Author: Awareness News

Towards a better tomorrow: The role of behavioral economics in mental health

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Part II: A small nudge for man, a giant leap for mental health

Where do nudges come in?

We’ve talked about how widespread mental health struggles are and how important it is to pay them proper attention. It is particularly necessary to drive people into taking better care of their mental health, as well as end the stigma around mental issues. We will now examine the idea of how behavioral economics can be used for these purposes, namely through nudges.

Nudges influence choices and behavior patterns, which can be critical to mental health

But what, exactly, is a nudge? According to Thaler and Sunstein, the creators of the concept, “a nudge is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives”. 

Many of those struggling with their mental health do not seek the needed treatment. This may be related with the implications of these issues in decision making, which help-seeking models and interventions often fail to account for.

This is exactly where Behavioral Economics comes in. It can help reduce engagement in behavior patterns that represent risk factors in the development of mental problems and provide the necessary and adequate frameworks for incentivizing help-seeking by individuals affected by them. Nudges can, therefore, be a complementary and cost-effective strategy for suicide and mental health issues prevention, both by tackling risk factors and by effectively encouraging individuals to seek help.

But what would such interventions look like? Well, it is necessary to understand that both the field of behavioral economics and our current generalized concern with mental health issues are still very recent. Therefore, they are still in the earliest stages of development, and studies can be costly and hard to implement, so no widespread intervention has taken place so far. Still, there is no lack of initiatives out there!

There are some initiatives to support mental health

Dodging the risks

Ashleigh Woodend, Vera Schölmerich, and Semiha Denktaş, in their article “Nudges to Prevent Behavioral Risk Factors Associated With Major Depressive Disorder”, look at what they call risk factors, behavioral patterns which can increase the odds of developing mental health problems (or worsen existing ones), and propose a series of nudges that could be effective in tackling them. Those negative behaviors include low physical activity, since exercising has a strong positive impact on mental well-being (it releases dopamine and improves self-esteem), inappropriate stress coping mechanisms, as stress can be a powerful trigger of mental health problems, and inadequate maintenance of social ties, as healthy social interaction promotes psychological wellbeing (if the pandemic has taught us anything, is that social isolation and mental health are no friends!).

Nudges play on our cognitive biases. One such bias is our tendency to prioritize immediate reward over gains in the distant future. For example, how many times have you allowed yourself “just five more minutes” of sleep in the morning, even though you knew it would make you late for class? What if we could use this effect to make us want to get up and increase our physical activity? This can be done through a nudge called temptation bundling, combining an unpleasant activity with a pleasant one.

For example, regarding the improvement of physical activity habits, you can try to fuse that unappealing morning run with something you will enjoy, like hanging out with friends or listening to some music. Or, if a trip to the gym seems like a punishment, throw in an episode of your favorite show. These are easy ways to nudge yourself into building an active lifestyle pattern.

Listening to your favorite songs while running can be a way to nudge yourself into improving your physical activity habits

Another great way to nudge behavior is by fiddling with the phrasing of the message we are trying to convey. It has been shown that positive framed messages are more effective than negative framed messages in promoting prevention behavior. So, putting up a sign with a phrase like “If you meditate, you reduce your risk of mental health problems” is more likely to get people some quiet time with their own thoughts than one phrase saying “If you don’t meditate, your risk of depression will increase”.

When you go to the beach, do you wear sunscreen? And what if, on your way there, you notice a sign pointing out that without protection, you are likely to get sunburnt within half an hour of direct sunlight? Will you wear it now? Most people will. This is called a salience nudge, where some characteristic of a choice is brought to your immediate attention, “put under the spotlight”, in order to influence that same choice. And this can be done to decrease the risk of mental issues too. By simply highlighting, in the workplace, for example, that a significant number of people have engaged in stress management training, it is possible that more people will try it as well, learning appropriate coping mechanisms to keep their minds as healthy as possible through the difficulties that may come their way.  

You are probably familiar with the feeling of meaning to do something but never actually getting to do it. Sure, you will read that book you’ve been wanting to read, catch up on your microeconomics study before the midterm gets too close, or finally try to chat a bit with your coworkers and get to know them better. Eventually. The thing is, we are not very good at moving away from the status quo, i.e., we tend to stick to the current state of things and struggle to find the drive to make changes in our lives and environment. So, if we want to stimulate social interaction, it is better, for example, to create an environment where that is the default option rather than something towards which people have to make an effort. 

An open office can increase employers’ wellbeing

It may be possible, for example, to change the typical workspace from a place with little to no person-to-person engagement into one of sociability, by adopting an open office model. We would be nudging individuals towards building connections by creating an opt-out system of personal interaction instead of an opt-in – a system requiring extra effort to dodge interaction instead of one that requires extra effort to engage in interaction.

So, there are ways to nudge people away from behavior patterns that can be detrimental to mental health. But what can nudges do to help those already in mental distress?

Seeking Help

In these situations, the best to do is to guide someone towards seeking proper help. Instagram, for example, takes preventive measures when users search for a #depression hashtag: a screen pops up redirecting them to help (this will also work with other mental health related searches, like self-harm). A similar thing happens when someone googles depression or suicide. These are small nudges towards the right path, tailored to those who need them the most.

 If you search for depression on Instagram, the suggestion of help shows up
If you google “suicide”, the following message appears:
Help Available
talk to someone today
SOS Friendly Voice 213 544 545

The last mechanism we want to outline is a particularly clever and effective one (as obvious as it may seem): social norms (1). Humans have a strong tendency to follow the norm, tied to a desire for others’ approval. Social norms have been proven to predict behavior patterns. Hence, it is plausible that greater awareness of others recurring to mental health treatment and overall shows of acceptance of those who do it can increase help-seeking behavior. Normalizing the problem can help solve it.

(1) If you want to know more about this topic check out our article about peer pressure influence click here.

Authors’ Note:

We are writing this article as more of an exploration of the power of behavior economics in the prevention of mental health issues and in easing the burden of those already struggling with it than as simply an awareness-raiser to the problem. However, awareness for these issues can never be too much, both in society in general and in the academic community, so we lay out some of the signs to watch out for and urge you to reach out to your friends/loved ones if you notice these signs in them, and to seek help if you feel them yourself.

Sources: Mental Health Foundation, World Population Review, World Health Organization, WebMD, Yale University, PubMed Central, Medium, SAGE Journals, IZA World of Labor, Recovery Ways.

