Smart cities: are they a smart idea?

Reading time: 7 minutes

Article written in partnership with Nova Tech Club.

In the European Union’s point of view, a smart city goes beyond the use of digital technologies for better resource use and less emissions. It means smarter urban transport networks, upgraded water supply and waste disposal facilities, as well as more efficient ways to light and heat buildings. It also means a more interactive and responsive city administration, safer public spaces and striving to meet the needs of an aging population.

SDG 11 of the UN 2030 Goals looks at these solutions as ways to achieve more inclusive, safe, resilient, and sustainable human settlements. For example, their 2022 report highlights that 99% of the world´s urban population breathes polluted air, and municipal solid waste has collection and management problems that need to be tackled immediately (only 82% of this waste is collected and only 55% is managed in controlled facilities). In line with this, smart cities emerge as a possible approach to deal with these issues.

In short, smart cities are designed to achieve a sustainable organization as a society. It incites discussions between urban planners, city councils and even technology giants so as to enhance the population´s lives. Nonetheless, opposing views bring forth a sense of distrust related to the actual smartness of an actual implementation of the concept of smart cities.

Portugal’s Smart Cities initiatives

Unbeknownst to many, Portugal has a vast number of initiatives with the aim of creating or developing smart cities by easing collaborations between municipalities
SMART PORTUGAL has been promoting the ‘smartification’ of Portuguese cities through various events, namely Smart Cities Tour and the “Cimeira dos Autarcas”, in an effort to increase national and international collaboration, but crucially, to let the public in on the innovations already in development. In collaboration with “Associação Nacional de Municípios Portugueses”, NOVA Cidade – Urban Analytics Lab, the organization behind SMART PORTUGAL, has implemented an annual activity plan to accelerate smart city innovation in the country, having also created simple and clear guidelines and standards, paving the way for Portugal to become a global leader in the field.

Portugal Smart City, under the SMART PORTUGAL program, tries to bring cities and companies together to connect innovators and implementors. Gatherings and fairs, such as the SMARTCITY Expo World Congress, allow businesses, academics, and legislators to come together and find partners for pioneering projects. Some initiatives have already broken ground and are producing palpable results. Rener Living Lab, or RPCI, formed in 2009, is a national smart city network that now accounts for more than 120 municipalities with certified smart projects, distinguishing their quality and workability, and increasing their international projection. 

SMARTCITY Expo World Congress

In more practical terms, a number of Portuguese cities have been recognized as being in the forefront of positive change. 2020 saw Lisbon crowned European Green Capital following efforts to use residual waters to feed the city’s parks and an affordable public transport pass that allows citizens to cheaply travel between the cities and surrounding 18 boroughs. Valongo has been distinguished with the European Green Leaf award in 2022 as a result from an effort to increase city energy efficiency and create urban farms. Guimarães has also been classified as one of “100 Smart Cities” by the European Commission through its efforts in river shore quality with the construction of “Ecovias”, as well as a bet in a circular economy with the programme RRRCICLO, among others. 

The European Approach on Smart Cities

On a European scale, there have been in the past few years many examples of city implementations and EU initiatives. Take Copenhagen for a great urban design example: approximately 43% of all commutes are conducted by bikeVienna´s Citizens´ Solar Power Plant project must also be highlighted since it was very successful in engaging its citizens and energy companies to promote solar power energy. In Barcelona for example, the REC (Real Economy Currency) is introduced as a local social currency, which allows transactions in a community between individuals, institutions and businesses that accept it. This project fosters small businesses that are struggling to survive in digital times and in big cities.

The European Union has been very avant-garde when it comes to respecting the historical roots of cities and advocating for their sustainable future. EU Missions are a new way to bring concrete solutions to some of our greatest challenges. They have ambitious goals and hope to deliver tangible results, with the Climate-Neutral and Smart Citiesinitiative being one of the most ambitious missions that aims to deliver 100 climate-neutral and smart cities by 2030, ensuring that these cities will act as experimentation and innovation hubs to enable all European cities to follow suit by 2050. Funding will cover a wide range of subjects such as urban planning and design for climate-neutral cities, sustainable urban mobility, positive and clean energy districts, with a lot of projects already being implemented. Furthermore, personal data protection is also a pertinent subject to the EU´s concerns. Project Decode, for instance, provides tools that put individuals in control of whether they choose to keep their personal information private or share it for the public good.

Smart Cities across the World

While smart city projects exist and thrive worldwide, some cities have gone above and beyond in creating a smart ecosystem for its residents, improving sustainability and efficiency. Masdar, in the UAE, was what can perhaps be called the most significant green project in the Arab World. This pilot project aimed at housing 50 thousand people in an urban landscape with no automobiles and making sole use of renewable energy. While the initiative has seen its fair amount of success, it’s important to point out that it is still significantly smaller than first planned, with some critics also pointing out that the focus should be on greenifying existing cities and not creating new ones. 

Songdo, South Korea followed a similar path to Masdar, though at a more significant scale. With innovative urban waste collecting systems, trash is transported using a network of pipes eliminating the need for trucks. With the concept of Ubiquitous City – where citizens can access services anywhere, anytime, from home banking and teleconferencing to intelligent transport systems and remote sensing – becoming an area of intense focus, Songdo has also incorporated some innovations in line with it. CCTV and sensors, for example, have become essential for the Korean city to control traffic flows and quickly respond and adapt when accidents occur, informing locals of exact public transport timetables and occupancy. 

Songdo Control centre (CCTV and sensors control)

Nevertheless, this city concept has its flaws. Korean residents have complained that, maybe due to its intent as an international city, Songdo doesn’t feel quite authentic. Foreigners, in contrast, have a sense of deja vu as the replicas of the boulevards of Paris, pocket parks of Charleston, Central Park in New York City, or the canals in Venice make the city seem like a patchwork of other urban areas.  Another big area of complaint has been what many thought would be the city’s main selling point: technology. Constant surveillance and monitoring have left many with a feeling of unease, with concerns for privacy and intellectual property growing. Similar smart projects have been halted entirely after encountering significant pushback from citizens not wanting to share so much information. Alphabet’s Sidewalk Labs Toronto project, with “(…) mass timber housing, heated and illuminated sidewalks, public Wi-Fi, and, of course, a host of cameras and other sensors to monitor traffic and street life(…)” was one of said projects, facing heavy criticism from the get-go.

Conclusion

Smart Cities are now more popular than ever. Meeting UN’s SDG 11, this project has even gained momentum in small countries such as Portugal, with EU legislation adapting to ease the rise of smarter and more sustainable practices. Worldwide examples, from the Middle East to South East Asia, offer a glimpse of more radical initiatives, along with its benefits and shortcomings. While services may be improved upon, privacy is an ever-growing concern, and if legislators, investors, and urban planners want to go ahead with these new forms of design and construction, the safeguard of private information needs to be on top of everyone’s mind.  


Sources: Energy Cities Hubs, DECODE project, European Commission, The Global Goals, NOVA Cidade Urban Analytics Lab, Forum das Cidades, Jornal de Negócios, The Verge, Bloomberg

Manuel Rocha

Manuel Lourenço

(guest writer NTC)

Is GDP a good measure of a country’s development?

Reading time: 6 minutes

Gross Domestic Product (GDP) is the standard measure for the value added generated by the production of goods and services in an economy over a specific time period – the total value of all goods and services produced in a country minus the value of the goods and services required for their production. But is it enough to measure a country’s development?  

This measure can be divided by the country’s population, returning the amount of money that each individual gets in a particular country, known as GDP per capita, which provides a much better determination of living standards as compared to GDP alone, allowing comparisons between countries of different sizes. 

GDP per capita per country in 2020

Since it is simpler to quantify the production of commodities and services rather than measure other welfare accomplishments using a multi-dimensional index, GDP is the most commonly used indicator to gauge economic growth. However, it is not a sufficient indicator of development on its own. Development is a multifaceted idea, with not only an economic component but also a social and environmental one that should just as well be taken into account.

