Project: FREE policy brief

Can the Baltic States Do Without Russian Electricity?

Posted on November 30, 2022 | Policy Brief

20221130 Can the Baltic States Do Without Russian Electricity Image 01

Although much smaller than Russian exports of other energy commodities, Russian electricity exports to Europe have been a part of the European electricity systems. There are several connection points between the Russian and EU markets, but the Baltic States are the most exposed to Russian influence in the electricity sector. This brief discusses the Baltics’ dependency on Russian electricity, which currently accounts for 10 percent of the total Baltic electricity consumption. We argue that, while the Baltic states have some resilience (partly due to their connection to the Nordic countries), they are not immune to a complete halt to the Russian electricity trade, at least not in the short run.

The continuing military conflict in Ukraine and cut-offs of Russian gas to Europe are driving energy prices to unprecedented levels and creating concern about energy security all over Europe. The reliance on the Russian gas supply and the consequences of this has been profoundly discussed (for an overview, see e.g., Le Coq and Paltseva, 2022). At the same time, the topic of Russian electricity delivered to the EU has been largely left out of the current conversation.

Russia is exporting electricity directly to Europe, although at a much smaller scale than it has been exporting other energy commodities. There are several transmission connection points between the Russian and EU markets, but the situation of the Baltic States is the most precarious. They consume Russian electricity (about 10 percent of their needs) and their grids are still synchronised with Russia and Belarus. Therefore, they are exposed to some supply disruption and a desynchronization threat from Russia, potentially resulting in high market prices, severe congestion and even blackouts. Because the Baltics are connected to the leading power market in Europe, Nord Pool, any unexpected shocks may have consequences beyond the Baltic region.

Understanding how the Baltic States depend on Russia for their power consumption is an important element of the European energy security debate. This brief discusses the severity of the Baltics’ reliance on Russian electricity. We initially discuss the effect of a sudden halt to the Russian electricity trade in May 2022. We then address the potential consequences of the abrupt exclusion from the Russia-controlled transmission network. Finally, we discuss the future energy mix thought to replace Russian electricity in the Baltics.

The Baltic States’ Exposure to Indirect Imports of Russian Electricity

The Baltics’ exposure is analysed by examining the impact of a sudden stop of imports of Russian electricity to the EU in May 2022, which affected Nord Pool (https://www.nordpoolgroup.com/en/) prices as well as congestion in the Baltic States. This event cannot be qualified as an external shock, required for a rigorous empirical analysis. Nonetheless, it helps us assess the Baltics’ exposure.

On May 15th 2022, Russia broke off its electricity trade with Finland. This event is relevant to consider as Finland is increasingly a primary import source for the Baltic States. Any electricity supply disruption affecting Finland may therefore impact the Baltics’ energy system balance. To assess how the event impacted the Baltic electricity market, we compare the congestion occurrences in 2021 and 2022.

A standard way to assess the misfunctioning of a power market is to look at congestion episodes. The Nord Pool market, to which the Baltic states are connected, has several bidding areas. Prices between zones may differ in case of transmission bottlenecks. When transmission lines are saturated, no more electricity can, in that period, be transported from the cheap to the expensive areas to alleviate prices, referred to as congestion.

In the graphs below, we illustrate the congestion in the Baltics in 2021 as compared to 2022. Looking at the 2021 data for Estonia and Latvia, the countries belonged to the same price area most of the year; some price differences were observed in the summer months, but only 10 percent of the hours within those months were congested. In 2022 the price differences between the two countries grew substantially, since May reaching 20 percent, with more congested hours (Figure 1). In 2022 price differences also increased between Lithuania and Southern Sweden (region SE 4) as depicted in Figure 2.

Figure 1. Congestion between Estonia and Latvia (as percentage of congested hours out of all hours within a given month).

Source: Own calculations based on NordPool data.

Figure 2. Congestion between Lithuania and Sweden (SE4) (as percentage of congested hours out of all hours within a given month).

Source: Own calculations based on NordPool data.

Our aim is not to show a causal effect of the withdrawal of Russia from commercial electricity trading with the Baltic States region, but to describe some general, coincidental trends in congestion. Note that the congestion might be a result of the extreme prices observed in the Baltics – on August 17th 2022, prices reached the Nord Pool cap of 4000€/MW, the highest ever level in the region (Lazarczyk Carlson and Le Coq, 2022a).

To conclude, halting the electricity trade between Russia and Finland appears to have had some impact on the congestion in the Baltic States. Still, the consequences were not severe as the Baltics were already curtailing commercial exchanges with Russia and Belarus. Additionally, the Finnish yearly imports from Russia constituted at most 10 percent of the annual Finnish consumption.

The Baltic States’ Exposure to a Desynchronization Threat

The Baltics belong to the Moscow-controlled synchronous electrical power grid, BRELL, which connects power systems of Belarus, Russia, Estonia, Latvia and Lithuania. This grid dependency makes it virtually impossible for the Baltic States to completely stop Russian and Belarussian power from floating into the Baltics´ territory. A desynchronization from the BRELL network is currently not feasible. Although the Baltics have invested heavily in grid extensions and upgrade, the connection to the European grid is scheduled only for 2024/2025. Therefore, even though the Baltic States have been limiting commercial trading with Russia and Belarus on the Nordic electricity market, they are still receiving Russian/Belarusian electricity.

The Baltics’ dependency on the BRELL network creates a potential threat to the Baltic electricity supply security in case Russia should decide to weaponize its electricity supply further and disconnect the Baltic States from the network ahead of the planned exit in 2024/2025 (Lazarczyk Carlson and Le Coq, 2022a). Such premature disconnection could result in severe blackouts, and immediate reactions would be required to keep the system operational. In such scenario, strong support from the Nordic countries via Finland and/or Sweden would be needed. It is however important to keep in mind that a sudden disconnection from BRELL also could harm Kaliningrad – the Russian enclave between Lithuania and Poland, on the shores of the Baltic Sea. Although Russia has invested heavily in expanding Kaliningrad generation capacities and its energy self-sufficiency, it is not clear whether the region is to this day prepared to operate in island mode without the support of the BRELL and neighbouring countries. Up to date, three successful operating exercises in island mode have been conducted in Kaliningrad, the longest lasting for 72 hours. However, the two tests scheduled for 2022 have been cancelled.

The future re-initialization of electricity trading with Russia is uncertain at this point and the role of Russian electricity has diminished over the years. The Baltics are not planning to maintain any transmission connection with Russia and Belarus after synchronising with the European power grid. However, the Finnish standpoint needs to be clarified. If the Finnish-Russian electrical power trade exchange is re-established in the future, Russian electricity might once again flow into the Baltics´ transmission grid as imports from Finland are forecasted to increase in the coming years due to a third interconnector, which should become operational in 2035.