Leonor Cunha

Mariana Gomes

Constança Almeida

Towards a better tomorrow: The role of behavioral economics in mental health

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Reading time: 7 minutes

Part I: The silent pandemic

If we start being honest about our pain, our anger, and our shortcomings instead of pretending they don’t exist, then maybe we’ll leave the world a better place than we found it.

– Russell Wilson

Did you know that 12% of the world’s population (a little more than 1 in every 10 people) live with a mental health disorder? And that Portugal is the 2nd European country with the highest prevalence of mental problems? Sadly, there’s no way of knowing by how much the real numbers surpass these (and there is no question that they do, particularly in less developed countries). 

Mental health is as important as physical health. It comprises all dimensions of our well-being besides the physical one, namely the emotional, psychological, and social ones. Remember that our body and mind are more than two sides of the same coin. They’re like cogwheels on a machine, making each other spin. And if one of the wheels isn’t turning, you can’t expect the engine to keep running. Your body is a complex system, and if one element is damaged, the others will inevitably suffer too.

A mental health problem is a health problem. Just like a heart issue can limit your ability to exert physical effort, it affects how you think, feel and act. This way, this can interfere with how you cope with stressful situations, with your relationships, and (most significantly for Behavioural Economics) your choice-making process.

It should be noted that, contrary to general belief, not all mental health problems are situational, i.e., not all stem from traumatic events or abusive pasts. There are many factors that can make someone predisposed to these kinds of issues, including genetics, brain chemistry, or personality. At the end of the day, mental illness does not choose age, gender, or class. No one is immune, but there are some precautions everyone can take. Learn how to deal with the stress in your life. Take time for yourself. Do something you love (like reading the latest NAC article). Your mental health is to be taken good care of.

It is important to take time for yourself

We should also remember that we are all different, and so are our struggles. Sometimes, the same condition will manifest itself in wildly different ways between individuals. And sometimes, a behaviour that is a cause for concern in one person can be completely a healthy and normal conduct for another.

Two of the most common mental illnesses affecting people are Major Depressive Disorder (colloquially referred to as depression) and Generalized Anxiety Disorder. These mood disorders can be identified by a professional and are treatable. Depression causes feelings of sadness, hopelessness, reduced energy, and sometimes agitation and restlessness. Anxiety causes nervousness, worry, or dread. It should be noted that all these feelings are expected to occur from time to time. However, they are not expected to overwhelm you. When these negative feelings start to show up too often and take their toll on your life, that’s when there could be a cause for concern.

Economic Impact

We know mentally ill people are not at their best (they are ill, after all). Someone struggling with mental issues is, therefore, less productive than otherwise. This affects the labour force – if mental health problems are, at least, as frequent as current data shows (and we’ve already made the argument that they may be even more), then a relatively large share of the working-age population is not producing as much as they could be. Needless to say, this will hurt the economy. Depression and anxiety are estimated to cost the global economy $1 trillion per year in loss of productivity (WHO). Besides, the current solutions for these problems (therapy, drugs, among others) are costly and lengthy to apply, with patients often requiring a follow-up. This understandingly puts a heavy strain on healthcare systems, resources, and individuals.

Mental illness hurts job performance

Depression and Suicide

Depression is particularly prevailing. Around 280 million people worldwide suffer from it (the majority of which are women). Moreover, the large number of cases that goes unreported is mostly due to a general feeling of shame or lack of awareness of mental health conditions. Data usually shows higher numbers of mental diseases in developed countries. This does not, however, necessarily mean that such problems are more common in these countries, but rather that they are more readily diagnosed and reported, as developing nations often do not yet possess the resources required to properly address these illnesses.

Depression Rates by country 2022

The COVID-19 pandemic hasn’t helped: in 2020, the global prevalence of anxiety and depression increased by 25% (WHO). Young people have been particularly affected – they are disproportionally at risk of self-harming and suicidal behaviour. Worst of all, this boom in the prevalence of mental health issues was paired with severe disruption of mental health services. Although this situation had somewhat improved by the end of 2021, many of those who desperately need care are still unable to get it. Professional psychological support is not cheap or particularly easy to access in most healthcare systems, and there is still a lot of catching up to do after the major gap in services that the pandemic represented. And as if the difficulty in obtaining help was not enough, there are still people who don’t bring themselves to ask for help. It is still too common to believe that it is wrong, shameful or pointless to acknowledge our struggles and search for outside support. 

The WHO currently estimates that, by 2030, depression will be the world’s most common disease in the world. If we are not careful, the next pandemic we face may be one of mental illness.

In some cases, depression may even lead to suicide. An individual suffering from depression has a risk of suicide around 20 times higher than one without it. The statistics are beyond troubling, they are outright alarming. Over 700 000 people end their own lives every year. This is the equivalent to one suicide every 40 seconds, making suicide one of the biggest killers in the world, and it is the fourth leading cause of death in 15–29-year-olds. 

 A mental health problem gets in the way of your thought process

How does this affect how you think?

Depression doesn’t just get in the way of being happy. It causes chemical changes to happen in your brain, which can seriously impact your thought process. The condition can interrupt or reduce neurotransmitters (chemical “messengers” in the brain), such as serotonin, dopamine, and norepinephrine. These changes may either be what is causing you to be depressed or be another result of whatever triggered it. 

Depression can impair your attention and memory, altering your ability to absorb new information and make decisions.  

Decision Making

Depressed people tend to have more trouble making decisions, even trivial ones. Try putting yourself in such a person’s shoes. Imagine you’re going out to dinner with friends. You have to choose the restaurant, but which one? And there are so many tables there, where will you sit? And what will you order when the menu goes on for so many pages! All those light decisions can weigh so heavily when anxiety keeps telling you that every choice is the wrong one.

Depression frequently brings along hopelessness. People are unwilling to waste their time on plans that they believe will fail. Besides, they experience considerable anxiety when faced with the need to make a call, even the smallest decisions. This results in high levels of what economists refer to as risk-aversion (reluctancy in taking risks), leading to less information collection, idea production, and option consideration.

Fortunately, studies have shown that using specific techniques such as cognitive behavioural therapy can help depressed people make better decisions, leading to better long-term outcomes. Moreover, problem-solving treatment can train people to improve their problem-solving skills and distorted thinking patterns.

