Tag: Ukraine
Expected Effects of Tobacco Taxation in Five Countries of the Former Soviet Union
Authors: Irina Denisova and Polina Kuznetsova, CEFIR.
In this policy brief, we discuss the results from a study of different dimensions of tobacco taxation policy in five former Soviet Union countries: Belarus, Kazakhstan, Kyrgyz Republic, Russia and Ukraine. We find that the increase in budget revenue from raising excises on filter cigarettes is high in all studied countries. Furthermore, due to a low elasticity of the demand for cigarettes, the increase in excise taxes needs to be substantial to lead to a noticeable improvement in public health.
A Russian Sudden Stop Still a Major Risk
The Russian economy is facing serious challenges in 2015 even after the currency and stock market have strengthened on the back of (expectations of even) higher oil prices. Policy makers that ignore these challenges may be in for a rude awakening when more statistics on the real economy are now coming in. It is time that actions are taken to deal with Russia’s structural problems, mend ties with its neighbors that are also important economic partners, and refocus political priorities towards generating growth and prosperity for its population. In the long run, this is what creates the respect and admiration a great nation deserves.
Recent developments
The value of Russian assets, including shares and the currency, was more or less in free fall in the second half of 2014 and into the beginning of 2015. The annexation of Crimea and continued fighting in Eastern Ukraine and the associated sanctions contributed to a general loss of confidence in Russian assets, but the fall in international oil prices was an even more decisive factor (for a detailed account of the sanctions, see PISM (2015)).
Figure 1 shows how the stock market first took a big hit at the time of the invasion of Crimea, but then recovered before the massive downturn in mid-2014 as oil prices collapsed. The ruble followed a similar path, but with less volatility than the stock market, which is not too surprising given that the Central Bank of Russia (CBR) intervenes to stabilize the currency. However, the ruble had a short time of extreme volatility in mid to end-December when the uncertainty about the impact of financial sanctions was very high.
Figure 1. Oil price, Ruble and Stocks
Sources: CBR, US EIA, MICEX
Financial sanctions were particularly troubling since Russian companies, both private and state owned, have significant external debt that became increasingly hard to refinance. The magnitude of this external debt is also such that it is not a trivial matter for the government or central bank to handle despite the fact that public external debt is very low and international reserves are among the largest in the world. As a matter of fact, external debt was around $250 billion more than then the value of CBR’s international reserves at the peak, but the difference has come down somewhat to around $200 billion as external loans had to be paid back when new external funding was not available at attractive terms.
Sudden Stops
Before turning to the outlook for the Russian economy, a short discussion of sudden stops is warranted. “Sudden stops” is short for sudden stops or sharp reversals in international capital flows. Sudden stops and its effects on the real economy have been analyzed for some time now (see Calvo (1998) for an early contribution). Becker and Mauro (2006) concluded that sudden stops have been the most costly type of shock for emerging market countries in terms of lost GDP in modern history. In their study the average country that experienced a sudden stop had a cumulative loss of income of over 60 percent of its initial GDP before recovering back to its pre-crisis income level.
Sudden stops in capital flows have such large effects on the real economy because of the adverse effects reduced external funding has on imports. A first look at the accounting identity for GDP (GDP=Y=C+I+G+X-M) makes it hard to see how reduced imports can be a problem since imports (M) enter with a negative sign. This in itself suggests that reduced imports should increase GDP. However, imports are used for domestic consumption (C) or investment (I), two factors that enter the same identity with positive signs, which means that when they fall so does GDP. If this were the full story, the net effect on GDP from falling imports would be zero since the positive direct effect from imports would be exactly offset by reduced domestic consumption and investment.
Unfortunately the accounting identity does not make clear the dynamics that follow from this reduction in consumption and investment. For example, the foreign car (or machine) that is no longer imported and will not be sold, will also not require a domestic sales person, annual service, a parking space etc., so the eventual decline in consumption (or investment) will be much larger than the first round effect that is captured by a static accounting relationship. This is one reason why “improvements” in the trade balance stemming from the sudden decrease in imports is not necessarily a good thing for the economy.
Russia is also part of the international financial system with important capital flows both in and out of the country. As such, it is also subject to the risk that changes in sentiment and large capital outflows can affect imports and the real economy. For a time before the global financial crisis, net capital flows to Russia tended to be positive. However, this changed in 2009 and since then most quarters have been showing outflows.
Figure 2. Private Sector Capital Outflows Continue (Q1 2015 in red)
Source: CBR
The speed of outflows picked up dramatically in 2014, reaching more than $150 billion for the year. The general picture of outflows has continued in the first quarter of 2015, with outflows of around $35 billion (which for comparison is twice the $17.5 billion IMF package that was agreed for Ukraine in March 2015). Although Russia still has resources to support a high level of imports, the more capital that leaves, the less money there is to spend and invest in the country.
The Outlook
Everyone knows that Russia generates most of its export revenues from natural resources in general and from oil more specifically. The fact that the health of the economy is closely related to international oil prices is no secret either and Figure 1 showed the tandem cycle of oil prices, the ruble and the stock market. But how important is oil prices as a determinant of GDP growth? This is of course a big question that requires sophisticated thinking and modeling to figure out at a more structural level. But if we are just looking for a back of the envelope estimate, a simple regression of growth of oil is potentially interesting. Perhaps somewhat surprisingly, oil price growth has very high explanatory power: regressing annual changes in GDP per capita in real dollar terms on annual changes in real oil prices (and a constant) for the period 1998 to 2014 generates an R2 of 0.64! Not bad for a one variable macro “model” of the Russian economy. The coefficient on real changes in oil prices is estimated to be 0.15 and hugely significant and the intercept, which could be interpreted as the underlying growth rate in this “model”, of 2.4%.
Using the same IMF data on the real oil price for the first three months of 2015 and comparing that to the average oil price for the full year 2014 implies a drop in the real oil price of 46 percent. Using this oil data as the forecast for all of 2015 and plugging this into the estimated equation suggests that the oil price drop in itself would be associated with a decline in income of almost 7 percent. Adding back the underlying growth rate of just over 2 percent still means a negative growth rate of almost 5 percent in 2015, without even starting to think about sanctions, capital flows or structural problems.
However, there is more data that points in the directions of the economic troubles that lay ahead in 2015, which is trade data. We just discussed the importance of sudden stops and associated drops in imports in explaining large drops in output in emerging markets. Figure 2 already showed the continued capital outflows, and Figure 3 provides a scatter plot of changes in imports and GDP growth. Over the years, Russia has displayed a strong positive correlation between import growth and GDP growth that is in line with the description of sudden stop dynamics.
Figure 3. Imports and GDP Growth (Q1 2015 in red)
Source: Author’s calculations based on CBR and the Federal State Statistics Service (GKS) data
Figure 3 shows the import change in Q1 2015 (i.e., Q1 in 2015 compared to Q1 2014) as a red diamond and puts it on the linear regression line of past observations to get the implied GDP growth number for Q1 2015. First of all, the 36 percent drop in imports is at an all time high for the decade and at roughly the same level as in the worst quarter of 2009 in the global financial crisis. The implied drop in GDP is 10.5 percent (compared with a drop of 9.5 in the worst quarter of 2009). Again, this is not a formal model to generate GDP forecasts, but it is certainly a signal that suggests that the Russian economy has problems to deal with.
Concluding Remarks
The IMF (2015) just released its latest forecast for Russia together with the other countries of the world. The projection for 2015 is a decline of real GDP of 3.8 percent, which is not a great growth number by any means but less negative than what was discussed at the end of 2014. The Economist (2015) in its latest issue is also quoting a banker who says that the situation is not as bad as was previously imagined. The upward revisions have also led to statements among policy makers that seem to suggest that the problems for the Russian economy are behind the country.
Although the free fall associated with the sharp drop in oil prices is halted, recent data on capital flows and imports suggest that the problems for the Russian economy are far from over. If oil prices stay at current levels, capital outflows continue, and imports remain as suppressed as they were in the first quarter, the fall in GDP may be in the same order as in 2009. At that time GDP declined by 8 percentage points, or more than twice the recent forecasts for 2015.
Russian policy makers need to make serious structural reforms and mend ties with its important economic partners near and far to put the country on a more healthy growth trajectory. Simply praying for increasing oil prices is not enough; it is time that Russia becomes the master of its own economic faith.