The Baltics’ (Future) Energy Mix Without Russian Electricity

The alternatives to Russian electricity depend on the Baltics’ energy mix and transmission system. In 2021 the demand for electric power in the Baltics was 27 TWh, with Latvia representing 26 percent, Estonia 30 percent, and Lithuania 44 percent of the total demand. Consumption is forecasted to grow by 60-65 percent by 2050, due to the electrification of the economy and increasing needs within industries, housing, transportation, etc. (Nordic Energy Research, 2022).

All Baltic States are today net importers of electricity. The main import sources are Finland and, to a lesser extent, Sweden, which have jointly exported 45 TWh of electric power to the region over the years 2016-2021. Finland is itself a net importer of electricity mainly importing power from Sweden. Until May 2022, Finland’s second import source was Russia.

The Baltics are heavily dependent on fossil fuels in their electricity mix as illustrated in Table 1.

Table 1. Energy mix for electricity production (MW) in the Baltics, 2022.

Source: ENTSO-E Transparency platform.

The region is now trying to limit the use of fossil-fuel energy and expand its green energy potential, as extensively discussed in Lazarczyk Carlson E. and Le Coq C. (2022b). The actual installed capacity for the onshore wind is however insufficient, with 326 MW in Estonia, 87 MW in Latvia, and 671 MW in Lithuania. The current offshore wind’s capacity is non-existent. There are some plans to develop 4.5 GW in Lithuania, 7 GW in Estonia, and 14.5 GW in Latvia by 2050, but this will require substantial investments (European Commission, 2019).

The region also plans to expand solar power production, especially in Latvia and Lithuania, where the current capacity is 14 and 259 MW respectively. There are also plans to expand Latvian hydro production for storage and balancing needs; currently, Latvia has 1588 MW of installed run-of-the-river hydro capacity, the highest among the Baltic States.

Investing in nuclear power is another possibility which is currently being considered. As part of the EU accession process, Lithuania shut down its Ignalina Nuclear Power Plant, the first unit in 2004 and the second in 2009, turning the country from a net exporter into a net importer of electric power (IEA, 2021). A project of replacing the Ignalina Nuclear Power Plant (NPP) by a new Polish-Lithuanian Plant, the Visaginas NPP, was discussed but later abandoned. The Estonian company Fermi Energy, in collaboration with the Swedish firm Vattenfall, are currently looking into small modular reactor (SMR) technology to develop nuclear energy. This project is however in the initial phases of development.

Renewables and nuclear power are credible alternatives to limit fossil-fuel energy usage and dependency on Russian electricity. The alternatives might however not be easily implemented in the short run.

Conclusion

The Baltic States’ dependency on the Russian electricity supply is limited. Nevertheless, discontinuing Russian electricity deliveries is not innocuous for at least two reasons.

First, the Baltics are still part of the BRELL network, so they are still physically dependent on Russia, although they plan to desynchronize from this network in the longer run. However, a sudden desynchronization initiated by Russia may have severe consequences in the short run (e.g. blackouts).

Second, considering the forecasted future increase in the demand for electrical power in the Baltics and the Nordic countries, the Baltics will remain dependent on power imports. Today, the Baltics rely on Finland and Sweden, as all three Baltic States are net electricity importers. To limit any future dependence on Russian/Belarussian electricity, the Baltics plan to sever any transmission connections with Russia and Belarus after desynchronization, thus cutting the potential for future electricity trade with both countries. If, however, the Nordic countries re-establish commercial exchanges with Russia via Finland, it is nevertheless possible that Russian electricity will be flowing in the Baltics transmission system again.

Acknowledgement

This policy brief is based on a project funded by the Energiforsk research program.

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.

An Overview of the Georgian Wine Sector

Posted on November 21, 2022 | Policy Brief

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Georgia has an 8000-year-old winemaking tradition, making the country the first known location of grape winemaking in the world. In this policy brief we analyze and discuss major characteristics of the wine sector in Georgia, government policies regarding the sector and major outcomes of such policies. The brief provides recommendations on how to ensure sustainable development of the sector in a competitive, dynamic environment.

Introduction

The Georgian winemaking tradition is 8000 years old, making Georgia the world’s first known location of grape winemaking. There are many traditions associated with Georgian winemaking. One of them is ‘Rtveli’ – the grape harvest that usually starts in September and continues throughout the autumn season, accompanied with feasts and celebrations. According to data from the National Wine Agency, the annual production of grapes in Georgia is on average 223.6 thousand tones (for the last ten-years), with most grapes being processed into wine (see Figure 1).

Figure 1. Grape Processing (2013-2021)

Source: National Wine Agency, 2022. Note: Some producers do not participate In Rtveli and the total annual quantity of processed grape in the country might therefore be higher than the numbers presented in the figure.

Wine is one of the top export commodities for Georgia. It constituted 21 percent of the total Georgian agricultural export value in 2021 (Geostat, 2022). Since 2012 wine exports have, on average, grown 21 percent in quantitative terms, and by 22 percent in value (Figure 2). The average price per ton varies from 3 thousand USD to 3.9 thousand USD (Figure 2). Exports of still wine in containers holding 2 liters or less constitute, on average, 96 percent of the total export value.

Figure 2. Georgian Wine Exports (2012-2021)

Source: Geostat, 2022.

The main destination market for exporting Georgian wine is the Commonwealth of Independent States (CIS) countries which account for, on average, 78 percent of the export value (2012-2021). The corresponding share for EU countries is 10 percent. As of 2021, the top export destinations are Russia (55 percent), Ukraine (11 percent), China (7 percent), Belarus (5 percent), Poland (6 percent), and Kazakhstan (4 percent).  While Russia is still a top market for Georgian wine, Russia’s share of Georgian wine exports declined after Russia imposed an embargo on Georgian wines in 2006. The embargo forced market diversification and even after the reopening of the Russian market and Georgian wine exports shifting back towards Russia, its share declined from 87 percent in 2005 to 55 percent in 2021.

While there are more than 400 indigenous grape varieties in Georgia, only a few grape varieties are well commercialized as most of the exported wines are made of Rkatsiteli, Mtsvane, Kisi, and Saperavi grape varieties (Granik, 2019).

Government Policy in the Wine Sector

The Government of Georgia (GoG) actively supports the wine sector through the National Wine Agency, established in 2012 under the Ministry of Environmental Protection and Agriculture (MEPA). The National Wine Agency implements Georgia’s viticulture support programs through: i) control of wine production quality and certification procedures; ii) promotion and spread of knowledge of Georgian wine; iii) promotion of export potential growth; iv) research and development of Georgian wine and wine culture; v) creation of a national registry of vineyards; and vi) promotion of organized vintage (Rtveli) conduction (National Wine Agency, 2022).

