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The Inevitable Social Security Reforms in Belarus

Posted on February 8, 2016 | Policy Brief

In 2016, Belarus will face the need to reform its social protection policy. The three main directions of reforms will be to departure from subsidized tariffs, to reform the pension system, and to increase unemployment benefits. Needless to say, some of these reforms will be highly unpopular. The government needs not only to cut expenditures, but also to think about new ways of providing targeted social support.

Faced with an anemic growth over the last 5 years and a GDP decline of 3.9 percent in 2015, Belarus has to rethink its economic policy. While the government is so far reluctant to undertake serious structural reforms, the decrease in budget revenues and lack of access to international financing leaves the authorities with few other options than to reform the social security system. This push might actually be a good thing, as social security in Belarus needs to depart from its current non-sustainable model of subsidies for everyone, to a model of focused means-tested social support.

Subsidized Tariffs

A lot of government-set tariffs in Belarus are currently subsidized. Utility service tariffs and transport fees are lower than the costs of providing these services. This is especially true for the heating tariffs, which currently cover 10-20 percent of total costs.

The subsidization policies are inefficient, as they benefit the rich (who consume more) rather than the poor in need of government support. Moreover, in the case of energy tariffs, cross-subsidization leads to higher energy costs for the firms, making them less competitive. Both prospective creditors, the IMF and the Eurasian Fund for Stabilization and Development, demand that the subsidies are gradually removed.

Zhang and Hankinson (2015) estimate the effects of an increase of the heating tariff on welfare. They find that the burden of higher tariffs will mostly fall on low-income groups. In particular, if the heating tariffs increase to 100 percent of the costs, households from the lowest income quintile will spend over 16 percent of their income on energy. Therefore, the authors conclude that the government should introduce a targeted social assistance together with the tariff increase.

While tariff increases were already introduced in the beginning of 2016, a targeted social assistance is still only a project.

Unemployment Benefits

Despite calling itself a social economy, Belarus has inexplicably low unemployment benefits (currently below 10EUR per month in Minsk). These low unemployment benefits contribute to a very low registered unemployment rate – 1 percent in November 2015. The more adequate measure of unemployment, based on labor force surveys, is classified in Belarus. However, large-scale job cuts in the biggest state-owned enterprises suggest that unemployment is a real threat.

Akulava (2015) argues, that given the current situation on the labor market, unemployment benefits should be increased to at least the minimal subsistence level. However, unemployment benefits per se will not solve all the problems in the labor market, and Belarus needs more active labor market policies facilitating the retraining and reallocation of workers.

The IMF has also emphasized the need to introduce proper unemployment insurance. The government has already pre-announced an introduction of increased unemployment benefits, but the details and dates are still unclear. There is a risk that, as many other policies in Belarus, the unemployment support will favor the state-controlled part of the economy and only offer increased support for those laid off from state-owned enterprises.

Pension Reform

The Belarusian pension system has not change much since the Soviet times: it is still a pay-as-you-go redistributive system, with a pension age among the lowest in Europe (55 for women and 60 for men). The Pension Fund first registered a deficit in 2013, and given the ageing population, deficits will only deepen in the future.

Due to relatively low fertility rates (1.6 per woman) and increasing life expectancy, the Belarusian population is quickly ageing: In 2015, there are 4 persons of retirement age per 10 persons of working age, but in 2035, this ratio will be 6 per 10.

Lisenkova and Bornukova (2015) build a demographically accurate overlapping generations model of Belarusian economy to estimate the stability of the pension system. They find that if the current parameters do not change, the deficit of the Pension Fund will explode up to 9% in 2050 (line 55/60 in Figure 1).

Figure 1. The Pension fund deficits under different scenarios, in % of GDP

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Source: Lisenkova and Bornukova, 2015

The authors also estimate different reform scenarios. An increase in the contribution rate and a decrease in the replacement rate (ratio of average pension to the average wage) do not seem feasible, as the current contribution rate of 29 percent is already too high, and the replacement rate is near the minimum set by the National Development Strategy 2020. The most obvious reform is then to increase the pension age for women, who retire 5 years earlier than men, despite having 10 years longer life expectancy. However, as can be seen from line 60/60 in Figure 1, equating the pension ages for women and men will not be enough to curb the deficits. Another simulated reform is to gradually increase pension age to 65 years for everyone, after increasing it to 60 for women only. This reform would mean that the deficits would be kept below 1 percent of GDP (and even generate a small proficit by 2035, although in a very long perspective the deficit will increase to 2 percent again (line 65/65)). In the very long run, Belarus needs to build a fully funded pension system.

The need to increase the pension age is already on the public debate agenda, and the authorities recognize the need for reforms. Needless to say, however, this move will be very unpopular.

Conclusion

The current economic crisis gives an opportunity and incentive to make Belarusian social policy more efficient. This policy brief describes the three major fields of reform. Subsidized tariffs are unfair and inefficient, but before removing subsidies the government should create a targeted system of social assistance to those in need. Increasing unemployment (and demands from the creditors) may force the government to change its unemployment benefit policy. The pension system needs reforms, but these would be difficult to implement due to unpopularity.

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References

  • Akulava, M. (2015), ‘Unemployment insurance as a tool of social protection’, BEROC policy paper series, PP no. 32 (in Russian)
  • Lisenkova, K., and Bornukova K. (2015), ‘Effects of Population Ageing on the Pension System in Belarus’, BEROC working paper series, WP no. 28
  • Zhang, F., and Hankinson, D. (2015), ‘Belarus Heat Tariff Reform and Social Impact Mitigation,’ World Bank Publications, The World Bank, number 22574

 

The Issue of Repeat Cartel Offences

Posted on February 1, 2016 | Policy Brief

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Leniency policies have become an important antitrust tool but it is not clear whether they have effectively prevented recidivism or whether firms have learned to collude under, and even make strategic use of them. If “recidivism” is really an industry-level phenomenon, the appropriate policy measures are very different from what is necessary if individual firms, having been detected and punished for colluding, engage in the behavior again. Following Levenstein et al. (2015), this brief discusses the recidivism question as one about post-cartel behavior, i.e. the set of policies required to assure that effective competition emerges post-cartel breakup.