Indecisiveness can be a symptom of depression and anxiety

Executive Function

Depression may also impair your executive function, which affects your ability to process information. Executive function is often called the CEO of the brain (you are walking around with your version of a tiny Warren Buffet in your head!) because it is in charge of getting things done. Simple tasks, such as paying bills, cleaning your room, or getting out of the house, can be compromised if that CEO takes an unplanned vacation. Fortunately, the executive function can be improved with educational strategies and behavioural approaches. If you’re experiencing issues with executive function, try breaking large tasks down into smaller chunks, create to-do lists and review them frequently.

As we have seen, depression affects everyone differently, changing habits and the way people live. This translates into changes in behaviour, consumer patterns and decision-making.

There’s a reason why people say depression runs deep. It affects so much more than just your mood. Fortunately, this is a preventable evil – and Behavioural Economics (nudges, particularly) may be a part of the solution.

Sources: Mental Health Foundation, World Population Review, World Health Organization, WebMD, Yale University, PubMed Central, Medium, SAGE Journals, IZA World of Labor, Recovery Ways.

Leonor Cunha

Mariana Gomes

Constança Almeida

Far-right extremists in the Ukraine conflict

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Reading time: 5 minutes

The Russian offensive in Ukraine is posing detrimental consequences to many of its stakeholders. While media coverage has initially largely focused on the daily unfolding of the events directly related to the war, attention has increasingly been drawn to another subject for concern: individuals from around the globe with far-right ideals are leveraging the war to join militia groups that are in alignment with their political views, increasing their social and political influence. With the increase of far-right thinking and the support these political ideologies have received over the last decade across Europe and beyond, it is particularly important to be aware of the movements that are currently happening, what their consequences could be, and if, as well as how, the institutions are proceeding against them.

What is happening?

What we are currently seeing is an inflow of far-right groups into Ukraine and increased support for those that are there for positioning themselves as major protagonists on the stage of the war. Here, the Ukrainian military unit Azov, which holds a central role in an extensive global network of extremist groups, appears to be the most influential. The group was formed in 2014 out of volunteers from the ultra-nationalist Patriot of Ukraine gang and the neo-Nazi Social-National Assembly. Both of these had xenophobic and neo-Nazi ideologies which were evidenced in reports of physical assaults on migrants and people who were opposed to their views. Azov’s volunteers act as fighters in their “National Militia“ vigilante force which has its own military training bases and access to a wide array of weaponry. They are now receiving extensive transnational support which is transforming Ukraine into a hub for the global far-right-oriented minds. Azov has been attracting young men from anywhere in their global network who want to join their training units to gain in-combat fighting experience and engage in their ideology. While the FBI estimates a total of 17,000 foreign individuals to have come to Ukraine in the last six years with these motivations, the Ukrainian Foreign Minister claims another 20,000 fighters to have arrived in Ukraine since the outbreak of the war with a large proportion of them joining for related purposes.

Veterans of the Azov Batallion at a demonstration in 2020 demanding President Zelenskyjs’ resignation.

Ever since the group was born out of an interest to defend Ukraine against Russia, it has been accused internationally of fostering neo-Nazi and white supremacist ideology. In 2019, voices from US congress members have called for the US State Department to classify the group as a foreign terrorist organisation for “recruiting, radicalising, and training American citizens”. Despite lawmakers noting that “the link between Azov and acts of terror in America is clear“, this has never happened. Facebook’s ban of users in support of or representing the group in 2016 was lifted the day Russia launched its invasion to allow praise for Azov concerning its contribution to defending Ukraine. This reflects the shift in perception of Azov as it is taking on a definitive role in the war against Russia.

The implications and dangers

With this overview of the situation at hand, it becomes clear that there are certain risks implicated as these far-right groups gain traction. Mainly, foreign fighters may become radicalised by groups like Azov and return home with weapons, and military and tactical combat experience. Some of the Western neo-Nazis and white nationalists that are going to fight in the war want to turn the country into an ultra-nationalist ethno-state and use it as a role model to expand their ideas across the world. Their objective is not focused on defending Ukraine but rather on spreading their own ideology. Just like in the Syrian conflict, the fragile situation Ukraine could be exploited as an opportunity for extremists to become trained for launching terrorist attacks in the West upon returning. Lessons from the past show that the West has provided military assistance that unintentionally landed in the wrong hands: In the 1980s, the US supported the Islamist guerrilla fighting the Soviets in the Soviet-Afghan War during which Afghanistan became the plotting and training ground for future radical Islamic terrorist attacks on the West. While NATO is equipping Ukraine with weapons and ammunition, there is a risk of a similar chain of events unfolding uncontrollably. It is unlikely that all of the foreign volunteers arriving in Ukraine have such political motivations, but there is clear evidence for extremists being attracted due to viewing the war as an ideal training ground to wage race or guerrilla wars back in their home countries.

International responses

Some efforts to address this problem have been launched in the countries from where fighters are coming. Germany has seen a sharp rise in neo-Nazism over the last years and the ongoing war has become a highly discussed topic on far-right channels. However, the Federal Office for the Protection of the Constitution takes the stance that while many young men are active on related social media channels, very few have left for Ukraine. Yet, passports of extremists who have been identified with intentions to fight in the war are being seized to prevent them from leaving the country. The UK has implemented measures to position Counter-terrorism police at major airports for identity checks and to question travellers about their reasons for travel. Similarly, American Counter-terrorism officials are paying more attention to travellers after reports of at least half a dozen known neo-Nazis having gone to Ukraine in early February and even more since the invasion began. Overall, there are some government responses to the threat but effective solutions by the EU, NATO, or ONU are yet to be implemented. In an age where democratic values are being challenged by the rise of right-wing parties and extremist thinking, these international organisations must show a strong hand to stop radicalisation and extremist behaviour in its’ tracks.

Sources: Time, Aljazeera, MSNBC, Washington Post, World Politics Review, DW

André Rodrigues

Maria Mendes Silva

João Sande e Castro

Natalie Enzelmüller 

The founding ideas influencing todays’ economic discussions 

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Reading time: 8 minutes

The current mainstream economic ideologies are founded on very distinct views on economics and social interactions. From free markets to state ownership of the economy, there is an entire spectrum of ideas founded way back in the days that still deeply influence existing economic discussions.

In this article we go through the main figures behind some of the most influential ideas followed today, expressing their economic and social ideas and the arguments behind them. We also try to establish a bridge with periods in time where those ideas were put in practice thus providing some real-world examples.

