those that did not. This builds on the idea that provinces that had an IPV policy strategy before UN recommendations were adopted are more efficient in implementing new such policies. It is found that self-reported physical violence falls from 20% to 16% between 2010 and 2015 in provinces that had IPV policies while this number remained at 18% in those that did not. While sexual violence decreased in both groups, provinces with IPV policies experienced a stronger reduction.

Accurate reporting is a key issue when it comes to IPV since it makes up the foundation for designing effective policy. Due to long-lasting and tiresome judicial procedures, threats, social barriers, or emotional costs, victims might choose not to report. Looking at the introduction of specialized IPV courts in Spain, Marta Martínez-Matute presented her paper on how institutions shape reporting. Bestowed with specialized staff, victim-oriented resources, and a swifter judicial process, these courts are specifically designed to deal with IPV cases. Martínez-Matute and co-author investigate if these resources make women more prone to report IPV by exploiting the sequential rollout of specialized courts. They use yearly court-level data on individual IPV cases between 2005 and 2018 in a staggered difference-in-differences framework with matched control districts. The results show that the introduction of an IPV court in a judicial district reduces the length of the judiciary process by 61% and increases the reported number of IPV cases by 22%. Ensuring that this increase is not fully driven by a rise in false reports, it is found that the share of dismissed IPV cases remains unchanged. Further, it is shown that the increase is driven by less severe IPV cases and not aggravated IPV offenses or homicides.

A distinctive feature of DV crimes is that there is a high degree of recidivism, with many women experiencing repeated violence from the same partner. However, little is known about how police should respond to such crimes to ensure safety to those victimized. From one perspective police arrests deter repeated DV crimes since they incapacitate perpetrators and allow police to investigate while offering safety to victims. However, some argue that this safety is merely temporary and that DV arrests might trigger offenders to retaliate against victims, leading to increased long-term DV. Against this reasoning, Victoria Endl-Geyer presented a study on the relationship between police arrests and DV dynamics in the UK. It uses highly granular administrative data on the population of DV incidents in the West Midlands which allows the researchers to observe the detailed information on the incidents’ timing and location as well as on police officers and their crime scene responses. It adopts an instrumental variables approach using the dispatch team’s previous propensity to arrest (measured as the weighted average arrest rate of officers in the team) as an instrument. The results provide evidence consistent with a deterrence effect. While regular OLS estimates show an insignificant impact, the IV results indicate that an on-scene arrest decreases repeat DV incidents by 25-26 percentage points. They find that the effect is the same when restricting the sample to incidents reported by a third party, supporting that this effect is not driven by a change in reporting behavior.

Factors of Domestic Violence and its Mechanisms

Other studies presented at the conference focused less on policy assessment and more on identifying the determinants of IPV and DV.

Losing or obtaining a job causes a shock in the intra-relationship dynamics and changes the economic power balance between spouses. Deniz Sanin presented her paper on the DV effect of women’s employment in the context of Rwanda. Following the government-initiated National Coffee Strategy in 2002, the number of coffee mills in Rwanda increased from 5 to 213 over the course of ten years. This natural experiment allows studying the effect of having a paid job as it captures the shift from unpaid labor on a family farm to paid work on a mill, keeping job-related skills constant. Using survey data on both DV and labor market outcomes along with administrative data on DV hospitalizations, the study adopts a staggered difference-in-differences strategy and compares women before and after mill opening as well as within and outside of the catchment area (a buffer zone surrounding the mill). The results show that upon mill opening, the probability of working for cash increases and that of self-reporting domestic violence in the past 12 months decreases by 26% (relative to the baseline of 0.35). During the harvest months, the only period of the year in which the mills operate, hospitals are significantly less likely to admit DV patients compared to the month before the harvest season, suggesting that the initial results are not driven by reporting bias. Looking at the mechanisms, she finds evidence supporting an increased bargaining power explanation – women in catchment areas who are exposed to mill opening are more likely to have a bigger say in household decisions such as larger household purchases and contraception usage. Increases in husbands’ earnings and decreased exposure are also ruled out as possible channels since a decline in DV is also found among spouses where the husband works in a different occupation with no change in earnings.