During 2014-2016, the GoG’s spending on the wine sector (including grape subsidies, promotion of Georgian wine, and awareness increasing campaigns) amounted to 63 million GEL, or 22.8 million USD (As of November 1, 2022, 1 USD = 2.76 GEL according to the National Bank of Georgia). Out of the spending, illustrated in Figure 3, around 40-50 percent was allocated to grape subsidies implemented under the activities of iv) (as mentioned above).

There are two types of subsidies used by the GoG– direct and indirect. Direct subsidies imply cash payments to producers per kilogram of grapes. As for indirect subsidies, they entail state owned companies purchase grapes from farmers.

Starting from 2017, the GoG decided to abandon the subsidiary scheme and decrease its spending on of the wine sector.  The corresponding figure reached a minimum of 9.2 million GEL (3.3 million USD) in 2018. Meanwhile, the grape production has been increasing, reaching its highest level in 2020 (317 thousand tons). In 2020, the GoG resumed subsidizing grape harvests to support the wine sector as part of the crisis plan aimed at tackling economic challenges following the Covid-19 pandemic. The corresponding spending in the wine sector increased from 16.7 million GEL (around 6 million USD) in 2019 to 113.4 million GEL (41 million USD) in 2020, out of which the largest share (91 percent) went to grape subsidies. In 2021, the GoG continued its extensive support to the wine sector and the corresponding spending increased by 44 percent, compared to 2020. The largest share again went to grape subsidies (90 percent).

Figure 3. Grape Production and Government Spending on the Wine Sector (2014-2021)

Source: Ministry of Finance of Georgia, National Statistics Office of Georgia, Author’s Calculations, 2022.

In 2022, the GoG have continued subsidizing the grape harvest to help farmers and wine producers sell their products. During Rtveli 2022, wine companies are receiving a subsidy if they purchase and process at least 100 tons of green Rkatsiteli or Kakhuri grape varieties grown in the Kakheti region, and if the company pays at least 0.90 GEL per kilogram for the fruit. If these two conditions are satisfied, 0.35 GEL is subsidized from a total of 0.9 GEL per kilogram of grapes purchased (ISET Policy Institute, 2022). Moreover, the GoG provides a subsidy of 4 GEL per kilogram for Alksandrouli and Mujuretuli grapes (unique grape varieties from the Khvanchkara “micro-zone” of the north-western Racha-Lechkhumi and Kvemo Svaneti regions), if the buying company pays at least 7 GEL per kilogram for those varieties (Administration of the Government of Georgia, 2022). Overall, about 150 million GEL (54.2 million USD), has been allocated to grape subsidies in 2022.

Policy Recommendations

Although the National Wine Agency is supposed to implement support programs in various areas like quality control, market diversification, promotion and R&D, these areas lack funding, as most of the Agency’s funds are spent on subsidies. Given that the production and processing of grapes have increased over the years, subsidies have been playing a significant role in reviving the wine sector after the collapse of the Soviet Union (Mamardashvili et al., 2020).  However, since the sector is subsidized as of 2008, the grape market in Georgia is heavily distorted. Prices are formed, not on the bases of supply and demand but on subsidies, which help industries survive in critical moments, but overall prevent increases in quality and fair competition. They further lead to overproduction, inefficient distribution of state support and preferential treatment of industries (Desadze, Gelashvili, and Katsia, 2020). After years of subsidizing the sector, it is hard to remove the subsidy and face the social and political consequences of such action.

Nonetheless, in order to support the sustainable development of the sector, it is recommended to:

  1. Replace the direct state subsidy with a different type of support (if any), directed towards overcoming systemic challenges in the sector related to the research and development of indigenous grape varieties and their commercialization level.
  2. Further promote Georgian wine on international markets to diversify export destination markets and ensure low dependence on unstable markets like the Russian market. Although wine exporters have in recent years entered new markets, to further strengthen their positions at those markets, it is vital to:
    • ensure high quality production through producers’ adherence to food safety standards.
    • promote digitalization – e-certification for trade and distribution, block chain technology for easier traceability and contracting, e-labels providing extensive information about wine etc. – enabling producers to competitively operate in the dynamic environment (Tach, 2021)
    • identify niche markets (e.g. biodynamic wine) and support innovation within these sectors to ensure competitiveness of the wine sector in the long-term (Deisadze and Livny, 2016).

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.

Intergenerational Occupational Mobility in Belarus

Posted on November 14, 2022 | Policy Brief

20221113 Intergenerational Mobility Belarus Image 01 representing Intergenerational occupational mobility

This brief presents an analysis of the magnitude of the intergenerational occupational mobility in Belarus, taking into account a differentiated gender effect. The analysis considers movements along the occupational scale for individuals with respect to their parents, both through an aggregate magnitude (using transition matrices and mobility rates) and in detail (using a multinomial logit model), using data from the 2017 Generations and Gender Survey for Belarus. The findings show, firstly, that the downward intergenerational changes of occupational status have a strong gender bias: downward mobility is higher for men than for women. Secondly, the probability of moving up the social ladder is higher for women than for men in Belarus. Additionally, the results verify the important role of education as a mechanism towards reaching a society with more equal opportunities. In particular, the effect is more intense for individuals with higher education.

Introduction

Intergenerational social mobility is defined as the movement of individuals from the social class of the family in which they lived when they were young (the origin class) into their current class position (the destination class), where social class is determined by as decided by income, occupation, education etc. (Ritzer, 2007; Scott and Marshall, 2009).

One of the main results from the economic literature on intergenerational social mobility shows that the degree of social mobility depends on the characteristics of an individual’s family background. These characteristics include an individual’s choice to acquire human capital and corresponding type of education, innate and acquired abilities, gender differences, or the knowledge people acquire through lifelong learning or work experience (Behrman & Taubman, 1990; Dutta, Sefton & Weale, 1999).

However, such characteristics may encourage children to work in the same occupations as their parents, slowing down intergenerational change. Research on intergenerational mobility can help identify and remove barriers to mobility which could improve the effective distribution of human skills and talents, in turn increasing productivity and promoting competitiveness and economic growth.

This brief summarizes the results of the first research focused on intergenerational occupational mobility in Belarus (Mazol, 2022). The research attempts to obtain new empirical evidence on intergenerational social mobility in Belarus by examining the movements of individuals along the occupational scale in relation to their parents, while taking into account other relevant factors such as gender differences and educational background of the individuals. Two specific gender dimensions are introduced: on the one hand, this study analyzes whether mobility in occupational categories differs for men and women; on the other hand, it examines whether there is a difference in the transmission of occupational categories from fathers to sons in comparison to mothers to daughters.