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References
- Becker, T., and P. Mauro (2006), “Output drops and the shocks that matter”, IMF Working Paper, WP/06/197
- Becker, T. (2014), “A Russian Sudden Stop or Just a Slippery Oil Slope to Stagnation?”, BSR Policy Briefing 4/2014, Centrum Balticum
- Calvo, G. (1998), “Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops,” Journal of Applied Economics, Vol. 1, No. 1, pp. 35–54.
- Economist, The (2015), “Russia and the West: How Vladimir Putin tries to stay strong”, April 18-24 issue
- IMF, (2015), World Economic Outlook, April
- PISM, (2015), “Sanctions and Russia”, Polski Instytut Spraw Międzynarodowych, (The Polish Institute of International Affairs)
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 Ukrainians Expect From Reforms
Author: Tom Coupé, KSE.
Ukraine needs reforms badly. However, there is a huge difference in how the government, the expert community, and the general public understand reforms. According to a recent survey conducted by a prominent Ukrainian newspaper, people expect that reforms should, in the first place, improve their personal wellbeing. However, research findings beware that in the short run structural changes in the country can worsen economic performance and increase inequality. To reduce the pain of unmet expectations and popular discontent, the government should openly communicate any difficulties to come, and wisely mix the most painfull measures, like the increase of tariffs for the use of public infrastructure, with empowering changes that give citizens a sence of progress, like actions that strengthen democracy and help SMEs to flourish.
Growing Inequalities in Workplace Amenities
Inequality is considered to be a serious detrimental factor for societies’ development. It has been shown to undermine the health of the population, cause civil unrest, and slow down countries’ economic growth. Nizalova’s (2014) paper shows that the focus on the purely monetary component in the studies of inequality is too narrow. In Ukraine, which has had almost no change in income/wage inequality since 1994, the inequality in other workplace dimensions has soared. Nizalova finds that workers in establishments paying higher hourly wages have enjoyed (i) relatively greater reductions in the total workplace injury burden, (ii) greater retention of various benefits/amenities, and (iii) relatively larger increases in wage payment security (de-creased wage arrears). These findings document a high degree of an unequal shift away from work-centered provision of social services, not counter-balanced by the government, and highlight the importance of timely policy intervention as a possible cause of societal disturbances.
Inequality in income, health, and political rights has been on the agenda of many governments and international organisations. It has been shown to lead to tensions in society that can grow into civil unrest, and is named one of the top global risks in the World Economic Forum Global Risk Report, 2013. Country-level comparisons by epidemiologists have documented that more unequal countries have (i) higher rates of mental illness, drug use, and homicide, (ii) a larger incarceration rate, (iii) a larger share of obese population, (iv) higher school drop-out rates, lower socio-economic mobility, lower child wellbeing, and (v) a lower level of trust (Wilkinson and Pickett, 2010). At the macro level, inequality has also been shown to impede sustainable growth (Ostry and Berg, 2011).
Yet, in Ukraine, in spite of a number of continuing severe problems with population health, labor markets, infrustructure, etc., inequality has not been high on the agenda, except for occasional concerns raised by some international organisations and researchers. In our view, there are at least three reasons for this.
First of all, most of the attention in inequality discussions is paid to income inequality. However, in Ukraine after a significant increase in this indicator by the mid-nineties, there has been hardly any dynamics, with the exception of extreme increases in incomes/wealth of a few oligarchs.
Second, and this relates to inequality in any dimension, when people in power are predominantely concerned with self-enrichment, and citizens are not showing their dissatisfaction, or the government has “effective” means of dealing with this dissatisfaction (imprisonment, physical elimination, etc.), as has been the case in Ukraine for many years, those at the lower end of the income distribution have the least chances to attract attention.
Finally, we believe that the reason international organisations have not given much attention to Ukrainian inequality must be related to the fact that the situation in many areas of life has been so dire, i.e. the level of “well-offness” is so low throughout the distribution that the overall level was considered more important than the distribution.
A recent paper by Olena Nizalova (2014) examines the importance of the non-monetary dimensions of work in studies regarding inequality in total returns to work. Nizalova’s paper exploits a unique data set collected by the International Labour Office in Ukraine to study whether there has been a significant change in the non-monetary components of inequality. If this is the case, it can explain the growing tensions in society where the changes in income/wage inequality have been limited.
Non-monetary aspects of inequality
A few academic studies have explored the issue of income/wage inequality in Ukraine and Russia (Ganguli and Terrell, 2006; Galbraith, Krytynskaia, and Wang, 2004; Gorodnichenko, Peter, and Stolyarov, 2010; Lokshin and Ravallion, 2005), and found that, if anything, the change in inequality after 1995 has been quite modest. These results are in line with the dynamics of wage inequality in Ukraine presented in Figure 1, which pictures the ratio of wages in 2nd, 3rd, and 4th quartiles of the wage distribution against those in the 1st quartile.
Figure 1. Log Differences in Hourly Wages Relative to the Lowest Paying Quartile
Source: The authors own calculations based on Ukrainian Labour Flexibility Survey for the period 1994-2004.
However, the measures used in the earlier studies may not reflect the true inequality levels in the society. Indeed, they are omitting the contribution of the non-monetary dimension of work to the overall inequality.
The study of non-monetary working conditions is important for several reasons. First, work is central to people’s lives not only because a major share of household income in most countries comes from labor earnings (Guerriero, 2012), but also because individuals spend a considerable part of their time at work. Thus, earnings inequality can inappropriately reflect the true level of the total inequality in the labor market.
Second, the importance of this direction of research is further highlighted by the development of the ILO “Decent work agenda”. One of its aims is to promote both inclusion and productivity by ensuring that women and men enjoy working conditions, which satisfy several criteria. These criteria include that working conditions are safe, allow adequate free time and rest, take into account family and social values, provide for reasonable compensation in case of lost or reduced income, and permit access to adequate healthcare.
Lastly, inequality in working conditions, and in particular workplace injuries, may directly translate into income and wealth inequality, and, indirectly, affect inequality in future generations.
Ukraine: Inequality in Non-Monetary Work Dimensions Matters
The analysis in Nizalova (2014) shows that establishments that pay higher wages, tend to provide safer and, in general, better working conditions than establishments that pay lower wages. In addition, the latter are much more likely to experience difficulties with the payment of wages and have a higher percentage of workers with severe (more than 3 months) wage arrears. This suggests that the wage inequality may be further exacerbated by the inequality in non-monetary work dimensions.
A further distributive analysis demonstrates that the inequality in non-moneraty work dimensions has been changing noticeably over time. In particular, Figure 2 shows that the burden of workplace injuries, measured as total work days lost due to injuries per 100 Full Time Equivalent (FTE) employees, over time has shifted from being concentrated in the top part of the wage distribution to the lowest part (the way to interpret Figure 2 and all subsequent figures is as follows: the diagonal line in all figures corresponds to the equal distribution of the mentioned workplace characteristic across the wage distribution. The further the actual distribution curve (in red) is from the diagonal, the more unequal it is, with the curve below the diagonal indicating a concentration of the characteristic among higher paying enterprises and the curve above the line – concentration of the characteristic in the lower end of the wage distribution).
Figure 2: Concentration Curves – Total Injury Burden by Year
Source: The authors own calculations based on Ukrainian Labour Flexibility Survey for the period 1994-2004.
Moreover, the distribution of employer-provided benefits has also changed from being almost equally spread across the wage distribution to being more concentrated in the upper part (Figure 3).
Figure 3: Concentration Curves – Amenity Scores by Year
Source: The authors own calculations based on Ukrainian Labour Flexibility Survey for the period 1994-2004.
Notice that this result is not driven by any one particular amenity – it is observed across the whole range of indicators (for example, see Figures 4-6).
Figure 4: Distribution of Transportation Subsidy Provision by Year
Source: The authors own calculations based on Ukrainian Labour Flexibility Survey for the period 1994-2004.
Figure 5: Distribution of Kindergarden Subsidy Provision by Year
Source: The authors own calculations based on Ukrainian Labour Flexibility Survey for the period 1994-2004.
Figure 6: Distribution of Health Service Provision by Year
Source: The authors own calculations based on Ukrainian Labour Flexibility Survey for the period 1994-2004.