Karl Marx and The Communist Manifesto

Karl Marx (1818-1883) was a philosopher, author and economist that became famous due to his theories about capitalism and communism. In 1848, Karl Marx and Friedrich Engels published The Communist Manifesto, his most influential book. Later, he also wrote Das Kapital where he states his labor theory of value that the value of a produced economic good can be measured objectively by the average number of labor hours required to produce the good.                                                                                 

Figure 1 – Karl Marx

Operating from the premise that capitalism contained the seeds of its own destruction, in the mid-19th century, Marxism was created, serving as a theoretical base for communism. Marxism is a social, political, and economic philosophy that examines the effect of capitalism on labor, productivity, and economic development and argues for a worker revolution to overturn capitalism in favor of communism. This theory believes in the revolutionary communism which inevitably happens due to the struggle’s existence between the bourgeoise (capitalists) and proletariat (workers).

According to Marx, every society is divided into social classes with different powers in society. As base for the Marxism theory there is a capitalist society which is made of two classes: the bourgeoisie, who control the means of production and the proletariat, the part which in fact transforms the inputs into outputs. The latter has little power in the capitalist economic system which means that in periods of high unemployment rate, workers will be replaced very fast, and, according to the profit maximization profit, business owners would want the best of their workers while paying the lowest possible wages. All these points would create an unfair imbalance in the society leading to the alliance of the workers and consequently to a revolution in which the working class takes control of the means of production and would dethrone capitalism (capitalism contains the seed of its own destruction) and private ownership of the means would be replaced by collective ownership, first under socialism and then under communism with no more class struggles. Society would then be run by a central committee that would allocate all the means and resources within the economy without the intervention of markets and the price system.

Marxism has developed over time into various branches and schools of thought, and currently there is not a precise, concise, and single definitive Marxist theory.

The Marxism-Leninism was the self-described ideology of many communist states in the second half of the 20th Century. The repressive political regime and famines that led to the deaths of millions of people in the Soviet Union constitute what is regarded as one of the great tragedies of the previous century. Supporters of Marxism argue that the economic ideology and that Stalin’s oppressive political regime can and should be separated, and that dismissing the Marxist critic of capitalism because of the tragedy of the Soviet Union is fallacious.

John Keynes and the Keynesian Theory

Figure 2 – John Maynard Keynes

In the 1930´s a new economic school of thought emerged that represented a complete break from the previous theories of the deemed “classical economics”. In the wake of the Great Depression, – a gloom period of the world economy marked by low output and high levels of unemployment – the existing economic theory proved unable to both explain the causes of the severe worldwide economic downturn, as well as provide a suitable public policy response to launch the economy back on track.                                                                            

Consequently, in response to this, British economist John Maynard Keynes (1883-1946) developed a new theory that claimed aggregate demand as the most crucial driving force of the economy, calling for the need for government intervention to stimulate demand, hence becoming the founder of what is now modern macroeconomics.

Keynes’s theory was greatly revolutionary for its era, focusing instead on the “demand-side” of the economy and the impact of short-run changes on output, employment, and inflation. In his book “The General Theory of Employment, Interest and Money” (1936), he refuted the then-prevailing notion that free markets would automatically adjust to business cycle changes in order to guarantee a return to full employment (i.e., a situation in which anyone who wanted a job would have been able to get one as long as they were flexible in their wage demands). However, he argued that, as the paradigm of the 1930´s showcased, high levels of unemployment persisted even though people were willing to work for any price, which could simply be explained by the fact that firms were not hiring at all. Indeed, in true snowball fashion, as consumer confidence eroded and uncertainty increased, firms (also plagued by fear and pessimism), responded in kind in a self-fulfilling manner, by cutting back on investment and in their unwillingness to hire people to produce goods that would not be sold due to the weak demand. As a result, the recession became even more pronounced, in the form of a further plunge of aggregate demand and unemployment.

Faced with this, Keynes defended that stabilization of the economy in these recessionary periods should be achieved through government intervention in the form of public policies aimed at reclaiming full employment and guaranteeing price stability. Indeed, in accordance with his belief that prices, and particularly wages, are not quick to respond to changes in supply and demand, he argued that active fiscal and monetary policies were required to reduce the amplitude of the business cycle and thus boost aggregate demand and fight unemployment, ultimately succeeding in pulling the economy out of its depression. For that to be achieved, Keynes advocated for countercyclical fiscal policies, reasoning that during economic downturns the government should incur in deficit spending to compensate for the drop in investment, therefore increasing its expenditures and lowering taxes to promote consumer spending.

An example of the influence of Keynes ideas can be found between the 1933 and 1937 when, following the Great Depression, President Roosevelt implemented “The New Deal”. The New Deal was program of strong government involvement in the American economy through increased public spending, through work programs that employed people in public infrastructure projects, and through the increased government support of unionization.

Milton Friedman and the Free Markets Capitalism

Milton Friedman, born in 1912, was the twentieth century’s most prominent advocate of free markets. In 1976 he was awarded the Nobel Prize in economics for “his achievements in the field of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy.” Before that, he had served as an adviser to President Richard Nixon and was president of the American Economic Association in 1967.

Figure 3 – Milton Friedman

In Capitalism and Freedom, Friedman made the case for relatively free markets to a general audience. He argued for, among other things, a volunteer army, freely floating exchange rates, abolition of licensing of doctors, a negative income tax, and education vouchers. His ideas spread worldwide with Free to Choose, the best-selling nonfiction book of 1980. This book made Milton Friedman a household name.                         

Although much of his work was done on price theory (the theory that explains how prices are determined in individual markets), Friedman is popularly recognized for monetarism. Opposing Keynes, Friedman presented evidence to resurrect the quantity theory of money, the idea that the price level depends on the money supply. In Studies in the Quantity Theory of Money, published in 1956, Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output. In the short run, he argued, increases in money supply growth cause employment and output to increase, and decreases in money supply growth have the opposite effect.

Friedman’s solution to the problems of inflation and short-run fluctuations in employment and real GNP (Gross National Product) was a money-supply rule. If the Federal Reserve Board were required to increase the money supply at the same rate as real GNP increased, he argued, inflation would disappear.

Throughout the 1960s, Keynesians had believed that the government faced a stable long-run trade-off between unemployment and inflation (Phillips curve), and thus by increasing the demand for goods and services, permanently reduce unemployment by accepting a higher inflation rate. But in the late 1960s, Friedman challenged this view arguing that once people adjusted to the higher inflation rate, unemployment would creep back up. To keep unemployment permanently lower, he said, would require not just a higher, but a permanently accelerating inflation rate. The stagflation of the 1970s (rising inflation combined with rising unemployment) gave strong evidence for the Friedman view and convinced most economists, including many Keynesians.