Measuring Recidivism

Cartels are one of the main concerns of the European Commission (EC) and the US Department of Justice (DOJ) and so, the US and EU Leniency Programmes (LPs) were designed, in 1978 and 1996 respectively, as a device for the deterrence and dissolution of collusive agreements (see Marvão and Spagnolo (2015a) for an in-depth review on the available evidence of the effects of LPs).

In the analysis of cartel formation, recidivism is an important issue. In the set of 510 cartel members fined by the EC in 1998-2014, Marvão (2015) identifies 89 “multiple offenders” (firms fined for collusion more than once), 10 “repeat offenders” (firms which initiate a cartel after being investigated for another cartel), and 5 recidivists following the definition from Werden et al. (2011): firms which initiate a cartel after being fined for another cartel.

The DOJ dataset compiled by Levenstein and Suslow (2015), spanning 1961-2013, preliminarily finds 113 “multiple offenders” but only 14 “repeat offenders”. Of these 14 firms, 5 that had been previously indicted were caught in the 1990s, but none was indicted again by the DOJ in the 2000s.

Although the number of (discovered) “true recidivists” is not zero, it is less than 1% in these two samples (EU, US). Recidivism seems to arise when there are lapses in enforcement; not surprisingly, some firms take advantage of these lapses to return to old behaviors. Designing policies that are able to prevent recidivism requires understanding whether this is an industry or firm-level phenomenon.

Industry Recidivism

Levenstein et al. (2015) use the above-mentioned EU and US datasets to show that collusion occurs in virtually all sectors of the economy, but with discernable patterns.

In the US, construction and chemicals are frequently cartelized (pre and post leniency). There are a large number of cartels in local markets in some industries, such as retail gasoline stations and dealers and ready-mix concrete. While collusion in these local markets is frequently uncovered, it is not necessarily amongst the same firms.

In the EU, chemicals and transport cartels are also frequent areas of collusive activity (although cartels that are strictly within national boundaries and prosecuted by national competition authorities are not included in the sample).

The authors show that there is a large share of repeat and multiple offenders in chemicals and a surprisingly high proportion of repeat offenders in the manufacture of transport and electrical equipment. The highest proportion of multiple offenders is found in pharmaceuticals and refined petroleum products. The transportation and storage market is a sector with a high incidence of collusion (83 convicted cartel members), but no repeat offenders.

While the determinants of cartel activity are varied and endogenous, some correlations with industry-driven recidivism can be discussed:

  1. Industry concentration. It increases the ease of tacit collusion and it should increase the likelihood of explicit collusion, but there are many cartel examples in unconcentrated industries. In some industries, it has been argued that high fixed costs make competition unstable, so that, absent collusion, firms price below long-run marginal cost and are unable to cover fixed costs (Pirrong, 1992).
  2. Culture and history. Spar (1994) argues that the cooperative culture necessary for survival for diamond miners facilitated collusion as the industry matured. Policy fluctuations can also contribute to this problem, as was the case in the US during the Great Depression.
  3. Inelastic demand. This is empirically challenging to capture if the observed prices have been affected by monopoly power, thus potentially raised to a level at which demand is elastic. In many cases, the direct consumer is a producer, so the downstream cost function and competitive intensity also influence elasticity of demand for the cartelized product. Grout and Sonderegger (2005) estimate the likelihood of collusion in the US and EU and rank industries accordingly. This could be used to target competition authority resources to select industries.

Firm Recidivism

Once a cartel breaks-up, cartel members may decide to compete in the market, merge, tacitly collude, or explicitly collude again. The latter does not mean that the cartel re-forms: a firm may collude in a new industry or product line or with a new set of co-conspirators.

U.S. Steel was involved in 6 different US cartels between 1948 and 1969, with different cartel partners and in different steel products. VSL construction was similarly involved (including as a leader) in multiple US cartels across several decades with distinct, but overlapping partners.

In the EU, Akzo Nobel N.V. has been convicted for 9 cartels, which lasted between 1987 and 2007, and in which its co-conspirators were mostly overlapping – e.g. collusion with Arkema in 6 instances (although the latter changed its name during the period). Many of the other co-conspirators were also multiple offenders. While Akzo only received one fine increase for recidivism, it received 7 leniency reductions, of which 3 were full immunity.

Other EC repeat offenders are ABB and Degussa Evonik – both convicted 4 times and received full immunity twice – as well as Brugg and Sumitomo. The latter was convicted for 7 cartels, of which 5, in the automotive wire harness, were self-reported.

What may influence repeated cartel participation, at the firm level?

  1. Firm’s corporate culture. In such a case, the leadership of the organization expects managers to collude, and collusion occurs in many markets in which the firm operates. Firm norms and expectations of managerial behavior can repeatedly encourage collusion and “disregard” previous fines, as illustrated in the ADM case (Eichenwald, 2000).
  2. Firm structure. Multi-market collusion literature focuses on the ability of firms to target punishments in particular markets. Multi-market firms may also encourage the spread of collusion if they have learned to collude in one market and share their “best practices” in another. This seems to have been the case, for example, in the spread of the vitamin cartel from vitamins A and E to other vitamins (Connor, 2008). Multi-market collusion is encouraged not only by multi-product multinationals, but also multi-market relationships between what appear to be smaller firms in local markets. For example, if gas stations are owned by multi-market firms such as large oil firms or chains of stations, that may facilitate repeated collusion over time and/or across geographic locations.

Policy Tools

In complementarity with LPs, Levenstein et al. (2015) discuss additional (possibly) effective post-cartel policies, aimed at preventing firm-driven recidivism.