Similarly, wage arrears’ (non-payments) concentration has changed from being almost equally distributed across all wage levels to being more concentrated among lower paying establishments (Figure 7).
Figure 7: Distribution of Wage Arrears by Year
Source: The authors own calculations based on Ukrainian Labour Flexibility Survey for the period 1994-2004.
Further, the analysis of distributional shifts in the establishment characteristics over the corresponding period shows significant changes only with respect to firm size, export status, and some sectoral shifts.
Overall, the findings of the paper document an emergence of sizeable inequality in the workplace characteristics in the Ukrainian labor market: workers in poorly paying establishments are facing disproportionately larger risks of on-the-job injury, worse provision of amenities, as well as less security in timely payments of earning.
Conclusion
Although further research on causes of growth in multidimensional inequality in returns to work is required, this study provides two important lessons for the research community and policy makers.
First of all, it highlights the importance of a multi-dimensional approach to labor market returns, since a focus on monetary compensations only may significantly underestimate the true inequality in a society.
Secondly, it draws attention to the need of developing adequate governmental policies to address the inequality of workplace-centered provisions of social services during the transition to market economy. By prioritizing measures to facilitate provision of affordable housing, health care, kindergartens, as well as training opportunities, the government could mitigate increasing inequalities. This would allow the government to avoid significant tensions and conflicts in society, which is an important pre-requisite for ongoing sustainable development.
References
- Bockerman, Petri and Pekka Ilmakunnas. 2006. “Do job disamenities raise wages or ruin job satisfaction?” International Journal of Manpower 27 (3):290–302.
- Clark, Andrew E. and Claudia Senik. 2010. “Who Compares to Whom? The Anatomy of Income Comparisons in Europe.”Economic Journal 120 (544):573–594.
- Galbraith, James K., Ludmila Krytynskaia, and Qifei Wang. 2004. “The Experience of Rising Inequality in Russia and China during the Transition.” European Journal of Comparative Economics 1 (1):87–106
- Ganguli, Ina and Katherine Terrell. 2006. “Institutions, markets and men’s and women’s wage inequality: Evidence from Ukraine.” Journal of Comparative Economics 34 (2):200–227
- Gorodnichenko, Yuriy, Klara Sabirianova Peter, and Dmitriy Stolyarov. 2010. “Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income.” Review of Economic Dynamics 13 (1):209–237
- Guerriero, Marta. 2012. “The Labour Share of Income around the World. Evidence from a Panel Dataset.” URL http://www.sed.manchester.ac.uk/idpm/research/publications/wp/depp/documents/deppwp32.pdf. Working Paper
- Hamermesh, DS. 1999. “Changing inequality in markets for workplace amenities.”Quarterly Journal of Economics 114 (4):1085–1123.
- Hensler, Deborah R., M. Susan Marquis, Allan Abrahamse, Sandra H. Berry, Patricia A. Ebener,Elizabeth Lewis, Edgar Lind, Robert J. MacCoun, Willard G. Manning, Jeannette Rogowski, and Mary E. Vaiana. 1991. “Compensation for Accidental Injuries in the UnitedStates.” RAND Corporation Report Series R3999, Santa Monica, CA: RAND Corporation. URL http://www.rand.org/pubs/reports/R3999
- Keogh, J. P., I. Nuwayhid, J. L. Gordon, and P. W. Gucer. 2000. “The impact of occupational injury on injured worker and family: outcomes of upper extremity cumulative trauma disorders in Maryland workers.” American journal of industrial medicine 38 (5):498–506. Research Support, U.S. Gov’t, P.H.S
- Lokshin, Michael and Martin Ravallion. 2005. “Rich and powerful?: Subjective power and welfare in Russia.” Journal of Economic Behavior & Organization 56 (2):141–172.
- Marquis, M. S. and W. G. Manning. 1999. “Lifetime costs and compensation for injuries.” Inquiry: a journal of medical careorganization, provision and financing 36 (3):244–254. Research Support, Non-U.S. Gov’t.
- Nizalova, Olena Y., 2014. “Inequality in Total Returns to Work in Ukraine: Taking a Closer Look at Workplace (Dis)amenities,” IZA Discussion Papers 8322, Institute for the Study of Labor (IZA).
- Ostry, Jonathan David and Andrew Berg. 2011. “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” IMF Staff Discussion Notes 11/08, International Monetary Fund.
- Rosen, Sherwin. 1986. “The Theory of Equalizing Differences.” In Handbook of Labor Economics, edited by O. Ashenfelter, R. Layard, P.R.G. Layard, and D.E. Card, v.2, chap. 12. North-Holland, 641–692.
- Senik, Claudia. 2009. “Direct evidence on income comparisons and their welfare effects.”Journal of Economic Behavior&Organization 72 (1):408–424.
- Wilkinson, R. and K. Pickett. 2010.The Spirit Level:Why Equality is Better for Everyone. Penguin Books Limited.
Decentralization Reform in Ukraine
The current Ukrainian political system, which is a highly centralized “winner-take-all” system, is one of the main causes of the recent mass street protests. A decentralization reform is needed to make the system more stable by providing people with more impact on policy making, and increasing accountability of the government. A decentralization reform would reduce paternalistic expectations and provide people with more opportunities to take responsibility for public policy design in their region. In addition, it would improve the quality of national politics by introducing more competition and allowing successful regional politics to spread to the national level. However, as all reforms, decentralization bears some risks. This policy brief discusses the benefits and risks of such reform, suggests some ways of mitigation of the risks, and the procedure for reform development.
“In decentralized systems, problems can be solved early and when they are small. And when there are terrible failures in economic management—a bankrupt county, a state ill-prepared for its pension obligations—these do not necessarily bring the national economy to its knees.” / Nassim Taleb
In their path-breaking article Roger Myerson and Tymofiy Mylovanov argue that the underlying reason for the Ukrainian street protests in 2004 and 2014 is a fundamental flaw in the country’s Constitution, namely, the design of its government system. Currently, it is basically a “winner-take-all” system, where a winner of the national elections gains almost a dictator’s power, and then tries to prolong his stay in office with all means.
Such a system – where almost all the power is concentrated in the hands of the central government, and where local authorities, even the elected ones, have very little room for their own decisions – resembles an inverted pyramid and is therefore unstable. A natural way to stabilize the system is to put the pyramid on its foundation – i.e. to provide people with more impact on (and responsibility for!) both local and central government policy.
However, the Ukrainian government has announced a decentralization reform, and has already adopted a Decentralization Concept, which defines the main goals and milestones of the reform. According to the Concept, the legislative base for the decentralization should be developed by the end of 2014. However, it is clear that these plans are unrealistic. This, since on top of Constitutional changes, the reform implies changes to the administrative structure of the country, a redistribution of responsibilities between different levels of local government, and changes to the Tax Code, the Budget Code, and to several other documents. Such a scope of reforms is hardly attainable within the planned timeframe.
So far, the President’s office has developed changes to the Constitution, and the Cabinet of Ministers has drafted changes to the Budget Code. However, both documents miss the main point of the reform – empowering of people (rather than simply delegating some responsibilities from central to local governments). Instead, the drafted law on changes to the Constitution empowers the President, and the drafted changes to the Budget Code are an attempt of the central government to get rid of its “headaches” (e.g. ecological or social housing programs) while at the same time consolidating “electorally valuable” spheres, such as education and healthcare. This Draft Law proposes transferring some revenue sources from central to local levels, and at the same time to extract a part of the revenues that currently belong to local budgets to the central budget. A more detailed analysis of the proposed changes is provided in this article.
To my mind, the main impediment to the decentralization reform is a lack of a systemic approach. The Decentralization Concept does not provide a clear reform path, and changes to the legislation proposed so far look like pieces of a puzzle that do not fit together.
I suggest that the decentralization reform should be developed together with the administrative reform and proceed according to the following algorithm:
- Define functions of the state and distribute them between different levels of government according to a subsidiarity principle; i.e. a function should be transferred to the lowest government level capable of implementing it.
- Estimate the volume of funds needed to implement these functions.
- Assign sufficient revenue sources to local governments.
- If a community is too small to generate a sufficient revenue flow, merge several communities and repeat steps 3-4, keeping the distance between the center of such a united community and its most remote settlement below a defined limit.
- Establish feedback mechanisms through which people in a community could control the authorities and impact their decision-making. These mechanisms are not only elections, but also, more importantly, permanent between-elections activities, such as public hearings/discussions of drafts of local government decisions.