Data and Methodology

The study makes use of data from the Generations and Gender Survey (GGS) conducted in Belarus in 2017 by the United Nations Population Fund (UNFPA) and the United Nations Children’s Fund (UNICEF) within the framework of the Generations and Gender Program of the United Nations Economic Commission for Europe. The survey provides information on a range of individual characteristics (age, gender, marital status, educational attainment, employment status, hours worked, wages earned, etc.) as well as household-level characteristics (household size and composition, religion, land ownership, location, asset ownership, etc.).

The research considers the subsample of respondents between 25-79 years old and utilizes the information on occupation of the respondent and his/her parents. In order to evaluate the intergenerational occupational mobility, occupations are ranked by their position in the occupational ladder according to the National Classification of Occupations, based on the International Standard Classification of Occupations (ISCO-08) This defines a ranking of occupations based on the performance area and qualification required to carry out the occupation, from armed forces occupations (ranking the highest), through  a manager, a professional, a technician or professional associate, a clerk, a sales worker, a skilled agricultural worker, a craft worker a plant and machine operator, ending with an elementary occupation ranking the lowest. The influence from the father’s/mother’s occupation on that of the son’s/daughter’s is then estimated.

The analysis is carried out partly by estimation of transition matrices and mobility rates, and partly by the use of a multinomial logit model that aims to analyze the impact of a set of covariates on intergenerational occupational mobility. The explanatory variables are: the highest degree of education an individual has achieved (educational attainment), gender, potential labor experience (calculated as the number of years an individual has regularly worked), status in the labor market (full-time or part-time), and region of residence. The choice of these independent variables relies on channels identified from relevant sociological and economic literature.

Figure 1. Intergenerational occupational transitions in percent, by gender lines

Source: Author’s estimates based on GGS.

The intergenerational transmission of occupational immobility is almost equal for men and women (31 percent and 30,1 percent respectively). Occupational upward mobility is far more common as compared to downward mobility. 39.7 percent of men, compared to their father’s, and 50.6 percent of women, compared to their mother’s, have better occupations. The gender differences may be explained by the high proportion of women with higher educational levels in Belarus.

The estimates of the marginal effects obtained by the multinomial logit model indicate that social occupational mobility in Belarus depends on personal and labor characteristics. Three possible states are considered in relation to father-son and mother-daughter gender lines: the individual experiences downward intergenerational occupational mobility as compared to their parent of the same gender (Y = 0); they remain in the same occupation (immobility) (Y = 1) or they experience upward intergenerational occupational mobility (Y = 2) (see Table 1).

Table 1. Estimates of the marginal effects corresponding to the multinomial logit model

Notes: Estimates reflect weighted data. Standard errors in square brackets. Significance: *** – 1% level, ** – 5% level, * – 10% level. OV – omitted variable. Source: Author’s estimates based on GGS.

As evident from Table 1, gender is an important determinant of intergenerational occupational mobility. In particular, the results show that women are more likely to move up the social ladder than their male counterparts, as men are 10 percentage points less likely to have upward occupational mobility than women with similar (on average) socio-economic characteristics, with all coefficients being statistically significant.

In terms of educational attainment, the findings show that, on the one hand, higher educational attainment has a positive and significant influence on upward occupational mobility, with the highest values displayed for higher education. The probability of moving up to the occupational ladder is around 27 percentage points higher for an individual within this educational group than for an individual with primary studies and similar (on average) socio-economic characteristics. On the other hand, higher education has a negative and significant influence on downward occupational mobility, indicating that the probability of moving down the occupational ladder is around 13 percentage points lower for a highly educated individual compared to an individual with primary education.

Considering human capital, there is a positive impact of potential labor experience on upward intergenerational occupational mobility. Specifically, the probability of moving up along the occupational ladder increases on average by about 0.3 percentage points for every additional year of labor experience.

Finally, the results show that full-time workers are more likely to move up the social ladder than their part-time counterparts. Full-time workers are about 12 percentage points more likely to experience upward occupational mobility and 11 percentage points less likely to face downward occupational mobility compared to their part-time working counterparts.

Conclusion

This brief summarizes the findings for the first study on intergenerational occupational mobility in Belarus.

Firstly, the findings indicate, from a gender perspective, that the probability of moving up the social ladder is higher for women than for men in Belarus.

Secondly, the research results verify the important role of education as a mechanism to reach a society with more equal opportunities. In particular, the effect is more intense for individuals with higher educational attainments.

Thirdly, potential labor experience positively influences the upward intergenerational occupational mobility. This may reveal an underlying effect from training (however an unobservable variable given the data provided by the GGS).

Lastly, the impact of employment status on intergenerational occupational mobility in Belarus depends on the stability of labor relations, where possessing a part-time job worsens one’s probability of accomplishing a social class advancement.

References

  • Behrman, J., and P. Taubman. (1990). The Intergenerational Correlation between Children’s Adult Earnings and Their Parents’ Income: Results from the Michigan Panel Survey of Income Dynamics. Review of Income and Wealth, 36(2), pp. 115-127.
  • Dutta, J., Sefton, J., and M. Weale. (1999). Education and Public Policy. Fiscal Studies, 20(4), pp. 351-386.
  • Mazol, A. (2022). Intergenerational Occupational Mobility: Evidence from Belarus. BEROC Working Paper Series, WP no. 79.
  • Ritzer, G. (2007). The Blackwell Encyclopedia of Sociology. Malden: Blackwell Publishing Ltd.
  • Scott, J., and G. Marshall. (2009). A Dictionary of Sociology. Oxford: Oxford University Press.

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

Homeownership and Material Security in Later Life

Posted on November, 2022 | Policy Brief

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Many previous studies show that homeownership is related to various aspects of well-being, although the causal nature of this relationship is difficult to identify. We analyze the association between homeownership and material security, measured through subjective expectations of being better or worse off in the future, using data from 15 European countries. Our findings show that homeowners have a higher level of material security than renters, with larger differences among those living in big cities. We find that material security increases with the value of owner’s property and at the same time find no significant relationship with education, income or financial situation. We interpret the results as support for one of the most commonly emphasized mechanisms behind the positive effects of homeownership for well-being – that homeownership provides a particular form of material security in old age.

Introduction

Vast empirical literature links homeownership to numerous outcomes, such as well-being, health or mobility (Costa-Font, 2008; Dietz and Haurin, 2003; Rohe and Stewart, 1996 among others). In most cases the specific causal link with homeownership per se is however difficult to demonstrate. This because homeownership, especially in old age, usually reflects the financial resources accumulated over the life course through labor market history, as well as health and family developments (Angelini et al., 2013). This means that many unobservable characteristics can obscure the relationship between homeownership and welfare outcomes and bias the estimated parameters.