  1. Company Fines and Leniency. Theoretical research has emphasized the aptitude of well-designed and well-run LPs to improve cartel detection and deterrence (for a survey, see Spagnolo, 2008). However, Marvão and Spagnolo (2015b) note the generosity of the current EU LP: the average LP reduction is 45% and leniency is granted to 52% of convicted cartel members. In addition, Marvão (2015) shows that repeat offenders appear to receive larger EC leniency reductions, which suggests that firms can learn the “rules of the game”, colluding repeatedly and reporting the cartel to reduce their penalties. As such, fines need to be tougher and recidivism needs to be dealt with differently.
  2. Individual Accountability. Senior management in EU cartels does not seem to suffer from their participation in cartels. For example, Robert Koehler became CEO of SGL Carbon in 2012, after being convicted in 1999 of price-fixing in the graphite electrodes cartel. Imposing tougher sanctions, such as individual prison sentences or disqualification of senior executives from employment in their sector or role, may prevent repeated collusive behaviors (in new firms) and thus, increase deterrence levels.
  3. Follow-On Damages. Private damage suits may increase deterrence. In the US, private litigation plays a major role in the enforcement of antitrust law. Conversely, access to private damages is relatively new in the EU. A recently adopted EU Directive on damages (11/2014) prevents the use of LP statements in subsequent damage actions. However, Buccirossi et al. (2015) show that the effectiveness of damage actions can be improved if the civil liability of the immunity recipient is minimized and claimants receive full access to all evidence collected by the competition authority. Access to previous cartel decisions, for a given firm, will increase the amount of available information and can increase the likelihood and/or amount of successful damage claims.
  4. Consent Decrees. These impose conditions on the behavior of convicted firms (e.g. maximum price, and transparency). If these are violated, the authorities intervene, thus lowering the cost of prosecuting recidivists. In the US, decrees were routinely used by the DOJ in the 1960s and 1970s, but the practice was abandoned due to concerns of effectiveness and large costs. More recently, in September 2007, the Brazilian Administrative Council for Economic Defense enacted a resolution that allows for the use of consent decrees with the aim to settle cartel investigations. Two have already been executed.

If recidivism is industry-driven, its prevention may require a different set of tools, including those below, to complement leniency.

  1. Structural Remedies. Competition authorities have repeatedly permitted mergers among former cartel members, often without review, let alone structural intervention. Davies et al. (2014) examine mergers among former cartel conspirators and conclude that only 29% of the mergers were investigated by the EC. Remedies such as disclosure, divestiture of assets, selling minority shares in competitors, or licensure of intellectual property to competitors may change the nature of competition in the market and make collusion more difficult (see Marx & Zhou, 2015 regarding post-cartel mergers). This is particularly relevant if recidivism is industry-driven.
  2. Monitoring and screening. Some antitrust authorities have implemented monitoring and screening techniques to identify anticompetitive behavior in a given industry. These initiatives involve the analysis or monitoring of the characteristics of products or market structures that are thought to be more prone to collusion (mostly due to repeated offenses). Some examples are watch lists (e.g. Australia, UK, Chile), price observatories (e.g. Belgium, Spain, France), statistical screens (e.g. US FTC, Korea FTC), gasoline retail in Brazil and public procurement in Sweden (see Abrantes-Metz (2013) for further details on screens).

Conclusions

While literal recidivism, i.e. the formation of a cartel after having been convicted of illegal collusion, appears to be rarely detected in the EU and US, there remain policy gaps closing which could improve competition post-cartel.

A variety of post-cartel policies should be explored for their ability to increase the likelihood that workable competition, rather than tacit collusion or single firm dominance, will emerge. These reduce the reliance of competition authorities on leniency-driven self-reports, which will in turn make leniency more effective and less amenable to strategic use by firms determined to collude.

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References

  • Abrantes-Metz, Rosa (2013). “Proactive vs Reactive Anti-Cartel Policy: The Role of Empirical Screens.” Available at SSRN: http://ssrn.com/abstract=2284740.
  • Buccirossi, Paulo, Catarina Marvão, and Giancarlo Spagnolo (2015). “Leniency and Damages,” CEPR Working Paper DP 10682.
  • Connor, John M. (2008). Global Price Fixing, 2nd ed. Berlin: Springer.
  • Eichenwald, Kurt (2000). The Informant. New York: Random House.
  • Grout, Paul and Silvia Sonderegger (2005) “Predicting Cartels,” Office of Fair Trading, Economic Discussion Paper.
  • Levenstein, M., Marvão, C., Suslow, V., 2015. Serial Collusion in Context: Repeat Offenses by Firm or by Industry? OECD Global Forum on Competition. DAF/COMP/GF(10/2015)
  • Levenstein, Margaret C., and Valerie Y. Suslow (2015). “Price Fixing Hits Home: An Empirical Study of U.S. Price-Fixing Conspiracies,” working paper.
  • Marvão, C., 2015. The EU Leniency Programme and Recidivism. Review of Industrial Organization, 48(1), 1-27
  • Marvão, Catarina and Giancarlo Spagnolo (2015a). “What do we know about the effectiveness of leniency policies? A survey of the empirical and experimental evidence,” in Beaton-Wells, C and C Tran (eds.), Anti-Cartel Enforcement in a Contemporary Age: The Leniency Religion, Hart Publishing.
  • Marvão, Catarina and Giancarlo Spagnolo (2015b). “Pros and Cons of Leniency, Damages and Screens”. Competition Law and Policy Debate (forthcoming)
  • Marx, Leslie M., and Jun Zhou (2015). “The Dynamics of Mergers among (Ex) Co-Conspirators in the Shadow of Cartel Enforcement,” working paper.
  • Pirrong, Stephen Craig (1992). “An application of core theory to the analysis of ocean shipping markets” Journal of Law and Economics, 35(1): 89-131.
  • Spar, Debora (1994). The Cooperative Edge: The Internal Politics of International Cartels, Ithaca: Cornell University Press.
  • van Driel, Hugo (2000). “Collusion in Transport: Group Effects in a Historical Perspective.” Journal of Economic Behavior and Organization, 41(4): 385–404.
  • Werden, Gregory, Scott Hammond, and Belinda Barnett (2011). “Recidivism Eliminated: Cartel Enforcement in the United States since 1999,” Georgetown Global Antitrust Enforcement Symposium, Washington DC, Sept. 22, 2011.

Did Russian Migration to Russia Affect the Labor Market?

Posted on January 25, 2016 | Policy Brief

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As a result of the collapse of the Soviet Union, five million Russian and Russian-speaking people repatriated to Russia during 1990-2002. I use this natural experiment to study the effect of a large migration wave on the employment and wages of the local population. Taking into account the non-random choice of location by migrants within Russia, I find a negative effect of the inflows of immigrants on the local population’s employment but not on wages. The initial negative effects on employment are particularly large for local men, but they disappear after about ten years from the peak of the migration wave.