- Use a few communities as pilots and thus find out potential strengths and weaknesses of the proposed reform and make necessary corrections.
The outcome of this algorithm should be a logically connected package of legislative changes rather than a bunch of separate documents.
The development of this reform should be as transparent as possible, and accompanied by wide information and education campaigns about the opportunities that decentralization will provide, and the ways to use these opportunities. These information campaigns are necessary because many Ukrainians now think that decentralization (or federalization) is pushed by the Russian president in order to split Ukraine into parts.
As with all reforms, the decentralization has its potential benefits and risks, which should be accounted for. Fortunately, there exists both a wide academic literature and international experience on this issue.
The economic literature, both theoretical and empirical, does not unambiguously show that “decentralization is good”. Rather, a success of decentralization depends on a number of other factors, such as the presence of democracy (Inman, 2008) and a sufficient accountability of the government (both local and central).
In itself, decentralization does not lead to higher economic growth (e.g. the review of Feld et al, 2013). However, when accompanied by other growth-enhancing reforms, decentralization can positively impact a country’s economic development (Bardhan 2002).
Both the literature and experience of other countries suggest the following major risks of decentralization:
- Decentralization may increase corruption at the local level. If a local official is not accountable to a higher-level government, she may try to extract some rent from her position. This risk can be reduced by a high transparency of the government and working mechanisms of control of citizens over officials.
Indeed, Lessmann and Markwardt (2009) show that decentralization lowers corruption in countries with high levels of freedom of the press, and is harmful for countries where monitoring of the government is not efficient. Besides, Fan, Lin and Treisman (2009) find that “giving local governments a larger stake in locally generated income can reduce their bribe extraction”, i.e. for decentralization to lower corruption, the institutional setup should encourage local officials to create a favorable business environment in their regions.
- Decentralization may intensify secessionist movements. To lower this risk, the largest volume of responsibilities should be transferred to the lowest (community) level. It is rather easy for separatists to buy support of oblast-level officials and get control over an entire oblast. It would be much harder for them to buy every community head in an oblast. Moreover, getting control over an oblast, even rayon by rayon, let alone by community, is practically infeasible.
- Decentralization enhances initial inequality between regions – so the central government has to step in by providing subsidies/subventions to less developed regions (Cai and Treisman, 2005).
At the same time, the “bonuses” of decentralization are worth taking the risks:
- Reduction of tensions between the regions. In the Ukrainian situation, this implies removing grounds for mutual accusations that “one region feeds other regions” or “one region rules the entire country”. If a party that wins a majority in the national elections does not have extensive power over the daily life of people, they can more easily accept the fact this is not the party they voted for.
- Improvement of the national politics by increasing competition between local officials, and between local and central officials. As we know, competition typically increases the quality of a product. Political competition is no exception. As Myerson (2006) notes, “by creating more opportunities for politicians to build reputation as responsible democratic leaders, a federal [decentralized] system can effectively offer an insurance policy against general failure of democracy”. Thus, democracy and decentralization strengthen each other.
- More efficient government. On average, policy decisions will be made closer to their final beneficiaries and hence, will be more fitted to the needs of a certain community. At the same time, all levels of government will work more efficiently.
Decentralization does not imply a weakening of the central government. Rather, it frees its institutions from an unnecessary workload allowing them to concentrate on more strategic tasks, such as:
- protecting people’s rights by establishing a working judicial and security (police and army) systems;
- forming a strategic vision and general directions of the country’s development;
- protecting the country’s interests on the international level.
To make sure that decentralization does not result in feudalization, local officials should be controlled not only by local citizens but also by the central government (law enforcement); strong country-wide political parties would also help to hold the country together.
Conclusions
A decentralization of the Ukrainian political system is currently in the very focus of political, public and research debate.
However, this reform is not likely to be an easy one. The prerequisites for successful decentralization include functioning democratic mechanisms – fair elections, a free press and a strong civil society – resulting in government accountability. Also, for the decentralization reform to succeed, it needs to be coherently bundled with a range of political and administrative reforms (such as the development of a functioning judicial system, deregulation, reduction of rent-seeking opportunities etc.), and development and implementation of such a package is challenging and time-consuming.
At the same time, a wisely designed decentralization process will be highly beneficial for Ukraine, both politically and economically. It will strengthen democracy (by increasing people’s participation) and improve the quality of national politics by introducing more competition into the political system. It is also likely to significantly contribute to economic growth and prosperity, and these benefits make the decentralization reform in Ukraine a challenge worth undertaking despite of all the costs and risks.
References
- Bardhan, Pranab (2002). “Decentralization of Governance and Development,” Journal of Economic Perspectives, American Economic Association, vol. 16(4), pp. 185-205
- Brancati, Dawn (2006). Decentralization: Fueling the Fire or Dampening the Flames of Ethnic Conflict and Secessionism? International Organization. Vol.60, issue 03, pp. 651-685
- Cai, Hongbin and Daniel Treisman (2005). Does competition for capital discipline governments? Decentralization, globalization and public policy. The American Economic Review, Vol. 95, No. 3, Jun.2005
- Cai, Hongbin and Daniel Treisman (2009). Political decentralization and policy experimentation. Quarterly Journal of Political Science. Vol 4. Issue 1.
- Deiwiks, Christa, Cederman, Lars-Erik und Kristian S. Gleditsch (2012). Inequality and Conflict in Federations. Journal of Peace Research. March 2012 vol. 49 no. 2, pp. 289-304
- Enikolopov, Ruben and Ekaterina Zhuravskaya (2007). Decentralization and political institutions. Journal of Public Economics, No. 91, pp. 2261–2290
- Fan, C. Simon, Lin, Chen and Daniel Treisman (2009). Political decentralization and corruption: Evidence from around the world. Journal of Public Economics. Vol.: 93 (2009)
Issue: 1-2, pp: 14-34 - Inman, Robert P. (2008). Federalism’s Values and the Value of Federalism. NBER Working Paper 13735. http://www.nber.org/papers/w13735
- Lars P. Feld, Baskaran, Thushyanthan and Jan Schnellenbach (2013). Fiscal Federalism, Decentralization and Economic Growth: A Meta-Analysis. Public Finance Review 41 (4), 421-445
- Lessmann, Christian and Gunther Markwardt (2009). One Size Fits All? Decentralization, Corruption, and the Monitoring of Bureaucrats, CESIFO Working Paper No. 2662, Cat. 2: Public Choice.
- Myerson, Roger B. (2006). Federalism and Incentives for Success of Democracy. Quarterly Journal of Political Science, 2006, 1: 3–23
- Treisman, Daniel (2006). Fiscal decentralization, governance, and economic performance: a reconsideration. Economics and Politics, July 2006, 18, 2, pp. 219-35.
The Relationship between Education and Migration. The Direct Impact of a Person’s Education on Migration
This brief is based on a section from a large policy report, which investigates to what extent education directly influences major migration decisions. The results indicate that education does not have a clear and persistent effect on most of the migration decisions of Ukrainians — while in 2005-2008 education did not have any effect on the probability of migration at all, in 2010-2012 an inverse relation between qualification and probability of migration appeared. It has been observed that education is positively related to the probability of finding high profile positions, such as professionals, technicians or clerks. Still, the analysis of 2005–2008 data tends to support the “brain-waste”, or better to say, “skills-waste” hypothesis for white-collar Ukrainian migrants but not for blue-collar workers. In 2010-2012 the hypothesis doesn’t hold. *
Trust and Economic Reforms
This brief discusses the importance of trust in economic development. In the aftermath of the 2008 financial crisis, many countries experienced a decline in the level of both general trust and trust and confidence in the government and market institutions. Trust is important for economic growth as it facilitates economic transactions by reducing uncertainty and risk. A lack of trust in the government hinders implementation of structural reforms needed for economic development. Hence, policies aimed at rebuilding trust in the government and institutions become especially important for countries like Ukraine.
Recent events in Ukraine have highlighted an acute crisis of trust in the Ukrainian society (such as trust in the government, politicians, institutions, etc.). Over the past two decades, in the absence of a fair and transparent legal and court system, Ukrainians have become accustomed to relying on informal and often corrupt ways of living and doing business. According to a poll conducted in December 2013, less than 20 percent of the Ukrainian population said that they trust the government, police and courts.