Rather than studying the impact of women’s employment status, Cristina Clerici shared a related paper that focuses on male unemployment. To investigate its effect on IPV, the study exploits the exogenous shock to employment caused by COVID-19 containment measures in Uganda. The authors collect individual-level data via phone surveys on the incidence of IPV among food vendors, including information on husbands’ sector of employment. To identify a causal DV effect of male employment exit, the authors distinguish between two groups of women with similar pre-lockdown experiences of abuse: those with spouses employed in sectors where operations were halted by COVID-19 lockdowns (construction workers, taxi drivers, etc.) and those with spouses who were unaffected (food vendors, farmers, etc.). The results show that male unemployment increases the probability of experiencing physical violence by 4.9 percentage points, corresponding to a 45% increase relative to the average likelihood. The effect cannot be explained by increased exposure (the man being more at home) – affected and unaffected women spend on average an equal number of nights in the market, which could be used as a coping mechanism. This suggests it is the change in unemployment status itself that drives the increase in DV.

While most of the literature on domestic abuse has documented that its drivers often come from changing life conditions of the victim or perpetrator, there is broad anecdotal evidence that exogenous events can lead to exacerbations in domestic violence as well. Ria Ivandic presented her paper that documents a causal link between major football games and domestic violence in England. The authors use a dataset on the universe of calls and crimes in the Greater Manchester area. The data provides a time series on the incidence of different types of domestic abuse with information on the timing, relationship to the accused, and individual characteristics of the victim and perpetrator, including whether the perpetrator was under the influence of alcohol at the time of the incident. They adopt an event study approach focusing on the hours surrounding a game and document a substitution effect in that the two-hour duration of a football game is associated with a 5% decline in DV incidents. However, following the game, the initial decrease is offset as DV incidents start increasing and culminate after 10-12 hours, eventually leading to an aggregate positive effect which constitutes a 2.8% hourly increase on days when games are played.

The authors argue that alcohol consumption, rather than emotions, is the main mechanism through which domestic violence is affected by sporting events. Supporting this hypothesis, they first find that the outcome of the game or the associated element of surprise (measured using the ex-ante probability of winning a game through betting markets) does not affect the probability of DV occurring. Second, they show that the increase in DV following a game is solely driven by an increase in alcohol-related DV incidents, while those committed by non-alcoholized men remain constant. Further strengthening this finding, it is shown that for games scheduled early in the day, when perpetrators can start drinking sooner and continue throughout the day, they find a significant increase in DV incidents committed by alcoholized perpetrators while this is not the case for late-scheduled games.

The Role of Women’s Empowerment

In the literature on gender-based violence, there is a common disposition to think about women’s empowerment as a central element of DV mitigation. However, theories point in opposite directions making the effect of women’s economic empowerment rather unclear. On one end of the spectrum, there are bargaining theories indicating that an increase in women’s employment opportunities or income should have a negative effect on DV by creating outside options or increasing the bargaining power in a relationship. At the other end, there are backslash theories arguing that enhancing women’s financial empowerment may further exacerbate violence by undermining the role of the breadwinner, triggering male partners to retaliate with the use of violence in order to restore the power balance. Going in the same direction, theories of instrumental violence point towards that the male partner might also use violence to extract resources.

In her keynote lecture, Bilge Erten outlined the evidence relating to DV and women’s empowerment and discussed to what extent and in which contexts these theories are supported.

The evidence of a positive or negative effect of empowerment may depend on which aspect of it is studied. Education is seen as an important one because it has the potential to raise women’s self-awareness of IPV, increase the likelihood of matching with a well-educated partner (which is negatively correlated to abusive behavior), and improve labor market outcomes. Although evidence is scarce in this area, Erten shared her own findings on the causal effect of education reform on IPV in Turkey. In line with instrumental violence theories, it is found that, while women in cohorts affected by the reform performed better in the labor market, they experienced more psychological violence and financial control behavior, and there was no sign of an effect on DV attitudes, partner-match quality or marriage decisions.

What we know about women’s empowerment and DV is also different across countries. When it comes to the effect of employment, findings from developed countries are generally consistent with bargaining theory explanations while what is found in the developing world is more mixed. This is also the case for studies on unilateral divorce laws – while a negative effect on IPV has been documented in the United States, a positive effect of these laws is found in Mexico.