The effect of migration on the labor market of the host country is a long-standing question within economic literature and in public debate. In many cases, researchers try to estimate this effect using the data on large and unanticipated migration movements. The most famous study of this kind is probably Card (1990). Another case is the Russian migration to Russia resulting from the collapse of the Soviet Union. According to the 2002 Russian Census, 5.2 million of the people living in Russia in 2002 resided outside the country in 1989. That is, 3.6 percent of the 2002 population immigrated to Russia after 1989. Almost all of them (94.4 percent) immigrated from the former Soviet republics, most notably Kazakhstan, Ukraine and Uzbekistan.

The existing literature on migration flows in the former Soviet Union (fSU) since its collapse has emphasized the socio-political factors of migration. Locher (2002) finds that ethnic sorting was a major determinant of migration among the fSU countries, with the countries’ stage of transition and wealth level playing a minor role. Yerofeeva (1999) shows that ethnic repatriation was one of the main reasons behind migration from northern and eastern Kazakhstan.

In Lazareva (2015), I study two sides of the labor market effects of the immigration from fSU countries to Russia. The first side is the process of assimilation of migrants in the Russian labor market. The second side is the effect that inflows of immigrants had on the labor market position of the local population in Russia. Data used for estimation span a long period of time, which allows for tracing dynamic long-term effects of the influx of immigrants. This is the first comprehensive study of the labor market effects of one of the largest migration waves in Europe in recent history.

Method

In order to estimate the effects of the inflow of immigrants on the employment and wages of the local population, I exploit variation in the share of immigrants across Russian regions. According to the Census in 2002, migrants were quite dispersed over Russia’s vast territory; their share in population varied from 0.42% in the Tyva region to 8.5% in the Kaliningrad region. A relatively large share of migrants is observed along the border to fSU countries as well as in the oil-rich regions of Western Siberia.

A major problem when using regional variation to estimate labor market effects is that the migrants’ choice of region may be affected by the condition of that region’s labor market. Naturally, migrants tend to choose locations with higher wages and more employment opportunities. If this is the case, the estimates of the labor market effects will be biased.

However, the immigrants’ choice of location was not completely unconstrained due to the costs of migration related to the distance and access to information. Given these constraints, there is a relative crowding of immigrants in the regions of Russia that are closer to the border with fSU countries. Hence, I use the variation in the share of migrants across regions, which depend on the geographical distance from the source countries. In other words, I obtain the estimates from the comparison of regions that are similar in all their characteristics except for the distance to the border with fSU.

Data and Results

I use panel data on households from the Russian Longitudinal Monitoring Survey for the period 1995-2009. In the 2009 survey, the respondents were asked since what year they live in the Russian Federation. I define as immigrants, people at the age of 18 and above who moved to Russia after 1989. Note that the RLMS sample, which consists of people residing in the same dwelling units in each round, is unlikely to include illegal migrants or temporary (seasonal) labor migrants. Rather these are mainly people who settled in Russia permanently at some point during the 1990s and 2000s.

In the RLMS sample, 3.6 percent of the respondents moved to Russia after 1989. This is consistent with the national-level statistical data on immigration flows. A majority of the immigrants arrived to Russia in the early and mid-1990s. Immigration peaked in 1994 when almost 1.2 million people moved to Russia. After that, immigration steeply declined; during the 2000s, the registered level of immigration was at about 200,000 people per year.

A majority of the immigrants (71.7%) in the RLMS sample are of Russian ethnicity, and there is a slightly higher share of males. Importantly, migrants are not significantly different from the locals in terms of their education levels. The statistics on marital status show that a higher share of migrants compared to locals have families and children. Apparently, family migration was a large part of this migration wave.

Using the methodology described above, I obtain an insignificant effect of the share of immigrants on the wages of the local population over the period of 1995-2009. The effect of immigrant share on the unemployment of the local population is also insignificant. In contrast, estimates for the labor force participation (LFP) show a significant negative effect of immigration on the LFP of the local population. The size of the effect is non-negligible: a one-percentage point increase in the share of immigrants in a region reduces the probability for a local person to be in the labor force by 0.6 percentage points. Thus, over the whole period of 1995-2009, Russian immigration is estimated to have had some displacement effect, but only in terms of the labor force participation of the local population.

Since the inflow of immigrants was mostly concentrated in the first half of 1990s, I estimate my model for three sub-periods: 1995-2000, 2001-2004, and 2005-2009. The results for the wages remain insignificant in all sub-periods. Immigration is shown to increase the unemployment among locals in the first half of 2000s, but this effect dissipated in the second half of 2000s. The effect of immigration on the labor force participation is negative and highly significant for the late 1990s, still negative and significant but smaller in magnitude in the early 2000s, and disappears in the late 2000s. This analysis suggests that the immigration wave had a quite significant displacement effect for the local population in terms of unemployment and labor force participation, but not in terms of wages. This effect slowly declined and had disappeared by the second half of 2000s. My results also suggest that the negative labor market effects were more significant for men than for women.

Conclusion

The results of this study have implications for the debate on the effect of immigration on local labor markets, in particular on wages and employment opportunities for the native population. The majority of existing studies find only minor negative effects of migration on the labor market position of locals. My results suggest that immigrants who are close substitutes to the local labor force, due to the common language and similar education, have more significant effects on the labor market outcomes of the local population.

The finding that displacement effects in Russia dissipated quite slowly may be related to the very low migration rates of the local population in Russia throughout the transition. In order to reduce negative labor market effects of large influxes of immigrants, policy measures are needed that improve labor mobility across regions. These may include moving or housing subsidies, retraining programs and policies ensuring equal access to jobs and public services for internal migrants across the regions of Russia.

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References

  • Card, David, 1990, The Impact of the Mariel Boatlift on the Miami Labor Market, Industrial and Labor Relations Review, Vol. 43, No. 2, pp. 245-257.
  • Lazareva O. Russian Migrants to Russia: Assimilation and Local Labor Market Effects //IZA Journal of Migration. 2015. No. 4:20
  • Locher, Lilo, 2002, “Migration in the Soviet Successor States,” Applied Economics Quarterly, 48 (1), 2002, 67-84
  • Yerofeyeva, Irina, 1999, “Regional aspects of Slavic migration from Kazakhstan on the basis of examples from North Kazakhstan and East Kazakhstan provinces”. In: Vyatkin, Anatoly, Kosmarskaya, Natalya, Panarin, Sergei (Eds.), V Dvizhenii Dobrovoljnom i Vynuzhdennom [In Motion—Voluntary and Forced]. Natalis, Moscow, pp. 154–179

Electoral Competition and Political Selection

Posted on January 18, 2016 | Policy Brief

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Research in political economy has recently rediscovered that individuals, and not only institutions, matter for economic outcomes: not all politicians are of the same quality. Competition in the political market may have another virtue than its traditional disciplining role: it may favor the selection of good politicians. In a recent paper, Marijn Verschelde and I study the (time-varying) relationship between political competition and the quality of French deputies.