A low level of trust in society is not, however, limited to Ukraine; this problem is also pronounced in many other parts of the world. According to the 2012 Edelman Trust Barometer survey, the general level of trust in most countries surveyed decreased compared to 2011. The most notable decline was in Brazil (36.3%), Japan (33.3%) and Spain (27.5%). These countries also experienced large drops in the level of confidence in the government: Brazil went down by 62.4%, Japan by 51% and Spain by 53.5%. According to the OECD report, generally, less than half (40%) of the citizens trust their government (OECD, 2013).
General trust is important for economic life as it reduces uncertainty and costs associated with economic transactions. Trust affects the functioning of businesses, financial markets, and government intuitions. The level of general trust varies significantly across countries (see Figure 1). While only 3.8 percent of people in Trinidad and Tobago fully trust most people, the Scandinavian countries’ share of trusting people exceeds 60 percent (Algan and Cahuc, 2013).
Economists have in their studies repeatedly appealed to the problem of trust because there are several channels through which trust may influence economic development. First, trust creates favorable conditions for long-term investment and financial market development (Algan and Cahuc, 2013). Second, a higher level of trust in various regulatory authorities increases the level of compliance with the rules and regulations if citizens believe in the fairness of such rules and regulations (Murthy, 2004). In Tabellini (2010), the level of economic development (measured by GDP per capita) of different regions of the EU member countries is compared to their level of trust (defined as in the Figure 1) and respect (defined as the proportion of people who mentioned the quality “tolerance and respect for other people” as being important). Using data from the World Value Survey rounds conducted in the 1990s, he shows that regions with a high level of trust and respect are also the regions that are the most economically developed.
In his Master thesis, the graduate of the Kyiv School of Economics Oleksii Khodenko (Khodenko 2013) analyzed the relationship between the level of trust in the government and the attitude towards market economy (in particular, the attitude towards competition and private property). For this purpose, he used data from the World Values Survey and the European Values Survey. His results have different implications for developed and less developed countries. While a lack of trust in the government in developed countries is transformed into a desire to see more market mechanisms in the economy, this mistrust of the government in developing countries (including Ukraine) undermines the faith in the entire market economy.
Khodenko’s results highlight important policy implications for transition countries: people who grew up in a centrally planned economy tend to underestimate the benefits of the free market and, therefore, only puts confidence in the government and the state as a whole to achieve the development of market mechanisms. Thus a lack of trust hinders, or even prevents implementation of structural economic reforms, which are often “painful” for some groups or for society as a whole. In countries with a low level of trust, the long-term promise of the implemented reforms to improve the lives of people is not perceived as credible. Instead of being viewed by the general public as a today’s sacrifice in the name of future prosperity, they are rather viewed as a deadweight loss (Györffy, 2013).
Figure 1. The Level of Trust in the World
Source: Yann and Cahuc (2013), Figure 1.
Note: Trust is computed as the country average from responses to the trust question in the five waves of the World Values Survey (1981-2008), the four waves of the European Values Survey (1981-2008) and the third wave of the Afrobarometer (2005). The question regarding trust asks: “Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?” Trust is equal to 1 if the respondent answers ”Most people can be trusted” and 0 otherwise.
Moreover, low levels of trust affect all types of structural reforms. Elgin and Garcia (2012) show that the effect of the tax reform on the economy can significantly differ depending on the level of trust in the government; under low levels of trust the announced tax cuts do not lead to exit from the informal sector.
The question is then how to revive or rebuild trust? Knack and Zak (2003) argue that the most efficient policies for building general trust are policies that (1) reduce income inequality since people in countries with more equal income distribution tend to have higher levels of interpersonal trust, and (2) strengthen civil society to increase government accountability. Income inequality often resulting from unequal opportunities can be reduced via increases in educational attainment and income redistribution programs. The presence of a strong civil society with free press ensures that the government is accountable and responsive to its citizens. A government needs to be reliable, open and transparent to effectively address citizens’ demands (OECD, 2013). All these policies cannot be implemented without a fair legal system that guarantees equal treatment of all citizens.
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References
- Algan, Y. and P. Cahuc (2013) “Trust, Growth and Well-being: New Evidence and Policy Implications”, IZA Discussion Paper No. 7464
- Elgin, C. and M. Solis-Garcia (2012), “Public Trust, Taxes and the Informal Sector”, Journal Review of Social, Economic and Administrative Studies, 26(1), pp. 27-44
- Györffy, D. (2013), Institutional Trust and Economic Policy: Lessons from the History of the Euro, Central European University Press
- Knack, S. and P.J. Zak (2003), “Building Trust: Public Policy, Interpersonal Trust, and Economic Development”, Supreme Court Economic Review, 10, pp.91-107
- Khodenko, Oleksii (2013). How Does Confidence in the State Authorities Shape Pro-market Attitudes?
- Murthy, K. (2004), “The Role of Trust in Nurturing Compliance: A Study of Accused Tax Avoiders”, Centre for Tax System Integrity, Working paper No49
- OECD (2013), Government at a Glance 2013, OECD Publishing.
- Tabellini, G. (2010), “Culture and Institutions: Economic Development in the Regions of
- Europe”, Journal of the European Economic Association, 8(4), pp. 677–71
The Arab Spring Logic of the Ukrainian Revolution
Motivated by the unusual patterns and dynamics of the Arab Spring, we construct a model explaining the vulnerability of the newly established incumbent to popular unrest. Using this model for the case of similar protests in Ukraine, we find that the current combination of availability of information, military capacity of the incumbent and his radicalization, together with the opportunity costs of participation in a protest, are likely to result in the formation of new government that is also vulnerable to popular protests. The persistence of the protests after the formation of a temporal government in Ukraine supports this hypothesis. Additionally, as the policy position of Viktor Yanukovych was relatively mild, his potential successor might be more radical. Exponential growth of social media users, reduction of military capacity, relatively high unemployment and the possible radicalization of the Ukrainian President might put the country into an “instability zone” with recurrent protests.
On the night of 21 November 2013 spontaneous protests erupted in Kiev, the capital of Ukraine, after the Ukrainian government suspended preparations for signing an Association Agreement and a Free Trade Agreement with the European Union in favor of agreements with Russia. The movement concentrated on Independence Square (Maidan Naseljenosti) soon took on the name “Euromaidan”. Soon the protest spread to other cities in the country. The initial agenda of closer relations with the EU was soon encompassed in the wider protest against Viktor Yanukovych, elected President in 2010. He fled the country on February 21 under the pressure of popular protests, exacerbating the leadership crisis. Temporary leadership was taken up by the Speaker of the Supreme Rada – Oleksander Turchinov, while new elections were scheduled to take place on May 25.
Despite the successful removal of Victor Yanukovich from power and a promise of new elections in May, the protests on Maidan did not cease. The major factor of uncertainty comes from the very nature of the protests. For many months, it ran without organizers or formal leadership so that the future course of action remains unclear. It is hard to comply with the demands of Maidan, as no clear set of demands are formulated. Though five figures of Maidan: Tymoshenko, Klitschko, Tyagnybok, Yatsenuk and Yarosh remain the most visible, none of them has sufficient support of Maidan. Whichever course prevails – resumed Eurointegration or an alliance with Russia (which became a less likely option)– the number of people who oppose the new course is likely to be enough to fill a new Maidan.
The swift happenings in Maidan are highly reminiscent of the events of the Arab Spring at its crux: it also was a leaderless protest, coordinated mainly with social media, and encompasses people of vastly different socio-economic, political and demographic characteristics.
Using social media technologies, Euromaidan has created an interactive map of logistics (http://maydanneeds.com/) that provides detailed information on and locations of where to eat, makeshift hospitals, information booths, and the barricades. Clicking on the icons of the map, one discovers not only the locations of the facilities but also their needs, which enables coordination of protesters’ efforts to contribute to the common cause. However, just as in case of Tahrir Square or the Tunisian unrest, the common cause is poorly defined: aside from dissatisfaction with Viktor Yanukovych, the protesters exhibited very different preferences for the future course of action, and the three most prominent figures of the protest – Klitschko, Tyagnybok and Yatsenuk – were shunned as they spoke about the common agenda.