Assessing the literature on the income effect leads to a somewhat ambiguous verdict too. Although generally, most studies confirm that overall violence declines with women’s income, there is often heterogeneity in the effect. It has for instance been found that the sign of the income effect from cash transfers on DV changes from negative to positive as the size of the transfer increases.

Finally, Erten provided some important policy considerations. There is evidently a widespread backlash problem that can arise after a policy intervention of the types discussed above. Policymakers need to think more about monitoring and protecting victims from more violence when implementing such a policy. Further research assessing post-intervention is also needed to identify interventions that are the most effective in minimizing domestic violence. In particular, a change in broad social norms around gender roles should be a desirable outcome, to the effect that a new, improved status of women in society and in the household becomes more culturally acceptable and needs not lead to backlash. In the case of expressive violence (that is not a rational, calculated response but rather a compulsion in the heat of the moment), mental health interventions should also be considered.

Concluding Remarks

As highlighted by the 2022 FROGEE conference, domestic violence not only has been put in the spotlight following the pandemic or the ongoing conflict in Ukraine, but is widespread across the globe in regular conditions too. The mixed findings shared at the conference suggested that policies limiting gender-based violence should be designed with respect to the cultural and social setting where they are to be implemented as the heterogeneity is very high across contexts. Although research has come a long way, the conference stressed that there is much more to be done, in terms of not only knowledge but also the political will and commitment to seriously address the issue of gender-based violence.

The presentations held at the conference can be viewed at this link and a separate policy brief based on the panel discussion on gender-based violence in times of conflict can be found here.

List of Speakers

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

Gender-Based Violence in Conflict

Posted on May 30, 2022 | FROGEE PROJECT, Policy Brief

20220529 Gender-Based Violence Image 02

The eruption of war exposes women to increased gender-based violence, in the immediate conflict area as well as in the countries where they seek refuge. Acknowledging the specific conflict-related risks that women face is important, in order to target interventions, especially considering that the actors that sit at peace negotiation tables are predominantly or exclusively men. In this policy brief, we discuss the implications of conflict for gender-based violence, with a special focus on the ongoing war in Ukraine. We also outline some policy interventions that might help mitigate the risks that women face, holding those responsible to account, and building a more gender-equal society from the reconstruction efforts. Our discussion draws from existing academic literature and inputs from the special panel session on conflict during the FROGEE conference “Economic and Social Context of Domestic Violence”.

Gender-Based Violence During Conflicts

During war, as in peacetime, women are exposed to different forms of violence, and to a different extent, as compared to men. In other words, there are gender-specific aspects of conflict-related violence, both in immediate conflict areas and in the places where affected populations might seek refuge.

One form of violence against women in conflict areas is sexual violence and rapes perpetrated by combatants. Scholars and policy analysts tend to portray this violence as a weapon of war (Eriksson and Stern, 2013), meaning that it is a way of humiliating and demoralizing the enemy as individuals and as communities. Differently put, the narrative that portrays sexual violence as, for instance, the consequence of unmet sexual needs among soldiers is increasingly less accepted. Sexual violence against women perpetrated by armed forces in conflict areas is tragically prevalent. While proper quantification of the phenomenon is hard for obvious reasons, it is estimated for example that at least 500,000 women were raped during the Rwandan genocide, and 50,000 during the war in Bosnia (Guarnieri and Tur-Prats, 2022).

Another form of gender-based violence in conflict is that women who are uprooted by war tend to confront a high risk of sexual violence during their journey away from home and in the places where they seek refuge. Vu et al. (2014) estimate, through meta-analysis, that approximately one in five refugees or displaced women in complex humanitarian settings experienced sexual violence. The study also highlights the need for more data to shed light on the characteristics of perpetrators. The presence of aid workers among them appears to persist through several humanitarian crises (Reis, 2021).

Further, women and children fleeing war areas are vulnerable to the risk of trafficking and exploitation for sexual or other work (as highlighted in the FROGEE conference panel). Traffickers and criminal organizations tend to exploit the combination of a mass movement of people in precarious economic situations and the decreased scrutiny generated by the humanitarian emergency.