Economist view 

Thomas Piketty, renown professor and French economist, states that future economic downturns brought on by technological or populational reductions would most likely result in enormous concentrations of economic and political power as the richest individuals amass more capital (or wealth). In line with this, he claims that inequality is rooted in ideology and politics and argues that his beliefs explain the fundamental flaws in capitalism’s market system. Given this, Piketty says it cannot be expected that sustainable development would always result from an increasing GDP.

Thomas Piketty argues against using GDP growth as synonym for development

Other economists have also weighed in on the topic, as exemplified by Nobel Prize-winning economist Simon Kuznets´s view that GDP should not be used as a gauge for “the welfare of a nation”.

Moreover, Nancy Folbre, professor of economics at the University of Massachusetts Amherst, once said that “Time that you spend taking care of your kids is very valuable time, but it doesn’t get factored into GDP.” According to Folbre, about half of the time people spend working, on average, is unpaid work which is not accounted for in GDP. She thus states that the GDP measurement will only be able to provide an estimation of a portion of the overall economic picture that is regularly taken into account.

Alternate measures

As an alternative to GDP per capita, the United Nations Development Programme (UNDP), The World Bank, and the non-profit Social Progress Imperative, launched, respectively, the Human Development Index (HDI), the Human Capital Index (HCI) and the Social Progressive Index (SPI).

The Human Development Index

The Human Development Index (HDI), an indicator of the multi-dimensional aspect of development, incorporates the conventional approach to measuring growth in the economy while accounting as well for education and health, which are key factors in determining how developed a society is. This is determined by taking the geometric mean of the GDP per capita, the life expectancy at birth, and the average of the mean and expected school years.

Human Development Index per country in 2017

The Human Capital Index

The Human Capital Index (HCI) ranks 157 countries on a set of four health and education indicators. The main advantage is that, unlike GDP, it emphasizes output rather than input. For instance, the weighting of educational quality in relation to school years is better when it is determined by actual adjusted learning. The main criticism of the HCI is that it might overvalue the tangible advantages of health and education, commoditizing people instead of valuing their contributions to society and inherent status as fundamental human rights. However, it is anticipated that the HCI will be used primarily by developing countries to quantify the outcomes of social sector investments, leading to increased expenses on human development, which the World Bank claims has been overlooked in favor of infrastructure and institutional development.

The Social Progress Index

The SPI is arguably a more accurate metric for assessing societal development. Created by the non-profit organization Social Progress Imperative, the SPI is one of the main achievements of the Stiglitz-Sen-Fitoussi Commission on the Measurement of Economic Performance and Social Progress. The Commission’s main goal was to look into alternative metrics to the one-dimensional GDP measure for measuring a nation’s wealth and social development. Despite only having data for the past four years, this indicator is still relatively new and covers more than 130 nations.  

The SPI is an improvement over the HDI because it increases the number of composite indicators from four to fifty-four in a variety of areas, including fundamental human needs, well-being pillars, and advancement opportunities. This index can therefore synthesize the most important factors that influence development. As an illustration, it considers the availability of water and sanitation, education and health outcomes, public crime, housing, information access, and communication, among others. Naturally, the SPI’s primary flaw is that it is comparatively complicated and impractical to use in informing policy decisions.

Social Progress Index per country in 2021

Weakness of GDP – Examples

The biggest weaknesses that are attributed to GDP target the fact that it solely considers average income, hence failing to reflect how most people actually live or who benefits from economic expansion. Many crucial elements that affect well-being are not included in how much consumable material things people produce, such as a healthy environment and good physical condition. 

For instance, an oil spill can raise GDP because it costs money to clean it up, but it also has a negative impact on the environment. Besides this, GDP includes the value of the sugar-sweetened beverages we sell without deducting the health issues they cause. In a similar fashion, it counts the number of cars we make without accounting for the amount of emissions they produce, and adds up the cost of developing new cities without deducting the cost of replacing vital forests.

Moreover, there is concrete evidence, such as the data from The Office for National Statistics (ONS), which reports that the UK’s annual GDP growth averaged just under 2% from 2009 to 2019. In contrast, over that ten-year period, income inequality rose by 2.2%, and in the year ending March 2020, the ONS’s annual average ratings of life satisfaction, happiness and anxiety all declined. Despite GDP growth, the trend of rising income inequality shows that not everyone is benefiting from it or living a prosperous life, proving that GDP is a poor indicator of citizens’ well-being.

Conclusion

Although GDP is a rough indicator of a society’s standard of living, it does not directly consider leisure, health, education, environment, changes in income inequality, advances in technology or the importance that society may place on different types of output, be that positive or negative.

The World´s Happiest Countries (2015)

All aspects of the standards of living, whether they are purchased and sold on the open market or not, have an impact on people’s happiness, and that is why GDP is not a perfect measure for a country’s development. Given this, the HDI, the HCI and particularly the SPI, have come to try to solve some of the concerns raised over GDP´s accuracy, adding important information on a country´s development levels.


Sources: International Growth Centre, Scientific American, Our World in Data

Mariana Gomes

Joana Brás

Leonor Cunha

Urban Master Plan: Cities Built from Scratch

Reading Time: 7 minutes

Introduction

From Paris to Rome, Alexandria to Benghazi, and Tokyo to Beijing, cities tend to be perceived as old creations, with hundreds if not thousands of years of age, that grew naturally throughout the course of history. Usually built with military purposes in mind, or taking advantage of natural geographical conditions, a significant number of today’s major metropolises have followed this pattern, showing their evolution through their centuries-old buildings, monuments, and traditions. 

Nevertheless, a not so insignificant number of recent populational centers have been built following detailed masterplans with years of planning and significant financial commitment.  While some have arguably successfully transitioned into well-established cities, others may have been left abandoned as a reminder that a successful urban center is much more than just a cluster of buildings. These initiatives can broadly be categorized depending on the issue they intended to address – Politics, Environment and Economic development – and the motive for their success or failure most often results from how relevant this issue was and how well it was tackled.

Politics

One of the most common reasonings for planning a new city has to do with the need for the creation of a neutral capital city that has a more central position to the country’s population distribution. 

Washington DC, established in 1790 by the Residence Act, had its location defined as a compromise between the opposing forces of the expanding United States at the time. In what came to be known as the Compromise of 1790, Alexander Hamilton, aligned with the northerner states, agreed to move the capital to the states of Maryland and Virginia in an exchange with Thomas Jefferson, aligned with the southerner states. The deal paved the way for the establishment of the 100 square mile (256 square kilometers) new capital. While having its size diminished (following the decision of the area formerly belonging to Virginia to rejoin the state), with a population greater than 700 thousand, a strong economy, and continuing to serve its original purpose of capital of the United States, Washington DC is certainly a success story. 

Washington’s original design

Other planned capital cities that stood the test of times include Canberra – created in the middle of the two largest and rivaling Australian cities of Sydney and Melbourne – and Brasilia – in a push to develop Brazil’s interior region.

However, Egypt’s successive failed attempts to move its capital away from Cairo – to Nasr city, New Cairo, and even the 10th of Ramadan, a city shaped and sized similarly to the original DC – show that there is room to fail. The country is now planning yet another capital move, to the still-in-construction “New Administrative Capital”. Situated roughly 45km east of Cairo, this new multi-billion-dollar project has officially been initiated to alleviate congestion in the current capital, currently boasting a population of 22 million people. Nevertheless, some have pointed out that the significant potential financial gains by the military and construction industries may be the true motive behind the move. By planning to increase the distance between government buildings and the masses at Cairo, the move has also given rise to allegations that, in truth, this is an attempt by President Al-Sisi to hold on to power, attempting to prevent a repetition of the events of the Arab Spring. 

Environment 

protection from environmental issues in an existing important city, or simply a need to experiment with innovative sustainable ideas, have also fueled the creation of new urban areas across the globe.