The aftermath of the Arab Spring remains unclear for both protesters and the world. The Syrian social unrest has resulted in ongoing violent conflict, while Libyan society still experiences serious problems with the formation of a new government after the murder of Kaddafi and the end of civil war. Tunisia and Egypt were able to choose new Presidents and form new governments. The latter were themselves dismissed soon after they came to power: the first elected post-Mubarak government collapsed in mid-2013 after a year of almost uninterrupted protests. These two cases are especially interesting as constitutional exits of leaders who were in autocratic office for less than one year were generally caused by coups and not protests between 1945 and 2002 (Svolik, 2009).
Nevertheless, we can apply the knowledge acquired there to the new Ukrainian protest we observed on Maidan and try to predict its development by the means of stylized models suggested in Dagaev, Lamberova, Sobolev and Sonin (2013).
Our approach relies on four simple parameters that drive the dynamics of the protests. First, we consider the costs of collective action – the opportunity costs of spending time on Maidan. The second parameter is the military capacity of the incumbent that can be devoted to the suspension of the protest. The higher it is, the more numerous should the protest be to succeed. The third parameter we use is the degree of the radicalization of the incumbent (the difference between his position and the preferred policy of the majority of the population). Finally, we use an information availability parameter (how many people are aware of the place and time of the occurrence of the protest).
With the electric telegraph, a communication tool of the 19th century, information availability was low and many of those who would have been glad to pay the costs of collective actions to replace the incumbent stay at home as they are not aware of the protest taking place. With Facebook and Twitter, the availability of information is much higher. According to our findings, the crucial role in dynamics of contemporary mass actions is played by the ratio of military capacity to the information availability rather than their values per se.
Our framework assumes that each citizen’s decision of whether to participate in the protest or not is based on the difference between her position and the preferred policy of the incumbent. According to this decision, all citizens can be classified into two groups – those who participate in a protest against the incumbent, and those who do not. We define a person, who has the median position among the protesters, as the expected new incumbent. So if the elections were held among the protesters, he would receive the widest support. If the number of citizens participating in the protest is sufficient to overcome the military capacity of the current incumbent, the protest becomes successful, and the expected new incumbent of the protest becomes the new incumbent. The combination of military capacity, opportunity costs and costs of coordination determine the size of the stability zone – a segment of policy space where the incumbent is not vulnerable to mass protest.
The model allows us to predict the dynamics of the protests that is generated by different combinations of the parameters. For illustrative purposes, the availability of information about the protest is proxied by data on Facebook penetration and military capacity is described by the number of military personnel per capita in 2009 collected by the International Institute for Strategic Studies (Hackett, 2010). The incumbent policy position is proxied by the Legitimacy Index from Polity IV, where a higher index corresponds to lower legitimacy of the incumbent and his regime. Finally, the costs of participation in a protest are proxied by the employment rate. A recent study by Campante and Chor stresses unemployment as important determinants of opportunity costs of taking to the streets during Arab Spring (Campante & Chor, 2012). As unemployed individuals have fewer options of how to spend their time, one should expect that a substantial number of unemployed people corresponds to a relative ease of sparking unrest.
Using these parameters, we can explain success or failure of the protest, and predict some proprieties of its aftermath.
For example, high military capacity, opportunity costs and costs of coordination generate a broad stability zone, so that even a radical incumbent would not face a threat of revolution. The decline of any of three parameters can narrow the zone of stability and make the autocrat vulnerable to mass protest. As the incumbent is highly radical, a significant part of the population takes to the streets. As a result, the new incumbent’s position is sufficiently close to the one of the median voter and is, thus, inside the stability zone. An example of such a scenario is the overturn of Slobodan Milosevic after the fall of communism, when there were eight failed and one successful attempts to form a wide coalition of opposition parties (Spoerri, 2008). The process of finding a common ground started in 1990 with the emergence of the coalition of six parties, the Associated Opposition of Serbia, which broke shortly after a series of power struggles, policy disagreements, and personality clashes. It was only ten years later that the protest which facilitated Milosevic’s downfall took place, as the leader of the united opposition, the Democratic Opposition of Serbia, was able to ensure the non-involvement of the crucial military unit on behalf of Milosevic (Bujosevic & Radanovic, 2003).
In contrast, the events of the Arab Spring had different political dynamics. Low military capacity and high unemployment of Egypt and Tunisia determined a narrow stability zone ex ante. The absence of protests of these long-lived regimes can be explained by the relatively moderate position of the incumbent. In 2010, the Egyptian and Tunisian regimes had scores of 5 and 4 (out of 12) of Political Legitimacy from Polity IV, respectively. However the emergence of social media that enabled the users to coordinate their actions easily narrowed the relatively small stability zone. As the incumbent was less radical, fewer citizens benefit from its replacement and take to the streets. Thus, the new incumbent is defined by protesters, her policy position is more radical and now is out of the stability zone. The new incumbent immediately faces the new social unrest.
Table 1 presents the stylized results of our study. Locating the combination of parameters of the country in the table allows us to make the prediction about the dynamics of the protest. There are several possible courses of events: the protest can be weak and die out soon, with the incumbent staying in place; it can be significant, but yet not large enough to overthrow the incumbent; it can lead to the replacement of the incumbent, followed by the period of stability; and, finally, it can result in the replacement of the incumbent, but not cessation of the protest.
Table 1. Protest Outcome as a Function of Parameters
What do our findings tell us about Ukraine? The previously used proxy for the information index there is not a good choice, as the majority of users prefer the Russian version of Facebook – Vkontakte – as the major social network of the country. Thus, we rely on the Vkontakte penetration data (as of 2013, 18.5 million of people in Ukraine were using the network, constituting 40.6% of the population, see report of Ukranian IT-news agency AIN.UA: http://ain.ua/2013/11/28/503853).
The military parameter, that reduces the likelihood of successful protest, is low, compared to the countries of Arab Spring and constitutes 2.8 active military per 1000 people (see the Ukrainian law “Armed Forces of Ukraine for 2013”, http://w1.c1.rada.gov.ua/pls/zweb2/webproc34?id=&pf3511=49126&pf35401=283834), which is half of the one in Egypt at the beginning of the protests. The unemployment parameter fell to 8.6 during the incumbency of Victor Yanukovych, which corresponds to the pre-protest unemployment in Egypt in 2010.
The legitimacy measure presents a difficulty for comparison with the Arab Spring cases, as the Legitimacy Index has not yet been updated. However, the harsh actions of Victor Yanukovych during the 2013-2014 protests (including the suppression of the protest and the passage of laws denying freedom of assembly and freedom of expression, as well as the refusal to repeal his earlier changes of the constitution towards more presidential form of government) suggest that his legitimacy level fell by approximately 50% (and was about 20% right before he was ousted from power), which is corroborated by polls (“Ukraine’s future in peril under President Yanukovych”, The Washington Post, 2 December, 2013). Thus, the conservative estimate is that his legitimacy index shifted from 3 to 4 or 5, as shown on Figure 1.
For the purpose of comparison, we plot the Arab Spring countries and Ukraine in the space of our variables in Figure 1. The X-axis shows the incumbent’s departure from the median population-preferred policy (proxied by the Legitimacy Index from Polity IV). We use the value of the index in the year prior to the start of unrest, and the index value in 2010 for countries with no protests (Morocco, Oman, Djibouti). The Y-axis corresponds to the employment level. The size of the bubble corresponds to the ratio of military capacity and Facebook (or Vkontakte) penetration (data from the Arab Spring Social Media Report).
The shading of the bubble reflects the type that country belongs to: striped (no significant protest), light gray (continuing protest), and dark grey (multiple protests). Syria is excluded from the classification and is marked white, because of the civil war and international intervention.
Figure 1. Legitimacy index (X-axis), Employment (Y-axis), Military capacity / Social media penetration (size of the bubble) in Arab Spring countries and Ukraine
Figure 1 illustrates that countries appear in tight clusters in line with our theoretical predictions. The countries with continuing protests that did not lead to the downfall of the incumbent are divided into two groups. The first group (Kuwait, Jordan, Lebanon, and Bahrain) has relatively a moderate incumbent policy position and extremely high level of development of new media. The reasons why these countries are not «striped» is high military capacity of the government that could be employed against protesters, combined with high opportunity costs of protesting (low unemployment rates).
