Tag: Sweden

Navigating Market Exits: Companies’ Responses to the Russian Invasion of Ukraine

Posted on May 20, 2024 | Policy Brief

20240519 Navigating Market Exits Image 02

Russia’s invasion of Ukraine on 24 February 2022 led to widespread international condemnation. As governments imposed sanctions on Russian businesses and individuals tied to the war, international companies doing business in Russia came under increasing pressure to withdraw from Russia voluntarily. In the first part of this policy brief, we show what kind of companies decided to leave the Russian market using data collected by the LeaveRussia project. In the second part, we focus on prominent Swedish businesses which announced a withdrawal from Russia, but whose products were later found available in the country by investigative journalists from Dagens Nyheter (DN). We collect the stock prices for these companies when available and show how investors respond to these news.

Business Withdrawal from Russia

The global economy is highly interconnected, and Russia forms an important part. Prior to the invasion, Russia ranked 13th in the world in terms of global goods exports value and 22nd in terms of imports (Schwarzenberg, 2023). In the months following the full-scale invasion of Ukraine, Russia’s imports dropped sharply (about 50 percent according to Sonnenfeld et al., 2022). Before February 24th, Russia’s main trading partners were China, the European Union (in particular, Germany and the Netherlands) and Belarus (as illustrated in Figure 1). While there is some evidence of Russia shifting away from Western countries and towards China following the annexation of Crimea in 2014 and the resulting sanctions, Western democracies still made up about 60 percent of Russia’s trade  in 2020 (Schwarzenberg, 2023). In the same year, Sweden’s exports to Russia accounted for 1.4 percent of Sweden’s total goods exports, of which 59 percent were in the machinery, transportation and telecommunications sectors. 1.3 percent of Swedish imports were from Russia (Stockholms Handelskammare, 2022).

Figure 1. Changes in trade with Russia, 2013-2020.

Source: IMF Direction of Trade Statistics, data until 2020. From Lehne (2022).

In response to Russia’s invasion of Ukraine in February 2024, Western governments imposed strict trade and financial sanctions on Russian businesses and individuals involved in the war (see S&P Global, 2024). These sanctions are designed to hamper Russia’s war effort by reducing its ability to fight and finance the war. The sanctions make it illegal for, e.g., European companies to sell certain products to Russia as well as to import select Russian goods (Council of the European Union, 2024). Even though sanctions do not cover all trade with Russia, many foreign businesses have been pressured to pull out of Russia in an act of solidarity. The decision by these businesses to leave is voluntary and could reflect their concerns over possible consumer backlash. It is not uncommon for consumers to put pressure on businesses in times of geopolitical conflict. For instance, Pandya and Venkatesan (2016) find that U.S. consumers were less likely to buy French-sounding products when the relationship between both countries deteriorated.

The LeaveRussia Project

The LeaveRussia project, from the Kyiv School of Economics Institute (KSE Institute), systematically tracks foreign companies’ responses to the Russian invasion. The database covers a selection of companies that have either made statements regarding their operations in Russia, and/or are a large global player (“major companies and world-famous brands”), and/or have been mentioned in relation to leaving/waiting/withdrawing from Russia in major media outlets such as Reuters, Bloomberg, Financial times etc. (LeaveRussia, 2024). As of April 5th, 2024, the list contains 3342 firms, the companies’ decision to leave, exit or remain in the Russian market, the date of their announced action, and company details such as revenue, industry etc. The following chart uses publicly available data from the LeaveRussia project to illustrate patterns in business withdrawals from Russia following the invasion of Ukraine.

Figure 2a shows the number of foreign companies in Russia in the LeaveRussia dataset by their country of headquarters. Figure 2b shows the share of these companies that have announced a withdrawal from Russia by April 2024, by their country of headquarters.

Figure 2a. Total number of companies by country.

Figure 2b. Share of withdrawals, by country.

Source: Authors’ compilation based on data from the LeaveRussia project and global administrative zone boundaries from Runfola et al. (2020).

Some countries (e.g. Canada, the US and the UK) that had a large presence in Russia prior to the war have also seen a large number of withdrawals following the invasion. Other European countries, however, have seen only a modest share of withdrawals (for instance, Italy, Austria, the Netherlands and Slovakia). Companies headquartered in countries that have not imposed any sanctions on Russia following the invasion, such as Belarus, China, India, Iran etc., show no signs of withdrawing from the Russian market. In fact, the share of companies considered by the KSE to be “digging in” (i.e., companies that either declared they’d remain in Russia or who did not announce a withdrawal or downscaling as of 31st of March 2024) is 75 percent for more than 25 countries, including not only the aforementioned, but also countries such as Argentina, Moldova, Serbia and Turkey.

Withdrawal Determinants

The decision for companies to exit the market may range from consumer pressure to act in solidarity with Ukraine, to companies’ perceived risk from operating on the Russian market (Kiesel and Kolaric, 2023). Out of the 3342 companies in the LeaveRussia project’s database, about 42 percent have, as of April 5th, 2024, exited or stated an intention to exit the Russian market. This number increases only slightly to 49 percent when considering only companies headquartered in democratic (an Economist Intelligence Unit Democracy Index score of 7 or higher) countries within the EU. Figure 3 shows the number of companies that announced their exit from the Russian market, by month. A clear majority of companies announce their withdrawal in the first 6 months following the invasion.

Figure 3. Number of foreign companies announcing an exit from the Russian market, 2022-2024.

Source: Authors’ compilation based on data from the LeaveRussia project.

Similarly to the location of companies’ headquarters, the decision to exit the Russian market varies by industry. Figure 4 a depicts the top 15 industries with the highest share of announced withdrawals from the Russian market among industries with at least 10 companies. Most companies with high levels of withdrawals are found in consumer-sensitive industries such as the entertainment sector, tourism and hospitality, advertising etc.

Figure 4a. Top 15 industries in terms of withdrawal shares.

Figure 4b. Bottom 15 industries in terms of withdrawal shares.

Source: Authors’ compilation based on data from the LeaveRussia project.

In contrast, Figure 4b details the industries with the lowest share of companies opting to withdraw from the Russian market. Only around 10 percent of firms in the “Defense” and “Marine Transportation” industries chose to withdraw. Two-thirds of firms within the “Energy, oil and gas” and “Metals and Mining” sectors have chosen to remain in business in Russia following the war in Ukraine.

Several sectors have been identified as crucial in supplying the Russian military with necessary components to sustain their military aggression against Ukraine, mainly electronics, communications, automotives and related categories. We find that many of these sectors are among those with the lowest share of companies withdrawing from Russia. Companies for which Russia constitute a large market share have more to lose from exiting than others. Another reason for not exiting the market relates to the current legal hurdles of corporate withdrawal from Russia (Doherty, 2023). Others may simply not have made public announcements or operate within an industry dominated by smaller companies that are not on the radar of the LeaveRussia project. Nonetheless, Bilousova et al. (2024) detail that products from companies within the sanction’s coalition continue to be found in Russian military equipment destroyed in Ukraine. This is due to insufficient due diligence by companies as well as loopholes in the sanctions regime such as re-exporting via neighboring countries, tampering with declaration forms or challenges in jurisdictional enforcement due to lengthy supply chains, among others. (Olofsgård and Smitt Meyer, 2023).

And Those Who Didn’t Leave After All

The data from the LeaveRussia project details if and when foreign businesses announce that they will leave Russia. However, products from companies that have announced a departure from the Russian market continue to be found in the country, including in military components (Bilousova, 2024). In autumn 2023, investigative journalists from the Swedish newspaper Dagens Nyheter exposed 14 Swedish companies whose goods were found entering Russia, in most cases contrary to the companies’ public claims (Dagens Nyheter, 2023; Tidningen Näringslivet, 2023). For this series of articles, the journalists used data from Russian customs and verified it with information from numerous Swedish companies, covering the time period up until December 2022. This entailed reviewing thousands of export records from Swedish companies either directly to Russia or via neighboring countries such as Armenia, Kazakhstan, and Uzbekistan. All transactions mentioned in the article series have been confirmed with the respective companies, who were also contacted by DN prior to publication (Dagens Nyheter, 2023b). DNs journalists also acted as businessmen, interacting with intermediaries in Kazakhstan and Uzbekistan, exposing re-routing of Swedish goods from a company stated to have cut all exports to Russia in the wake of the invasion (Dagens Nyheter, 2023d).

For Sweden headquartered companies exposed in DN and that are traded on the Swedish Stock Exchange, we collect their stock prices and trading volume. Our data includes information on each stock’s average price, turnover, number of trades by date from around the date of the DN publications as well as the date of each company’s prior public announcement of exiting Russia. Table 1 details the companies who were exposed of doing direct or indirect business with Russia by DN and who had announced an exit from the Russian market previously. In their article series, DN also shows that goods from the following companies entered Russia; AriVislanda, Assa Abloy, Atlas Copco, Getinge, Scania, Securitas Tetra Pak, and Väderstad. Most of the companies exposed by DN operate within industries displaying low withdrawal shares.

Table 1. Select Swedish companies’, time of exit announcement and exposure in Dagens Nyheter and stock names.


Source: The LeaveRussia project, 2023; Dagens Nyheter, 2023b, 2023c, 2023d. Note: The exit statements have been verified through companies’ press statements and/or reports when available. For Epiroc, the claim has been verified via a previous Dagens Nyheter article (Dagens Nyheter, 2023a).

In Figure 5, we show the average stock price and trades-weighted average stock price of the Swedish companies in Table 1 around the time when the companies announced that they are leaving Russia.

Figure 5. Average stock price of companies in Table 1 around Russian exit announcements.

Source: Author’s compilation based on data from Nasdaq Nordic.

There appears to be an immediate increase in stock prices after firms announced their exit from the Russian market. Stock prices, however, reverse their gains over the next couple of days. In general, stock prices are volatile, and we also see similar-sized movements immediately before the announcement. Due to this volatility and the fact that we cannot rule out other shocks impacting these stock prices at the same time, it is difficult to attribute any movements in the stock prices to the firms’ decisions to leave Russia.

The academic evidence on investors’ reactions to firms divesting from Russia is mixed. Using a sample of less than 300 high-profile firms with operations in Russia compiled by researchers at the Yale Chief Executive Leadership Institute, Glambosky and Peterburgsky (2022) find that firms that divest within 10 days after the invasion experience negative returns, but then recover within a two-week period. Companies announcing divesting at a later stage do not experience initial stock price declines. In contrast, Kiesel and Kolaric (2023) use data from the LeaveRussia project to find positive stock price returns to firms’ announcements of leaving Russia, while there appears to be no significant investor reaction to firms’ decisions to stay in Russia.

When considering the effect from DN’s publications, the picture is almost mirrored, with the simple and trades-weighted average stock prices dipping in the days following the negative media exposure before not only recovering, but actually increasing. Similar caveats apply to the interpretation of this chart. In addition, the DN publication occurred shortly after the Hamas attacks on Israel on October 7 and Israel’s subsequent war on Gaza. While conflict and uncertainty typically dampen the stock market, the events in the Middle East initially caused little reaction on the stock market (Sharma, 2023).

Figure 6. Average stock price for companies listed in Table 1 around the time of DN exposure.

Source: Author’s compilation based on data from Nasdaq Nordic.

Discussion

As discussed in Becker et al. (2024), creating incentives and ensuring companies follow suit with the current sanctions’ regime should be a priority if we want to end Russia’s war on Ukraine and undermine its wider geopolitical ambitions. Nevertheless, Bilousova et al. (2024), and Olofsgård and Smitt Meyer (2023), highlight that there is ample evidence of sanctions evasions, including for products that are directly contributing to Russia’s military capacity. Even in countries that have a strong political commitment to the sanctions’ regime, enforcement is weak. For instance, in Sweden, it is not illegal to try and evade sanctions according to the Swedish Chamber of Commerce (2024). There is little coordination between the numerous law enforcement agencies that are responsible for sanction enforcement and there have been very few investigations into sanctions violations.

Absent effective sanctions enforcement and for the many industries not covered by sanctions, can we rely on businesses to put profits second and voluntarily withdraw from Russia? Immediately after the start of Russia’s invasion of Ukraine, as news stories about the brutality of the war proliferated, many international companies did announce that they will be leaving Russia. However, a more systematic look at data collected by the LeaveRussia project and KSE Institute reveals that more than two years into the war, less than half of companies based in Western democracies intend to distance themselves from the Russian market. A closer look at companies who are continuing operations in Russia reveals that they tend to be in sectors that are crucial for the Russian economy and war effort, such as energy, mining, electronics and industrial equipment. Many of these companies are probably seeing the war as a business opportunity and are reluctant to put human lives before their bottom line (Sonnenfeld and Tian, 2022).