Note: this column draws heavily on a paper written with Marijn Verschelde, which is available here. The figures are taken from it.

How to design the political selection mechanism in order to favor the emergence of “good” politicians? The traditional public-choice literature emphasized the role of institutions in shaping the behavior of politicians, but have paid little attention, if any, to the individual decision maker. From this point of view, it is purely illusive to seek for “morally superior agents who will use their powers in some public interest” (Buchanan, 1989): all politicians are purely self-interested agents who have to be incentivized to act in accordance with voters’ preferences.

However, a recent stream of empirical papers provides evidence that individual politicians matter for economic outcomes (Besley et al., 2011; Jones and Olken, 2005). In other words, as suggested by common sense, they are not all cut from the same cloth. This emphasizes the need not only to shape institutions in order to discipline incumbent politicians, but also to select “good” decision makers.

Several determinants have been shown to affect political selection: the wage of politicians (Besley, 2004; Messner and Polborn, 2004), the transparency of politics (Mattozzi and Merlo, 2007), the institutional flexibility (Acemoglu et al., 2010), and reservation quotas (Besley et al., 2005; Besley et al., 2013). In addition to a well-known disciplining effect (for instance Stigler, 1972, and Becker, 1983), electoral competition is also likely to enhance this selection process as well (Galasso and Nannicini, 2011): competition pushes parties to select candidates of good quality in order to seduce neutral voters, who, contrary to partisans, are sensitive to the quality of the candidates. As recruiting experts are difficult, hence costly, parties will allocate them in the most contested districts only.

In a recent paper, Marijn Verschelde and I investigate the relationship between quality and competition in the case of the French National Assembly. Measuring the quality of politicians is not straightforward. A wide theoretical definition of quality is a combination of competence and motivation. Such a broad definition is challenging to operationalize in empirical work. Some papers approximate quality by variables like level of schooling and experience of politicians (Baltrunaite et al., 2014; Besley et al., 2011; Kotakorpi and Poutvaara, 2011), while others use their absenteeism rate or vote attendance (Galasso and Nannicini, 2011; Gagliarducci and Nannicini, 2013). We innovate by proposing a measure of quality based on productivity, i.e., on what deputies actually do. We gathered from the Assemblée Nationale archive all the information that has been systematically collected over the years for each deputy and for each year from 1958 to 2012: (i) propositions of law, (ii) oral questions, (iii) reports, and (iv) debates in which the deputy has been involved in. From these four aspects of parliamentary work, we compute a composite indicator of productivity (bounded between 0 and 1, higher values indicating higher performance). To measure political competition, we use a measure based on a Herfindahl index of the vote shares at the first round (bounded between 0 and 1, larger values indicating stiffer competition).

Figure 1. Estimated Productivity Conditional on Competition

fig1

We document a strong effect of competition on deputies’ productivity, in accordance with the theoretical framework. Figure 1 displays the estimated level of productivity as a function of the degree of competition, controlling for personal (age, schooling, etc.) and political (party, committee, and the likes) variables. Everything else equal, a deputy elected in the a priori most contested district is estimated to reach a productivity close to 0.8, while if she is elected in a safe district her productivity is estimated to be at most 0.6. This means that the productivity of deputies can vary by up to 30% depending on the degree of contestability. This relation holds even after minimizing problems of potential reversed causality and controlling for reelection incentives, indicating that we actually observe a selection effect.

Considering the time span of our dataset, it is interesting to observe how the positive relationship between electoral competition and political selection evolved over time. The most noticeable evolution over the second part of the XXth century in France is certainly the ideological convergence after the 80’s, marked with the reconciliation of the Socialist Party with the market and the rise of the Pensée unique (“one track thinking”, Knapp and Wright, 2001). Such an evolution should have decreased ideological voting and produced more competence-based elections, hence increasing the effect of competition on quality.

Figure 2. Effect of Competition over Time

fig2

However, we uncover a clear inverse-U shaped evolution. Figure 2 plots the effect of competition conditional on the year: the effect of electoral competition sharply increased till the 1980’s, but it has continuously decreased since then. How to explain this pattern? A possible explanation is the increased voters volatility, i.e., a higher unpredictability in voters’ behavior. If at first sight this phenomenon indicates an increase in the share of neutral voters, this is however not necessarily the case. Instead of moving from partisanship to neutrality, it is possible that supporters of a party A at election t turn into supporters of party B at election t+1. Partisans disappointed by the behavior of their party while in office might provide an unconditional support to the competing party at the next election. This is consistent with the fact that not any party succeeded to win two national elections in a row since the 80’s.

Conclusion

Our analysis point out a clear positive relationship between electoral competition and the quality of the French deputies, measured by a composite indicator of productivity. Overall, deputies elected in contested districts tend to perform better than others. From a public policy perspective, this result suggests that reforms enhancing political competition (for instance by redistricting jurisdiction in a proper way or by ensuring a fair access to media to competing parties) should be supported. However, we observe that the impact of competition increased till the 80’s, but continuously decreases since then. This opens the door for a vast research agenda, as it indicate that drivers of an efficient selection mechanism are not necessarily stable over time.

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References

  • Acemoglu, D., Egorov, G., Sonin, K., 2010. Political selection and persistence of bad government. Quarterly Journal of Economics 125 (4), 1511-1575.
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  • Besley, T., Pande, R., Rao, V., 2005. Political selection and the quality of government: Evidence from south india. PEPP/8, Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.
  • Besley, T., Folke, O., Persson, T., Rickne, J., 2013. Gender quotas and the crisis of the mediocre man: Theory and evidence from sweden. IFN Working Paper 985.
  • Buchanan, J., 1989. Constitutional Economics, Explorations into Constutional Economics. College Station, TX: Texas A & M University Press.
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  • Galasso, V., Nannicini, T., 2011. Competing on good politicians. American Political Science Review 105 (1), 79-99.
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Changes in Oil Price and Economic Impacts

Posted on December 7, 2015 | Policy Brief

Authors: Chloé Le Coq and Zorica Trkulja, SITE.