Material security is an important aspect of well-being, facilitating longer-term planning of financial decisions, smoothing of expenditures across periods of lower contemporaneous incomes and allowing exceptional spending when faced with various negative shocks. It seems particularly relevant in old age when people’s ability to adjust their current income to their specific needs is significantly reduced, and material needs increasingly depend on health.  As people age and as their ability to maintain labor market activity diminishes, the material resources available to them, and the security these can provide, are increasingly composed of pensions and accumulated assets. Among the latter, fixed assets, and in particular ownership of one’s home, play a very special role, as they provide some financial backup and secure a flow of regular consumption in the form of accommodation.

It is reasonable to expect that homeownership would influence well-being through the channel of material security, particularly in old age. Surprisingly, the findings in the literature directly exploring this mechanism are so far scarce. We address this gap using data collected in the Survey of Health, Ageing and Retirement in Europe (SHARE) on individuals aged 50 years and above. We take advantage of the 2006 edition of the survey from 14 European countries and Israel and develop a measure of perceived future material security using two consecutive questions on ‘the chances that five years from now the standard of living [of the participant] will be better/worse than today’. Participants reported the estimated chances on a scale from 0 to 100, where 0 means ‘absolutely no chance’ and 100 denotes ‘absolutely certain’. In line with previous behavioral literature, we calculate a difference between the chances of being better vs. worse off, and recode into a categorical variable with 5 outcomes spanning from ‘very likely worse off’, through ‘rather likely worse off’, ‘equally likely’, ‘rather likely better off’ and ‘very likely better off’ (more details in Garten et al., 2022). In our sample, ‘equally likely’ is the most frequent category (30 percent of total responses), and being either ‘very’ or ‘rather likely worse off’ was more frequently reported than being better off (48 percent of total responses coded as either outcome for being worse off as compared to 22 percent for the two categories of being better off).

The Impact of Homeownership on Expectations of Future Standard of Living

We regress the measure of perceived material security on an extended vector of characteristics including basic demographics, education, marital status, labor market status, the relative position in the distributions of income and financial assets, and physical and mental health. Our main variable of interest is a categorical measure of homeownership, where individuals are split between renters and homeowners, who are further divided based on the country-specific quartiles of their home value. This measure is then interacted with being a big city resident. Below we present some selected results, which are reported in full in Garten et al. (2022).

In Figure 1 we report the results for each outcome of perception of material security for owner occupiers (depending on the value of their home) as compared to renters, by place of residence. The correlation with material security is particularly strong among those living in cities. However, among other respondents, those in the top quartile of the home value distribution are also more likely to report being optimistic about their material conditions in the future. For big city dwellers, the differences between renters and home owners are statistically significant already for owners with home values in the second quartile of the distribution, and the effects carry through to higher quartiles. The differences for selected perceptions of material security are not only statistically significant but also large in magnitude in the case of city dwellers who own the most expensive properties. As compared to renters they are 3.7 percentage points more likely to expect that their future situation will be either ‘rather’ or ‘very likely’ better. Among those living in big cities, 17.5 percent and 8.5 percent respectively, declare these positive expectations. This means that proportionally, the estimated 3.7 percentage points correspond to respective increases of 21.2 percent and 43.3 percent. 

Figure 1. Marginal effects of homeownership for outcomes of perception of material security

Note: Results presented as marginal effects based on estimations using the ordered probit model with 95% confidence intervals. More details available in Garten et al. (2022).

We relate the marginal effect of owning a property in the top quartile of the home value distribution, as compared to owners with properties in the bottom quartile or renters, to the effect resulting from: higher education, being in the top income quartile or in the top financial assets quartile. While education, income and financial assets affect the perception of future material situation in the expected direction, the estimated relationships are statistically insignificant, and their magnitude is much lower compared to the estimated relationship with homeownership.

Conclusion

Relative to renters, individuals owning their homes tend to have higher levels of well-being across numerous dimensions (see Garten et al., 2022 for an overview). Due to the complex nature of the accumulation of wealth and its interaction with different spheres of life over the life cycle, the identification of the causal character of this relationship is a nearly impossible task. Although many mechanisms behind this relationship have been suggested, few have actually been put to the test against real-life data. Therefore, better understanding of these mechanisms might be a way to verify the hypothesis that homeownership actually matters for well-being.

Our findings confirm that homeowners – in particular those living in big cities – enjoy a higher level of self-perceived material security and are more likely to express optimism about their material standard of living in the future as compared to renters. Such feeling of security for the coming years may contribute to a more general positive outlook, and consequently to the higher reported levels of well-being and life-satisfaction observed in the literature. The examined relationship is especially strong among those in the top quartile of the distribution of property values, although for dwellers in big cities the effect is also strong for those with lower property value. While these findings cannot be interpreted as strictly causal, we suggest that owning a home offers a very particular type of material security in old age and that this security might be an important mechanism leading to the observed positive relationship between homeownership and overall well-being.

Acknowledgement

The authors wish to acknowledge the support of the German Science Foundation (DFG, project no: BR 38.6816-1) and the Polish National Science Centre (NCN, project no: 2018/31/G/HS4/01511) in the joint international Beethoven Classic 3 funding scheme – project AGE-WELL. For the full list of acknowledgements see Garten et al. (2022).

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.

The Bleak Economic Future of Russia

Posted on October 31, 2022 | Policy Brief

20221031 Economic Future of Russia Image 01

Is the Russian economy “surprisingly resilient” to sanctions and actions of the West? The short answer is no. On the contrary, the impact on Russian growth is already very clear while the economic downturn in the EU is small. The main effects from the sanctions are yet to be realized, and the coming sanctions will be even more consequential for the Russian economy. The biggest impacts are however those in the longer run, beyond the sanctions. Mr. Putin’s actions have led to a fundamental shift in the perception of Russia as a market for doing business. The West and especially EU countries are on a track of divesting their economic ties to Russia (in particular in, but not only, energy markets) and the country is simultaneously losing significant shares of its human capital. All these effects mean that the long-term economic outlook for Russia is not just a business cycle type recession but a lasting downward shift.

Introduction

The global economic outlook at the moment seems rather bleak. According to the International Monetary Fund’s (IMF) most recent World Economic Outlook, global growth is expected to slow from above 6 percent in 2021, to 3.2 percent this year, and 2.7 percent in 2023. For the US and the Euro area the corresponding numbers are slightly above a 5 percent growth in 2021, between 2 and 3 percent in 2022, while barely reaching 1 percent in 2023. At the same time inflation is up and central banks are trying to curb this by raising interest rates.