Jakarta, Southeast Asia´s most populous city, is currently facing severe flooding problems, with the coastal city sinking as much as 25cm per year in some districts. This is far from a recent issue, however, going way back and beginning with the arrival of the Dutch in the XVII century. As an attempt to emulate the urban planning found in the Netherlands at the time, the existing settlements were torn down and a new one was built with a heavy use of canals. These canals, however, due to lack of upkeep, eventually clogged up and turned out to be a channel of disease-spreading, forcing the Europeans to relocate further south, where a system of pipes to distribute clean water was introduced. These pipes, nevertheless, took decades to reach the canal region, and even today don’t reach more than half of the city’s population. This particular circumstance left many with no option but to pump water directly from subterranean aquifers, ultimately sinking the city in the process

Furthermore, the city has consistently ranked among the worst polluted areas worldwide. Heavy traffic due to high population density and low public transport use, as well as the existence of several coal fired plants in the city outskirts, have all contributed for the city to register “unhealthy air” days for more than half of the 2019 calendar year. A move to the brand-new Nusantara, more than 1000km away from Jakarta, powered by renewable energies, plans to fix most of these issues.

Map of Batavia (current Jakarta)

Across the continent, in the Middle East, the EAU have been building the city of Masdaraimed to be the first zero emissions city, in an effort to test the limits of urban sustainability. The green efforts started right in the construction phase, through the reuse and recycling of waste material. The city is also striving to be completely powered by renewable energy. The urban space was designed with buildings close together, providing protection from the desert heath. Additionally, The Masdar City wind tower, a modern spin on the traditional Arabic “barjeet”, is expected to reduce electricity needs throughout the whole city.  

While effectively an experiment in urban sustainability, having Siemens and the International Renewable Energy Agency relocating their Middle East headquarters to the city are certainly important anchors for Masdar to achieve its goals of housing 50 thousand people and succeed as not just a test-trial, but as an overall functioning city. 

Economics 

Oftentimes, the urban landscape is shaped purely by economic efforts to develop a region and guarantee better living standards

One such case is Malaysia’s Cyberjaya, aiming to emulate Silicon Valley’s success. Launched in 1997, the city was envisioned as “a space for startups to create and innovate; for students to pursue dreams of changing lives with technology; for tech giants to make new discoveries; for small businesses to conquer the world one market at a time”. Flexible repayment schemes and competitive rental rates were among the vast number of incentives offered to attract talent. More than 20 years onwards, having attracted the likes of Shell, DHL, Dell and HP, and with a population of 85 thousand people, some have called the initiative a success. Critics, however, point out the dominance of low-level employment, with the city’s residents mostly employed in call centers for global firms as opposed to the promised innovative and highly specialized tech outlook.

On another spectrum, pure financial motives can lead to vanity projects, as exemplified by Azerbaijan’s Khazar Islands. As the brainchild of billionaire Ibrahim Ibrahimov, it was projected to include luxury apartments and villas, a yacht club, a Formula One track, and even what was to be the tallest building in the world – the Azerbaijan Tower. In a country where GDP per capita is barely above the 5000 US$ mark, with a project such as this one accounting for a price tag of 100 billion US$, many have criticized the endeavor due to its lack of meaningful contribution for the development of the country. The lavish undertaking ultimately failed due to lack of funding, with construction coming to a stop in 2015 just four years after work had begun, a striking reminder that an ambitious plan and piles of cash may not be enough to support the creation of a brand-new metropolis.

Conclusion 

Moving away from the historical trends of organic development, there has been a growing trend of planning cities from scratch, with politics, the environment and economics coming up as the top motivators for such blueprints. These fresh creations, with varying degrees of success, come to show that planned projects of huge scale are in fact possible. Nevertheless, in many occasions, pure financial availability or political power are not sufficient to sustain them. Besides needing to address a real issue, these projects, like any urban area, need to create the right set of conditions to attract people and businesses, in order to successfully make the transition from just an idealized setting into an actual living space.  


Sources: Washington DC, Britannica, Ellis, Joseph J. (2000). “Founding Brothers: The Revolutionary Generation”, Statista, Davison, G. (2001). “Canberra” From “The Oxford Companion to Australian History”. In Oxford University Press., Cairo Observer, Aljazeera, Channel News Asia, Centre for Research on Energy and Clean Air, Arab News, Masdar, Diário de Notícias, World Bank, IDEAS (Institute for Democracy and Economic Affairs), Wired, Plaza London, Harris-Brandts, Suzanne; Gogishvili, David. (2018). “Architectural rumors: unrealized megaprojects in Baku, Azerbaijan and their politico-economic uses. In Eurasian Geography and Economics, Armenian Weekly, Azer News.

Manuel Rocha

Leonor Cunha

B-Corporations: The New Tomorrow

Reading time: 5 minutes

Consumer Activism Nowadays 

In a progressively connected world with access to more information and data than ever before, consumer demands are becoming ever greater and more ambitious. Consumers’ choices are based on their tastes and values and, therefore, it is expected that they would want to buy and use companies’ products that are aligned with said values. With companies operating on an increasingly public stage, we have witnessed the advent of mainstream media and social platforms that accelerate consumer movements, which in turn has culminated in the concept of Consumer Activism – consisting, in simple terms, on taking an action in favor of a company (BUYcott) or against it (BOYcott).  

Consumers´ Impact 

The wake of a more demanding and aware consumer, with a larger desire to see their consumption habits produce as little environmental impact in the world as possible (or at least in some way improve upon it), has led companies on an ongoing journey towards sustainability and corporate social responsibility. This change in the outlook of firms has as main goals not only the satisfaction of customer needs and demands but also an improvement on customer loyalty, that is translated through repeated purchases, word of mouth, increased revenues, and a more positive reputation

This change of path is being clearly reflected in the actions that many large corporations have taken recently, in the form of pledges and initiatives towards a more sustainable world. For example, Google is aiming to become carbon free by 2030, being already carbon neutral since 2007. The firm announced in October 2022 that it has restored over 15 acres of native habitats with oak and willows in Silicon Valley. Amazon has also pledged to become net-zero carbon by 2040. In 2019, it created the Right Now Climate Fund, a $100 million fund to restore and preserve forests, wetlands and grasslands globally, currently supporting programs in Italy, Germany, Brazil and the United States. In 2021, 85% renewable energy was used in its operations, with the plan being to exclusively rely on this type of energy by 2025.

Questionable Decisions

However, this road towards sustainability has not always been smooth, with clients becoming increasingly more skeptical of the claims enterprises make in this department to justify some of their controversial actions. An example of this was seen when in 2020, with the announcement of the iPhone 12, Apple made the decision to no longer provide its customers with a wall charger or earphones included in the box when purchasing an iPhone, claiming that it was it could “fit up to 70% more products on a shipping pallet, removing carbon emissions in their global logistics chain” due to a “smaller and lighter iPhone box” leading to lower shipping emissions and the reduction of e-waste. Nevertheless, the removal of these items created knock-on effects as clients needed to buy a separate charger as older chargers are less efficient and are susceptible to breaking. Consequently, this requires more packaging to be utilized and even more fossil fuels to be burnt due to its shipping. This decision led Apple to be able to reduce costs and diversify its revenue streams by increasing the likelihood of selling either its chargers or earphones to its clients and, ultimately, improving its financials, with environmental concerns ultimately pushed to the background and essentially used as an excuse.   

B-Corporations

Nowadays, it is possible to characterize a company in as many ways as the consumer sees fit: “sustainable”, “environmentally friendly”, “polluting”, among many others. A point has been reached in which, with the aim of standardizing the classifications given to companies and ensuring clients of the truthfulness of the claims said enterprises make, the creation of non-profit organizations becomes essential. 

With this motto in mind, the B-Corp Movement was built to change the economic system and to “Make Business a Force For Good”. This movement has its starting point on the slogan “There’s no Planet B”, in a way to create an international network of organizations that all together will lead economic systems towards change in order to support an inclusiveequitable, and regenerative economy. Moreover, the B-Corp movement is responsible for analyzing and certifying companies according to rigorous standards to ensure that B-Corps and Non-B-Corps jointly plan a more resilient future. 

B-Corp Movement

Therefore, certified B-Corporations are companies verified by B Lab to meet high standards of social and environmental performance, transparency, and accountability.