Oil has for decades been perceived as a necessary and highly addictive energy commodity, fueling the world economy. It is a crucial input good for most of the net-oil consumer countries, and it is an important source of revenue for the net-oil supplier countries. This means that any changes in the oil price will affect the entire world economy. However, the extent to which the oil-price fluctuations matter for the economy depends on the perspective (e.g. whether it is that of the macro economy, international trade, firm strategies, or the climate economy). In this policy brief, we outline the answers to this question that were provided at the 9th SITE Energy Day, held at the Stockholm School of Economics on November 5, 2015.                                                    

Is War Good for a Country’s Political Institutions?

Posted on November 30, 2015 | Policy Brief

Author: Tom Coupe, KSE.

Recent research suggests that experiencing war violence might make people more likely to turn out during elections. Using data from the conflict in Eastern Ukraine, we show, however, that people who were injured or had close friends or relatives killed or injured were less likely to turn out at the 2014 parliamentary elections. We also show that the impact of violence on turn out and political views depends on the type of violence one experienced.

Does Social Media Promote Protests?

Posted on November 23, 2015 | Policy Brief

 Author: Ruben Enikolopov, CEFIR.

Despite a lot of speculations about the role of social media in recent political protests throughout the world, there is still no persuasive empirical evidence to support these claims. We fill this gap by providing evidence that social media indeed played an important role in promoting political protests in Russia in 2011-2012. Using data on the dominant Russian online social network, VKontakte, we show that higher penetration of the social network across cities increased the likelihood of protest occurrence and the number of participants in these protests. Additional evidence suggests that reducing the costs of coordination is a mechanism behind social media influence.

Latvia Stumbling Towards Progressive Income Taxation

Posted on November 16, 2015 | Policy Brief

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The 2016 budget includes measures aimed at increasing the progressivity of the Latvian income tax system. In this brief we report some exercise on the impact of these measures using the Latvian EUROMOD tax-benefit microsimulation model. We show that by their design, the reforms are aimed at a reduction in income inequality and an increase in the progressivity of the tax system. However, there are risks that the behavioural response of the tax payers will subvert the intended impact of the reforms.

Ever since it was introduced in 1994 the Latvian personal income tax has been applied at a flat rate, albeit varying over time, mitigated only by a small untaxed personal allowance. Partly as a result of this, the Latvian tax-benefit system redistributes less original income than most other EU countries. Is this all about to change? The 2016 budget currently being debated in the Parliament contains two proposals aimed at introducing more progressivity in the personal income tax. These are the introduction of a “solidarity tax” aimed at high earners and the introduction of an earnings differentiated non-taxable allowance. The stated aims of these measures are to reduce inequality and help low wage-earners.

Description of the Reforms

Solidarity Tax

The solidarity tax foresees that income above 48,600 EUR per year will be taxed at a rate of 10.5% (employee’s part), plus 23.59% (employer’s part). The new tax will affect a very small share of wage earners. According to Finance ministry’s estimate, this tax will affect 4.7 thousand persons, whose income in 2015 exceeded this threshold, or 0.59% of all employed individuals (Finance Ministry, 2015).

Differentiated Non-Taxable Personal Allowance

The differentiated non-taxable personal allowance will be introduced gradually between 2016 and 2020. The basic idea is to make the allowance dependent on income: individuals receiving income below a certain threshold are eligible for the maximum possible allowance, then the allowance gradually declines with income until it is zero. The system will be introduced gradually in the sense that the minimum allowance will not reach zero until 2020 – it will be gradually reduced from 85 EUR in 2016 to 0 EUR in 2020.

The way the system will be implemented foresees that during a fiscal year, all individuals will be taxed applying the minimum non-taxable allowance (e.g., 85 EUR in 2016). At the beginning of the next year, people eligible for a higher tax allowance will have the opportunity to apply for a tax refund, by making an income declaration, and to get the overpaid tax back.

Simulations of Reforms: Inequality

Below we present simulation results from EUROMOD, which is an EU-wide tax-benefit microsimulation model (for more details see Jara and Leventi, 2014). The results show the first-round effect of the simulated policies, i.e., they show the pure effect of the proposed reforms abstracting from any behavioural responses that these reforms might induce. We simulate the effect of five reform scenarios: two scenarios of differentiated non-taxable allowance (one scenario reflects the system that is planned to be introduced in 2016, the second scenario represents the system that is planned to be introduced in 2020), one scenario that simulates introduction of the solidarity tax, and two scenarios that combine the solidarity tax with the new non-taxable allowances. We compare these reforms with the baseline system, which describes the tax-benefit rules that are in place in 2015.

It is important to note that we assume in the simulations that everyone who is eligible for a tax refund under the new non-taxable allowance rules does in fact apply for the refund, which means that we estimate the maximum possible effect from the introduction of the higher tax allowances.

Table 1 summarizes the effect of the proposed reforms on income inequality as measured by the Gini coefficient. All the proposed reforms reduce income inequality, but the solidarity tax achieves higher equality by reducing incomes in the top decile. The non-taxable allowance mainly affects people in the middle of the income distribution, as the bottom deciles contain proportionally fewer employed individuals, while in the top deciles the allowance, which is set in absolute terms, makes a smaller share of the income – hence, a weaker effect. Pensioners, who mainly belong to the lower deciles of the income distribution, do not gain from a higher allowance, because of a special taxation regime for pensions that already provides for a higher personal allowance. All major benefits (unemployment benefit, social assistance, child-related benefits) are not subject to personal income tax, hence benefit recipients also do not gain from the proposed changes (see Figure 1).

Table 1. Gini Coefficient Associated with the Reforms

Baseline ST* 2016 allowance 2020 allowance ST + 2016 allowance ST + 2020 allowance
Gini 0.361 0.358 0.360 0.357 0.357 0.355

 Source: authors’ calculations using EUROMOD

Note: ST – solidarity tax

Figure 1. Deviation of Equivalised Disposable Income from the Baseline Scenario, %

Figure1 Source: authors’ calculations using EUROMOD

Figure 1 also shows that the losers from the solidarity tax are in the highest decile, though it should be borne in mind that enterprises are also losers because they now have to pay part of the solidarity tax. The solidarity tax generates no direct gainers.