The second group of countries (Syria, Algeria, Iraq, Yemen, and Mauritania) has more radical incumbents and higher unemployment rates (so the incentives to protests are higher there), but is poor in terms of IT development. The ratio of military capacity and Facebook (Vkontakte) penetration is high, which is reflected by the size of bubbles that are much larger than in the first groups. That is why in a country with a small military capacity (such as Yemen), the protests did not lead to the incumbent’s replacement.
Two Arab Spring countries belong to the “multiple protests” group. Both Egypt and Tunisia had relatively mild incumbents in the pre-protest era, with Tunisia’s Bashar al-Assad being the milder of the two. Both countries had relatively high unemployment rates and wide Facebook coverage, both factors alleviating the problem of organizing a collective action. Despite the fact that before the start of the protests Facebook coverage in Egypt had close to average values among the countries of Arab Spring, they grew at exponential rates and Egypt attained leading positions in the region in usage of new media several months later. Moreover, low rates of military capacity made protest activity less risky in both Tunisia and Egypt. The remaining differences in Facebook coverage and employment rates in Egypt and Tunisia account for the different structure of recurrent protests, predicted by our model.
Comparison of the Arab Spring countries data with the Ukrainian case shows that high military capacity, new media penetration and unemployment generate even more narrow stability zones than one observes in the cases of Egypt and Tunisia. The reason why the incumbent was not vulnerable to mass protests can be explained by the political legitimacy of Yanukovych as the winner of relatively free elections in 2010.
But if the Arab Spring protests were triggered by rapid growth of new (cheap) communication technologies, the successful protest against Yanukovych can be explained by his radicalization. The radicalization took the form of parliamentary acts that put significant constraints on political rights and civil liberties and violent suppression of dissident actions.
Employing the proposed approach and contrasting the Ukrainian case with the countries of the Arab Spring allows us to draw several conclusions.
Firstly, the current combination of availability of information, military capacity of the incumbent and his radicalization, together with the opportunity costs of staying on Maidan, are likely to result in successful and recurrent protest. The persistence of the protests after the formation of a temporal government supports this hypothesis.
Secondly, it is worthwhile to note that as the policy position of Viktor Yanukovych was relatively mild, his potential successor might be more radical.
Thirdly, the exponential growth of social media, the reduction of military capacity and relatively high unemployment puts Ukraine into an “instability zone”. This implies that the 2004 scenario of the Orange Revolution is unlikely to repeat. The protest of 2004 resulted in a general election, and the elected president Viktor Yushchenko served his term without interruption. The protests of 2013 are more likely to result in a rapid change of incumbents and a period of instability.
One factor can strengthen the possible incumbent’s vulnerability. The external pressure of the Russian government reduces costs of collective resistance to the new Ukrainian authorities among pro-Russian citizens, while the promise of Western countries to support fast EU integration can incentivize politicians to accelerate reforms opposed by significant parts of the population.
References
- Bujosevic, D., & Radanovic, I. (2003). The fall of Milosevic: the October 5th revolution. Palgrave Macmillan.
- Campante, F. R., & Chor, D. (2012). Why was the Arab world poised for revolution? Schooling, economic opportunities, and the Arab Spring. The Journal of Economic Perspectives, 167–187.
- Dagaev, D., Lamberova, N., Sobolev, A., & Sonin, K. (2013). Technological Foundations of Political Instability. Centre for Economic Policy Research Working Paper Series
- Hackett, J. (2010). The Military Balance 2010: The Annual Assessment of Global Military Capabilities and Defense E conomics. London: The International Institute for Strategic Studies.
- Spoerri, M. (2008). Uniting the opposition in the run – up to electoral revolution – Lessons from Serbia 1990 – 2000. Totalitarismus Und Demokratie, 5(2005), 67–85.
- Svolik, M. (2009). Power sharing and leadership dynamics in authoritarian regimes. American Journal of Political Science, 53(2), 477–494
The crisis in Ukraine and the Georgian economy
We analyze how the crisis in Ukraine will likely impact the Georgian economy and distinguish between short-run and long-run effects. We argue that the short-run effects are transmitted through trade and capital flows and that they are rather negative for Georgia and can hardly be bolstered. In the long-run, however, the crisis could improve the competitiveness of the Caucasus Transit Corridor, an important trading route between Europe and Central Asia Georgia participates in. We give recommendations how political decision makers could support such a development in the wake of an impairment of the northern Ukrainian transit routes.
Introduction
When Ukrainian President Victor Yanukovich decided not to sign the association agreement with the European Union and instead opted for a Russian package of long-term economic support, many Ukrainians perceived this not to be a purely economic decision. Rather, they feared this to be a renunciation of Western cultural and political values, and – to put it mildly – were not happy about this development.
The Russian political system, characterized by a prepotent president, constrained civil rights, and a government controlling important parts of the economy through its secret service, is not exactly the dream of young Ukrainians. Russia can offer economic carrots, but these do not count much against the soft power of Europe that comes in the form of political freedom, good governance, and economic development to the benefit of not just a small group of oligarchs.
Hence, it was all but surprising when many young Ukrainians took their anger about Yanukovich to the streets. After protests that lasted for nearly three months, President Yanukovich fled the country, a temporary government took over, and chaos broke out on the Crimean peninsula.
The dispute about the Crimea has the potential to impede the relations between Russia and the West for a long time to come, in particular if Russia enforces an annexation of the territory. Moreover, the tensions could quickly turn into a military conflict. The aircraft carrier USS George H.W. Bush was moved into an operational distance to the Crimea, accompanied by 20 smaller U.S. warships, and 12 additional fighter planes will be stationed in Poland. Yet even if there will be no direct confrontation between official Russian and U.S. forces, Ukraine could become the battleground of a proxy war, a kind of conflict that was common in the Cold War era. In this respect, one can already read the writing on the wall: the new Ukrainian government begs the U.S. for supplying arms and ammunition, and while the Obama administration is still reluctant to give in to such requests, the call is supported by hawkish U.S. congressmen who might finally prevail.
Ukraine is a country that is geographically close to Georgia and, like Georgia, has vital economic stakes in the Black Sea area. Georgia will not be unaffected by whatever happens in Kiev and Simferopol. In this policy brief, we will inform policy makers about the likely short-run and long-run economic consequences of the turmoil in Ukraine, discuss the challenges and opportunities that may arise, and derive some policy recommendations.
Short-run economic consequences
The crisis in Ukraine will almost instantaneously affect trade and capital flows between Georgia, Ukraine, and Russia. The effects will likely be negative and hit Georgia in a situation of economic recovery.
The Georgian real GDP growth rates were 6.3% in 2010, 7.2% in 2011, and 6.2% in 2012, and the real GDP per capita evolved from about 2,600 USD to about 3,500 USD in this time, but the upsurge discontinued in 2013 (if no other source is mentioned, figures presented in this policy brief (including those in the graphs) come from the Georgian statistical office GeoStat). ISET-PI, in its February 2014 report on the leading GDP indicators for Georgia, estimates the GDP in 2013 to be 2.6%, while GeoStat, the statistical office of Georgia, believes it to be 3.1%.
The unsatisfactory performance of the Georgian economy in 2013 was arguably caused by political uncertainties resulting from the government change that took place in late 2012, and as these uncertainties are largely overcome, most economists believe that Georgia will get back to its remarkable growth trajectory in 2014. The IMF, in its Economic Outlook, predicts a real GDP Growth of 6% in 2014, and the government of Georgia expects this number to be 5%. With an escalating crisis in Ukraine, it is questionable whether these rosy forecasts are still realistic.
Effects on imports
In 2013, Ukraine and Russia were the 3rd and the 4th largest importers to Georgia, respectively. Graph 1 shows the top five importers to Georgia, which together make up about 50% of total imports. The imports from Ukraine and Russia are mainly comprised of consumption goods: of all goods that were imported between 2009 and 2013 from Ukraine and Russia, about 30% were foodstuff. The ten main import goods in this time (in order of monetary volume) were cigarettes, sunflower oil, chocolate, bread, cakes, meat other than poultry, poultry, and sugar.