Whether companies who announce that they are leaving Russia actually do leave is difficult to independently verify. A series of articles published in a prominent Swedish newspaper (Dagens Nyheter) last autumn revealed that goods from 14 major Swedish firms continue to be available in Russia, despite most of these firms publicly announcing their withdrawal from the country. The companies’ reactions to the exposé were mixed. A few companies, such as Scania and SSAB, have decided to cut all exports to the intermediaries exposed by the undercover journalists (for instance, in Kazakhstan, Uzbekistan and Kyrgyzstan). Other companies stated that they are currently investigating DN’s claims or that the exports exposed in the DN articles were final or delayed orders that were accepted before the company decided to withdraw from Russia. Another company, Trelleborg – a leading company within polymer solutions for a variety of industry purposes – reacted to the DN exposure by backtracking from its earlier commitment to exit the Russian market (Dagens Nyheter 2023b, 2023d). Wider reaction to these revelations was muted. Looking at changes in stock prices for the exposed companies, we find little evidence that investors are punishing companies for not honoring their public commitment to withdraw from Russia.

In an environment, where businesses themselves withdraw at low rates and investors do not shy away from companies contradicting their own claims, the need for stronger enforcement of sanctions seems more pressing than ever.

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.

Nuclear Energy Renaissance: Powering Sweden’s Climate Policy

Posted on April 15, 2024 | Policy Brief

Cooling towers of a nuclear power plant releasing steam into a clear blue sky representing nuclear energy in Sweden.

Sweden’s Nuclear Energy Expansion: Is It the Key to Net-Zero Emissions by 2045?

The Swedish government has placed nuclear energy at the forefront of its climate policies, aiming for two new reactors to be operational by 2035 and a total of ten new reactors by 2045. This policy brief explores whether the large-scale expansion of nuclear energy in Sweden is an environmentally and economically viable solution to achieve the nation’s goal of net-zero emissions by 2045. To assess this, we examine three critical factors: potential emission reductions, the cost-effectiveness of nuclear power, and the feasibility of the proposed construction timelines.

As a case study, we compare Sweden’s approach to nuclear energy with the successful nuclear build-out in France during the 1970s. France significantly reduced its carbon dioxide (CO2) emissions while reaping economic benefits, with an average reactor construction time of about six years. However, the situation in Sweden’s nuclear energy sector today differs from France in the 1970s. Sweden already has a low-carbon electricity grid, and the costs of alternative zero-carbon energy sources, such as wind and solar, have dropped considerably. Additionally, the construction costs and timelines for nuclear reactors in Sweden have increased compared to historical norms.

Thus, while nuclear energy in Sweden may contribute to modest emission reductions, the abatement costs are high, and reactor construction is expected to take much longer—up to two or three times longer than France’s build-out. This raises questions about whether Sweden’s nuclear expansion can effectively support the country’s ambitious climate goals.

A Renewed Focus on Nuclear Energy

When the current government in Sweden, led by Prime Minister Ulf Kristersson, came into power in 2022, they swiftly made changes to Sweden’s environment and climate policies. The Ministry of Environment was abolished, transport fuel taxes were reduced, and the energy policy objective was changed from “100 percent renewable” to “100 percent fossil free”, emphasizing that nuclear energy was now the cornerstone in the government’s goal of reaching net zero emissions (Government Office 2023, Swedish Government 2023). This marked a new turn in Sweden’s relationship with nuclear energy: from the construction of four different nuclear power plants in the 1970s – of which three remain operational today – to the national referendum on nuclear energy in 1980, where it was decided that no new nuclear reactors should be built and that existing reactors were to be phased-out by 2010 (Jasper 1990).

Today’s renewed focus on nuclear energy, especially as a climate mitigation policy tool is, however, not unique to Sweden. As of 2022, the European Commission labels nuclear reactor construction as a “green investment”, the US has included production tax credits for nuclear energy in their 2023 climate bill the Inflation Reduction Act, and France’s President Macron is pushing for a “nuclear renaissance” in his vision of a low-carbon future for Europe (Gröndahl 2022; Bistline, Mehrotra, and Wolfram 2023; Alderman 2022).

France As a Case Study

In the 1970s, France conducted an unprecedented expansion of nuclear energy, which offers valuable insights for Sweden’s contemporary nuclear ambitions. Relying heavily on imported oil for their energy needs, France enacted a drastic shift in energy policy following the 1973 oil crisis. In the subsequent decade, France ordered and began the construction of 51 new nuclear reactors. The new energy policy – dubbed the Messmer Plan – was summarized by the slogan: “All electric, all nuclear” (Hecht 2009).

To support the expansion of new reactors, the French government made use of loan guarantees and public financing (Jasper 1990). A similar strategy has recently been proposed by the Swedish government, with suggested loan guarantees of up to 400 billion kronor (around $40 billion) to support the construction of new reactors (Persson 2022).

France’s Emissions Reductions and Abatement Costs

To make causal estimates of the environmental and economic effects of France’s large-scale expansion of nuclear energy, we need a counterfactual to compare with. In a recent working paper – titled Industrial Policy and Decarbonization: The Case of Nuclear Energy in France – I, together with Jared Finnegan from University College London, construct this counterfactual as a weighted combination of suitable control countries. These countries resemble France’s economy and energy profile in the 1960s and early 1970s, however, they did not push for nuclear energy following the first oil crisis. Our weighted average comprises five European countries: Belgium, Austria, Switzerland, Portugal, and Germany, with falling weights in that same order.

Figure 1 depicts per capita emissions of CO2 from electricity and heat production in France and its counterfactual – ‘synthetic France’ – from 1960 to 2005. The large push for nuclear energy led to substantial emission reductions, an average reduction of 62 percent, or close to 1 metric ton of CO2 per capita, in the years after 1980.

Figure 1. CO2 emissions from electricity and heat in France and synthetic France, 1960-2005.

Andersson and Finnegan (2024).

Moreover, Figure 1 shows that six years elapsed from the energy policy change until emission reductions began. This time delay matches the average construction time of around six years (75 months on average) for the more than 50 reactors that were constructed in France following the announcement of the Messmer Plan in 1974.

Table 1. Data for abatement cost estimates.

Andersson and Finnegan (2024).

Lastly, these large and relatively swift emission reductions in France were achieved at a net economic gain. Table 1 lists the data used to compute the average abatement cost (AAC): the total expenses incurred for the new policy (relative to the counterfactual scenario), divided by the CO2 emissions reduction.

The net average abatement cost of -$20 per ton of CO2 is a result of the lower cost of electricity production (here represented by the levelized cost of electricity (LCOE)) of new nuclear energy during the time-period, compared to the main alternative, namely coal, – the primary energy source in counterfactual synthetic France. LCOE encompasses the complete range of expenses incurred over a power plant’s life cycle, from initial construction and operation to maintenance, fuel, decommissioning, and waste handling. Accurately calculated, LCOE provides a standardized metric for comparing the costs of energy production across different technologies, countries, and time periods (IEA 2015).

Abatement Costs and Timelines Today

Today, more than 50 years after the first oil crisis, many factors that made France’s expansion of nuclear energy a success are markedly different. For example, the cost of wind and solar energy – the other two prominent zero-carbon technologies – has plummeted (IEA 2020). Further, construction costs and timelines for new nuclear reactors in Europe have steadily increased since the 1970s (Lévêque 2015).

Figure 2 depicts the LCOE for the main electricity generating technologies between 2009 and 2023 (Bilicic and Scroggins 2023). The data is for the US, but the magnitudes and differences between technologies are similar in Europe. There are two important aspects of this figure. First, after having by far the highest levelized cost in 2009, the price of solar has dropped by more than 80 percent and is today, together with wind energy, the least-cost option. Second, the cost of nuclear has steadily increased, contrary to how technology cost typically evolves over time, meriting nuclear power the “a very strange beast” label (Lévêque, 2015, p. 44). By 2023, new nuclear power had the highest levelized cost of all energy technologies.

Regarding the construction time of nuclear reactors, these have steadily increased in both Europe and the US. The reactor Okiluoto 3 in Finland went into commercial operation last year but took 18 years to construct. Similarly, the reactor Flamanville 3 in France is still not finished, despite construction beginning 17 years ago. The reactors Hinkley Point C in the UK were initiated in 2016 and, after repeated delays, are projected to be ready for operation in 2027 at the earliest (Lawson 2022). Similarly, in the US, construction times have at least doubled since the first round of reactors were built. These lengthened constructions times are a consequence of stricter safety regulations and larger and more complex reactor designs (Lévêque, 2015). If these average construction times of 12-18 years are the new norm, Sweden will, in fact, not have two new reactors in place by 2035. Further, it would need to begin construction rather soon if the goal of having ten new reactors by 2045 is to be achieved.

Figure 2. Levelized Cost of Electricity, 2009-2023.

Source: Bilicic and Scroggins (2023).

Sweden’s Potential Emission Reductions

The rising costs and extended construction times for new reactors are notable concerns, yet the crucial measure of Sweden’s new climate policy is its capacity to reach net zero emissions across all sectors. Figure 3 depicts per capita emissions of CO2 from electricity and heat production in Sweden and OECD countries between 1960 and 2018.

Figure 3. Sweden vs. the OECD average.

Source: IEA (2022).

In 2018, the OECD’s per capita CO2 emissions from electricity and heat averaged slightly over 2 metric tons. In comparison, Sweden’s per capita emissions at 0.7 metric tons are low and represent only 20 percent of total per capita emissions. Hence, the potential for substantial emission cuts through nuclear expansion is limited. By contrast, Sweden’s transport sector, with CO2 emissions more than two times larger than the emissions from electricity and heat, presents a greater chance for impactful reductions. Yet, current policies of reduced transport fuel taxes are likely to increase emissions. The electrification of transportation could leverage the benefits of nuclear energy for climate mitigation, but broader policies are then needed to accelerate the adoption of electric vehicles.

Conclusion: Sweden’s Nuclear Energy Renaissance and Its Impact on Climate Policy

As Sweden rewrites its energy and climate policies, nuclear energy is placed front and center – a position it has not held since the 1970s. Yet, while nuclear energy may experience a renaissance in Sweden, it will not be the panacea for reaching net zero emissions the current government is hoping for. Expected emission reductions will be modest, abatement costs will be relatively high and, if recent European experiences are to be considered an indicator, the aspirational timelines are likely to be missed.

Considering these aspects, it’s imperative for Sweden to adopt a broader mix of climate policies to address sectors such as transportation – responsible for most of the country’s emissions. Pairing the nuclear ambitions with incentives for an accelerated electrification of transportation could enhance the prospects of achieving net zero emissions by 2045.

References

  • Alderman, L. (2022). France Announces Major Nuclear Power Buildup. The New York Times. February 10, 2022.
  • Andersson, J. and Finnegan, J. (2024). Industrial Policy and Decarbonization: The Case of Nuclear Energy in France. Working Paper.
  • Bilicic, G. and Scroggins, S. (2023). 2023 Levelized Cost of Energy+. Lazard.
  • Bistline, J., Mehrotra, N. and Wolfram, C. (2023). Economic Implications of the Climate Provisions of the Inflation Reduction Act. Tech. rep., National Bureau of Economic Research.
  • Government Office. (2023). De första 100 dagarna: Samarbetsprojekt klimat och energi. Stockholm, January 25, 2023.
  • Gröndahl, M-P. (2022). Thierry Breton: ’Il faudra investir 500 milliards d’euros dans les centrales nucléaires de nouvelle génération’.  Le Journal du Dimanche January 09, 2022.
  • Hecht, G. (2009). The Radiance of France: Nuclear Power and National Identity after World War II. MIT Press.
  • IEA. (2015). Projected Costs of Generating Electricity: 2015 Edition. International Energy Agency. Paris.
  • IEA. (2020). Projected Costs of Generating Electricity: 2020 Edition. International Energy Agency. Paris.
  • IEA. (2022). Greenhouse Gas Emissions from Energy (2022 Edition). International Energy Agency. Paris.
  • Jasper, J. M. (1990). Nuclear politics: Energy and the state in the United States, Sweden, and France, vol 1126. Princeton University Press.
  • Lawson, A. (2022). Boss of Hinkley Point C blames pandemic disruption for 3bn delay. The Guardian. May 20, 2022.
  • Lévêque, F. (2015). The economics and uncertainties of nuclear power. Cambridge University Press.
  • Persson, I. (2022). Allt du behöver veta om ’Tidöavtalet. SVT Nyheter. 14 October, 2022.
  • Swedish Government. (2023). Regeringens proposition 2023/24:28 Sänkning av reduktionsplikten för bensin och diesel. State Documents, Sweden. Stockholm, October 12, 2023.