ECOALF’s Case

The number of B-corporations has grown immensely over the past few years around the world, currently accounting for 5,981 firms spanning 158 industries. A successful case is ECOALF – combination of “ECOLOGY” and “ALFRED” – a Spanish company, founded in 2009, operating in the apparel industry, manufacturing its products with fabrics made from 100% recycledplastic, cotton, wood, coffee, fishnet, and tires. In 2018, the company obtained the B-Corporation certification, recognizing its core business as being an environmentally responsible business while still seeking to make profit at the same time. In this same year, ECOALF was already a case of success with a product portfolio with high quality garments, footwear, and accessories featuring in various global media outlets (i.e., The economist; Bloomberg; etc.), essentially becoming an icon of the sustainable fashion industry. 

ECOALF´s logo

All this success is greatly due to several and heavy investments that the company made in research and development to create a unique and unparalleled production process and input fabrics, as well as cooperating with well-known brands and personalities, creating alliances and partnerships to increase brand awareness.

Conclusion

All in all, ECOALF is a success story among many others that is able to showcase that, with help and having the right direction and goals in mind, there is a growing market directed towards sustainability yet to be fully explored by companies, challenging them to attract investors and entrepreneurs through impact investments for an area that benefits everyone.

However, at the end of the day, there is still a long path to forge before a fully sustainable, greener, and circular economy is reached. Nevertheless, efforts by various entities, authorities and companies trying to channel the effort of society towards that end are remarkable and seem promising.


Sources: Forbes, Google, Amazon, The Verge, B Lab, Pasquini, Martina; Kolk, Berend van der. (2019). “Because There Is No Planet B: El Caso de ECOALF”. In IE Publishing

João Correia

Hannah Ribeiro

Bad Behaviour: a Behavioral Economics take on Corruption

Reading time: 7 minutes

What is corruption? Is it taking a bribe? Smuggling millions to a tax haven? Or skipping the line on a public service because the office clerk is your neighbor’s nephew’s kid? “Corruption is what those dirty bankers, politicians, and the referee who conducted the last match my club lost at are guilty of, that’s what it is!” – any of us will enragedly say. “I”- we confidently add – “would never do it”.

But is this really so straightforward? The prevalence of corruption in a given society can be hard to measure, both due to its secretive nature and differences in how it is defined. We rely essentially on what law enforcement records (a biased source if the authorities happen to be corrupt themselves) and on perception surveys, both of the general public and of experts on the matter (which may also be skewed if people have different ideas about what constitutes a corrupt act). But statistical issues aside, the truth is that corruption appears to be a worldwide phenomenon, and a relatively stable one at that. According to Transparency International, the Corruption Perception Index (measured in a 0-100 scale, 100 being the least corrupt), in 2021, was lower than 50 for two thirds of the world. 131 countries “made no significant progress against corruption over the last decade”. Portugal ranked 32nd least corrupt out of 180 countries, at 62 points.

Corruption Perception Index, 2021

So, it seems we don’t really think of ourselves as corrupt, but we perceive corruption around us. Is it external factors and mechanisms that influence a person’s choice to engage in the kind of behavior that we call corruption? We know what an economist’s point of view would be on the matter: each choice is dependent on incentives and preferences (of the agent making that choice), and on a rational cost-benefit analysis of the situation. And, like with any decision process, Behavioral Economics also has something to add on the subject: the agent’s choice is conditioned by cognitive biases and bounded rationality. This means that people could be guided (or should we say, nudged?) towards a different behavior pattern. Let us now explore these ideas.

Why are we corrupt?

If there’s one thing we should remember when dealing with corruption is that it is harmful, undoubtedly undermining the potential for human and economic development. Corruption can be like a disease, spreading all over and destroying a system from within. Corruption, in fact, corrupts.

Perception of Corruption by Institution, 2017

At its core, an act of corruption is a break of trust. An agent is trusted with some power or task and is expected to act according to the best interest of those who deposited that trust in him/her. We can think of it as a contract being made between society and the agentThe agent is trusted by society as a whole to act in society’s best interest. It is easy to see where the problem starts. Two things, together, provide an incentive for the contract to be breached: a conflict of interest between the agent and society, and asymmetry of information. In other words, there is a risk of corrupt behavior if the agent stands to gain something from breaking the contract and can do it without being caught. 

Given this, the economic reasoning for acts of corruption is simple enough – an agent will rationally assess the costs and benefits of breaking ethical rules and do it if the benefit exceeds the cost. So, a public official who is offered a 5-million-euro bribe will simply perform a cost-benefit analysis (5 million in my pocket vs some time in jail if caught) and decide accordingly.

Following this line of reasoning, anticorruption policies should focus on increasing transparency and accountability, decreasing asymmetry of information (making it harder to act without our actions becoming public knowledge), and better aligning the agent’s and society’s interests, so that not breaking the contract becomes in the agent’s best interest.

In a simple, perfectly rational world, this would be all. For better or for worse, that is hardly the picture the world we live in paints.  

A Behavioral Economics Approach

A person’s actions are hardly ever determined solely based on costs and benefits. Any agent is affected by mental shortcuts, reciprocity, context, fast-thinking and social norms. People rarely go about their lives carefully deliberating every choice. Indeed, many decisions are automatic. For example, a public official may hire his friend’s nephew for his office without necessarily thinking about ethical rules or the public good. Nonetheless, this is a textbook case of nepotism.

Another important mechanism is reciprocity – the “you scratch my back, I’ll scratch yours” mentality. This could be seen either in a large-scale favor exchange between two powerful people or in something as small as a driver bribing a police officer to avoid getting a speeding ticket.

Bribery Payers Index, 2011

But it is not all about automaticity in decision-making and ethical blind spots. Although no one likes to see themselves as the bad guy, even when agents are aware of the dubious nature of their actions they may still choose to engage in corrupt acts. Why?

The moral “weight” of corruption is lighter when the agent feels somehow distanced from the action. Experimental evidence shows that having an intermediary as a third party who arranges the bribe (someone to “do the dirty work”, so to speak) significantly increases the percentage of people willing to offer and accept bribes! Thus, bribery is perceived as a common transaction.

Another problem is our tendency to consider only obvious and immediate results (fast thinking). Corruption presents an obvious, palpable gain, and is often thought of as a “victimless crime”. It is easier to break a rule if no one seems to be worse-off by it. However, according to the United Nations, corruption, bribery, theft, and tax evasion cost at least US$1.26 trillion each year to developing countries, money that essentially could have been implemented in much-needed social and economic policies.

Finally, let us not forget that as human beings we tend to abide by the perceived behavior of the majority. As a matter of fact, we are easily influenced by our peers, with the underlying mentality of “If everyone is doing it, what’s the big deal if I do it too?” being heavily present in many of the choices we make, corruption decisions not excluded.

What can we do about it?

So, does this mean that nothing can be done about corruption, that it should be accepted as a feature of humanity, and that we may as well have to learn to live with it? Far from that! Truth is, by identifying the cognitive biases and mental shortcuts that stir people towards corruption, we are also learning which buttons to push to get them away from it.

A simple way to surpass the ethical blind spot problem in our decision-making is to simply reiterate the ethical principles a person is already trying to live by. An experiment was conducted where the participants were asked to solve a math test, while being given incentives to cheat. However, some were asked to write down the Ten Commandments they remembered beforehand. Those participants cheated much less than the control group, having been reminded beforehand of the existence of a moral code (not even necessarily their own). As it turns out, awareness matters

In turn, this opens the door for new anticorruption initiatives. Businessmen could, for example, be asked to sign a document stating their awareness of the organization’s ethical code. Politicians may be required to publicly state all their possible conflicts of interest before taking office. 

5th Pillar, an Indian NGO, created a Zero Rupee note with a pledge against corruption, to be given to officials who ask for a bribe

Moreover, nudges that communicate the ethical standards people have for each other may be helpful, again, as a reminder of the trust society puts in each individual, which may work in itself as an incentive for citizens to live up to that trust.

We know these small nudges are hardly the definitive solution to end corruption once and for all – transparency and accountability measures are still the ones most likely to have a noteworthy impact. However, the nudges we discussed may be just what is needed to curb the small corrupt tendencies in a society in which more sizable schemes are tolerated or even go unnoticed. We may never live in a fully honest world, but awareness of what makes it dishonest is crucial to make sure it never becomes fully, and irreversibly, corrupt.