If the supply of these goods would be reduced through a breakdown of production and logistics, roadblocks, damaged infrastructure etc., the consequences for Georgia would not be utterly severe. From Ukraine and Russia, Georgia receives few goods that are (1) needed for investment projects and (2) cannot be produced domestically (an example of sophisticated investment goods that need to be imported would be ski lifts for tourism projects). Moreover, as Ukraine and Russia supply primarily standard goods that are produced almost everywhere, it is unlikely that a cutback in their imports would lead to sharp price rises in Georgia. Very quickly, increased imports from other countries would close any supply gaps. In addition, many imported consumption goods, like Ukrainian orange juice, are but luxury for ordinary Georgians, who buy their food in cheap domestic markets that sell almost exclusively local products.
Effects on exports
A small anecdote may illustrate the status of Georgian products in the Russian market. In the late 1940s and early 1950s, Stalin used to invite his comrades to his Kuntsevo dacha almost every night. At these occasions, he drank only semi-sweet Georgian red wine. His clique, usually preferring Russian vodka, adopted this habit out of fear to displease the dictator. Yet the real highlight of these nightly gatherings took place after midnight, when an opulent feast began, featuring all the delicacies of the Georgian cuisine. Through Stalin (and the fact that Georgia was a preferred destination of Soviet tourism), Georgian food obtained an excellent reputation in most countries of the former Soviet Union, and, to the dismay of Georgians, some younger Russians even do not know that Khinkali is not an originally Russian dish.
As can be seen in Graph 2, Russia and Ukraine are among the top 5 destinations for Georgian produce, together absorbing about 14% of total Georgian exports in 2013. In 2006, two Georgian products that are traditionally highly popular in Russia, namely wine and mineral water (the famous “Borjomi” brand), were banned from the Russian market. Yet in the wake of the diplomatic thaw that set in after the new government assumed power last year, this ban was lifted, and in 2013, the export of these goods regained momentum. In 2013, 68% of all wine exported from Georgia was sold in Russia and Ukraine (44 and 24 percentage points, respectively). In both countries, Georgian wines are sold at the higher end of the price range and are typically consumed by people with middle and high income. It is likely that these exports, in particular those to Ukraine, will be affected considerably by the crisis. This may happen through decreased demand for luxury foods and through a possible depreciation of the Ukrainian hryvna and the ruble vis-à-vis the Georgian lari.
Another sector that may be affected by the situation in Ukraine is the car re-export business. Georgia imports huge numbers of used cars from the U.S., Europe, and Japan, and passes them on to countries in the region. While this business hardly yields potential for real economic progress, it accounts for roughly 25% of Georgian exports! Of these 25%, about 7 percentage points go to Russia and Ukraine. Moreover, many cars are imported to Georgia on the land route from Europe through Ukraine and Russia (often driven by private, small-scale importers). If it will become more difficult to cross the border between Russia and Ukraine, this business, providing income to many low-skilled Georgians, may be at risk.
It should also be noted that Ukrainians and Russians make up an ever-increasing share of the tourists coming to Georgia (though the biggest group of tourists are Israelis). Also through this channel, an economic downturn in Ukraine and Russia will have unpleasant consequences for Georgia.
Effects on capital flows
According to the National Bank of Georgia, in 2013 a total of 801 mln USD was flowing in from Russia (see Graph 3). Ukraine contributed 45 mln USD to the money inflows, still significant for an economy as small as Georgia’s. An economic downturn in Russia and Ukraine would hit many Georgian citizens, often pensioners and elderly people, who depend on remittances of their children and other family members sent from these countries. This may aggravate a trend that already exists: in January 2014, money inflows decreased by 4% from Russia and by 5% from Ukraine (compared to January 2013).
Long-run economic consequences
Most of the economic dynamics Georgia experienced since 2003 was “catch up growth”. A country permeated by corruption, with a dysfunctional police and judicial system, without protection of property rights and contract enforcement, will grow almost automatically when the government restarts to fulfill its basic functions. Yet once this phase of returning to normal economic circumstances is over (Georgia probably is already in this situation), high growth rates can hardly be achieved without a strong export orientation of the economy, in particular when an economy is as small as Georgia’s. Most economists concerned with Georgia are therefore struggling to identify economic sectors where Georgia is in a good position to develop export potential. The National Competitiveness Report for Georgia, written in 2013 by the ISET Policy Institute on behalf of USAID, therefore extensively discusses the question what Georgia can deliver to the world. Though not related to export in a classical sense, the report points out that one of the advantages Georgia has is its geographical location, providing for possibilities to transform Georgia into a logistics hub.
There are three main routes to transport goods from Europe to the Central Asian countries (e.g. from Hamburg to Taraz in Kazakhstan). One route goes via the Baltic ports of Klaipeda or Riga, and then through Ukraine and Russia, and another route goes overland through Ukraine. A third one, the so called Caucasian Transit Corridor, has the Georgian port city of Poti and Turkey as its Western connection points, then goes through Georgia, Azerbaijan, and the Caspian Sea, and further east it splits up into a Kazakhstan and a Turkmenistan branch.
According to the Almaty based company Comprehensive Logistics Solutions, the fastest and cheapest route is the one through the Baltic ports. The transport from Hamburg to Taraz takes around 33 days and costs 6,220 USD per standard container. The overland transport via Ukraine takes around 34 days and costs 7,474 USD. Finally, transport through the CTC currently takes the longest time, namely around 40 days, and costs 6,896 USD.
Unlike many other economic activities, competition for transportation is more or less a zero-sum game played by nations. If transport through Ukraine and Russia will be restrained due to closed borders and political and economic instability, the total transport volume will not change substantially. Rather, instead of going through the northern routes, the goods will flow through the CTC. A similar development could be observed when the embargo against Iran was tightened and shipping goods through Iranian ports became increasingly difficult for Armenia and Azerbaijan. As a result, Azerbaijan, traditionally importing through Iran and exporting through Poti, now facilitates both its imports and exports through Poti.
This is a great chance for Georgia if it wants to become serious about transforming into a logistics hub. In our policy recommendations, we will speak about how to utilize on this opportunity.
Policy recommendations
Georgia can do little to bolster the short-run effects that are transmitted through the trade and capital flow channels. Political decision makers should be aware of problems that might arise for particularly vulnerable groups in the population, like pensioners who lose income in case remittances from Russia and Ukraine run dry, and help out with social support if necessary.
Regarding the long-run impact, Georgia should use this opportunity for gaining ground in the competition with northern transit routes. The Caucasus Transit Corridor can become much faster and cheaper if (a) a deepwater port and modern port facilities with warehouses will be built in Poti, (b) the road and train infrastructure will be improved, and (c) it will be easier to bring cargo over the Caspian Sea. Regarding the latter point, it would be important to assist Azerbaijan in improving the port management at Baku (in particular reducing corruption), and in reforming the monopolistic Azerbaijani State Caspian Sea Shipping Company.
Azerbaijan invests 775 mln USD into the Georgian part of the Baku-Tbilisi-Kars railway, proving their serious interest to upgrade CTC. Given this impressive commitment of Azerbaijan, Georgia should not stand back.
Conclusion
The crisis in Ukraine yields short-run risks and long-run opportunities for the Georgian economy. While there is little that can be done about the risks, the opportunities call for courageous steps to improve the Caucasus Transit Corridor. If the countries that hold stakes in the CTC are now further reducing the cost of transportation and make the route faster and more customer-friendly, the CTC may establish itself as the main trading route connecting Europe and Central Asia. Once critical investments have taken place, CTC’s advantage could be sustained beyond the current crisis. It is a competitive route that simply needs upgrading, which can happen now as a fallout of the conflict between Ukraine and Russia.
References
- Leading GDP Indicators for Georgia, The ISET Policy Institute, February 2014, http://www.iset-pi.ge/index.php?article_id=711
- The National Competitiveness Report for Georgia, The ISET Policy Institute, 2013, http://www.iset-pi.ge/index.php?article_id=713
- World Economic Outlook, The International Monetary Fund, October 2013, http://www.imf.org/external/pubs/ft/weo/2013/02/
The relationship between education and labor market opportunities: the case of Ukraine
Author: Hanna Vakhitova, KSE and Tom Coupe, KSE
This brief is based on a research project that analyses the extent to which the educational system in Ukraine contributes to better local employment opportunities, hence diminishing the outflows. According to the results, additional year of education increases the chance of finding a job by 2-3%. However, the effect of education on wages is small, especially when compared to other transition countries (1-5% wage premium for a year of education). In addition, while in 8 out of 10 countries education has zero or positive impact on the probability of starting a business, this impact is negative and significant in Ukraine. *)