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.

What Is the Evidence on the Swedish “Paternity Leave” Policy?

Posted on February 5, 2024 | Policy Brief

20240204 Swedish Paternity Leave image representing fathers parental leave policy

Since 1995, Sweden has earmarked an increasing number of parental leave days to each parent, creating a strong incentive for fathers to increase their (traditionally low) parental leave uptake. The literature on the causal impacts of these policies establishes several important findings. First, the incentive seems to work, as fathers tend to increase their uptake of paternity leave. However, who responds to the incentive, the timing of the leave and how mothers adjust to it is heterogenous, depending on the policy design and the underlying couple characteristics. Second, there is no strong support in the data for the argument, popular in public opinion and among policy-makers, that paternity leave should improve the balance of childcare duties within a couple and ultimately enhance women’s labor market position. However, in order to estimate causal effects, the studies reviewed in this policy brief focus on the first cohort of families affected by earmarked parental policies, whereas impacts on mothers’ labor market outcomes are more likely to manifest in the long run. Further, paternity leave policies in the broader sense have benefitted mothers’ health post childbirth and they may also have broken the social stigma on fathers taking time off to care for their children. Finally, recent evidence suggests that earmarking has improved gender attitudes in the next generation, making men less likely to hold stereotypical views about gender roles in society.

Parental Leave in Sweden

All parents in Sweden have been entitled to paid parental leave benefits since 1974, with no difference between birthing and non-birthing parents (for simplicity referred to as mothers and fathers henceforth). Despite this, fathers’ parental leave take-up has historically been very low (see Figure 1).

To change this pattern, the legislator has introduced a few reforms over the years. In 1995, 30 of the wage-replaced days (i.e. parental leave days compensated at almost the rate of the daily wage) were earmarked to each parent, creating the so called ”mum/dad month”. When a parent failed to take up these 30 days these would be “lost”, as earmarked days could not be transferred to the other parent. Through two subsequent reforms, effective from 2002 and 2016 respectively, the number of earmarked wage-replaced days increased, first to sixty days and then to ninety days.

Today, the total allowance is 480 benefit days, of which 390 are wage-replaced (paid at about 80 percent of the parent’s wage), and the remaining 90 are compensated at a low flat rate (approximately 15 euros per day). 90 of the wage-replaced days are earmarked to each parent. The parental leave days can be utilized until the day the child turns 12 or until the child finishes 5th grade, but 80 percent of these days must be used by the time the child turns 4.

As shown in Figure 1, father’s share of the total parental leave steadily grew over the years when the earmarking reforms occurred but has since 2018 stalled at a rate of 69/31 (i.e., mothers and fathers take 69 and 31 percent respectively of the total number of leave days claimed in Sweden during one year).

Figure 1. Men’s share of parental leave days in Sweden, 1974-2021, in percent.

Source: Author’s compilation based on data from Statistics Sweden.

One could speculate, based on these trends, that earmarking might have successfully increased father’s take-up of parental leave. However, without rigorous statistical analysis, it is virtually impossible to distinguish between the role of the earmarking polices and secular trends in preferences over parental leave. Thankfully, a few papers have studied the Swedish parental leave reforms, using state-of-the art techniques to understand their respective causal impacts. What is the research-based evidence on the Swedish parental leave earmarking reforms? Did they successfully incentivize fathers to increase their take-up? Did they succeed in their broader goal of balancing child responsibilities within couples, ultimately helping women improve their position in the labor-market? How were children affected by them? What lessons from the Swedish experience can be useful for fine-tuning of the Swedish policy or for similar designs in other countries?

This policy brief delves into the academic literature on the impacts of the Swedish earmarking reforms. The review is by no means representative of the large amount of academic work produced on the Swedish parental leave reforms. Rather, it is a small selection of studies where results can be more easily interpreted as causal impacts, as they are based on comparing families with children born just before versus just after the relevant date for the policy implementation, and account for so called month-of-birth effects (see e.g. Larsen et al., 2017) when needed. Causal estimates can be more directly used to inform policy-making, which is what motivates the focus of this review.

Earmarking and Take-up of Paternity Leave

As explained above, the Swedish earmarking system creates strong incentives for fathers to increase their take-up of leave days, as these would otherwise be “lost”, leaving couples with the need to resort to potentially more costly arrangements for childcare.

It is thus not surprising that the 1995 reform increased fathers’ take-up of wage-replaced leave by an average of 15 days, 50 percent of the pre-reform take-up (Ekberg et al., 2013). This change seems to mostly stem from the 54 percent of fathers who were taking 0 days of leave before the reform and were induced to take between 20 and 40 days after, so that the percentage of fathers not taking any leave declined to 18 precent.

In a recent working paper, Avdic et al. (2023) complement this evidence, considering all leave days together. They show that the reform induced fathers to increase their take-up of total parental leave by 21 days, whereby mothers decreased it by the same amount. Therefore, on average, the total amount of leave taken by Swedish parents remained unchanged, but the mother’s share decreased by about 5.4 percentage points. The paper also compares changes in parents’ take-up month-by-month, finding that some mothers took some unpaid leave within the child’s first year to compensate for the loss of wage-replaced days. It is not clear why these mothers would not resort to the low flat rate leave, as other mothers seem to have done (see Ekberg at al., 2013). In general, the data points to fathers having mostly, although not exclusively, substituted for mothers’ time with the child during the child’s second year of life.

Avdic and Karimi (2018) extend the policy-evaluation to the 2002 reform, which earmarked one additional month to each parent, but also made one more month of wage-replaced leave available. They find that this reform also caused an increase in take-up of paternity leave, but for a different group of fathers. While in 1995 fathers that otherwise would have taken no leave were induced to take approximately one month, the 2002 shift occurred mostly among fathers who, instead of taking between 30 and 40 days of leave, started taking more than 50 days.

These findings are consistent with those in Alden et al. (2023), who study the characteristics of fathers who do not take any leave. They find that while the 1995 reform changed the composition of this group of fathers, the same thing did not happen with the 2002 and 2016 reforms. Over-time, one group of men consistently stands out for not taking any parental leave regardless of the incentives created by the legislator, namely fathers with worse labor-market positions, and whose earnings are lower than that of the mothers.

Paternity Leave and Gender Gaps

The main motivation for policies that seek to increase the take-up of parental leave among fathers is that this increase can help women, especially high-skilled ones, improve their labor-market position (Ekberg et al., 2013). The economics literature has long established a systematic loss in earnings and employment for women following the birth of their first child (the so-called child penalty; see e.g. Kleven et al., 2019). There are two main mechanisms through which earmarking policies could improve women’s labor market outcomes. First, if firms discriminate against women because of the (perceived) cost of maternity leave, the discrimination should decline once employers expect also men to take parental leave. Ginja et al. (2020) show evidence (although not causal) consistent with long maternity leaves reducing child-bearing aged women’s “attractiveness” among Swedish employers.  Second, by creating a stronger bond between fathers and children, and by reducing mothers’ specialization in childcare, paternity leave should increase the time fathers allocate to childcare as the child grows up, thus re-balancing the division of non-market (and possibly market) work within the couple.

As pointed out in Cools et al. (2015), the first type of effect, more likely to be relevant in the long run, is hard to estimate with data from only one country, as virtually all employers in the country should be somewhat affected by the change in perceptions.

Instead, Ekberg et al. (2013) study the effect on intra-household division of childcare responsibilities, by estimating the impact of the 1995 reform on the amount of time that fathers and mothers claim off work when their child is sick. They find no evidence that the 1995 reform increased the share of time off taken by fathers to care for sick children. Consistently, the study also fails to find evidence of large and robust changes in mothers’ earnings for thirteen years post childbirth. Similarly, Avdic et al. (2023) show that mothers affected by the 1995 reform did not increase, on average, their labor supply, except during the first year of the child’s life.

While these analyses are extremely valuable for our understanding of the reforms’ effects on the first cohort of families affected, they fall short of capturing long-term dynamics. For instance, it is important to acknowledge that the decision on who takes time off when the child is sick depends on many factors, including the availability of flexible arrangements at work. Women are known for selecting into occupations and jobs that allow a more flexible schedule (Goldin, 2014). This pattern might change if the increase in take-up of paternity leave leads to updated expectations among women on partners’ willingness to share daycare responsibility. This is most likely a long-term development, which the design used in the above outlined studies does not capture.

Another effect of the Swedish parental leave system, not directly linked to earmarking but nevertheless indicative of the importance of fathers’ time off work during the child’s first year of life, is that on mothers’ health. Persson and Rossin-Slater (2019) show that a Swedish 2012 reform that in practice allowed fathers to take 30 days of parental leave in concomitance with the mother during the child’s first year of life reduced the likelihood of mothers experiencing health issues due to post-partum complications.

An important aspect that the literature has so far not emphasized is also that earmarking reforms might affect another gender gap, namely the “freedom” to take the leave. Given the traditional division of roles across genders, there might be a stigma at a societal level against men taking parental leave. By creating strong economic incentives for taking paternity leave, the earmarking policies may downplay the stigma in the short-term and break it in the long-term. There is some suggestive, although not definitive, evidence that norms around paternity leave might have changed. Avdic and Karimi (2018) show that between 1995 and 2002 the share of fathers who were taking more than one month of leave had already started increasing before the second month was earmarked. More research would be needed, however, to assess the role of policies in changing societal perceptions around paternity leave.

Paternity Leave and Children’s Outcomes

An obvious question to ask is how children are affected by earmarking of parental leave days. Avdic et al. (2023) study this question in the context of the 1995 reform. By looking separately at different groups of children by sex and parents’ education, they find that the 1995 reform caused a decline in GPA for sons of non-college-educated fathers and mothers. The most likely channel for this relationship, according to the authors, is boys’ diminished access to fathers’ time, due to the 1995 reform increasing the likelihood of couple dissolution within the child’s first three years of life (for households with low-earning mothers). At that time children tended to live predominantly with the mother in case of parental separation. However, a potential additional channel could be the worsened economic situation caused by the paternity leave. In households with low-earning mothers, mothers’ and family earnings declined post-reform due to mothers compensating for “lost” leave days by taking unpaid leave. Very conflictual separations could also be behind the effect on children’s GPA.

These findings highlight the importance of considering potential unintended consequences of the parental leave policies, and the diverse effects they might have on different demographic groups. Such considerations could improve the design of future policies. For instance, Avdic and Karimi (2018) find that the 2002 reform, which earmarked one more month and added one month of wage-replaced parental leave, did not cause couple dissolution. Thus, the authors conclude that not imposing strong constraints on households, while creating incentives for fathers to take paternity leave, is highly desirable.

Finally, in a very recent working paper, Fontenay and Gonzalez (2024) consider the effect of earmarking policies on children’s gender attitudes as adults, leveraging data from online surveys of 3,000 respondents across six European countries, including Sweden. They study changes in attitudes as measured by an Implict Association Test, which is meant to capture subconscious associations between women and family and men and career.  In five of the countries studied they find that male respondents born soon after an earmarking reform have less stereotypical gender attitudes than those born before. No differences are detected for women. The effect in Sweden is one of the largest: in a sample of 237 male respondents, the father being eligible for the “dad-month” makes the child hold more egalitarian gender-attitudes as an adult by 0.3 standard deviations. The authors suggest that a role model effect might be at play, whereby boys who observe their fathers being more involved in childcare are nurtured to hold more egalitarian beliefs about gender roles.

Conclusion

Since 1995, Sweden has earmarked an increasing number of parental leave days to each parent, creating strong incentives for fathers to increase their previously very low parental leave uptake. This policy brief has reviewed the literature that studies the causal impacts of these earmarking reforms, highlighting a number of important conclusions as well as gaps in the knowledge on the effects of these policies.

First, the incentives created by the earmarking policies seem to work, as fathers tend to increase their uptake of paternity leave, while mothers tend to increase their labor supply during their child’s first year of life. However, such effects are heterogeneous, depending on the policy design and the underlying couple characteristics. Designs that impose strong constraints on household choices seem to have adverse effects on low-income or low-education households, reducing mothers’ earnings, triggering couple dissolution, and negatively affecting children’s GPA. Future increases in earmarking or similar policies in other countries should consider these design details carefully.