Impact on Progressivity

The progressivity of a tax or system is typically measured by the Kakwani index. The Kakwani index (Kakwani, 1977) can vary between −1 and 1 and the larger the index, the more progressive is the tax. A positive index indicates that the tax is progressive and a negative index indicates it is regressive. Table 2 shows the calculated Kakwani index for all major direct taxes (which include personal income tax, social contributions and the newly introduced solidarity tax) and separately for personal income tax (PIT) for each of the postulated scenarios. The results suggest that all of the proposed reforms increase the progressivity of the tax system.

Table 2. The Kakwani Index for the Six Scenarios

Baseline ST* 2016 allowance 2020 allowance ST + 2016 allowance ST + 2020 allowance
All income taxes* 0.034 0.040 0.048 0.058 0.054 0.064
PIT 0.07 0.07 0.10 0.12 0.10 0.12

 Source: authors’ calculations using EUROMOD

Note: ST – solidarity tax; income taxes include personal income tax, social contributions and the newly introduced solidarity tax

Qualifications and Risks

The above results capture the so-called first round impact of the tax changes. In practice people will react to the changed incentives by changing behaviour and thereby changing the impacts. For example, the higher net reward for working in low wage jobs may increase the supply of workers willing to work in such jobs thereby possibly having a bigger positive effect on the incomes of low income households than implied by the simulations.

Perhaps more significant is the potential effect of the solidarity tax on the behaviour of high earners and of the enterprises that employ them. This effect is captured by the concept of the elasticity of taxable income – defined as the change in taxable income in response to a change in the marginal tax rate. The taxable income elasticity concept takes into account all the behavioural aspects of the taxpayer in response to a change in the tax rate. As well as labour supply responses it includes other responses e.g. switching the form in which income is received as well as simple tax evasion (Saez et al., 2012). It is the switching of the form in which income is received, away from wage income towards other less-taxed forms of income that can be expected here. Thus according to an internal Latvian Employers Confederation employer survey, if the solidarity tax is implemented one third of employers will consider using legal tax optimization tools such as dividends or the microenterprise tax to avoid paying the tax. Here, employers are important as well as employees, because employers will pay the larger share of the tax. If this happens on a significant scale (high elasticity of taxable income) then the intention of the solidarity tax will be subverted.

There are also risks with the differentiated personal allowance. If the burden of annual reporting of income is too high then many may simply not do it and suffer the loss of income or find a way of recouping through shadow earnings.

Concluding Remarks

The Latvian authorities should be applauded for grasping the nettle of progressive taxation but perhaps only with one hand for the way they have chosen to do it. Thus, the solidarity tax creates an incentive for both employers and employees to find ways of avoiding it and find they surely will. A tax accountant once said of the 80% supertax applied to high earnings in pre-Thatcher UK that it was a ‘voluntary tax’. This is also the likely fate of Latvia’s solidarity tax.

The differentiated personal allowance will clearly benefit low earners, if they claim it. In fact it will also benefit people earning well over the average wage. But will the low earners claim? Very few people in Latvia have ever filed an income declaration and we fear that many low earners will not do so now.

Thus at the top end progressivity is likely to be largely avoided and at the bottom end may not be fully claimed.

References

  • Finance Ministry (2015). “Solidaritātes nodokli maksās tikai personas ar algu virs 48 600 eiro gadā,” available at http://www.fm.gov.lv/lv/aktualitates/jaunumi/nodokli/51253-solidaritates-nodokli-maksas-tikai-personas-ar-algu-virs-48-600-eiro-gada
  • Kakwani, Nanak C. (1977). “Measurement of Tax Progressivity: An International Comparison”. Economic Journal 87 (345): 71–80
  • Jara, X. and Leventi, C. (2014). “Baseline results from the EU27 EUROMOD (2009-2013),” EUROMOD Working Papers EM18/14, EUROMOD at the Institute for Social and Economic Research.
  • Saez, E., J. Slemrod, and S. H. Giertz, (2012). “The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review.” Journal of Economic Literature, 50(1): 3-50

Buyer Heterogeneity in Public Procurement

Posted on November 9, 2015 | Policy Brief

Authors: Elena Paltseva and Giancarlo Spagnolo, SITE.

We show that different types of contracting authorities exhibit rather different behavior in public procurement. In particular, in Sweden strategic bunching below the EU threshold is only observed for a certain type of authorities. The identity of the strategically behaving group is also non-uniform across different types of procurement contracts or geographic localities. Similarly, in Italy’s public works procurement only a specific type of public buyer seems related to bunching below the threshold. This suggests that the type of public buyer, and associated differences in incentives and outcomes, should be taken into consideration in designing procurement regulation and more general policy-making.

Examining Social Exclusion among the 50+ in Europe – Evidence from the Fifth Wave of the SHARE Survey

Posted on November 2, 2015 | Policy Brief

Though intuitive, the concept of social exclusion is complex and hard to measure. Recently, however, we have witnessed policymakers and international institutions increasingly pay attention to better understand material and social distress and to identify the means to improve a broadly defined standard of living. In this brief, we summarize some of the results and conclusions from a recently published First Results Book based on the latest data from the Survey of Health, Ageing and Retirement in Europe (SHARE). We discuss the approach adopted to measure material and social deprivation, and the subsequent identification of risk of social exclusion. We show that Europeans increasingly value the quality of their social life as they grow older and that factors, such as worsening health, unmet long-term care needs, loneliness or lack of social cohesion are important determinants of social exclusion among the 50+ population. If socio-economic policies are to respond effectively to the needs of older Europeans, then broader aspects of their lives need to be taken into account and public policy should go beyond simple targets of income-defined poverty.

The Survey of Health Ageing and Retirement in Europe (SHARE) is an international research project focused on the European 50+ population, and combines information on key areas of life including health, labour market activity, financial situation, social involvement as well as family and social networks. The fifth wave of this panel study took place in 2013 with detailed interviews conducted in 15 European countries. The survey included a special set of questions aiming to improve the understanding of the degree of financial difficulties faced by the 50+, and to address the question of the extent of social exclusion in different European countries. The First Results Book documenting details of the survey has just been published by the international research team involved in the SHARE project. In this brief, we discuss some key results reported in this publication with focus on the analysis of deprivation and social exclusion in Europe among the 50+.