Conclusion

The article discusses some of the main themes behind the most mainstream economic ideas, providing real-world examples for which one. Their ideas have persisted the test of time and influence economic discussion until today.

Sources:

Diogo Almeida

João Baptista

Sara Robalo

Inês Lindoso

João Correia

The Forgotten War in Ethiopia

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Reading time: 6 minutes

Being one of the few countries which have originally never been colonised by Europeans, Ethiopia has a rich history, one where many ethnic groups have coexisted for centuries together. This coexistence, however, has not always been peaceful. With over 80 different ethnicities living in Ethiopia today, the cultural differences within the country have caused a war in its northern regions which where historically inhabited by one of its many peoples: the Tigrayans. This war has a complex background which one must be familiar with in order to better understand the motivations that have led to its offset.

Recent History of Ethiopia and Tigray

The group at the heart of the struggle in Ethiopia is called the Tigray People’s Liberation Front, or simply the TPLF. It was founded by a dozen young men from Tigray, a mountainous northern region of Ethiopia, under the principles of Marxism-Leninism and national liberation and particularly as a force of rebellion against the Ethiopian state. Within 5 years, the TPLF grew steadily, aided by its ability to nullify other Tigrayan opposition and by the increasing dissatisfaction against the Derg, the military Junta that ruled Ethiopia at the time.

By the late 1980’s, the TPLF emerged as the leader of a political coalition formed by other dissident armed rebel factions called the Ethiopian People’s Revolutionary Democratic Front (EPRDF) and, on the 28th of May 1991, the TPLF troops, with the support of Eritrea, seized the Addis Ababa, Ethiopia’s capital. Thus, the Derg was overthrown and the 36-year-old Meles Zenawi, the TPLF and EPRDF president, became the leader of the country. This allowed the Tigrayans, a minority that today constitutes 6% of the Ethiopian population, to dominate its intelligence services and military forces.

Ethiopia and Tigray’s position in Africa

This new coalition government reformed the country by introducing an ethnicity-based federal state which saw the country develop rapidly with massive infrastructure investment and stable economic growth. In addition, the old Marxist-Leninist line was abandoned by the TPLF, as with the fall of the Soviet Union in 1991 the new government pivoted towards closer cooperation with the US. Nonetheless, there was still active suppression of dissident groups, which due to the state’s closeness to the US and the EU as an ally tended to be ignored by western institutions.

After Meles’ death in 2012, however, general dissatisfaction with the government progressively grew, especially among the two largest ethnic groups – the Oromo and the Amhara, comprising around 35% and 27% of the current Ethiopian population. Eventually, after years of protests, representatives of the two communities joined forces to remove the TPLF from power: their goal was to get Abiy Ahmed, of mixed Oromo-Amharic parentage, appointed as prime minister, which happened in April 2018. With his victory, the goal became clear: to drain the TPLF’s power and influence in Ethiopia.

In a short period of time TPLF officials were sacked from key security posts and generals were arrested with important changes being introduced to counter the Tigrayan dominance of the armed forces. Furthermore, old political prisoners who opposed the TPLF were freed from the secret prisons, exiled dissidents were welcomed home, many public enterprises were privatised and restrictions on the media were reduced.

Meles Zenawi – former President (1991-1995) and Prime-Minister (1995-2012) of Ethiopia
Abiy Ahmed – current Prime-Minister of Ethiopia (2018-present)

In July 2018, Abiy Ahmed signed a peace deal with Eritrea, which was an important blow to the TPLF’s ambitions, as the old Meres government had previously engaged in conflict with the Eritreans. This deal won Abiy the Nobel Peace Prize since it not only ended the ongoing border-conflict between the nations but also allowed for the restoration of diplomatic ties and movement of goods and people between the two countries.

However, in the summer of 2020 tensions between the current government and TPLF had exponentially risen after their refusal to hand over wanted fugitives as well as to join the new political party set up to replace the old ruling coalition – the Prosperity Party. Furthermore, with the removal of Tigrayan military leaders from the federal army of Ethiopia many TPLF-influenced military battalions retreated to Tigray.

War Breakout

The increase in hostilities between the TPLF and the Federal Government lead to the war-offsetting events that occurred during the night of the 3rd of November 2020: the TPLF-lead militias launched a pre-emptive attack against multiple military bases of the Federal Government in Tigray, notably against the Northern Command Units of the Ethiopian army. The national officers and soldiers that were captured were assassinated by the TPLF militias, with the remaining troops fleeing to Eritrea causing enormous outrage across Ethiopia. It was this act of aggression that officially marked the beginning of the Tigray War.

Consequently, Abiy Ahmed’s government mobilized the Federal Army towards Tigray to try and pacify the region as soon as possible. However, less than five days into the war there were already multiple reports of ethnic killings: the Tigrayans claimed that they were being attacked by the Amhara military and the Amharas asserted that they were being targeted by the Tigrayan militias. Furthermore, on the 14th of November the TPLF fired rockets at different airports in Eritrea, bringing them into the conflict, causing more military forces to be involved in it.

TPLF’s 2021 summer offensive’s extent

Initially, it seemed that the Federal Government’s offensive had succeeded: they managed to capture Mekelle, Tigray’s capital, on the 28th of November 2020, along with the Eastern part of Tigray. However, the TPLF was able to recapture the capital on the 29th of June 2021 and they launched a vast offensive which saw them recapture most of Tigray and pushing south, seizing various Amharic cities in July.

In October 2021, the Ethiopian government launched a new offensive against the advances of the TPLF, managing to recapture the Amharic cities that had been occupied and leaving the TPLF controlled territories to almost exclusively the Tigray region. As of March 2022, this is believed to be the current state of territorial distribution.

It is also important to mention the humanitarian consequences of this conflict: over 400,000 people were thrown into famine, with approximately 2.5 million people, both Tigrayans and Amharas, being displaced of their homes in the first year alone. In Tigray, currently over 83% of the population has no food security, with many services, such as the banking and communication zones, being unavailable. Overall, it is believed that over 9.4 million people have been negatively affected by this conflict.

Rakouba refugee camp, which is housing people who fled the conflict in Tigray

A peaceful resolution?

It remains unclear whether a peaceful resolution is possible: the fierce fighting between both forces indicates that the cost of one force capitulating to another is great expenditure of military lives. However, the distrust that has been built over this year and a half regarding the accusations of atrocities and war crimes from both sides has resulted in calls for peace being barely acknowledged by the leaders of both parties.