Second, there is no strong support in the data for the argument, popular in the public opinion and among policy makers, that paternity leave improves the balance of childcare duties within a couple and that it ultimately enhances women’s labor market position. However, to estimate causal effects, the studies analyzed in this policy brief focus on the first cohort of families affected by the earmarked reforms, whereas impacts on mothers’ labor market outcomes are more likely to be seen in the long run. After all, Sweden is one of the countries with the lowest documented child penalty in employment and earnings (see the child penalty atlas), and it is unlikely that policy played no role in narrowing gender gaps among parents. Consistently, recent evidence suggests that earmarking has improved gender attitudes in the next generation, making men less likely to hold stereotypical views about gender roles in society.

Further, it is important to mention that paternity leave policies in general have benefitted mothers’ post-childbirth health and that they may have broken a societal stigma around fathers taking time off to care for their children.

References

  • Aldén, L., Boschini, A. and Tallås Ahlzen, M. (2023). Fathers but not Caregivers. http://dx.doi.org/10.2139/ssrn.4405212
  • Avdic, D. and Karimi, A., (2018). Modern family? Paternity leave and marital stability. American Economic Journal: Applied Economics, 10(4), pp. 283-307.
  • Avdic, D., Karimi, A., Sundberg, E. and Sjögren, A. (2023). Paternity leave and child outcomes. IFAU, Working Paper 25.
  • Ekberg, J., Eriksson, R., and Friebel, G. (2013). Parental leave—A policy evaluation of the Swedish “Daddy-Month” reform. Journal of Public Economics, 97, pp. 131-143.
  • Ginja, R., Karimi, A. and Pengpeng Xiao. (2023). Employer responses to family leave programs. American Economic Journal: Applied Economics, 15(1), pp. 107-135.
  • Goldin, C., (2014). A grand gender convergence: Its last chapter. American Economic Review, 104(4), pp. 1091-1119.
  • Gonzalez, L. and Fontenay, S. (2024). Can Public Policies Break the Gender Mold? Evidence from Paternity Leave Reforms in Six Countries. BSE, Working Paper 1422.
  • Kleven, H., Landais, C., Posch, J., Steinhauer, A. and Zweimüller, J. (2019). Child penalties across countries: Evidence and explanation”. AEA Papers and Proceedings, 109, pp. 122-126.
  • Larsen, E. R. and Solli, I. F. (2017). Born to run behind? Persisting birth month effects on earnings. Labour Economics, 46, pp. 200-210.
  • Persson, P., and Rossin-Slater, M. (2019). When dad can stay home: fathers’ workplace flexibility and maternal health. National Bureau of Economic Research, Working Paper 25902.

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 Impact of Rising Gasoline Prices on Households in Sweden, Georgia, and Latvia – Is This Time Different?

Posted on December 1, 2023 | FREECE Brief, Policy Papers

20231201 The Impact of Rising Gasoline Prices Image 02

Over the last two years, the world has experienced a global energy crisis, with surging oil, coal, and natural gas prices. For European households, this translates into higher gasoline and diesel prices at the pump as well as increased electricity and heating costs. The increase in energy related costs began in 2021, as the world economy struggled with supply chain disruptions caused by the Covid-19 pandemic, and intensified as Russia launched a full-scale invasion of Ukraine in late February 2022. In response, European governments have implemented a variety of energy tax cuts (Sgaravatti et al., 2023), with a particular focus on reducing the consumer cost of transport fuel. This policy paper aims to contextualize current transport fuel prices in Europe by addressing two related questions: Are households today paying more for gasoline and diesel than in the past? And should policymakers respond by changing transport fuel tax rates? The analysis will focus on case studies from Sweden, Georgia, and Latvia, countries that vary in economic development, energy independence, reliance on Russian oil, transport infrastructure, and transport fuel tax rates. Through this study, we aim to paint a nuanced picture of the implications of rising fuel prices on household budgets and provide policy guidance.

Record High Gasoline Prices, Historically Cheap to Drive

Sweden has a long history of using excise taxes on transport fuel as a means to raise revenue for the government and to correct for environmental externalities. As early as in 1924, Sweden introduced an energy tax on gasoline. Later, in 1991, this tax was complemented by a carbon tax levied on the carbon content of transport fuels. On top of this, Sweden extended the coverage of its value-added tax (VAT) to include transport fuels in 1990. The VAT rate of 25 percent is applied to all components of the consumer price of gasoline: the production cost, producer margin, and excise taxes (energy and carbon taxes).

In May 2022, the Swedish government reduced the tax rate on transport fuels by 1.80 SEK per liter (0.16 EUR). This reduction was unprecedented. Since 1960, there have only been three instances of nominal tax rate reductions on gasoline in Sweden, each by marginal amounts in the range of 0.04 to 0.22 SEK per liter. Prior to the tax cut, the combined rate of the energy and carbon tax was 6.82 SEK per liter of gasoline. Adding the VAT that is applied on these taxes, amounting to 1.71 SEK, yields a total excise tax component of 8.53 SEK. This amount is fixed in the short run and does not vary with oil price changes.

Figure 1. Gasoline Pump Price, 2000-2023.

Source: Drivkraft Sverige (2023).

Figure 1 shows the monthly average real price of gasoline in Sweden from January 2000 to October 2023. The price has slowly increased over the last 20 years and has been historically high in the last year and a half. Going back even further, the price is higher today than at any point since 1960. Swedish households have thus lately been paying more for one liter of gasoline than ever before.

However, a narrow focus on the price at the pump does not take into consideration other factors that affect the cost of personal transportation for households.

First, the average fuel efficiency of the vehicle fleet has improved over time. New vehicles sold in Sweden today can drive 50 percent further on one liter of gasoline compared to new vehicles sold in 2000. Arguably, what consumers care about the most is not the cost of gasoline per se but the cost of driving a certain distance, as the utility one derives from a car is the distance one can travel. Accounting for vehicles’ fuel efficiency improvement over time, we find that even though it is still comparatively expensive to drive today, the current price level no longer constitutes a historical peak. In fact, the cost of driving 100 km was as high, or higher, in the 2000-2008 period (see Figure 2).

Figure 2. Gasoline Expenditure per 100 km.

Source: Trafikverket (2023) and Drivkraft Sverige (2023).

Second, any discussion of the cost of personal transportation for households should also factor in changes in household income over time. The Swedish average real hourly wage has increased by more than thirty percent between 2000-2023. As such, the cost of driving 100 km, measured as a share of household income, has steadily declined over time. Further, this pattern is consistent across the income distribution; for instance, the cost trajectory for the bottom decile is similar to that of all wage earners (as illustrated in Figure 3). In 1991, when the carbon tax was implemented, the average household had to spend around two thirds of an hour’s wage to drive 100 km. By 2020, that same household only had to spend one third of an hour’s wage to drive the same distance. There has been an increase in the cost of driving over the last two years, but in relation to income, it is still cheaper today to drive a certain distance compared to any year before 2013.

Figure 3. Cost of Driving as a Share of Income, 1991-2023.

Source: Statistics Sweden (2023).

Taken all together, we see that on the expenditure side, vehicles use fuel more efficiently over time and on the income side, households earn higher wages. Based on this, we can conclude that the cost of travelling a certain distance by car is not historically high today.

Response From Policymakers

It is, however, of little comfort for households to know that it was more expensive to drive their car – as a share of income – 10 or 20 years ago. We argue that what ultimately matters for households is the short run change in cost, and the speed of this change. If the cost rises too fast, households cannot adjust their expenditure pattern quickly enough and thus feel that the price increase is unaffordable. In fact, the change in the gasoline price at the pump has been unusually rapid over the last two years. Since the beginning of 2021, until the peak in June 2022, the (nominal) pump price rose by around 60 percent.

So, should policymakers respond to the rapid price increase by lowering gasoline taxes? The perhaps surprising answer is that lowering existing gasoline tax rates would be counter-productive in the medium and long run. Since excise taxes are fixed and do not vary with the oil price, they reduce the volatility of the pump price by cushioning fluctuations in the market price of crude oil. The total excise tax component including VAT constitutes more than half of the pump price in Sweden, a level that is similar across most European countries. This stands in stark contrast with the US, where excise taxes make up around 15 percent of the consumer price of gasoline. As a consequence, a doubling of the price of crude oil only increases the consumer price of gasoline in Sweden by around 35 percent, while it increases by about 80 percent in the US. Households across Sweden, Europe, and the US have adapted to the different levels of gasoline tax rates by purchasing vehicles with different levels of fuel efficiency. New light-duty vehicles sold in Europe are on average 45 percent more fuel-efficient compared to the same vehicle category sold in the US (IEA 2021). As such, US households do not necessarily benefit from lower gasoline taxation in terms of household expenditure on transport fuel. They are also more vulnerable to rapid increases in the price of crude oil. Having high gasoline tax rates thus reduces – rather than increases – the short run welfare impact on households. Hence, policymakers should resist the temptation to lower gasoline tax rates during the current energy crisis. With imposed tax cuts, households will, in the medium and long run, buy vehicles with higher fuel consumption and thus become more exposed to price surges in the future – again compelling policymakers to adjust tax rates, creating a downward spiral. Instead, alternative measures should be considered to alleviate the effects of the heavy price pressure on low-income households – for instance, revenue recycling of the carbon tax revenue and increased subsidies of public transport.

Conclusion

To reach environmental and climate goals, Sweden urgently needs to phase out the use of fossil fuels in the transport sector – Sweden’s largest source of carbon dioxide emissions. This is exactly what a gradual increase of the tax rate on gasoline and diesel would achieve. At the same time, it would benefit consumers by shielding them from the adverse effects of future oil price volatility.

The most common response from policymakers regarding fuel tax rates however goes in the opposite direction. In Sweden, the excise tax on gasoline and diesel was reduced by 1.80 SEK per liter in 2022 and the current government plans to further reduce the price by easing the biofuel mandate. Similar tax cuts have been implemented in a range of European countries. Therefore, the distinguishing factor in the current situation lies in the exceptional responses from policymakers, rather than in the gasoline costs that households are encountering.

Gasoline Price Swings and Their Consequences for Georgian Consumers

The energy crisis that begun in 2021 has also made its mark on Georgia, where the operational expenses of personal vehicles, encompassing not only gasoline costs but also maintenance expenses, account for more than 8 percent of the consumer price index. The rise in gasoline prices sparked public protest and certain opposition parties proposed an excise tax cut to mitigate the gasoline price surge. In Georgia, gasoline taxes include excise taxes and VAT. Until January 1, 2017, the excise tax was 250 GEL per ton (9 cents/liter), it has since increased to 500 GEL (18 cents/liter). Despite protests and the suggested excise tax reduction, the Georgian government chose not to implement any tax cuts. Instead, it initiated consultations with major oil importers to explore potential avenues for reducing the overall prices. Following this, the Georgian National Competition Agency (GNCA) launched an inquiry into the fuel market for motor vehicles, concluding a manipulation of retail prices for gasoline existed (Georgian National Competition Agency, 2023).

The objective of this part of the policy paper is to address two interconnected questions. Firstly, are Georgian households affected by gasoline price increases? And secondly, if they are, is there a need for government intervention to mitigate the negative impact on household budgets caused by the rise in gasoline prices?

The Gasoline Market in Georgia

Georgia’s heavy reliance on gasoline imports is a notable aspect of the country’s energy landscape. The country satisfies 100 percent of its gasoline needs with imports and 99 percent of the fuel imported is earmarked for the road vehicle transport sector. Although Georgia sources its gasoline from a diverse group of countries, with nearly twenty nations contributing to its annual gasoline imports, the supply predominantly originates from a select few markets: Bulgaria, Romania, and Russia. In the last decade, these markets have almost yearly accounted for over 80 percent of Georgia’s total gasoline imports. Furthermore, Russia’s share has substantially increased in recent years, amounting to almost 75 percent of all gasoline imports in 2023. The primary reason behind Russia’s increased dominance in Georgia’s gasoline imports is the competitive pricing of Russian gasoline, which between January and August in 2023 was almost 50 percent cheaper than Bulgarian gasoline and 35 percent cheaper than Romanian gasoline (National Statistics Office of Georgia, 2023). Given the dominance of Russian gasoline in Georgia, the end-user (retail) prices of gasoline in Georgia, are closer to gasoline prices in Russia than EU gasoline prices (see Figure 1).