Sources: Muramatsu, Roberta; Bianchi, Ana Maria. (2021). “The big picture of corruption: Five lessons from Behavioral Economics”. In Journal of Behavioral Economics for Policy. Vol. 5, Special Issue 3: Roots and Branches, pp. 55-62., Muramatsu, Roberta; Bianchi, Ana Maria. (2021). “Behavioral Economics of Corruption and Its Implications”. In Brazilian Journal of Political Economy. Vol. 41 (1)., Ma, Qingguo; Yan Min. (2018). “Psychological, Behavioral, and Economic Perspectives on Corruption”. In International Journal of Psychology and Psychoanalysis., Statista, Our World in Data, India Times.

Mariana Gomes

Leonor Cunha

Joana Brás

The growing cracks on the Chinese economy – Is the country heading for a collapse?

Reading time: 6 minutes

The People’s Republic of China, with its 1.4 billion population, is the most populous nation on earth, boasting the 2ndhighest economy in nominal terms.  Being considered one of the largest economic miracles in recent history, – with sustained growth levels above 5% since 1990 up until 2020 – millions of Chinese people have been lifted out of poverty following the country’s embrace of international trade and investment. Nevertheless, ever since the beginning of the COVID outbreaks, China has struggled to maintain its historic impressive figures. While its zero Covid policy has certainly pressed the brakes on economic activity, through mandatory lockdowns and business shutdowns, a series of deeper and more serious problems – from a faulting real estate market to government overspending – have recently started to showcase the cracks on the country´s economy.

A brief recent history of China’s economy

For a large part of recent history, particularly between the 14th and 18th century, China is believed to have been responsible for one of the largest shares of economic activity worldwide. While it experienced a heavy economic decline in the subsequent period, it was during the 1970s that its share on global output began to rise once again. Following the end of the Chinese Cultural Revolution, the Four Modernizations were adopted to kick start the nation´s production sectors, with a special focus on agriculture, industry, defense, and science. This program heavily moved away from the “iron rice bowl”, or “work for life”, previously in place, and embraced a meritocratic system where workers and managers were rewarded if they hit or exceeded their targets. 

In the 1980s, China implemented Special Economic Zones in its southeastern region, creating pockets free to trade internationally and receive direct foreign investment without Beijing’s direct control, in a bid to increase productivity and prosperity. Fast forward to 2001 and the World Trade Organization welcomed China as its newest member, allowing the nation to access the world’s markets and more favorable rates, marking it one of the most consequential events of the 21st century. The country has since become responsible for almost one third of manufacturing output, surpassing Japan in 2010 to become the 2nd largest economy, and is now home to 12 of the 100 largest firms by market capitalization, more than any country apart from the United States.

Economic Troubles: The Real Estate indebtedness

China, unlike the vast majority of the developed world, imposes restrictions on capital outflows. Coupled with a very volatile stock market, Chinese consumers tend to favor housing as the main form of investment, visible by its high ownership rates (around 90% compared to the US’s 65%) and the increasing purchase of 2nd and 3rd homes. Home ownership also seems to be a consequence of China’s demographic imbalance, with men vastly outnumbering women, as it seemingly becomes a pre-requisite for marriage. This leaves the country heavily vulnerable to this market, with some estimating that it is responsible for as much as 30% of the GDP when accounting to related activities. In addition, as China’s population begins to decline, the increase in prices that supports this investment can only go on for so long. 

The year of 2008 marked one of the worst financial crises on record, shooting the world’s collective output growth into negative territory for the first time in at least 50 years. This tumble, however, did not seem to reach China as its output still recorded an impressive growth rate of 9%, due, in no small part, to the introduction of a massive stimulus package keeping interest rates low and borrowing cheap. This allowed companies like Evergrande – the largest (by sales) real estate developer in China as of 2016 – to use its lands as collateral to borrow money, to then be used to acquire more land (and so on), which, while allowing for massive growth, meant that debt levels also grew. With growing levels of non-financial debt by 2020, and with the goal of mitigating the risk, the Communist Party introduced the “three red lines” aimed at limiting the ease with which developers could accumulate debt. Going back to Evergrande´s case, while it announced plans to reduce its debt, issues resurfaced in 2021. With 1,5 million homes partially paid for, and an estimated 300 billion US dollars in liabilities, homebuyers began to protest in Guangzhou in a showing of the climbing proportion of these difficulties, and the company finally defaulted in December of 2021. With other major property developers having defaulted as well, namely HNA and Sunac, the sector is at risk of severely fragilizing one of the world’s largest economies.

Evergrande real estate group

Economic Troubles: The Railway headache

The massive fiscal stimulus of 2008 was not restricted to the real estate sector. In fact, to keep the economy going, China embarked on heavy infrastructure spending, of which the railway was a big part. Infrastructure spending is one of the most efficient ways to boost an economy; not only does it employ a large number of people, but it produces something that continues to offer value long before the project is concluded. Notwithstanding, this railway investment soon began to give the nation headaches. Not only was it plagued with corruption accusations, but by not technically being managed by the government but by public companies that could more easily borrow capital, a construction spree gave way to a bigger problem. As the most profitable lines between the largest populational centers had been constructed, the growth of the system was based on connecting smaller cities further apart, meaning profit was harder to come by. The troubles began to intensify in 2015 when operating profits didn’t even cover interest payments and have since worsened. As tracks began to age, requiring more frequent maintenance, and with ticket prices rigidity blocking a revenue increase, the issues began to pile up. Ultimately, COVID dealt the final blow, plummeting ridership numbers and effectively making every line unprofitable, leaving a system with estimated levels of debt close to a trillion dollars.

Railway evolution in China 2008-2020

Caveats and final thoughts

China has been recently facing a large number of economic headwinds, from a potential housing market collapse and overspending on infrastructure to more recent extensive lockdowns, trade wars, heat waves and floods. But to answer the question raised – “Is the country heading for a collapse?” – most probably not. Economies naturally go through booms and busts, and the latter, while painful, offer a way to remove the least efficient and productive elements in the market, and in the case of China, a chance to move away towards more sustainable sectors such as tourism or R&D. Furthermore, with a tight grip on the economy and the largest pile of foreign reserves of any country, China has a cushion against any possible bank runs and the ability to guarantee currency stability. The country has, for now, also dodged the climbing inflation levels seen in much of the rest of the world, and the central bank has even lowered interest rates. With the mentioned problems being addressed, and some more, including the lockdowns and environment irregularities set to dissipate in the short to medium run, China may no longer be able to support the huge growth levels it once did, but its economy is surely far from collapsing, with continuous stability and development guaranteeing its position as one of the largest and most robust on earth.  


Sources: World Bank, Trading Economics, Business Insider, Oxford, Boden, Statista, Bloomber, Market Cap, Financial Times, Reuters, New York Times, CNBC, Eurasian Times, FRED

Manuel Rocha

Patagonia: The owners that don’t own

Reading Time: 6 minutes

The debate about the true role of a firm in society is a longstanding and recurring one. Since Milton Friedman publishing, in 1970, that managers bear the responsibility of conducting the business according to shareholders’ wants and requirements – generally achieved by maximizing shareholder value – the concept has evolved over time. Now, a broader definition comes into play, with many perceiving a company as being an entity that has a responsibility towards the environment and the society it is inserted in, which has subsequently led to the creation and adoption of concepts such as Corporate Social Responsibility (CSR). This extension of a firm’s responsibility towards other stakeholders and society more broadly has paved the way for companies that test the limits of the definition of for-profits, such as the American clothing company Patagonia, Inc.   

Patagonia’s Foundation  

Yvon Chouinard, an American rock climber since his 14 years old, founded Patagonia, Inc in 1973, having always shown an entrepreneurial spirit throughout his earlier life: from making his own rock-climbing tools to teaching himself blacksmithing, and later moving on to selling rock-climbing tools and clothing.   

Patagonia has made significant strides in distinguishing itself from other brands, offering a wide range of products in its portfolio, from food to hiking clothing, while assuring a commitment to the environment and its causes. This fact stems a lot from its founder Chouinard, who has always sought to do more for the planet, pledging the word “activism” as a motto for the brand. 