Additionally, the introduction of a third-party mediator seems unlikely: whilst the TPLF lead-government used to be an important regional ally of the United States, Ethiopia’s recent integration into the Belt-and-Road initiative means that external geopolitical forces might already be influencing this conflict, preventing them from making an impartial assessment of it. Meanwhile, millions of lives will remain affected by this war, a war whose humanitarian impact cannot and must not be ignored. 

Sources: The Guardian, BBC, The New York Times, The Guardian, DW, Foreign Policy Magazine

André Rodrigues

Natalie Enzelmüller

Maria Mendes Silva

The climate-conflict nexus: Why armed conflict should serve as a wake-up call for global energy-security concerns in a rapidly changing climate

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Reading time: 7 minutes

A few days after the Russian invasion of Ukraine, the Intergovernmental Panel on Climate Change (IPCC)  released what has been deemed as “the bleakest warning yet”, in relation to the current state of our planet (Guardian 2022). We have often learnt that the wars of the 20th century were the product of mad autocrats, dangerous ideologies, or the long-term effects of the failed colonial experiment. The past few weeks have confirmed that the 21st century, despite all its modernization and westernization of societies, and even with the unimaginable danger of nuclear weapons as a supposed deterrent, has yet to see an end to armed conflict. The new wars of the 21st century, whether economic or military, have increasingly positioned natural resources, such as coal, gas or oil, as well as access to them, at the centre of the conflict. In the face of a rapidly changing climate, it is crucial that we begin to assess energy-security concerns within a broader climate-conflict nexus.

First, let us briefly outline two broad environmental economic approaches in relation to the discussion of the climate-conflict nexus here. The neo-Malthusian interpretation would suggest that from a position of environmental determinism, natural resource related conflicts are the inevitable result of population growth, resulting in an increased strain on domestic security concerns (Kahl 2018). Such an interpretation must, nonetheless, be contested by a more critical neo-classical approach, in which it is not just the scarcity, but the actual abundance of certain natural resources that precede the outbreak of conflict (Koren 2018). In this instance, distinct attention must be paid to local political structures that continue to inform decision making behind the management of such resources. 

Figure 1: Western leaders blackmailed by OPEC during 1973 oil crisis” 1973 Cartoon by Behrendt on the oil crisis 
Source: CVCE

Policymaking in the west must face up to the increasingly alarming parallels between energy-security, associated with the access to natural resources for consumption (IEA 2022), and the risk of armed conflict. According to the United Nations Environment Programme, UNEP, around 40% of all interstate conflicts, over the last 60 years, have been related to natural resources, and the risk of conflict is doubled in the first five years (UNEP 2013). In the western world, energy-security concerns are generally manifested within the economic realm of sanctions or embargoes. However, in much of the developing global south, the harsh reality is that inter-communal and inter-state competition over resources has taken place in the form of violent conflict (UNEP 2013). To reduce the risk of emerging energy-security concerns becoming conflict threats, the west must transition towards more sustainable and alternative renewable energy systems in the medium and long-term, alongside diversifying more immediate short term energy requirements (Forbes 2022). History has taught us that major global energy transitions have often emerged from conflicts, such as the 1973-74 OPEC oil embargo. The latter resulted in new legislation for more efficiently run trucks and cars, a large reduction in oil as fuel in the electricity power sector, and new research into oil and natural gas alternatives (Forbes 2022). 

Figure 2: An oil refinery behind residential buildings in Omsk, Russia
Source: Alexey Malgavko, Reuters

Global energy-security concerns are of crucial significance in the context of global climate change, and the war in Ukraine should serve as a wake-up call for a more accelerated transition towards green energy, and departure from a dependence on fossil fuels. The current conflict has highlighted how fossil fuels can be used as both political and economic weapons of war, as demonstrated by the fact that Europe relies on Russia for 40% of its natural gas supply, or even America´s reliance on globally stable oil markets (Forbes 2022). Svitlana Krakovska, Ukraine´s lead climate scientist, who alongside her team was forced to exit the final review process of the aforementioned IPCC report, and instead head to a bomb shelter, believes the war is “a fossil fuel war” (Guardian 2022; Politico 2019). However, former energy advisor to Obama´s administration, Jonathon Elkind, has argued that “It´s a crude oversimplification to call this a fossil fuel war” (Guardian 2022), whilst still recognizing the significance of global oil and gas resources in the outbreak of the war. 

Though the conflict in Ukraine may not explicitly be a conflict over resources, the control over natural resources is increasingly at the forefront of contemporary geopolitical struggles, and climate change is serving as the invisible catalyst.

As argued by environmental correspondent Fiona Harvey, “Kremlin strategists are therefore keenly aware that in the longer term the global move to net zero threatens the whole basis of Russia’s economy and global influence.” (Guardian 2022). Climate change is forcing an extensive global change in energy systems. Russia, as a major global energy player, will surely be concerned about influencing such transitions, when considering that 40% of its federal budget is from oil and gas, comprising 60% of exports (Carnegie Europe 2022; DW 2022). 

Whilst armed conflict over resources seems to be a growing threat in the west, in many regions of the global south, it has long been a growing reality, especially in the regions that are the most vulnerable to the impacts of climate change. In 2007, Ban Ki-Moon, then UN Secretary-General, referred to the Darfur crisis and ongoing drought in Sudan as an ecological crisis and the “first climate change conflict” (Ki-Moon 2007). Such discourses often represent the relationship between climate change and conflict as one of direct causality. Contrary to a neo-Malthusian approach building on Homer-Dixon´s emphasis on environmental scarcity (Homer-Dixon 2010), it is not so much rainfall quantity but rather its unpredictability and uncertainty that has led to conflict in the region (Biasutti 2019). The same has occurred across the broader Sahelian Acacia Savanna, from Darfur to the Mopti River delta in Mali, where the early arrival of ethno-Arabic pastoralist herders on the land of ethno-African agriculturalist farmers, has resulted in violent conflict over recent years (Hiernaux, et al 2009). 

Reinforcing a neo-classical approach, the conflict also serves to remind us that, on a political level, weakened traditional political structures have also resulted in increased inter-communal conflict. In this instance, Dogon farmers have often found themselves backed by state policies through international funding, whilst Fulani herding communities have been left neglected, which in turn has resulted in heavy recruitment from emerging Islamist groups such as the Al Qaeda affiliated Macina Liberation Front MLF (Benjaminsen 2019; Raineri 2020).