Figure 1. End-user Gasoline Prices in Georgia, Russia and the EU, 2013-2022.

Source: International Energy Agency, 2023.

However, while the gasoline prices increased steadily in 2020-2022 in Russia, gasoline prices in Georgia increased sharply in the same period. This more closely replicated the EU price dynamics rather than the Russian one. The sharp price increase in gasoline raised concerns from the Georgian National Competition Agency (GNCA). According to the GNCA one possible reason behind the sharp increase in gasoline prices in Georgia could be anti-competitive behaviour among the five major companies within the gasoline market. Accordingly, the GNCA investigated the behaviour of major market players during the first eight months of 2022, finding violations of the Competition Law of Georgia. Although the companies had imported and were offering consumers different and significantly cheaper transport fuels compared to fuels of European origin, their retail pricing policies were identical and the differences in product costs were not properly reflected in the retail price level. GNCA claims the market players coordinated their actions, which could have led to increased gasoline prices in Georgia (National Competition Agency of Georgia. (2023).

Given that increased gasoline prices might lead to increased household expenditures for fuel, it is important to assess the potential impact of recent price developments on household’s budgets.

Exploring Gasoline Price Impacts

Using data from the Georgian Households Incomes and Expenditures Survey (National Statistics Office of Georgia, 2023), weekly household expenditures on gasoline and corresponding weekly incomes were computed. To evaluate the potential impact of rising gasoline prices on households, the ratio of household expenditures on gasoline to household income was used. The ratios were calculated for all households, grouped in three income groups (the bottom 10 percent, the top 10 percent and those in between), over the past decade (see Figure 2).

Figure 2. Expenditure on Gasoline as Share of Income for Different Income Groups in Georgia, 2013-2022.

Source: National Statistics Office of Georgia, 2023.

Figure 2 shows that between 2013 and 2022, average households allocated 9-14 percent of their weekly income to gasoline purchases. There is no discernible increase in the ratio following the energy crisis in 2021-2022.

Considering the different income groups, the upper 10 percent income group experienced a slightly greater impact from the recent rise in gasoline prices (the ratio increased), compared to the overall population. For the lower income group, which experienced a rise in the proportion of fuel costs relative to total income from 2016 to 2021, the rate declined between 2021 and 2022. Despite the decline in the ratio for the lower-level income group, it is noteworthy that the share of gasoline expenditure in the household budget has consistently been high throughout the decade, compared to the overall population and the higher-level income group.

The slightly greater impact from the rise in gasoline prices for the upper 10 percent income group is driven by a 4 percent increase in nominal disposable income, paired with an 8 percent decline in the quantity of gasoline (Figure 3) in response to the 22 percent gasoline price increase. Clearly, for this income group, the increase in disposable income was not enough to offset the increase in the price of gasoline, increasing the ratio as indicated above.

For the lower 10 percent income group, there was a 23 percent increase in nominal disposable income, paired with a 9 percent decline in the quantity of purchased gasoline (Figure 3) in response to the 22 percent gasoline price increase . Thus, for this group, the increase in disposable income weakened the potential negative impact of increased prices, eventually lowering the ratio.

Figure 3. Average Gasoline Quantities Purchased, by Household Groups, per Week (In Liters) 2013-2022.

Source: National Statistics Office of Georgia, 2023.

Conclusion

The Georgian energy market is currently fully dependent on imports, predominantly from Russia. While sharp increases in petrol prices have been observed during the last 2-3 years, they do not seem to have significantly impacted Georgian households’ demand for gasoline. Noteworthy, the lack of impact from gasoline price increases on Georgian households’ budgets, as seen in the calculated ratio (depicted in Figure 2), can be explained by the significant rise in Georgia’s imports from the cheap Russian market during the energy crisis years. Additionally, according to the Household Incomes and Expenditures survey, there was in 2022 an annual increase in disposable income for households that purchased gasoline. However, the data also show that low-income households spend a high proportion of their income on gasoline.

Although increased prices did not significantly affect Georgian households, the extremely high import dependency and the lack of import markets diversification poses a threat to Georgia’s energy security and general economic stability. Economic dependency on Russia is dangerous as Russia traditionally uses economic relations as a lever for putting political pressure on independent economies. Therefore, expanding trade and deepening economic ties with Russia should be seen as risky. Additionally, the Russian economy has, due to war and sanctions, already contracted by 2.1 percent in 2022 and further declines are expected (Commersant, 2023).

Prioritizing actions such as diversifying the import market to find relatively cheap suppliers (other than Russia), closely monitoring the domestic market to ensure that competition law is not violated and market players do not abuse their power, and embracing green, energy-efficient technologies can positively affect Georgia’s energy security and positively impact sustainable development more broadly.

Fueling Concerns: The True Cost of Transportation in Latvia

In May 2020, as the Latvian Covid-19 crisis began, Latvia’s gasoline price was 0.99 EUR per liter. By June 2022, amid the economic effects from Russia’s war on Ukraine, the price had soared to a record high 2.09 EUR per liter, sparking public and political debate on the fairness of fuel prices and potential policy actions.

While gas station prices are salient, there are several other more hidden factors that affect the real cost of transportation in Latvia. This part of the policy paper sheds light on such costs by looking at some of its key indicators. First, we consider the historical price of transport fuel in Latvia. Second, we consider the cost of fuel in relationship to average wages and the fuel type composition of the vehicle fleet in Latvia.

The Price of Fuel in Latvia

Latvia’s nominal retail prices for gasoline (green line) and diesel (orange line) largely mirror each other, though gasoline prices are slightly higher, in part due to a higher excise duty (see  Figure 1). These local fuel prices closely follow the international oil market prices, as illustrated by the grey line representing nominal Brent oil prices per barrel.

The excise duty rate has been relatively stable in the past,  demonstrating that it has not been a major factor in fuel price swings. A potential reduction to the EU required minimum excise duty level will likely have a limited effect on retail prices. Back of the envelope calculations show that lowering the diesel excise duty from the current 0.414 EUR per liter to EU’s minimum requirement of 0.33 EUR per liter could result in approximately a 5 percent drop in retail prices (currently, 1.71 EUR per liter). This at the cost of a budget income reduction of 0.6 percent, arguably a costly policy choice.

In response to recent years’ price increase, the Latvian government opted to temporarily relax environmental restrictions, making the addition of a bio component to diesel and gasoline (0.065 and 0.095 liters per 1 liter respectively) non-mandatory for fuel retailers between 1st of June 2022 until the end of 2023. The expectation was that this measure would lead to a reduction in retail prices by approximately 10 eurocents. To this date, we are unaware of any publicly available statistical analysis that verifies whether the relaxed restriction have had the anticipated effect.

Figure 1. Nominal Retail Fuel Prices and Excise Duties for Gasoline and Diesel in Latvia (in EUR/Liter), and Nominal Brent Crude Oil Prices (in EUR/Barrel), January 2005 to August 2023.

Source: The Central Statistical Bureau of Latvia, St. Louis Federal Reserve’s database, OFX Monthly Average Rates database, The Ministry of Finance of Latvia, The State Revenue Service of Latvia.

The True Cost of Transportation

Comparing fuel retail prices to average net monthly earnings gives insight about the true cost of transportation in terms of purchasing power. Figure 2 displays the nominal net monthly average wage in Latvia from January 2005 to June 2023 (grey line). During this time period the average worker saw a five-fold nominal wage increase, from 228 EUR to 1128 EUR monthly. The real growth was two-fold, i.e., the inflation adjusted June 2023 wage, in 2005 prices, was 525 EUR.

Considering fuel’s share of the wages; one liter of gasoline amounted to 0.3 percent of an average monthly wage in 2005, as compared to 0.12 percent in 2023, with diesel displaying a similar pattern. Thus, despite recent years’ fuel price increase, the two-fold increase in purchasing power during the same time period implies that current fuel prices may not be as alarming for Latvian households as they initially appeared to be.

Figure 2. Average Nominal Monthly Net Wages in Latvia and Nominal Prices of One Liter of Gasoline and Diesel as Shares of Such Wages (in EUR), January 2005 to June 2023.

Source: The Central Statistical Bureau of Latvia.

Another factor to consider is the impact of technological advancements on fuel efficiency over time. The idea is simple: due to technological improvements to combustion engines, the amount of fuel required to drive 100 kilometers has decreased over time, which translates to a lower cost for traveling additional kilometers today. An EU average indicator shows that the fuel efficiency of newly sold cars improved from 7 liters to 6 liters per 100 km, respectively, in 2005 and 2019. While we lack precise data on the average fuel efficiency of all private vehicles in Latvia, we can make an informed argument in relation to the technological advancement claim by examining proxy indicators such as the type of fuel used and the average age of vehicles.

Figure 3 shows a notable change in the fuel type composition of the vehicle fleet in Latvia. Note that the decrease in the number of cars in 2011 is mainly due to a statistical correction for unused cars. At the start of the 21st century, 92 percent of Latvian vehicles were gasoline-powered and 8 percent were diesel-powered. By 2023, these proportions had shifted to 28 percent for gasoline and 68 percent for diesel. Diesel engines are more fuel efficient, usually consuming 20-35 percent less fuel than gasoline engines when travelling the same distance. Although diesel engines are generally pricier than their gasoline counterparts, they offer a cost advantage for every kilometer driven, easing the impact of rising fuel prices. A notable drawback of diesel engines however, is their lower environmental efficiency – highlighted following the 2015 emission scandal. In part due to the scandal, the diesel vehicles growth rate have dropped over the past five years in Latvia.

Figure 3. Number of Private Vehicles by Fuel Type and the Average Age of Private Vehicles in Latvia, 2001 to 2023.

Source: The Central Statistical Bureau of Latvia, Latvia’s Road Traffic Safety Directorate.

Figure 3 also shows that Latvia’s average vehicle age increased from 14 years in 2011 to 15.1 years in 2023. This is similar to the overall EU trend, although EU cars are around 12 years old, on average. This means that, in Latvia, the average car in 2011 and 2023 were manufactured in 1997 and 2008, respectively. One would expect that engines from 2008 have better technical characteristics compared to those from 1997. Recent economic research show that prior to 2005, improvements in fuel efficiency for new cars sold in the EU was largely counterbalanced by increased engine power, enhanced consumer amenities and improved acceleration performance (Hu and Chen, 2016). I.e.,  cars became heavier, larger, and more powerful, leading to higher fuel consumption. However, after 2005, cars’ net fuel efficiency started to improve. As sold cars in Latvia are typically 10-12 year old vehicles from Western European countries, Latvia will gradually absorb a more fuel-efficient vehicle fleet.

Conclusion

The increase of purchasing power, a shift to more efficient fuel types and improvements in engine efficiency have all contributed to a reduction of the overall real cost of transportation over time in Latvia. The recent rise in fuel prices to historically high levels is thus less concerning than it initially appears. Moreover, a growing share of cars will not be directly affected by fuel price fluctuations in the future. Modern electric vehicles constitute only 0.5 percent of all cars in Latvia today, however, they so far account for 10 percent of all newly registered cars in 2023, with an upward sloping trend.

Still, politicians are often concerned about the unequal effects of fuel price fluctuations on individuals. Different car owners experience varied effects, especially when considering factors like income and location, influencing transportation supply and demand.

First, Latvia ranks as one of the EU’s least motorized countries, only ahead of Romania, with 404 cars per 1000 inhabitants in 2021. This lower rate of vehicle ownership is likely influenced by the country’s relatively low GDP per capita (73 percent of the EU average in 2022) and a high population concentration in its capital city, Riga (32 of the population lives in Riga city and 46 percent in the Riga metropolitcan area). In Riga, a developed public transport system reduces the necessity for personal vehicles. Conversely, areas with limited public transport options, such as rural and smaller urban areas, exhibit a higher demand for personal transportation as there are no substitution options and the average distance travelled is higher than in urban areas. Thus, car owners in these areas tend to be more susceptible to the impact of fuel price volatility.

Second, Latvia has a high Gini coefficient compared to other EU countries, indicating significant income inequality (note that the Gini coefficient measures income inequality within a population, with 0 representing perfect equality and 1 indicating maximum inequality. In 2022, the EU average was 29.6 while Latvia’s Gini coefficient was 34.3, the third highest in the EU). With disparities in purchasing power, price hikes tend to disproportionately burden those with lower incomes, making fuel more costly relative to their monthly wages.