Finally, war heightens the risk of intimate partner violence (IPV) in conflict areas as well as among refugees and displaced individuals, by causing stress, trauma, economic hardship and increased substance abuse, all of which lead to deterioration in mental health and the quality of relationships (Conference panel). An actual or perceived sense of impunity can also undermine victims’ propensity to report IPV at such a time. A systematic review of the published literature on gender-based violence in conflict finds that estimated rates of IPV across most studies are much higher than the rates of rape and sexual violence perpetrated outside the home (Stark and Ager, 2011).

The consequences of conflict on IPV can be long-lasting. Evidence from post-genocide Rwanda shows that women who married after the conflict were more likely to be victims of spousal abuse; skewed sex ratios that reduced women’s bargaining power in the marriage market appear to be the relevant channel (La Mattina 2017). Another important factor is posttraumatic stress disorder (PTSD) among veterans: a study of US military personnel shows that assignment to combat in the Global War on Terrorism is associated with higher incidence of domestic violence and lower relationship quality (Cesur and Sabia, 2016). The increased availability of small weapons can also lead to more frequent or more violent instances of domestic abuse (Conference panel).

The War in Ukraine

Reports from the US State Department and Amnesty international document episodes of sexual violence from armed conflict actors in Donetsk and Luhansk since the start of the conflict in 2014 (Amnesty International, 2020). Both Russian and Ukrainian military were involved, speaking to the tragedy that the population close to the “contact area” have witnessed since 2014.

At present, growing evidence is emerging that Ukrainians, especially but not exclusively women and girls, are victims of rape, gang-rape and forced nudity perpetrated by Russian military troops invading the country (United Nations). It is notoriously difficult to collect and verify data and facts on sexual violence during wartime, but these early accounts, and the experience from previous conflicts, call for a high level of scrutiny and readiness to help. Research also suggests some potential factors that aggravate the prevalence of sexual violence in conflict. Guarnieri and Tur-Prats (2020) show that armed actors who hold more gender-unequal norms are more likely to be perpetrators of sexual violence, and that the incidence of sexual violence is highest when the parts in conflict hold gender norms that differ substantially (Guarnieri and Tur-Prats, 2022). Survey data show that the share of people who appear to hold gender-unequal norms in Russia remained high over the years, based on questions on the effectiveness of women and men as political or business leaders (Figures 1 and 2), or the desirability of women earning more than their husbands (not shown).

Figure 1. Men make better political leaders than women do, % agreement

Source: World Value Survey

Figure 2. Men make better business executives than women do, % agreement

Source: World Value Survey

Evidence on the evolution of norms in Ukraine is more mixed (see Figures 1 and 2). All in all, surveys of gender-role attitudes suggest that gender stereotypes persist in Russian society, but it is not obvious that the prevailing gender norms are starkly different between Russia and Ukraine. On the other hand, attitudes toward IPV in the two countries might be evolving differently, at least among the respective elites, based on the fact that legislation on domestic violence recently changed in opposite direction in the two countries. Specifically, Russia decriminalized minor forms of domestic violence in early 2017. Conversely, Ukraine strengthened the legal response to domestic violence in early 2019, in particular making minor but systematic domestic violence criminally punishable, and extending criminal punishment beyond physical violence to include emotional and economic violence.

As a consequence of the war, almost 13 million Ukrainians have left their homes since Russia invaded on Feb. 24, 2022, according to the United Nations. Almost all of them are women and children, since men and boys aged 18 to 60 are required to stay in Ukraine to defend the country. Women traveling alone with their children, especially when fleeing to foreign countries where they often have no connections, are clearly at risk of assault and exploitation. Such risk is heightened by the exceptional speed of the refugee influx, whereby an impromptu response from the host countries is by necessity reliant on individual independent participation. Private hosts have spontaneously been opening their homes to accommodate for days or even weeks Ukrainians fleeing the war. Proper vetting of these offers is made difficult by the sheer number of people who are being welcomed in bordering countries, for instance Poland, as well as by the exceptional response from private individuals. Within a little more than a month from the start of this crisis there had already been a few episodes of sexual violence against Ukrainian refugees in their host countries (specifically in Poland and Germany).

While the current death toll in the war in Ukraine is unlikely to lead to dramatically skewed sex-ratios, this aspect might become more relevant as events evolve, in light also of the fact that nearly the universe of those who fled the country so far consists of women and children.

Finally, in the post-conflict period, the presence of small weapons, which have been made available to civilians to defend the country, is an additional risk factor for IPV (Conference panel).