Figure 3: A herder guarding his cattle
Source: African Center for Strategic Studies 2021

Long-standing cultural and political struggles may well be the most significant factors in the emergence of conflict in the Mopti river delta. Climate change, nonetheless, is indirectly accelerating the dynamics of these tense interactions through providing an added, and increasingly damaging pressure on the local farmer-herder environment and their resources. As with its growing influence on changing global energy-security struggles, relating to the conflict in Ukraine, climate change must be understood as an indirect, yet an incredibly significant player in the emergence of conflict in the Mopti region. Late last year the infamous Russian paramilitary organization, Wagner, entered Mali´s Mopti region, with the support of Russian armed forces (CSIS 2022). The provision of mineral and financial concessions in exchange for PMC (private military company) protection for a coup-proof regime is the exchange (CSIS 2022). The link between Russian PMC´s and access to rich natural resources is further evidenced by both the reported presence of Wagner associated geologists in the region, and PMC protection for Russian companies involved in mining activities in the region (CSIS 2022; Aljazeera 2021). 

If Russia´s invasion of Ukraine was a mean to further protect its energy-security concerns, through hoarding mineral and agricultural resources from Ukraine´s vast depository, this certainly resembles an already existing and more global trend. Russia should certainly not be singled out here. The United States, in particular, has long been waging warfare, both directly, and through proxy states, in asserting its own global energy dominance. Energy-security concerns have never been far from armed conflict, and climate change is increasingly narrowing the proximity of that relationship. 

Sources:

  • The Guardian, Carnegie Europe, DW, IEA, Politico, UNEP, Forbes, Aljazeera, CSIS, Africa Center, CVCE
  • Homer-Dixon, Thomas F. Environment, scarcity, and violence. Princeton University Press, 2010.
  • Biasutti, Michela. “Rainfall trends in the African Sahel: Characteristics, processes, and
  • causes.” Wiley Interdisciplinary Reviews: Climate Change 10.4 (2019).
  • Benjaminsen, Tor A., and Boubacar Ba. “Why do pastoralists in Mali join jihadist groups? A
  • political ecological explanation.” The Journal of Peasant Studies 46.1 (2019): 1-20.
  • Hiernaux, Pierre, et al. “Woody plant population dynamics in response to climate changes from
  • 1984 to 2006 in Sahel (Gourma, Mali).” Journal of Hydrology 375.1-2 (2009): 103-113.
  • Raineri, Luca. “Sahel Climate Conflicts? When (fighting) climate change fuels terrorism”
  • European Union Institute for Security Studies, December 2020.

Francis Braddell-Dawson

Slaves of the Cheap: The Labour Exploration Cycle

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Reading time: 8 minutes

Mobile phones, clothes, flowers, or shoes. Many of the products we consume and use every day are produced by people trapped in what is called labor exploitation. First, what do we mean by labor exploitation and what are its principal forms and characteristics around the world? According to the International Labor Organization (ILO), labor exploitation involves workers who, against their will, accept miserable overworking conditions and receive low wages.  

In other cases, such as that of forced labor situations, workers are coerced to work due to violence or intimidation. Truth is, it is a challenge to define such complex concepts since its definition varies across the globe. There can be a lengthy debate of when a worker is acting out of free will or under coercion. People in extreme poverty may be forced by economic reasons to accept unfair working conditions. Irregular migrants are particularly at risk, as without legal documents they may put up with anything rather than risk denunciation to the authorities followed by deportation.

According to the International Labor Organization, approximately 25 million people are estimated to be within situations of forced labor, seeing their rights taken away. This translates into 5,7 victims of forced labor for every 1000 humans. 

Prevalence (per 1000 persons) of forced labor, by age and category

Although forced labor is more predominant in under-development countries, it can be found in every corner and industry of our globalized world.

Number and prevalence of persons in forced labor around the world

A Poverty cycle

Why would anyone willingly put themselves in a position so vulnerable to the exploitation by others? Shouldn’t they simply find a better job, perhaps pursuit higher levels of education? Surely, it should be easy…

Poverty creates vulnerability to these detrimental forms of work, which in turn contribute to perpetuate the poverty of the workers. It is not a cycle one easily escapes from. Just try and put yourself in such a worker’s shoes: to leave your exploited position (assuming you even have the option to walk away) will mean a significant reduction in income, which you may not be able to afford. Even if you managed to scrape up enough savings to put yourself and your family through a jobless period, there’s still the question of finding another job. Remember, you are a poor, likely uneducated, unskilled laborer. Do you think there are lots of opportunities available?

If the job doesn’t pay well, savings are likely to be scarce, and no company can compete for long with the low prices, achieved by those grossly underpaying for labor, leaving only the exploiters to provide work for the entire labor force. 

Increasing qualifications is also not an option: education is costly and requires time, and long hours working for little time doesn’t leave much room for personal investment.

Forced Labor in Supply Chains

We all know we live in the age of globalization. The t-shirt you are wearing right now may have been to more countries in its short existence than you have in your entire life, one land per stage of production. And yet, it still manages to make its way to you so amazingly cheap! Ever wondered how? (1)

The truth is many companies exploit their workers to cut costs. 

Most products go through a lengthy chain of producers, manufacturers, distributors, and retailers before they reach each consumer. Consequently, it is a challenge to control who is working where and under which conditions. Companies have a responsibility to ensure no forced labor is being used in the production of the goods they sell, playing a key role in building a sustainable economy and society. 

Agriculture provides the raw materials for most finished products – the sector is packed with cases of forced labor

Some companies have taken measures proactively. However, decades of “voluntary corporate social responsibility” have failed to protect people. There is a need for a higher-scale improvement that is hard to achieve with voluntary action. 

Fortunately, progressive steps have been made to combat forced labor, such as the development of modern forced labor legislation. The Introduction of the UK Modern Slavery Act required large corporations to report their efforts to tackle forced labor in their supply chains.

Additionally, at the beginning of 2022, the European Commission released its highly anticipated mandatory human rights and environmental due diligence directive to foster sustainable and responsible corporate behavior across global value chains. This is a notable moment in the history of human rights. This purpose would impose a large duty on EU and third-country companies to identify and address actual and potentially harmful impacts on human rights in the firm’s operations, as well in value chains.