These income and location factors suggest that inhabitants in rural areas are likely the most affected by recent price hikes. Distributional effects across geography (rural vs urban) are often neglected in public discourse, as the income dimension is more visible. But both geography and income factors should be accounted for in a prioritized state support, should such be deemed necessary.

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.

What More Besides Weapons Does Ukraine Need to Survive as a Nation?

Posted on February 24, 2023 | Videos

20230224 IVA post News Post Image

As of today, Russia’s aggression against Ukraine has persisted for a year. While several countries have helped Ukraine with military, financial and humanitarian aid, Ukraine requires additional assistance to endure the conflict with Russia. What other forms of support and aid are needed for Ukraine’s survival? And how can the EU and Sweden support Ukraine’s victory?

The Royal Swedish Academy of Engineering Sciences (IVA) hosted a seminar in which Ukraine’s needs were discussed from an economic and political science perspective by several leading economists, including:

  • Nataliia Shapoval, Director of the KSE Institute at the Kyiv School of Economics (KSE)
  • Torbjörn Becker, IVA member and Director of the Stockholm Institute of Transition Economics at the Stockholm School of Economics (SITE)
  • Fredrik Löjdquist, Director of the Centre for Eastern European Studies (SCEEUS)
  • Maria Perrotta Berlin, Assistant Professor at the Stockholm Institute of Transition Economics.

Nataliia Shapoval, Chairman of the KSE Institute at the Kyiv School of Economics, joined the seminar from Kyiv to share her views. According to Shapoval,

“Tougher sanctions across the board, hefty sanctions on energy, additional sanctions on trade, and more control over financial transactions with Russia are required by the outside world right now.”

As Russia’s war of aggression against Ukraine has lasted for a year, seminar experts advocated for tougher sanctions against Russia and discussed Ukraine’s needs from an economic and political science perspective.

About IVA

The Royal Swedish Academy of Engineering Sciences (IVA) is an independent academy with a mission “…to promote engineering and economic sciences and the advancement of business and industry for the benefit of society.” Read more: IVA website 

Disclaimer: Opinions expressed during events and conferences are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Inequality in the Pandemic: Evidence from Sweden

Posted on March 22, 2021 | Policy Brief

Condominium houses near the water representing inequality during the covid19 pandemic

Most reports on the labor-market effects of the first wave of COVID-19 have pointed to women, low-skilled workers and other vulnerable groups being more affected. Research on the topic shows a more mixed picture. We contribute to this discussion. Using monthly official unemployment data in Sweden we find that across wage levels, occupations with lower salaries display higher increases in unemployment, and low-wage occupations are also more difficult to do from home. The job loss probability is also higher in sectors with a higher concentration of workers born outside of the EU and those aged below 30. But we find no evidence of a gender unequal impact in Sweden. Overall, our results point to higher effects for low-wage groups but small gender differences overall.

Introduction

The ongoing Covid-19 pandemic has affected the health of millions of people worldwide. But it has also had an enormous impact on economic and living conditions through government policies aimed at containing the spread of the infection. While, at the onset of the pandemic, government officials, mainstream media, and even celebrities labeled COVID-19 “the great equalizer” (Mein, 2020), the reality has proven quite different, with the most vulnerable groups of the population appearing to be the most harmed by both the health and the economic crises (see, for instance, The World Economic Forum, Joseph Stiglitz in this IMF article, and The World Bank). In this brief, we focus on one specific economic impact of the pandemic, namely its effect on unemployment status, and we study the extent to which this impact has been unequal across different groups of the Swedish society. Our analysis uses administrative data and segments the population by wage, gender, age, and foreign-born status.

Covid-19 and Inequality in the Labor Market

An extensive review of the emerging literature on the effect of the pandemic on different kinds of inequality is beyond the scope of this brief. However, a number of studies are especially relevant to put our analysis in context, as they are focused on the unequal labor market impacts of the crisis and study real-time data. Based on these studies, a number of patterns emerge. First, the effect of the pandemic on the increased probability of job loss appears stronger for low-skilled workers, as proxied by education level (see e.g., Adam-Prassl et al., 2020, Gaudecker et al.  2020, Casarico and Lattanzio 2020). Gaudecker et al. (2020) also observe that in the Netherlands the negative education gradient has been mitigated by the government identifying some sectors of the economy as essential since some of these sectors are characterized by a high concentration of low-educated workers. Second, the evidence of unequal gender impacts on the probability of job loss is mixed. While survey information from the UK and the US reveals that labor market outcomes for women have more severely deteriorated during the crisis (Adams-Prassl et al., 2020), there is no evidence of unequal impacts by gender in Germany (Adams-Pras et al., 2020) and Italy (Casarico and Lattanzio, 2020). Other papers confirm that the effect on labor-market outcomes by gender varies across contexts (see, e.g.,  Hupkau and Petrongolo, 2020).

Analysis of Labor Market Data From Sweden

Our analysis of the Swedish labor market provides a valuable contribution to the existing findings for a number of reasons. First, despite rising inequality over the past decades, Sweden is characterized by relatively low income inequality (e.g. OECD, 2019), high participation of women in the labor market, and high level of society inclusiveness (e.g. Gottfries, 2019, OECD 2016) among OECD countries. Second, unlike the majority of countries worldwide, throughout the pandemic, Sweden has not adopted stay-at-home orders that would have separated sectors of the economy between “essential” and “non-essential”. As a result, sectors that were typically shut down in other countries, for instance, the hospitality industry, were not ordered to close during the first wave of the pandemic and have then only faced partial limitations during the second wave. Importantly, schools below the secondary level were never closed. Third, as we will describe in more detail below, the availability of administrative information on unemployment claims on a monthly basis allows studying the “real-time” development of unemployment throughout the pandemic for the universe of employees in the Swedish labor market.

Data

We use data from the registry of unemployed individuals kept by the Swedish Public Employment Service (Arbetsförmedlingen), the government agency responsible for the functioning of the Swedish labor market. The incentives for laid-off individuals to register with the Employment Service are high since the registration is directly connected to the right to claim various (relatively generous) unemployment benefits. As such, the data arguably includes a large share of employees who lost their job over the period studied. Based on the high incentives to register as unemployed, we also assume that the probability to register does not differ the segments of the population that we consider. The data does not include some self-employed who for various reasons choose not to register, but this group is not believed to be significant. Also, furloughed workers do not count as unemployed. This group was significant, especially in the very early stages of the pandemic, but still small relative to all unemployed. As of July 2020, they represented 13% of the total pool of unemployed individuals in Sweden (Swedish Agency for Economic and Regional Growth, 2021).

The population-wide coverage is the main advantage of our data vis-à-vis the survey information used in many recent studies of the labor market throughout the pandemic (other studies using administrative data are Casarico and Lattanzi, 2020, studying the Italian labor market, and Forsythe et al., 2020, who analyze the US case).

We consider everyone registered as unemployed/seeking employment each month from January 2019 to July 2020. The data is grouped by 4-digit occupational classification (there are about 440 occupations at this level) and each occupational group is further broken down by sex, age, and foreign-born status (specifically, Sweden born, foreign EU born, and foreign non-EU born.) We then merge this data with information on the average wage by occupational group and gender in 2019, as reported by Medlingsinstitutet and publicly available at Statistics Sweden. This measure, although not being at the individual level, allows us to develop a relatively precise proxy of wages by occupation that we use to rank unemployment by wage deciles.

Evidence

With the data described above, we build the following measure of the change in job-loss probability (JLP) between February and July 2020, adjusted for seasonality:

where u is the number of workers in 4-digit occupational sector who registered as unemployed in a month over the average number of employed in the same sector in 2017 and 2018 (data available at Statistics Sweden). Put it simply, ΔJLP is a sector-level indicator of the change in job loss probability due to the pandemic; it measures the change in chances of job loss between February and July 2020, i.e. between five months after the start of the pandemic and the month before its onset, as compared to the equivalent change the year before. We thus account for seasonal factors by differencing out the job loss probability during the same months of 2019, when the pandemic was neither occurring nor anticipated. Below we use ΔJLP to show differences in the impact of the pandemic on the chances of job loss for different groups of the Swedish society.

Job loss probability by wage deciles. We leverage information on sector-level average wages and the number of employees to partition occupational sectors into (approximate) wage deciles. The purpose of such a partition is to rank sectors as being typically “low-” or “high-” wage within the Swedish context. As we document in Figure 1, the pandemic has increased the probability of job loss across all sectors of the economy; however, this increase in percentage points is higher the lower is the average sector wage, with the category of least-paid workers being the most likely to lose their job. This category includes occupations such as home-based personal care and related workers, cleaners and helpers in offices, hotels and other establishments, or restaurant and kitchen helpers. Considering that the pre-pandemic probability of becoming unemployed was already largest for this group (19.7% compared to the average 6% in 2019), the existing inequality in the labor market has been exacerbated by the Covid-19 crisis. In our regression analysis that is available by request, we also find that accounting for an index of the share of tasks that can be performed from home, defined at 2-digit occupational level, does not explain away the negative and significant relationship between wages and job loss probability. Although, we confirm previous evidence that the probability of losing jobs is lower among occupations that can be performed from home. The substantial contraction in economic activity in some sectors of the economy seems to be the driver of the unequal distribution of job losses.

 Figure 1. Change in job loss probability by wage decile between February and July

Source: Author’s own calculation, for data sources see Data Section.

Job loss probability by gender. Figure 1 also documents that, even though the change in job loss probability is higher in sectors dominated by women, the likelihood of men losing jobs has increased more in these sectors. As a result, in the regression analysis we find that there is no significant association between the share of women in a sector and the sector-level change in job loss probability.

Job loss probability by foreign status and age. We find that workers who are born outside of EU countries are significantly more likely to transition into unemployment during the pandemic (see Figure 2). The difference is striking. Based on our indicator, considering male workers the pandemic has raised the probability of job loss by roughly 7 p.p. more for non-EU citizens as compared to non-Swedish EU citizens, and by 9 p.p. more compared to Swedish citizens. These differences are only slightly smaller for women. Another group particularly affected is that of workers in the age group below 30 (result available upon request). Such patterns are due to foreign-born and younger workers being more concentrated in those low-wage sectors that also appear, based on our analysis, to be more impacted by the pandemic in terms of job loss probability

Figure 2. Change in job loss probability by foreign status between February and July 2020

Source: Author’s own calculation, for data sources see Data section

Conclusion

Our analysis of administrative monthly data on the number of workers who register as unemployed in Sweden confirms previous evidence that the Covid-19 crisis has not been “the great equalizer”. While the pandemic has increased the probability of losing jobs across all sectors, the most affected in Sweden are those workers in occupations where the lowest wages were paid before the pandemic. Considering other demographic characteristics, vulnerable groups that were most impacted by the crisis are workers born outside of the EU and workers aged below 30. However, we do not find evidence of a gender-unequal impact of the pandemic in terms of the probability of job loss. There may of course be many other aspects to the issue along gender lines. For example, on one hand, there might be gender-unequal effects that we cannot observe in our data, for instance in the number of hours worked, temporary unemployment, and level of stress due to increased childcare responsibility. On the other hand, since schools in Sweden stayed open throughout the pandemic, the concerns related to increased childcare responsibility, which have led to identifying mothers as most vulnerable in other countries, do not necessarily apply to the Swedish context.

Sweden has adopted a number of measures to shield workers from the worst effects of the pandemic. As the country plans the recovery, special attention should be devoted to the opportunities for re-employment for the most vulnerable groups. Absent such focus, the economy emerging from the crisis might be less inclusive and equal than it has been before the pandemic, with important consequences for many societal outcomes that are generally linked to labor market inclusiveness.

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 Swedish Exceptions: Early Lessons From Sweden’s Different Approach to COVID-19 – Insights From a SITE-LSE Webinar

Posted on April 27, 2020 | Policy Brief

Image of sunrise in Stockholm street representing Sweden's different approach to COVID-19 response

Sweden’s policy in the Corona crisis has been subject to a lot of discussion in international media recently. Some point to the country portraying “the Swedish way” as a valid policy alternative to the forced lock-down of society, others criticize the Swedish government for being imprudent. Given the pace with which the virus spreads and considering the volatility of current events, it is pre-mature to draw any definite conclusions. But it is certainly time to start an informed policy discussion. The webinar “The Swedish Exceptions: Early Lessons from Sweden’s different approach to COVID-19, jointly organized by the Stockholm Institute of Transition Economics (SITE) and the London School of Economics (LSE) on April 22, 2020” brought together academics from different relevant disciplines from Scandinavia, the UK and the US . The webinar allowed to discern a few of the motivations behind the Swedish policy choices as well as a number of criteria which will serve to measure the success of governments’ responses to the Covid-19 pandemic in the future.