What Can Be Done?

Academics, international organizations, activists and female politicians from Ukraine have made specific requests to improve the system of protection and accountability in the face of sexual violence against women living in or fleeing from conflict zones. These suggestions include ensuring that the system of transitional justice that will govern the post-conflict period establishes proper investigation and punishment of every form of sexual violence performed by armed actors during the war. To this end, some steps have already been taken. The UN Resolution in favor of the creation of an International Commission of Inquiry refers explicitly to the need to recognize the gender dimension of violations and abuses.

Beyond the horizon of the war, the safety of Ukrainian women in their homes relies on the protection offered by State legislation against domestic violence. In this respect, the Ukrainian government has recently taken a few measures in what the international community deems to be the “right direction”. A very important reform taken in the summer of 2021 allows for the military to be prosecuted for domestic violence on a general basis rather than on the basis of the disciplinary statute as it was before. This is especially important in light of the findings of increased risk of domestic violence in families of veterans (Cesur and Sabia, 2016). However, some critical aspects remain. In the current context, a crucial factor might be the limit of 6 months to prosecute the crime from the occurrence of the violence. An extension of such a period at a time when the normal functioning of many institutions is suspended or subject to delays can attenuate the perception of impunity that the exceptionality of the circumstances creates.

When it comes to refugees, there is as mentioned a need for better vetting of private hosts, although the urgency of action that the current circumstances require makes this a particularly challenging task. State effort in this direction has been complemented by civil society initiatives. For example, in Sweden, Facebook groups that lined up to coordinate the offer of housing are now organizing themselves to create a system for verifying housing and hosts.

Ukrainian politicians have also asked Western countries to be prepared to offer expertise on how to support survivors of rape and other sexual violence in conflict.

Other experts recommend reliance on cultural and linguistic mediators to help refugee women access services for victims of IPV that are already offered by local actors in their temporary host country (Conference panel).

In the longer term, guaranteeing economic safety for refugees is also an effective measure to reduce their vulnerability to exploitation from sex-traffickers and criminal organizations.

Finally, yet importantly, the involvement of women in peace negotiation processes should be sought after. Echoing the discussion on women’s scarcity in leadership positions in peacetime, the gender-unequal composition of peace delegations poses an issue of equality, representativeness, and efficiency (Bertrand 2018). Interestingly, it has been noted that a more truthful narrative of war, which recognizes women’s role not only as victims but also as perpetrators (and the converse for men, although proportions are clearly unbalanced in both cases), might help pave the way for higher female representation at negotiation tables (Conference panel). Relatedly, the European Institute for Gender Equality proposes gender mainstreaming of all policies and programs involved in conflict resolution processes (EIGE). The international community should also consider gender mainstreaming of reconstruction programs, to help build a more gender-equal post-conflict Ukraine.

References

  • Amnesty International. (2020). Not a Private Matter. Domestic and Sexual Violence against Women in Eastern Ukraine.
  • Baaz, M. E., and Stern, M. (2013). Sexual violence as a weapon of war?: Perceptions, prescriptions, problems in the Congo and beyond. Bloomsbury Publishing.
  • Bertrand, M. (2018). Coase lecture–the glass ceiling. Economica, 85(338), 205-231.
  • Cesur, R., and Sabia, J. J. (2016). When war comes home: The effect of combat service on domestic violence. Review of Economics and Statistics, 98(2), 209-225.
  • Guarnieri, E., and Tur-Prats, A. (2022). Cultural distance and conflict-related sexual violence. Mimeo
  • Reis, C. (2021). Sexual abuse during humanitarian operations still happens. What must be done to end it. The Conversation, October 5 2021. https://theconversation.com/sexual-abuse-during-humanitarian-operations-still-happens-what-must-be-done-to-end-it-169223
  • Stark, L. and Ager, A. (2011). A systematic review of prevalence studies of gender-based violence in complex emergencies. Trauma, Violence, & Abuse, 12(3), pp.127-134.
  • Vu, A., Adam, A., Wirtz, A., Pham, K., Rubenstein, L., Glass, N., Beyrer, C. and Singh, S. (2014). The prevalence of sexual violence among female refugees in complex humanitarian emergencies: a systematic review and meta-analysis. PLoS currents, 6.

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.