  

Consumer Activism Nowadays 

In an increasingly connected world with access to more information and data than ever before, consumer demands are becoming ever greater and more ambitious. Consumers’ choices are based on their tastes and values and, therefore, they want to buy and use companies’ products that are aligned with their values. Nowadays, companies operate on an increasingly public stage, with mainstream media and social platforms accelerating consumer movements, leading to Consumer Activism, consisting of taking an action for (BUYcott) or against a company (BOYcott).  

Indeed, according to a study conducted by Weber Shandwick, 60% of US and UK consumers have reported some form of activism, as of August 2017. Here, any activism action can range from something simple like stop watching a show that a brand is advertised on or recommending a brand to friends, to larger scale events such as taking part in demonstrations or protests against or in support of a brand. 

Differentiating through environmental concerns  

Patagonia has been able to create a competitive advantage in comparison to its peers by continuously differentiating itself in its environmental sustainability efforts, which are entirely aligned with the previously mentioned consumer activism. Patagonia’s stance and values can be comprehended through several examples of marketing practices which actually tend to be considered by many “anti-marketing” campaigns. A well-known example of this marketing strategy is Patagonia´s “Don’t Buy This Jacket” campaign that was launched in the middle of the Great Recession in which they demonstrated the impact that the production of one of their best-selling garments had on the environment.  

Also, Patagonia is known for putting in practice the messages it preaches as it promotes used wear on its website, through the platform Worn Wear. There, customers can find second-hand items that have been cleaned and/or repaired, contradicting the fast-fashion trend and consumerism issue, which tends to be associated with higher profits for companies due to increased sales, but also a higher impact on the environment. Moreover, currently, Patagonia is pledging 1% of sales to the environment’s preservation and restoration. 

The results of these actions and core values have not only led Patagonia to grow its business and brand recognition but also to occupy a distinct position in the customer’s portfolio, as it has become intrinsically associated with environmental consciousness, especially targeting consumers that are preoccupied with sustainability and climate change. 

Patagonia’s Activism 

In September 2022, Chouinard donated his family’s ownership of the company, with a US$ 3 billion estimated valuation, stating that “Earth is now our only shareholder”.   

Back then, before the donation, various paths presented themselves for Patagonia´s future, including those most referred to as “common route” ones, such as the possibility of selling the company to the highest bidder, and then proceeding with the donation of that amount, or quoting the firm in the stock market through an IPO. However, after analyzing the various available options on the table, Chouinard reached the conclusion that neither would be totally aligned with Patagonia´s (and his own) values, as made clear in his open letter posted on Patagonia’s official website. There, he states that they “ couldn’t be sure a new owner would maintain [their] values or keep [their] team of people around the world employed” or how quoting the firm in the stock market through an IPO wouldn´t also work because “even public companies with good intentions are under too much pressure to create short-term gain at the expense of long-term vitality and responsibility”, considering that the company managers would become myopic and succumb to short-run pressures to provide a return on the new stockholders’ investment.  

So, faced with this situation, Chouinard and his team decided to tailor make a solution that would go in line with what the company represents, creating checks and balances to ensure that its mission and values remain unharmed. This solution, in which Patagonia will continue to operate as a private enterprise but the Chouinard family will not continue to have control over it was put into operation in two stages.   

To begin with, back in August 2022, the family transferred irreversibly 2% of Patagonia to a newly created entity called Patagonia Purpose Trust. This trust will continue to be supervised by members of the family and their advisors and has voting stock, having as its main goal safeguarding that Patagonia remains independent and its average profits of US$ 100 million would be used to combat climate change and protect the forests. Due to the portion of voting stock, the family will have to pay US$ 17.5 million in taxes for the donation. Secondly, this September, the family proceeded to donate the remaining 98% to Holdfast Collective, a non-governmental organization that will use the profits to fight climate change, with this part of the donation consisting of non-voting stock.   

Conclusion 

The decision to donate the shares has an incalculable social impact attached to Patagonia, stakeholders and society. With this action, Patagonia, Inc. opens a new possibility in the markets, creating the potential of donating shares for the benefit of society instead of the unbridled pursuit of profits. 

One thing is certain, this decision will be a subject of debate and study in the future in order to analyze if this solution will be the one that is able to yield the best results in the trade-off between cash flow maximization, including profit maximization towards these charitable causes, and ensuring that Patagonia remains the B-Corp corporation that continues true to its values for which their clients have come recognize it for.  


Sources: Financial Times, Observador, Público, McKinsey, “Battle of the Wallets: The Changing Landscape of Consumer Activism” (2018), in Weber Shandwick

João Correia

Hannah Ribeiro

Let’s play: Behavioral Game Theory

Reading time: 8 minutes

Picture this scenario: you’ve been locked in an interrogation room for hours, and the police finally layed out their cards on the table. They know you’re guilty and have your partner in crime in the other room. The police needs a confession, and the one to provide it can walk out freely, leaving the other to serve a long sentence in jail. If you both confess, you both go to jail, but for a shorter time. However, if neither does, both go to prision but receive an even shorter sentence. It is up to you to decide. What do you do? 

Would you confess or keep quiet?

If you’ve ever been formally introduced to game theory, you know that its answer is that both of you should run to the officers and tell them the truth. This is the economic prediction as it’s the rational thing to do. But would you do it? Most people’s answer is the economists’ favorite response to (almost) every question: it depends. Who is the other person? How much do you trust them? Is it your friend or your 3rd-floor neighbor? Is it your mother? And how long are those sentences? You may hold your ground facing 6 months, but what if you’re looking at 25 years? Are you even truly guilty? Are you willing to trade away your integrity for a shorter sentence?

The conventional game theory looks at the game elements (what are the actions and the payoffs?) for the answer. Behavioral game theory tries to look at all the other questions.

Game Theory vs Behavioral Game Theory

But let’s back away for a second: what even is game theory, and how exactly is behavioral game theory different?

Well, game theory’s main objective is to predict behavior through a systematic, mathematical approach. No need to close the article, this is only the “scary” version of the definition. Thankfully, we are not in a Microeconomics class, so we can use a much more pleasant definition: game theory analyses games. Of course, by “games”, we do not mean football or basketball (although that would be fun) but are instead referring to any interaction between people (the players), where their behavior (actions) determines what they get out of the game (their payoffs). Any economic, political, or social interaction can be rewritten as a game, and thus seen through the lens of game theory. The interrogation room situation we started with is a classic example. It is frequently used as an introduction to the subject. The idea is that each player will look at their possible strategies (if my partner confesses, I can confess/not confess…) and where those strategies will land them (if we both confess, we go to jail…), deciding then what the optimal course of action will be. It’s like playing chess – if, for example, your opponent moves the bishop to B7, and you take your knight to C4, you’re doomed; if instead you move your queen to D6, checkmate! The optimal course of action: queen to D6. 

Game Theory tries to find the optimal course of action

Game theory does a wonderful job predicting the outcome of such games, but the jump to real life can be tricky. Notice that the optimal course of action was left undefined. “Optimal” depends on what each person wants out of the game, on their preferences. The usual assumption is that players are self-interested to the extreme and completely rational, caring only about getting the best possible outcome for themselves, regardless of what happens to the other player.

This is exactly where behavioral game theory steps into the picture. It has a practical approach to the games, rather than theoretical. Game theory uses logic and mathematics to find out what a rational and self-interested player would do in a game, and then states what people will choose rationally in such a situation. Behavioral Game Theory takes the opposite path. It asks actual people to play the game and observes their behavior. Such experiments make it possible to see how different preferences affect human behavior (how things like altruism or fairness influence people’s decisions) and how that differs from the theoretical predictions. Why would this matter? Well, these preferences can be incorporated in the models, making them closer to the reality we know, and therefore allowing for better predictions of behavior.

Playing the Game

Ultimate Game

The Ultimatum game is an early example of behavioral game theory’s experiments. In this game, one player is given a certain amount of money (say, 10€) and asked to split it with the other player in whatever way they want. The second player then decides whether to accept the offer or to reject it, in which case neither player gets anything.