Understanding the Swedish Approach to Covid-19

Much has been written and said about the Swedish reluctance to impose a strict lock-down on the country: the Swedish government has so far relied mostly on expert recommendations, avoiding from more stringent policies such as the strict lock-downs imposed by for instance Sweden’s neighboring countries Norway and Denmark (more on Sweden in the Covid-19 crisis here). The majority of the speakers in the webinar agree that the Swedish policy in the Corona crisis has been an outlier, even with respect to traditional Swedish policy: Peter Baldwin, historian and professor at the University of New York and the University of California, Los Angeles, argued that Sweden has had an interventionist tradition with respect to social and health policy in the past. “Native policy traditions” therefore do not explain why Sweden has chosen this policy course in his view.

While it seems difficult to pin down historical or ideological reasons behind the Swedish policy stance with respect to Covid-19, Lars Trägårdh, professor of social history at Ersta Sköndal Bräcke University College in Stockholm, pointed out that even though the legal differences may seem stark, the difference in the policy impact may be smaller than expected, the crucial factor being the degree of compliance with a certain measure or recommendation and not its legal force. Trägårdh further argued that, since it may take many months to develop a vaccine, the sustainability of a given policy strategy is essential. According to him, a policy relying on voluntary compliance as the Swedish one rather than legal obligation, may therefore yield comparable effects in the short and medium run and could even turn out to be more successful in the long run.

Trägårdh argued that the true exceptionality of the Swedish response to the global pandemic has been the choice to not close elementary schools. This policy choice can be explained above all by the concern for children’s rights: for smaller children, digital learning simply is not a valid option. As declared by the government on several occasions, another reason is that parents working in professions such as healthcare may be induced to stay at home if schools are closed. Finally, Trägårdh cited a recent study from Iceland which suggests that the effect of closing schools on limiting the spread of the virus may be relatively small.

Later in the discussion, another potential argument in favor of the Swedish strategy emerged: Professor Sara Hagemann from the LSE School of Public Policy described the difficulty of leaving a lock-down, which Denmark is currently experiencing. The question which measures are to be lifted and which sectors of the economy are to be opened first has caused considerably more controversy than imposing the initial lock-down. In contrast, the public debate in Sweden can immediately focus on dealing with the long-term consequences of the crisis according to Trägårdh.

The significance of the concept of “herd immunity” (meaning the protection from disease arising from large percentage of the population having developed immunity) for the Swedish strategy is unclear. Baldwin pointed out that even though Swedish authorities have declared not targeting herd immunity, many measures implicitly seem to be aiming for this outcome.

Results of the Swedish Approach Until Today

Tom Britton, professor of mathematics at Stockholm University, agreed that the Swedish response to the Covid-19 crisis came late and that there has been too little testing. However, he argued that the government’s policy has been consistent, focusing on reducing the spread of the virus and protecting risk groups and especially the elderly. Whether Sweden has achieved the latter goal is still up to discussion, though. As of April 2020, reported infections and deaths in nursing homes had increased, which according to Trägårdh has been the major failure of the Swedish policy response up until today. Yet, the speakers agreed that the Swedish government’s measures have received a lot of public support within Sweden so far, which is a non-negligible factor for the long-term success of the strategy.

General Policy Conclusions

Professor Ole Petter Ottersen, president of the Karolinska Institute in Stockholm, Sweden’s largest centre of medical research, stressed the speed with which the virus has been spreading: the rapid development forces policymakers to quickly take decisions based on limited information. Given the lack of data, Ottersen called for politicians to practice humility and acknowledge the uncertainty surrounding policy choices. According to him, it will take years to evaluate whether the Swedish model or the Norwegian model of a quick and strict lock-down is better suited to fight the pandemic.

Policymakers around the globe face a dilemma: for sustainable crisis management and given countries’ interdependency, measures meant to fight the spread of Covid-19 should be aligned internationally and taken cooperatively. Yet, as Hagemann pointed out, it is clear that one policy cannot fit all: countries differ for instance with respect to their socio-economic structure, health care quality and availability, demographics, and with respect to the point in time when they were hit by the virus. This is not only the case between countries, but even within countries, which could justify a differentiated approach between rural and urban areas in some instances. In other words, all models and policy recommendations have to be adapted to the specific local setting. A strategy which allows for making local adjustments while maintaining a global perspective will be a major challenge for policymakers in the coming months and, likely, years.

Britton stressed the importance of understanding the limits of the models being used. Their predictions depend on a lot of assumptions regarding for instance how individuals behave and to what extent rules and regulations are being respected. Anti-body tests will soon provide more data on the actual spread of the virus, but even then, major questions, such as how to treat a potential trade-off between preventing deaths from Covid-19 vs. the socio-economic and health costs caused by a lock-down, will remain unanswered. This trade-off is country specific as well: Hagemann argued that Sweden and the other Nordic countries have quite successfully implemented remote working and learning options. This, however, will not be feasible in most developing countries, for instance, which necessarily affects the cost-benefit analysis of the available policy options.

Further, data collection and availability undoubtedly need to improve. As long as no better instruments of analysis are available, both scientists and politicians should be transparent about the simplifying assumptions and models they base their policy recommendations and decisions on.

Finally, despite their different academic backgrounds, all experts agreed on the need to take into account the indirect consequences of both the spread of the virus and the policy measures implemented to fight it. Covid-19 is likely to reinforce social inequities. For instance, it has been shown that in Stockholm, immigrant communities have been hit the hardest. As soon as the imminent health crisis is under control, the policy focus, therefore, has to shift towards the socio-economic consequences of the crisis.

Acknowledgements

The Stockholm Institute of Transition Economics wishes to express its appreciation to the speakers for their contributions to the policy debate, to the London School of Economics for the successful cooperation in organizing the event, and to the audience for its engaging questions and interest in the topic.

List of Speakers:

  • Peter Baldwin, New York University and University of California, Los Angeles
  • Tom Britton, Stockholm University
  • Sara Hagemann, London School of Economics
  • Ole Petter Ottersen, Karolinska Institute, Stockholm
  • Lars Trägårdh, Ersta Sköndal Bräcke University College, Stockholm
  • Erik Berglöf, London School of Economics (moderator)

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 Nordic Model of Prostitution Legislation: Health, Violence and Spillover Effects

Posted on April 21, 2019 | Policy Brief

20190422 The Nordic Model of Prostitution Image 01

An emerging literature is studying, with the help of new types of data and clever identification strategies, the effects of different legislative measures regulating the market for sexual services. The primary target of such measures are arguably the participants in the market, prostitutes and their clients, and law and order concerns in their immediate vicinity. In a new research project, we mean to shift the spotlight on potential broader spillovers from these policies, both to other outcomes and other countries. In their presence, we cannot understand the full impact of a law change if we limit our analysis to the prostitution market in that country alone. We focus on a particular model of prostitution legislation, first adopted in Sweden in 1999 and known since as the Nordic model.

The Nordic model

The debate on prostitution legislation shares clear similarities with the standard arguments put forward for or against alcohol prohibition or drug liberalization. The criminalization of an activity is most likely shrinking the corresponding market, because it increases the cost of participation. It also functions as a signal of what a society deems acceptable or not, and coordinates behavior to potentially change social norms. At the same time, however, it pushes the remaining market into the darkness, where criminal activity potentially increases. In the specific case of the prostitution market, what is particularly feared is an increased risk of violence and general worsening of conditions for the potentially fewer sex workers.

When, in 1999, Sweden enacted the first asymmetric criminalization of prostitution, whereby buyers but not sellers of sexual services are punished, a third way between criminalization and legalization seemed to appear. This legislation would still give a clear signal on societal values, but at the same time protect the, in large part female and in large part exploited, sex workers. The model proved very successful in deterring street prostitution, and, under the catchy name of the “Nordic model”, has subsequently been adopted by Norway, Iceland, Canada, and France. It is currently under consideration in further countries as well.

This is where most reports and policy evaluations stop. In a new project at SITE, involving an international research cooperation, we propose to investigate the impacts of this legislation beyond the participants in the prostitution market. Specifically, we encompass other outcomes such as gender-based violence, health outcomes and online behavior, both within Sweden and other countries that implemented the reform, but also, most importantly, across their borders. The idea is that law changes in one country may also affect the demand and supply of prostitution in other countries, especially but not exclusively those bordering the country that enacts the law change. Two possible channels for such cross-border effects are sex tourism and human trafficking.

This brief summarizes the preliminary evidence we collected so far.

Violence

The focus on the role of policies is a recent but rapidly growing addition to the economic literature on prostitution. The risk of violence, both for the participants and within the neighboring geographic areas, is a natural area of concern for policy in relation to the sex market, and to criminal activities in general. To improve on cross-country comparisons and draw causal links from policies to outcomes, the most robust contributions in this area focus on natural experiments. Cunningham and Shah (2018) study an unintentional, and therefore unexpected and temporary, decriminalization of indoor prostitution in Rhode Island, and find that reported rape offences fall by 30%. Cunningham and coauthors (2019) also look at the geographic expansion of the erotic services section of Craigslist, a popular advertisements website, before online solicitation was banned in 2018. The possibility to use online platforms for their work, by allowing prostitutes to keep mostly indoors, and screen their potential clients to a larger extent, appears to have been very beneficial: the study finds lower female homicide rates by 10-17% when and where the service was available. Ciacci and Sviatschi (2018) find that the opening in a neighborhood of indoor prostitution establishments decreases sex crime by 7-13%, with no effect on other types of crime, arguing that the reduction is mostly driven by potential sex offenders resorting to the establishments, instead, to satisfy their needs. What is common to these studies is the finding that allowing the sex market to exist in some form is beneficial for outsiders, while indoor prostitution is safer for the sex workers themselves.

Preliminary findings from our project (Berlin et al., 2019 a) are consistent with this. We base our strategy on a comparison, within Sweden, between counties that are above or below average in terms of representation of women among police force and elected officials (we refer to them as treated and control counties, respectively). Both these indicators have been found in previous studies to drive greater reporting and lower incidence of crimes against women (Iyer et al., 2012; Miller and Segal, 2018). Looking at population-wide rates of violence against women in Sweden, we observe an increase in assaults committed by acquaintances indoors by about 10% and an increase in rapes indoors by more than 20% in treated as compared to control counties. Since the reform is argued to have eliminated street prostitution, and pushed the remaining sex trade indoors, violence against prostitutes will be counted in the indoor assaults statistic. However, in treated counties, where we observe the increase in violent crimes against women, we at the same time find fewer convictions for buying sex. We argue therefore that the increase in assaults we observe is not likely in the context of the sex market, but rather indicates increased violence against non-prostitutes from frustrated former customers, in other words a negative externality of deterring prostitution. In order to distinguish whether this increase is only in reported or actually committed crimes, we look at hospitalizations of women for injuries that are related to sexual interactions. If we think that seeking hospital care is less sensitive than reporting a violent man to the police, the series of hospitalizations should be closer to the true violence than the convictions. Although numbers are small and differences not significant, hospitalizations spike up in treated counties directly after the reform, as Figure 1 shows. All in all, our preliminary evidence from Sweden suggests that intimate partner violence and violence on women in general might have increased as a consequence of the “Nordic model”.

Figure 1. Hospitalizations of women

Source: Hospitalizations of women for injuries related to sex, from Berlin et al. (2019 a).

Other outcomes

Besides violence, health outcomes are also a policy relevant objective with the regulation of prostitution. Indicators such as the spread of sexually transmitted infections serve the double purpose of giving a rough indication of the changes in the size of the sexual market while at the same time enabling inference on the work environment and general living conditions for prostitutes. In a companion paper, which is underway, we examine these statistics for Sweden and Norway, in terms of within country changes but also with a mind to capture potential cross-border spillovers between the two countries.