From an EU perspective it is an open question what proportion of the lower growth is caused by the economic consequences of the Russian invasion of Ukraine. Certainly, energy prices are affected as well as issues relating to natural resources and agricultural products (though the consequences of shortages in these goods are far larger for Middle Eastern, North African and Sub-Saharan countries). But it is not the case that all of the economic problems in the EU are due to the changed economic relations with Russia.

In assessing the economic impact of Russia’s war, and in particular the impact of sanctions, it is important to focus on both expectations as well as proportions. A widespread narrative portrays Russia’s relative economic resilience (compared to the expectations of some in March/ April 2022) as the Russian economy being surprisingly unaffected, while the EU is depicted as being badly hit, especially by high energy prices. In a European context, the Swedish daily newspaper Dagens Nyheter claims that “experts are surprised over Russia’s resilience” and the Economist, a British weekly newspaper, recently portrayed recession prospects for Europe as “Russia climbs out”. We argue that such point of view is misleading. To get a more balanced image of what is unfolding it is important to think both about the expected consequences of sanctions, including how long some of them take to have an effect, but also (and maybe most important when thinking about the long run), what economic consequences are now unfolding beyond the impact of sanctions.

Sanctions Against Russia

Let us start with what sanctions are in place, what types of impact these have had so far and what can be expected in the future. There are three types of sanctions currently in place. First, and most impactful in the short run, are limitations on financial transactions, especially those imposed on the Central Bank. In this category there are also the restrictions on other Russian banks disconnecting them from a key part of the global payment system, SWIFT, as well as measures targeting other assets: divestments from funds, investment withdrawals, asset freezes, and other impediments to financial flows. The main short-term aim of these actions was to reduce the Russian government’s alternatives to finance the army and their military operations. Second there are sanctions on trade in goods and services. At the moment these target particularly technology imports and energy and metals exports. These take a longer time to be felt and are potentially more costly to the sanctioning countries as well. They also contribute, in principle, to reduced resources for war. Besides affecting the government’s budget, both financial and trade sanctions disturb ordinary people’s lives as well and might create discontent and protests. A third group of sanctions are so-called sanctions of inconvenience such as limitations to air traffic, closure of air space, exclusion form sport and cultural events, restrictions of movement for both officials and tourists, and others, which aim at disconnecting the target country from the rest of the world. These are partly symbolic in nature, but can also impact popular opinion, including among the elites. However, a potential problem is that such sanctions can push opinion in either of two opposite directions: against the target regime in sympathy with the sanctioning parties; or against what is now perceived as an external enemy in a so-called rally-around-the-flag effect.

Along these dimensions the sanctions have so far had mixed effects in relation to the objectives listed above. We will return to this issue below, but in short, the sanctions on the Central Bank and the financial system, albeit powerful, fell short of causing anything like a collapse of the Russian financial system. Some of the trade restrictions, together with other global economic events, created an environment where lost trade volumes for Russia were compensated by price increases in resources and energy exports. When it comes to restrictions on imports of many high-tech components, these are certainly being felt in the Russian economy although still not fully. Public perceptions in Russia are hard to judge from the outside, especially given the problems of voiced opposition in the country, while public perceptions in sanctioning countries have mainly been favorable as people want to see that their governments are “doing something”.

What Do We Know About Sanctions in General?

A key question when judging whether sanctions “work” is to study what a reasonable benchmark can be. As discussed in a previous FREE Policy Brief (2012), sanctions don’t enjoy a reputation of being very effective. This is true both in the research literature as well as in the public opinion. There are reasons for this that have to do with both how “effectiveness” is intended and the limits that empirical enquiries necessarily face in trying to answer the question of effectiveness. This does not mean, however, that sanctions have no effect. Another FREE Policy Brief (2022) summarizes a selection of the most credible research in this area. In short, a majority of studies find that sanctions affect the population in target countries through shortages of various kind (food, clean water, medicine and healthcare), resulting in lower life expectancy and increased infant mortality. The types of effects are comparable to the consequences of a military conflict. In the cases where it has been possible to credibly quantify the damage to GDP, estimates are in the range of 2 to 4 percent of reduced annual growth over a fairly long period (10 years on average and up to 3 years after the lifting of sanctions). One has to keep in mind that lower growth rates compound over time, so that the total loss at the end of an average period is quite substantial. As a comparison, the latest estimate of the total loss in global GDP from the Covid-19 crisis stands at “just” -3.4 percent. Other studies find similarly significant negative effects on other economic outcomes such as employment rate, international trade, public expenditure, the value of the country’s currency, and inequality. There is of course variation in the effects depending on the type of sanctions and also on the structure of the target economy. Trade sanctions tend to have a negative effect both in the short and long run, while smart sanctions (i.e. sanctions targeting specific individuals or groups) may even have positive effects on the target country’s economy in the long run.

Sanctions and the Current State of the Russian Economy

When it comes to the Russian economy’s performance in these dire straits, the very bleak forecasts from spring 2022 have since been partly revised upwards. Some are surprised that the collective West has not been able to deliver a “knock-out blow” to the Russian economy. In light of what we know about sanctions in general this is perhaps not very surprising. Also, one can recall that even a totally isolated Soviet economy held up for quite some time. This however does not mean that sanctions are not working. There are several explanations for this. As already mentioned, some of the restrictions imply by their very nature some time delay; large countries normally have stocks and reserves of many goods – and on top of this Mr. Putin had been preparing for a while. Also, the undecisive and delayed management of energy trade from the EU reduced the effectiveness of other measures, in particular the impact of financial restrictions. Continued trade in the most valuable resources for the Russian government together with spikes in prices (partly due to the fact that the embargo was announced several months ahead of the intended implementation) flooded the Russian state coffers. This effect was also enlarged by the domestic tax cuts on gasoline prices in many European countries in response to a higher oil price (Gars, Spiro and Wachtmeister, 2022). This is soon coming to an end, but at the moment Russia enjoys the world’s second largest current account surplus.

The phenomenal adaptability of the global economy is also playing in Russia’s favor: banned from Western markets, Russia is finding new suppliers for at least some imports. However, although they are dampening and slowing the blow at the moment, it is difficult to envision how these countries can be substitutes for Western trade partners for many years to come.

The Russian Economy Beyond Sanctions

Given all of this, the impact on the Russian economy is not nearly as small as some commentators claim. Starting with GDP, an earlier FREE Policy Brief (2016) shows how surprisingly well Russia’s GDP growth can be explained by changes in international oil prices. This is true for the most recent period as well, up until the turn of the year 2021-2022 and the start of hostilities, as shown in Figure 1. Besides the clear seasonal pattern, Russian GDP (in Rubles) closely follows the BRENT oil price. This simple model, which performs very well in explaining the GDP series historically, generates a predicted development as shown by the red dotted line. Comparing this with the figures provided by the Russian Federal State Statistics Service, Rosstat, for the first two quarters of 2022 (which might in themselves be exaggeratedly positive) indicates a loss by at least 8 percent in the first and further 9 percent in the second quarter. In other words, GDP predicted by this admittedly simple model would have been 19 percent higher than what reported by Rosstat in the first half of 2022. As a comparison, Saudi Arabia – another highly oil dependent country – saw its fastest growth in a decade during the second quarter, up by almost 12 percent.