Conventional game theory’s prediction is that the first player should offer as little as possible (1 cent out of 10€) and pocket the rest, since the second one would have no reason to reject it – after all, 1 cent is better than nothing, right?

The Ultimatum Game consists of proposing a split that the other player accepts or not

Now, picture yourself playing the game. Do you accept such a low offer? Can you think of anyone who would? Do you think this is the right prediction? If not, congratulations! You are a wonderful forecaster of human behavior. In fact, when this experiment was first conducted, the average offer was equivalent to 3.5 €, and offers below 5€ were more likely to be rejected the further down they went. The experiment has been replicated over the years, with high and low amounts to be split, with consistent results.

The preference uncovered here is known as negative reciprocity – being willing to “pay a price” (give up some amount) to punish unfair or inappropriate behavior in others. Upon seeing what they considered as an unfair split (a much too low offer from the first player), most players decided they would rather gain nothing than allow the other person to, in their eyes, treat them unjustly.

Dictator Game

The dictator game is a slight modification of the Ultimatum game: here, the second player has no power to reject the offer. The first player (the dictator) proposes a split of the initial sum, and that is exactly what each one takes home, even if it means that the second player gets nothing at all. Of course, the theoretical prediction is exactly that – the “dictator” will choose to keep the entire 10€ to themselves and won’t offer anything to the second player.

But when the experiment was conducted this was not what happened at all! In fact, around two thirds of people chose to offer the equivalent of 1€ to 5€, keeping the rest.

Those unlikely nice “dictators” were displaying what is known as an altruistic preference. Someone with altruistic preferences is more content with an outcome if the well-being of others increases. That means they play not only with their own outcomes in mind, but also that of others involved in the game, and prefer situations where other people are also benefitted. This behavior can be found in everyday interactions too: when people donate to charities or help someone in need, they are manifesting altruistic preferences.

Altruistic behavior is found in everyday interactions

Gift Exchange Game

Now, for a break from ultimatums and offers, let’s look at the gift-exchange game. This is simply a game made to mimic the interaction between an employer and an employee. First, the “employer” offers the “employee” some amount of money (a “wage”). Then, the employee must perform a task to earn it. Now, what the task is in particular is not so important (it can be anything at all, as long as it is not completely effortless), what is really at stake is how much effort the “employee” puts into completing it.

Game theory’s prediction here is that being offered any amount at all the “employee” would work as little as possible (self-interested as they are). But do you think that happens? Chances are, you’ve had to do some job in your life, and put some amount of effort into it. Do you always do the least possible required? As it turns out, most people didn’t. They responded to more generous “wages” by working harder. They were, in fact, displaying negative reciprocity’s nicer counterpart: positive reciprocity, the willingness to reward generous actions. People presenting this preference respond positively to actions that benefit them: they go an extra mile when they feel that someone has acted in their best interest.

People often choose to work harder if they feel they were offered a generous wage

Notice that neither of these experiments challenge the validity of standard game theory. Its systematic and logic process is still sound – games do have optimal courses of action. Its cornerstone assumptions are the ones that fail: behavioral game theory shows that people in general are not merely self-interested, so what is “optimal” varies according to their preferences.  

Behavioral game theory is a great example of what the branch of behavioral economics can do for the economic science. It is not a replacement of traditional game theory, but a way to expand on and improve it: behavior models can arise from practice, not from theory. After all, there’s no better way to figure out someone’s behavior than to observe it.


Sources: American Economic Association, BehavioralEconomics.com, Blackwell Handbook of Judgment and Decision Making, Behavioural Economics: Introduction to Behavioral Game Theory and Game Experiments.

Constança Almeida

Mariana Gomes

Leonor Cunha

The death of Roe v. Wade and what it means for abortion in the United States

Reading time: 6 minutes

The decision is not official yet but according to an unprecedented leak of the Supreme Court of the United States, the 1973 decision on the Roe v. Wade judicial case that gave the right to women in America to have an abortion is about to be overturned. The overturn of the decision on this landmark case does not mean women will lose the right to have an abortion everywhere; it instead means that the Federal States will be free to set their abortion laws. However, it is estimated that half the women of reproductive-age live in US states that will further restrict or outright ban abortions if the Roe v. Wade decision is overturned. 

Figure 1: Pro-life protesters in front of the Supreme Court Building in Washington DC.
Picture from New York Times.

Before we dive into the consequences of what the end of the Roe v. Wade decision will mean for the United States, let us quickly look at the history of abortion in America and explain what exactly was the Roe v. Wade decision.

History of abortion in the United States

For much of American history, states did not regulate abortion before something called “fetal quickening”, the point in the pregnancy where the movement of the fetus can be detected in the womb. Well into the 19th century, abortions were widely practiced in the United States. Before the American Civil later in the second half of the 19th century, nearly 100% of women’s reproductive healthcare was done by women (midwives). This meant popular ethics regarding abortion and common law was grounded in the female experience of their own bodies.

The creation of the American Medical Association (AMA) in 1847 started the push to outlaw abortion. The AMA argued that abortion was immoral and that “quickening” was irrelevant because, after fertilization, a new human life would take place if no one interrupted its development. Many also argued that abortions lead to a declining birthrate of white protestant women, meaning it had to be outlawed to prevent the “browning” of America. The AMA was eventually successful, and by 1880, every US state had introduced criminal abortion laws.

Despite the criminalization of abortion, women continued to have them. It is estimated that there were up to 1.2 million abortions each year after 1880. Practitioners did their work behind closed doors or in private homes. The procedure became unsafe, and it was responsible for one-fifth of all recorded maternal deaths in 1930.

Attitudes towards abortion began to shift in the 1960s as people started to push for the liberalization of reproductive laws. In 1970, Hawaii, New York, Alaska, and Washington State were the first states to legalize abortion. However, the biggest shock came in January 1973 when the Supreme Court announced its landmark decision in Roe v. Wade, in which it decided that the restrictive states’ regulations on abortion were unconstitutional.

Figure 2: Protest for the legalization of abortion before Roe v. Wade.
Picture from Time Magazine.

Roe v. Wade explained

The Roe v. Wade Supreme Court case started when a young Texan woman named “Jane Roe” (her real name was Norma McCorvey)  wanted to have an abortion in 1969. At the time, abortion was illegal in Texas except to save the woman’s life. Since Jane Roe was not a risk, she tried unsuccessfully to get an illegal abortion and was approached by two attorneys that wanted to challenge anti-abortion laws. On the other side was the district attorney of Dallas, Henry Wade,  who enforced the Texas abortion law and was later sued by Roe. The case eventually went all the way up to the Supreme Court, and on January the 22nd of 1973, the court struck down the Texas’ law. The court ruled that a woman’s right to privacy in the 14th amendment superseded a state’s right to ban abortion. Abortion was now legal everywhere in the United States.

Figure 3: Norma McCorvey, also known as Jane Roe.
Picture from New Yorker.

What happened after 1973?

In 1973, the majority of the population supported the legalization of abortion; however, the Supreme Court Decision fueled a movement against abortion within the more religious and conservative electorate. While initially anti-abortion Americans were evenly divided between the two main parties, the Democrats and the Republicans, over the years, the Republican party adopted the overturning of the Roe v. Wade decision as one of its biggest political platforms. Their plan was simple, the party had to nominate enough conservative judges to the Supreme Court until there was a majority to overturn the 1973’s decision. Although it was simple, the plan was not easy to accomplish; Judges on the Supreme Court serve for life, and replacements have to be nominated by the President and approved by the Senate. However, between 2016 and 2020, the Republicans managed to nominate three conservative judges to the Supreme Court (out of a total of nine), which added to the three conservative judges already on the court. Although it is not yet officially known, it is expected that at least five of these six conservative judges have decided to overturn Roe v. Wade on their decision in the current case on abortion “Dobbs v Jackson Women’s Health Organization”.