Cross-border spillovers

In another working paper (Berlin et al., 2019 b) we study the reform enacted in France on April 13th, 2016, which removed the punishment for solicitation of prostitution (previously set to two months imprisonment plus a fine) and introduced instead a range of fines for the purchasing of sexual services, thereby, pushing the punishment to the side of the buyer. In order to study the cross-border effect of this change, we focus on the German Bundesländer bordering France: Baden-Württemberg, Saarland and Rheinland-Pfalz. The national law in Germany generally allows prostitution, but gives federal states the right to regulate it on a more detailed level. This generates variation at the level of the Gemeinde, the administrative division corresponding roughly to a municipality. The idea behind our analysis is to compare municipalities where prostitution is at least in part allowed with municipalities where it is banned (we refer to them as treated and control municipalities, respectively). Our preliminary results show that foreign tourism to cities where prostitution is at least partly legal increased after the reform more than to those completely overlapping with a Sperrbezirk, i.e. an area in which prostitution is banned. However, so does domestic tourism. This might be seen as a threat to our interpretation, since we can’t connect this increase directly to the French reform, unless we can show that there is a dynamic adjustment of the supply of sexual services, which also attracts domestic flows. We can’t isolate tourism from France in this data, so we go a step further by looking at online behavior.

Google searches

A key contribution of this project is to gather new data that haven’t been analyzed to date in the existing literature. In particular, we collected detailed data on Google searches originating in France using as keywords different German cities. The idea is to capture potential deviations of search trends over time driven by prostitute customers who after the legislative change find it more attractive to look for sexual services across the German border. Preliminary findings show that after the policy change there is a larger increase in search activity for cities closer to the French border relative to cities further away. While searches are generally downward trending over time, the trend is slowed after the French reform, and this effect is stronger the closer a city is to the border, although intermittently significant. Figure 2 reports the differential increase in searches (with 95% confidence intervals) as related to the distance from the border. The negative relationship between size of the impact and distance to the border is consistent when controlling for city and time fixed effects. However, further analysis is needed in order to validate the results and control for confounding factors.

Figure 2. Google searches for German cities before and after the French reform

Source: Google Search data on searches originating in France for cities closer to VS farther from the German border than the indicated distance (in km).

We are currently repeating the same exercise at the French borders with Belgium and Spain, with searches originating in Norway around the time of the Norwegian reform (2009), and at the US-Canada border around the time of the Canadian reform (2014).

Conclusion

When adopting a version of the Nordic model in 2014, the Canadian Department of Justice stated that the “overall objectives [of the reform] are to:

  • Protect those who sell their own sexual services;
  • Protect communities, and especially children, from the harms caused by prostitution; and
  • Reduce the demand for prostitution and its incidence.”

Research seems to show that restrictions on the sexual services market, rather than the sex trade itself, have substantial negative impacts on communities and sex workers. Nevertheless, it is understandable that legislators in many countries, sharing similar concerns and expectations as expressed by the Canadian DoJ, find it unattractive to legalize prostitution. What our project points to, then, is that when considering various forms of criminalization, it is crucial to understand how best to pursue each of these objectives. Taking into account side-effects, or spillovers, such as the ones we highlight above, might reveal the need for complementary policies, in order to avoid unexpected and counterproductive consequences.

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.

Understanding Currents in the Contesting Information Spheres

Posted on May 17, 2018 | Policy Brief

Computers and internet merely added new forms to age-old forms of propaganda. Its general purpose is, as it always has been, dualistic: to shape citizens’ image of their own country, and to streamline their views of foreign partners, competitors or enemies. Studies on information wars are often one-dimensional, i.e. presenting only actions directed against one’s own state. New Russian textbooks on information wars have a more complex approach and present long historical retrospective overviews.

Reports on disinformation campaigns are nowadays regular in the information sphere in Sweden, as in the West in general. The changes of today’s propaganda compared to classic stereotypes of the Cold War confrontations seem obvious. However, many debates on how to counter a feared information war or fake news campaigns apparently lack a long-term historical perspective. Therefore, they appear unnecessarily alarmist and might even miss their claimed purpose – to promote a sound political debate on domestic and international affairs.

Trends in Swedish information spheres – a retrospective overview

From time to time, a dominant political climate and consensus is challenged. During the prosperous 1950s, Sweden formed a self-image of the “golden middle way” between capitalism and socialism. Many aspects of this self-image were indeed partly myths. A Swedish author, Göran Palm, happened to be one of the succinct observers to challenge our prejudiced visions. His books “An unjust reflection” and “Indoctrination in Sweden” reached a wide audience and forced many to reconsider our achievements as a welfare state. Gunnar Fredriksson, editor of a Social-Democratic newspaper, alerted readers to the intricacies of “the politicians’ language” as a means to distort realities or evoke positive or negative emotions.

These books from the late 1960s were milestones for heightening the public awareness of mass media manipulation. A similar trend and radical change of Sweden’s self-image is taking place today. Until recently, the predominant view has been that Sweden represents a successful experience in forming a multicultural society, despite a few obvious crisis phenomena.

However, an awareness concerning the stress on the social fabric has spread from outsiders in the political scene towards mainstream parties. One example can highlight how changes have occurred. In January 2017, the Swedish journalist Katerina Janouch was scolded for an interview on Czech television, in which she inter alia stated her own personal view of the many problems that Sweden definitely is confronted with. After a vivid debate with harsh arguments involving even high-ranking politicians over her apparently controversial statements, she wrote a diary-like book “The Image of Sweden”. On a micro level, this fascinating personal experience succinctly shows how the image of Sweden changed over the last year, what has been accepted and what is still hotly debated concerning economics, migration and social problems.

Picture 1. “Bilden av Sverige” Book Cover

Over a short period, new political trends appeared. The political agenda has changed; serious debates treat formerly taboo topics. This is essentially because objective challenges to the economic stability, social fabric and cohesion cannot be ignored.

Even more noteworthy is, that given the outcome of the US presidential election campaign and the Brexit plebiscite of 2016, in particular the alleged role of outsiders’, supposedly decisive, involvement in these political events, Sweden has revitalized its organs on countering foreign political propaganda, which had been inactive after the Cold War era. Leading newspapers jointly with radio and TV intend to cooperate in order to thwart any attempts in 2018 to covertly interfere or overtly influence the upcoming parliamentary elections in September. Alerts against supposed disinformation campaigns by Russian mass media were at the center-stage of an annual defense policy conference in Sälen. The previous attempts to describe and analyze the supposed Russian information war efforts towards Sweden as presented hitherto seem, in my view, to lack in source collection from Russian mass media and blogospheres. They merely illustrate rather than form a structured picture of the Russian information spheres as a multiform complex.

Contests between the information spheres in Russia and the West

Therefore, as the Swedish proverb goes, “let’s turn the keg” and try to see things in a new perspective, by turning our usual modes of thought and preconceptions upside-down. A broad awareness on state propaganda in Russia, in the past as well as at present, can deepen our understanding of ongoing information wars. How does a Russian student in political sciences become aware of the formations of their nation’s self-image, as well as of foreign propaganda against their country? How do Russian scholars analyze their recent conflicts with neighboring states? What can they tell us of the general awareness concerning information warfare in the Russian public?

Three Russian historians, Viktor Barabash, Gennadii Bordiugov and Elena Kotelenets, all active in AIRO-XXI about which you can read more of here, give a broader perspective on how state propaganda has changed since the early 20th century till our times. They illustrate how countries at war, starting during World War I, directed propaganda to mass armies with, in general, literate soldiers and by that tried to influence the enemy’s morale. They evaluate how effective various forms of propaganda were, given the new technologies radio and TV during the Second World War and the Cold War eras.

After several in-depth chapters on the technological changes in the information era, on the cyber technological advances that have radically transformed traditional espionage, they finally describe how the information wars were carried out in Russia’s conflicts since 2000 (South Ossetia in 2008, Ukraine during the “Orange Revolution” and “Euro-Maidan”). Particular emphasis is devoted to how the conflicting parties formed their propaganda to their own population, on the one hand, and versus the opposing state, on the other hand.

Picture 2. ”Gosudarstvennaia propaganda i informatsionnye voiny” Book Cover

It is striking that in contrast to the Russian textbook by Barabash, Bordiugov and Kotelenets, very few analysts in Sweden have managed to present the contemporary information wars as a two-sided conflict; with two sides mutually intertwined in their mass media and social media strivings. Instead, information warfare is described as originating solely from more or less sophisticated “troll factories” in various locations in Russia. A couple of obviously forged “documents” ascribed to Swedish political leaders are sometimes referred to, although their actual effects have been nil.

In Sweden, as well as in the West in general, much has been stated on the real or imagined disinformation campaigns launched by Russia. Sometimes, they are said to direct public opinion in other states or even to influence the electorate (USA, United Kingdom). The role of relatively peripheral news agencies like RT (Russia Today) or Sputnik have seen their role amplified beyond reasonable belief. A further simplification is to reduce any Russian interpretation of events as a piece of falsification (fake news). Warnings of “Putin’s narrative” or “Russian Television fake stories” are common in mass media. In comparison, students of the Barabash textbook must undertake textual analyses of conflicting Russian and foreign opinions.

If one does not know history, you are likely to repeat its mistakes – so goes the proverb. Just as likely is the case where one repeat past generations’ mistakes because you are leaning on the mythology surrounding many events in your country’s past.

Minister of Culture Vladimir Medinskii has carried out a broad research project on the shifting images of Russia in the West, from eldest time when written sources by travelers are available. Although other historians criticized his original thesis on this subject for certain methodological flaws, there is no doubt that Medinskii accomplished a great feat as a popularizer of intricate phases in Russia’s history.

One book concerns the new historiography of the 1939–45 war on the Eastern Front. Since the late 1980s, many formerly taboo topics concerning the war were studied based on formerly secret archives as well as on interviews with veterans. In his book on the Great Patriotic War, Medinskii carefully unravels old myths and rejects new simplifications or distortions of battle histories.

Picture 3. “Mify o Rossii” Book Cover

Every historical nation tends to develop its own historiographical paradigm, which might be more or less objective and in conformity with general interpretations in other nations. However, just as often one nation’s image of their neighbors, former enemies or partners may differ substantially; thus are created the stereotypes of “the others”. In his grand comparative survey of Russia from the 12th century to the present, Medinskii provides the engaged reader with a plethora of examples of distortions of Russia’s history, created not only by foreign observers but also by ideologically motivated compatriots. Many legends on “eternal traits” in Russia are challenged. A Western reader of Medinskii’s book is bound to reflect on the various measures by which his or her country is evaluated in comparison with Russia.

In conclusion, the information contests or wars are only one element in the wider concept of cyber and hybrid wars. Observing our Swedish debate on the nefarious effects of alleged Russian disinformation, the absence of self-awareness is remarkable on how our own image of Russia (in our mass media and in the public opinion) is in itself the unconscious product of a pre-war attitude (sometimes alluded to as our age-long Russia-fear /Rysskräck/).

On the contrary, the legacy of the Soviet epoch has apparently raised the cultural curiosity among the Russian public. Mass media and publishing companies created a multidimensional panorama of their country’s past. The concerned Russian readers seem fairly well aware of politicization of historical issues and international affairs. Not for nothing do they often get substantial “food for thought” from the foreign news media translations, provided online by the InoSmi.ru site; a translation bureau, which took over the task of the Soviet-era magazine “Za Rubezhom”, and which lends its commentary fields open for anyone to comment. Even a cursory survey of commentary fields reveals their spontaneous character, rather than something created by Kremlin’s purported “troll armies”.

It goes without saying that a general and highly sophisticated awareness of overt or covert forms of meddling by a foreign state in the political process of any country must be welcomed and promoted. However, it is an open question how successful certain organized counter-disinformation strategies will be, e.g. EU’s site EUvsDisinfo.eu, NATO’s East StratCom Task Force or the Swedish joint public radio and TV with leading newspapers to “combat fake news”. Leaving much broader fields in the information sphere for freer opinion making in mainstream media as well as in the blog sphere might prove to be a sounder path towards dialogues, debates and mutual understanding.

References

  • Barabash, V. & G. Bordiugov & E, Kotelenets, Gosudarstvennaia propaganda i informatsionnye voiny (2015),  AIRO-XXI
  • Fredriksson, G., Det politiska språket (1966 and later editions), Tiden.
  • Janouch, K., Bilden av Sverige (2017), Palm Publishing.
  • Palm, G., En orättvis betraktelse, (1966) and Indoktrineringen i Sverige (1968), PAN/Norstedts
  • Medinskii, V., Voina: Mify SSSR, 1939 – 1945 (2011) and Mify o Rossii (2015), Abris/OLMA

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.

Buyer Heterogeneity in Public Procurement

Posted on November 9, 2015 | Policy Brief

Authors: Elena Paltseva and Giancarlo Spagnolo, SITE.

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