Figure 1. Russian GDP against predictions

Source: Authors’ calculations on GDP in rubles based on figures from Rosstat and the BRENT oil price series. Note that GDP is denominated in Rubles to avoid confusion due to the USD/Rubles exchange rates being volatile (given the lack of trade post invasion) and thus hard to interpret.

Other indicators point in the same direction. According to a report published by researchers at Yale University in July this year, Russian imports, on which all sectors and industries in the economy are dependent, fell by no less than ~50 percent; consumer spending and retail sales both plunged by at least ~20 percent; sales of foreign cars – an important indicator of business cycle – plummeted by 95 percent. Further,  domestic production levels show no trace of the effort towards import substitution, a key ingredient in Mr. Putin’s proposed “solution” to the sanctions problem.

Longer Term Trends

There are many reasons to be concerned with the short run impact from sanctions on the Russian economy. Internally in Russia it matters for the public opinion, especially in parts that do not have access to reports about what goes on in the war. Economic growth has always been important for Putin’s popularity during peace time (Becker, 2019a). In Europe it matters mainly because a key objective is to make financing the war as difficult as possible, but also to ensure public support for Ukraine. A perception among Europeans that the Russian economy is doing fine despite sanctions is likely to decrease the support for these measures. However, the more important economic consequences for Russia are the long-run effects. Many large multinational firms have left and started to divest from the country. There has always been a risk premium attached to doing business in Russia, which showed up particularly in terms of reduced investment after the annexation of Crimea in 2014 (Becker, 2019b). But for a long time hopes of a gradual shift and a large market potential kept companies involved in Russia (in some time periods more, in others less). This has however ended for the foreseeable future. Many of the large companies that have left the Russian market are unlikely to return even in the medium term, regardless of what happens to sanctions. Similarly, investments into Russia have been seen as a crucial determinant of its growth and wellbeing (Becker and Olofsgård, 2017), and now this momentum is completely lost.

Energy relations have been Russia’s main leverage against the EU although warnings about this dependency have been raised for a long time. In this relationship, there has also been a hope that Russia would feel a mutual dependence and that over time it would shift its less desirable political course. With the events over the past year, this balancing act has decidedly come to an end, if not permanent, at least for many years to come. The EU will do its utmost not to rely on Russian energy in the future, and regardless of what path it chooses – LNG, more nuclear power, more electricity storage, etc. – the path forward will be to move away from Russia. Of course, there are other markets – approximately 40 percent of global GDP lies outside of the sanctioning countries – so clearly there are alternatives both for selling resources and establishing new trade relationships. However, this will in many cases take a lot of time and require very large infrastructure investments. And perhaps more important, for the most (to Russia) valuable imports in the high-tech sector it will take a very long time before other countries can replace the firms that have now pulled out.

Yet another factor that will have long-term consequences is that many of these aspects are understood by large parts of the Russian population, and those with good prospects in the West have already left or are trying to do so. It has been a long-term goal for those wanting to reform the Russian economy, at least in the past 20 years, to attract and put to fruition the high potential that have been available in terms of human capital and scientific knowledge. However, these attempts have not succeeded and the recent developments have put a permanent end to those dreams.

Conclusion

In the latest IMF forecast, countries in the Euro area will grow by 3.1 percent this year and only 0.5 percent in 2023. In January the corresponding numbers stood at 3.9 percent and 2.5 percent. This drop, caused in large part by the altered relations with Russia, is certainly non negligible, and especially painful coming on the heels of the Covid-19 crisis. However, it is an order of magnitude smaller than the “missed growth” Russia is experiencing. When judging the impact from sanctions on the Russian economy overall, the correct (and historically consistent) counterfactual displays a sizable GDP growth driven by very high energy and commodity prices. Relative to such counterfactual, the sanctions effect is already very noticeable. In the coming months, economic activity will slow down and many European household will feel the consequences. In this climate it will be important that, when assessing the situation with Russia perhaps performing better than expected, the following is kept in mind. Firstly, Russia is still doing much worse compared to the EU as well as to other oil-producing countries. Secondly, and even more important, what matters are the longer run prospects. And these are certainly even worse for the Russian economy.

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.

Personality Traits, Remote Work and Productivity

Posted on October 24, 2022 | Policy Brief

20221024 Personality Traits, Remote Work Image 01

The Covid-19 pandemic generated a massive and sudden shift towards teleworking. Survey evidence suggests that remote work will stick in the post-pandemic period. The effects of remote work on workers’ productivity are however not well understood, some workers gaining in productivity whereas others experience the opposite. How can this large heterogeneity in workers productivity following the switch to teleworking be explained? In this brief, we discuss the importance of personality traits. We document strong links between personality, productivity, and willingness to work from home in the post-pandemic period. Our results suggest that a one-size-fits-all policy regarding remote work is unlikely to maximize firms’ productivity.

Introduction

The Covid-19 pandemic triggered a large and sudden exogenous shift towards working from home (WFH). Within a few months in Spring 2020, the share of remote workers increased from 8.2 percent to 35.2 percent in the US (Bick et al., 2020), and from 5 percent to more than 30 percent in the EU (Sostero et al., 2020). Surveys of business leaders suggest that WFH will stick in the post-pandemic period (e.g., Bartik et al., 2020).

The prevalence of teleworking will ultimately depend on its impact on workers’ productivity and well-being. This impact however remains ambiguous, some studies reporting an overall positive impact, some studies a negative one. Overall, the balance of these pros and cons can vary greatly across individuals. The existing literature emphasizes the importance of gender and occupation for workers’ productivity under WFH arrangements, but a large share of this heterogeneity remains unexplained.

In a recent paper (Gavoille and Hazans, 2022) we investigate the link between personality traits and workers’ productivity when working from home. Importance of non-cognitive skills, in particular personality traits, for individual labor market outcomes is well documented in the literature (e.g., Heckman et al., 2006; Heckman and Kautz, 2012). In the context of WFH, soft skills such as conscientiousness or emotional stability, are good candidates for explaining heterogeneity in relative productivity at the individual employee level.