The consequences of overruling Roe v. Wade

If the rumors are true and the Supreme Court decision is indeed overruled, it is expected that over half the states will prohibit all or virtually all abortions. Twelve states have “trigger laws” that have been designed to automatically ban abortion in the event Roe v. Wade is overruled. The likelihood of Congress passing federal laws to protect abortion access is very low since it would the support of ten Republican Senators to pass. Wealthier women will be able to travel to states where abortion is legal but poor women and teenagers will likely face the choice between an unsafe abortion or an unwanted child. The New York Times estimates that 34 million women of reproductive age live in states at risk of losing access to abortion.

Figure 4: Picture from Fortune

Conclusion

It is impossible to predict the social and political consequences the overruling of the 1973 landmark decision will have on America. According to recent polls, a large majority of the US population does not support overturning Roe v. Wade, and with the midterms around the corner, the Republican party is expected to face some backlash from voters for its role in ending the nationwide right of abortion. However, it is unlikely that the backlash will be large enough for Democrats to gain ten Senate seats from the Republicans needed to establish a Federal law on abortion. So if Roe v. Wade is indeed overruled, the landscape of abortion rights in America will change for decades to come.

Figure 5: Large shift in the polls after the leak from the Supreme Court came out.
Picture from PBS News Hour.

Sources: PBS Newshour, New York Times, Times, Fortune, Washington Post, Healthline, CNN, The Guardian, The New Yorker

André Rodrigues

Maria Mendes Silva

João Sande e Castro

Natalie Enzelmüller

Can the Euro survive its own diversity?

Reading time: 7 minutes

In general, there are many pros and cons to the creation of a monetary union. The creation of a single currency among many countries allows for the lowering of cross-country transaction costs, increases certainty for investment while, because of this, stimulating trade and job creation. On the other hand, it means that the union’s monetary authority has the responsibility of implementing a “one size fits all” monetary policy, which may create problems if the members of the monetary union have very different economies or if the shocks which monetary policy is meant to address occur asymmetrically across countries.

The creation of the Euro

An Economic and Monetary Union has been an objective of the European Union from as early on as the late ’60s/early 70s, with the first steps towards the coordination of the member states´ monetary policies having been taken with the launch of the EMS (European Monetary System) in 1979. However, it wasn´t until a decade later that the idea of a single currency union really started to take shape, upon the presentation in the “Delors Report” of a three-stage plan to be applied in the ’90s to prepare the union for what would come to be known as the euro area, ultimately culminating in the creation of a single currency and the European Central Bank.

The idea of a common currency first and foremost appeared as an important symbol of political and social integration in Europe, tied with the notion that an increased integration of the European member states would reduce the risk of war and crisis on the continent. Then, on an economic viewpoint, a common monetary policy centered around price stability was viewed as an important propulsor of economic stability. Likewise, those who supported the creation of the euro believed it would allow for an increase in market integration, consequently reducing transportation costs and improving market efficiency and price transparency.

In 1991, the Maastricht Treaty effectively cemented the transformation of the European Community into a full Economic and Monetary Union, laying down the rules for qualification for membership of the Monetary Union. Indeed, a set of macroeconomic criteria that member states had to respect to be able to participate in the EMU and adopt what would be the new common currency (the euro) was defined. These became commonly known as the four convergence criteria, focusing on price stability, public finances, exchange-rate stability, and long-term interest rates. In terms of price stability, a member state´s inflation rate (measured by the HCPI) should not exceed more than 1.5% of the best three performing member states. As for public finances, to ensure that they are sustainable, government deficit should not surpass 3% of the GDP and public debt should be below 60% of the GDP (although some accommodation here was made at the time of the start of the Union, as many member states did not fulfil these specific public finance requirements). Moreover, regarding long-term interest rates, to guarantee the durability of the convergence, they must not be more than 2 percentage points above that of the three member states with the lowest interest rates. Finally, when it comes to ensuring exchange-rate stability, applicants to the common union should have been participating in the ERM II (Exchange Rate Mechanism) for at least two years prior to the adoption of the common currency without severely devaluing against the euro.

The need for this set of requirements to be put in place prior to the entrance into the monetary union came as a necessary part of subjecting such a wide range of countries – still very much asymmetrical in some regards – to a single monetary policy but allowing them to keep their national fiscal policies. Indeed, some countries with better performing public finances and benefiting from low interest rates (such as Germany) expressed their concerns of how being associated with other not as well performing countries could negatively impact their economy, hence their pressure for a system of rules to be establish so as to guarantee as much as possible convergence among the member states. This type of concern is also reflected in the way much of EU´s monetary policy is designed, particularly in their rigidity and zealous focus on price stability, as is greatly patented in the way the European Central Bank was created in 1998 very much influenced by the German model, mirroring their Bundesbank.

Ultimately, the euro was officially launched on January 1st, 1999, with the exchange rates of the participating currencies being irrevocably fixed, replacing its precursor (the “ecu”, a transitory currency composed of a basket of European currencies to serve as a basis for fixing the exchange rates of the member states) at 1:1 value. In this initial phase the euro only served in the form of cashless payments, having been put effectively in circulation in 2002.

Figure 1 – Euro Statue in Frankfurt.

The beginning of the Monetary Union and the Financial Crisis

The process of increasing openness of financial markets alongside the adoption of the Euro’s convergence criteria by countries wishing to join the monetary union meant that during the 1990s there was a convergence of interest rates across countries, with some countries like Portugal, Greece and Italy enjoying interest rates much lower than before.

During the early 2000’s, thanks in part to the abundant credit and to the advances in economic openness, some countries (such as Portugal, Greece, and Italy) began accumulating large current account deficits. These may simply be the sign of a healthy economy, if they are being used to finance future growth so that, later, the current account deficit can be matched by a current account surplus. However, if this is not the case, then current account deficits will accumulate, increasing a country’s external debt until, at some point, external credit stops being granted. While they were accumulating large stocks of external debt, some of these countries were also amassing very significant amounts of public debt.

In 2008, as the financial crisis began, and its contagion spread across financial markets there was a global flight to safety. Because of this, Portugal, Spain, Greece, Italy, and Ireland, which, to differing extents, fell into the trends described above, began facing international credit crunches and the yields on their sovereign bonds began increasing, with Portugal and Greece being the most affected. This sovereign debt crisis then led to troubles in the banking sectors of these countries which can then worsen the sovereign debt crisis, creating the “Doom Loop”.

The Greek banking and debt crisis was challenging and, in 2012, the possibility of a default was looming. Certain actions, like currency devaluation to decrease current account deficits or drastic increases in liquidity to Greek banks to avoid the banking system from grinding to a halt, were not available to Greece, since monetary policy was delegated to the ECB. Because of the deteriorating situation and due to the possibility of Greece exiting the Euro, the ECB decided to do “whatever it takes” to save the Euro and announced a program for purchasing debt of the distressed countries on the secondary markets, reassuring markets and bringing down the debt spreads, and, potentially, saving the Euro.

Who to favor?

The ECB mandate has one and clear focus, price stability. To ensure so, the central bank applies all the tools that it has available. However, the effects from such tools impact multiple variables which have important macro-economic consequences for Eurozone countries, such as FX rates or credit spreads. This, coupled with an asymmetric impact on the moves of these variables for different countries creates a huge dilemma for the policy makers behind ECB’s decisions: Who to favor?

Does the question sound simple to you? Let’s think of today’s scenario for policy makers at the ECB. In Europe we are experiencing broad record inflation, way above the defined target for price stability, meanwhile credit spreads are already very high compared to historical values, mainly for peripherals countries, and the Euro FX is at some of its lowest levels, especially against the dollar. Should the central bank tighten financial conditions to fight inflation and strengthen the Euro but, at the same time, risking a default/crisis in peripherals countries? Or should it do the exact opposite?

What would you do, who do you favor?

Graph 1 – 10Y BTP-Bund Bond Spread [Italy – German], in bps.
Source: Borsa Italiana
Graph 2 – Euro area annual inflation rate, in %.
Source: Eurostat

Conclusion

The introduction of the euro brought many benefits for the countries involved but it is still a long way from its counterparty in the United States of America. These problems arise mainly due to the structural differences between all the economies in the Eurozone. The “one size fits all” is still one of the biggest challenges going forward with some steps already made into solving it.


Sources: European Commission

Diogo Almeida

João Baptista

Sara Robalo

Inês Lindoso

João Correia