Capturing a Complex Concept of Social Exclusion in Socio-Economic Data

In recent years, the notion of “social exclusion” has been gaining importance as a reference in academic and policy circles with regards to the goals and conduct of socio-economic policy. In fact, in the Europe 2020 strategy, the European Union has made a formal commitment to “recognise the fundamental rights of people experiencing poverty and social exclusion, enabling them to live in dignity and take an active part in society” (European Commission, 2010). Yet, while the concept has an intuitive appeal, the approach to its measurement and analysis has been far from formalised and continues to leave room for a high degree of arbitrariness. This flexibility in the treatment of social exclusion, given the nature of the concept, may seem necessary and in fact desired, but at the same time requires a lot of care at the level of analysis and caution with regard to conclusions drawn from it.

The recent increase in the popularity of broad measures of financial circumstances, going beyond the simple income-based poverty indicators, reflects a number of limitations of the latter as far as it reflects overall material conditions and welfare of individuals. These limitations may be particularly important in the case of older individuals, for whom material wellbeing will be strongly affected by health status or disability, as well as by the extent of accumulated assets at their disposal (e.g. Laferrère and Van den Bosch, 2015; Bonfatti et al., 2015). With this in mind, the fifth wave of the SHARE survey was enriched with a set of additional questions aimed at identifying different sources of deprivation that 50+ individuals are especially exposed to. Based on available data we developed two SHARE-specific measures to assess material and social aspects of deprivation, which were further combined into a single indicator of social exclusion. 13 items from the SHARE questionnaire, exploring affordability of basic needs and financial difficulties among SHARE respondents, were brought together into an aggregate indicator of material conditions (Bertoni et al. 2015). The measure of social deprivation was derived from 15 SHARE items investigating social isolation, quality of neighbourhood and social involvement (Myck et al. 2015). In both cases, so-called hedonic weights were applied to individual items (weights based on the relationship of deprivation items with life satisfaction measure). Based on the threshold of the 75th percentile of total distribution of each of the two indices, individuals with high levels of deprivation in both dimensions were classified as at risk of social exclusion. The scientific value of developed measures has been validated by Najsztub et al. (2015), who found a good compliance in the cross-country variation of material and social deprivation and with common welfare indicators, such as the Human Development Index or income per capita.

Ageing and Social Exclusion among Older Europeans

Comparing material and social deprivation between those aged 50-64 years old and respondents aged 65+ shows that while the level of social deprivation is higher for the older group, the opposite is true for material deprivation (Myck et al. 2015). This suggests that social deprivation grows with age; on the one hand because of increased isolation of older people, and on the other, because older individuals may value their social circumstances more. This conclusion is supported in Shiovitz-Ezra (2015), who reports that, with regards to loneliness, social cohesion and neighbourhood quality play an increasingly important role among older respondents.

Figure 1 Proportion of Individuals at Risk of Social Exclusion by Country

fig1Source: Myck et al. (2015)

When analysing country variation of the two-dimensional indicator of being at risk of social exclusion, we can see that the proportion of the 50+ population exposed to this risk is the highest in Estonia (27.1%), Israel (25.5%) and Italy (23.1%; see Figure 1). On the other hand, countries with the lowest proportion of individuals at risk of social exclusion are Denmark, Sweden and Switzerland. In these countries the proportion is lower than 4%. Naturally, there is important variation in the risk of exclusion also within countries. For example, the results of Hunkler et al. (2015) show that compared to a native born, migrants suffer much higher degree of exclusion in their present country, which, to a lesser extent, is also true for their children.

An analysis of factors that affect the risk of social exclusion reveals that higher education, being employed or retired, and living with a partner substantially limit this probability (Myck et al., 2015). There is also a strong correlation between social exclusion and poor health status. Older people in poor health and those with limited ability to carry out activities of daily living are more vulnerable to both material and social deprivation (Laferrère and Van den Bosch, 2015). People requiring long-term care but reporting unmet needs in this domain are more likely to suffer from deprivation in the social dimension. Importantly from a policy point of view, Bertoni et al. (2015) provide evidence that eyesight and hearing loss contribute to a higher probability of social exclusion, and among the oldest old lead to reduced actual social participation.

Conclusion

Since the importance of different aspects of social life increases when people grow older, policy instruments targeted at income-defined poverty will be ineffective in addressing important aspects of older people’s welfare. It therefore seems important that broader aspects of everyday life are taken into account when constructing socio-economic policies aimed at reducing social exclusion among older Europeans.

▪

References

  • Adena, M., Myck, M., Oczkowska, M. (2015) Material deprivation items in SHARE Wave 5 data: a contribution to a better understanding of differences in material conditions in later life. In: Börsch-Supan et al. (2015).
  • Bertoni, M., Cavapozzi, D., Celidoni, M., Trevisan, E. (2015) Development and validation of a material deprivation index. In: Börsch-Supan et al. (2015).
  • Bertoni, M., Celidoni, M., Weber, G., Kneip, T. (2015) Does hearing impairment lead to social exclusion?. In: Börsch-Supan et al. (2015).
  • Bonfatti, A., Celidoni, M., Weber, G., Börsch-Supan, A. (2015) Coping with risks during the Great Recession. In: Börsch-Supan et al. (2015).
  • Börsch-Supan, A., Kneip, T., Litwin, H., Myck, M., Weber, G. (eds) (2015) Ageing in Europe – Supporting Policies for an Inclusive Society. De Gruyter.
  • European Commission (2010) EUROPE 2020: A European strategy for smart, sustainable and inclusive growth.
  • Hunkler, C., Kneip, T., Sand, G., Schuth, M. (2015) Growing old abroad: social and material deprivation among first- and secondgeneration migrants in Europe. In: Börsch-Supan et al. (2015).
  • Laferrère, A., Van den Bosch, K. (2015) Unmet need for long-term care and social exclusion. In: Börsch-Supan et al. (2015).
  • Myck, M., Najsztub, M., Oczkowska, M., (2015) Measuring social deprivation and social exclusion. In: Börsch-Supan et al. (2015).
  • Najsztub, M., Bonfatti, A., Duda, D. (2015) Material and social deprivation in the macroeconomic context. In: Börsch-Supan et al. (2015).
  • Shiovitz-Ezra, S. (2015) Loneliness in Europe: do perceived neighbourhood characteristics matter? In: Börsch-Supan et al. (2015).