The Latvian context provides an ideal setup for studying the effect of teleworking on productivity. First, Latvia has a large but unexploited potential for teleworking. Dingel and Neiman (2021) estimate that 35 percent of Latvian jobs could be done remotely, which is about the EU average. However, prior to the pandemic only 3 percent of the workforce was working remotely – one of the smallest figures in the EU. Second, the Latvian government declared a state of emergency in March 2020, which introduced compulsory WFH for all private and public sector employees, except for cases where on-site work is indispensable due to the nature of the work. This led to a six-fold increase in the share of remote workers within a couple of months. This stringent policy constitutes a massive exogenous shock in the worker-level adoption of WFH, well suited for studying.

Survey Design

To study the link between personality traits, teleworking, and productivity, we designed an original survey, implemented in May and June 2021 in Latvia. The target population was the set of employees who experienced work from home (only or mostly) during the pandemic. To reach this population, we used various channels: national news portals, social media (Facebook and Twitter) and radio advertisement. More than 2000 respondents participated in the survey, from which we obtained more than 1700 fully completed questionnaires.

Productivity and Remote Work

In addition to the standard individual characteristics such as age and the likes, we first collect information about respondents’ perception of their own relative productivity at the office and at home. More specifically, we ask “Where are you more productive?”. The five possible answers are “In office”, “In office (slightly)”, “No difference”, “At home (slightly)” and “At home” (plus a sixth answer: “Difficult to tell”). Table 1 provides a description of the answers. Roughly one third of the respondents reports a higher productivity at home, another third a higher productivity at the office, and one third do not report much of a difference. This measure of productivity is self-assessed, as it is the case with virtually any “Covid-19-era” paper on productivity. Note however that our question is not about absolute productivity as such, but relative productivity of teleworking in comparison with productivity at the office, which is arguably easier to self-assess.

Second, we ask “Talking about the job you worked at mostly remotely, and taking into account all difficulties and advantages, what would you choose post-pandemic: working from home or in office for the same remuneration (if you had the choice)?” The five possible answers are “Only from home”, “Mostly from home”, “Indifferent”, “Mostly in office”, “Only in office” (and a sixth option: “Difficult to tell”). The main aim of this question is to study who would like to keep working remotely in the post-pandemic period, irrespective of productivity concerns. Notably, the answers are much different than from the productivity question (see Table 1), which suggests the latter does not reflect preferences.

Finally, we ask respondents about the post-pandemic monthly wage premium required by the respondent to accept i) working at the office for individuals preferring to work from home; ii) working from home for individuals preferring to work at the office. Median values of these premia for workers with different preferences are reported in Table 1 (panel C). These values appear to be economically meaningful both in absolute terms and relative to the median net monthly wage in Latvia (which was 740 euro in 2021), reinforcing the reliability of the survey.

Table 1. Outcome variables


Source: reproduced from Gavoille and Hazans (2022).

Measuring Personality Traits

The survey contains a section aiming at evaluating the personality of the respondent through the lens of the so-called Five Factor Model of Personality. The psychometrics literature offers several standardized questionnaires allowing to build a measure for each of these five factors – Openness to Experience, Agreeableness, Extraversion, Emotional Stability and Conscientiousness. We rely on the Ten-Item-Personality-Inventory (TIPI) measure (Gosling et al., 2003). This test is composed by only ten questions, making it convenient for surveys, and it has been widely used, including in economics. As simple as this approach seems, the performance of this test has been shown to be only slightly below those with more sophisticated questionnaires, and to provide measures highly correlated with the existing alternative measures of personality traits.

Results

Overall, the results indicate that personality traits do matter for productivity at home vs. at the office. The personality trait most strongly related to all three outcome variables is Conscientiousness. Controlling for a battery of other factors, individuals with a higher level of conscientiousness are reporting a higher productivity when working from home as well as a higher willingness to keep working from home after the pandemic. This link is not only statistically significant but also economically meaningful: an individual with a level of conscientiousness in the 75th percentile is 8.4 percentage points more likely to report a higher productivity from home than a similar individual in the 25th percentile. Considering that the sample average is 31 percent, this difference is substantial.

Previous studies documented a positive correlation between Conscientiousness and key labor market outcomes such as wage, employment status and supervisor evaluation. A usual concern of employers is a possible negative selection of workers in teleworking. Observing that highly conscientious workers are more willing to work from home, where they are more productive, suggests that firms do not need to exert a very strict control on employees choosing to telework.

Openness to Experience shows a similar positive relationship with productivity. Extraversion on the other hand is only weakly negatively related to productivity. The relationship between this trait and willingness to work from home is however much stronger. These findings are intuitive: workers with a high Openness to Experience are more likely to cope easily with the important changes associated with switching to WFH. On the other hand, extravert individuals may find it more difficult to remain physically isolated from colleagues.

The literature studying the relationship between WFH and productivity suggests a conditional effect based on gender. In parallel, the literature investigating the role of personality traits on labor market outcomes also documents gender-specific patterns. As our work builds on these two strands of literature, we provide a heterogeneity analysis of the personality traits/productivity relationship conditional on gender.

When disaggregating the analysis by gender, it appears that the relationship between personality traits and productivity is stronger for women than for men. Conscientiousness and (to a smaller extent) Openness to Experience have a strong positive relationship with relative productivity of teleworking for women, while Extraversion and Agreeableness feature economically meaningful negative relationships. Noteworthy, the effects of Agreeableness and Openness to Experience do not concern the probability to be more productive at the office but only the willingness to work from home after the pandemic. For men, only Conscientiousness is significant, with a much smaller magnitude than for women.

Conclusion

We document that personality traits matter for changes in productivity when switching to a WFH regime. In particular, individuals with high levels of Conscientiousness are much more likely to report a better productivity from home than from the office. Additionally, Openness to Experience and Extraversion also do play a role.

Taken together, these results suggest that a one-size-fits-all policy is unlikely to maximize neither firms’ productivity nor workers’ satisfaction. It also highlights that when estimating firm-level ability in switching to remote work, characteristics of individual workers should be considered. In particular, employers practicing remote work should invest in socialization measures to compensate the negative effect of teleworking on the wellbeing of more extravert workers. Finally, several surveys (e.g., Barrero et al., 2021) document that more than a third of workers in the US would start looking for a new job allowing (some) work from home if their current employer would impose a strict in-office policy. Our results support this finding but also indicate that the opposite also holds: some workers would strongly oppose to remaining in a WFH setup after the pandemic. Personality traits are important determinants of the value attached to working from home.

Acknowledgement

This research is funded by Iceland, Liechtenstein and Norway through the EEA Grants. Project Title: The Economic Integration of the Nordic-Baltic Region through Labour, Innovation, Investments and Trade (LIFT). Project contract with the Research Council of Lithuania (LMTLT) No is S-BMT-21-7 (LT08-2-LMT-K-01-070).

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.

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

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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

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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.