Children

Children around the world are also routinely engaged in labor that is considered detrimental to their health and development. In the world’s poorest countries, slightly more than 1 in 5 children are engaged in child labor. Eastern and Southern Africa have the largest proportion of child laborers, having approximately 26 % of children aged 5-17 performing this type of activity. 

The entire exploitation chain is particularly vile when with comes to kids. Children who are forced to work (either by someone or by their circumstances) are the ones who will have more trouble breaking the cycle.

Child workers are paid even less than adults and are often preferred by employers, as they are less likely to strike or have demands. Besides that, a large pool of child labor available hurts unskilled wages, worsening the poverty issue and delaying even more technological progress. This leads to harder conditions for families, who are more likely than ever to send their children to work.

Because it is children that we are talking about, the consequences spread even further along in time. Working children are more likely to underperform academically, as shown by data from 12 Latin American countries; they find that third and fourth graders who attend school and never conduct market or domestic work perform 28% better on mathematics tests and 19% better on language tests than children who both attend school and work. Besides that, they are also more likely to drop out of school, which has negative consequences on the child’s development and their future prospects, and on the country’s chances of social and economic development.

But surely, everyone agrees child labor is bad. Why isn’t it simply forbidden? 

In most places, it is. But, again, it is not so simple as that. Even in some places where they technically can’t, children continue to work, mostly in agriculture or factories. And we must remember that many of these little workers are the sole providers, or at least a crucial part of their sustenance for their families (with their parents being unemployed or unable to work).

The ILO estimates that some 246 million children are currently involved in child labour

How to end

What if we just ended it? What would the actual impact be?

There are two major sides to consider when answering this question: these workers’ incomes and the impact on consumers of the products they contribute to.

We’ve discussed already the negative impact on these families of simply removing these exploitative jobs, namely their reduction in income. To prevent them from (further) descent into poverty, either robust welfare programs would have to be set up, were the job posts to simply disappear, or firms would keep the worker, now paying fair wages and not engaging in harmful practices for their employees. 

Either way, production costs go up, which the manufacturers can either absorb (assuming they can afford it) or pass along the production chain to the consumer. So, consumers will likely be paying more. Remember your well-traveled t-shirt? Not so cheap anymore. The same goes for your coffee, your chocolate, or your electronics.

In more concrete figures, we are talking about a practice that annually generates 150 billion USD in profits, an ILO estimate. The same organization estimates ending child labor alone to cost around 760 billion USD worldwide (including the cost of adequate schooling for all 246 million kids now working) to achieve long-term benefits worth 5.1 trillion.

How about those augmented prices? Although it is hard to estimate what that would look like, we can use products now in the market which are branded Fairtrade (meaning, among other things, that they stay clear of labor exploitation in their production chain) as a proxy of how much more the average consumer would have to pay for everyday items. A quick search online shows, for example, chocolate with a fairtrade stamp priced at 2.70€, over twice what a similar chocolate costs. A t-shirt marketed as Fairtrade can cost as much as 30€ – the same as several packs of shirts in some stores.

Fairtrade products are often more expensive

Of course, some of the disparity comes from other practices in Fairtrade (environment-friendly, etc.) or simple lack of economies of scale, but the fact remains: breaking away from this cycle will be costly. Yet, it surely is a price worth paying.

(1) To find out more about this check out our article about Fast Fashion here.

Sources: Unicef, International Labour Organization, Delta Net, The Woodgrove Outlander, BIICL, White & Case, European Commission, EY.

Constança Almeida

Leonor Cunha

The Looming Russian Default

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Reading time: 7 minutes

Russia’s relationship with its debt has not been easy throughout history. In 1918, the embryonic Soviet Union repudiated the debt carried from the previous regime; in 1998, and after an attempt from the Russian Federation to gain credibility and integrate in international capital markets, Russia ended up defaulting in its domestic debt and in the Soviet-era external debt; in 2022, a Russian default seems to be looming once again.

With the Russian invasion of Ukraine, international markets price in the potential for a Russian sovereign debt default in external debt. Yields on Russian 10Y bonds, for example, have climbed vertiginously to nearly 20% since the beginning of the war.

An international bond from the Tsarist regime which was repudiated by the Bolshevik Regime.

An history of missed payments

Following the Bolshevik revolution and the overthrowing of the Tsarist regime, the embryonic Soviet Union, in 1918, repudiated all the debts of the previous regime. Despite this, throughout the Soviet experiment, the Soviet Union accumulated large levels of debt up until its dissolution in 1991.

After the breakup, the newly independent, former Soviet states, had an arduous road of restructuring their systems with more market-oriented economies in their sights. At that time, the Russian Federation assumed all foreign assets and debts of the former Soviet Union, an action that it viewed to be necessary to begin to integrate international capital markets and to build a good international reputation.

However, the restructuring of the economy proved to be more challenging than expected. Russian GDP suffered large contractions, decreasing nearly by half in the following years. At the same time, fiscal policy was quite loose with the government running large deficits and real interest rates were kept high as the new Central Bank tried to rein in inflation and create credibility. Together, these factors meant that Russian debt was not on a sustainable path throughout the 1990’s. In 1998, and although Russian debt was still not very high (60% of GDP), with the Asian financial crisis echoing throughout the markets, and the exchange suffering sharp devaluations, Russia ended up defaulting on its domestic debt, as it found itself unable to rollover existing short-term debt. And although Russia did also default on foreign Soviet-era obligations it honored all the external debt it had issued after the 1991, attempting to maintain good credibility.

With this same goal in mind, following this default, Russia sought assistance from the IMF, and was able to restructure the defaulted debt and implement structural reforms that placed it on the path towards sustainable debt management.

These changes can be seen in the evolution of sovereign debt ratings, which had deteriorated significantly during this crisis (S&P – SD), but that steadily rose in the early 2000’s. S&P rated Russian debt with a B in 2001 a grade of BBB in 2008. This grade was kept quite constant until recent months. Even now, although Russia finds itself in danger of defaulting, similarly to the 1998 crisis, its debt to GDP ratio is not very high (18% of GDP in 2020).

The importance of international capital markets and the credit rating system

Countries issue bonds in external debt markets as a way to collect the necessary funds to finance their sovereign debts; the associated price and respective interest rate at which they will trade will reflect a number of conditions that determine their risk level, which usually comes attached with a given credit rating.

Credit ratings will reflect the creditworthiness of the country in question, posing as an indicative tool for investors of the possible risks that are being undertaken when investing in said debt – which in turn will be translated into the interest rate at which the loan will be repaid. This risk represents the likelihood of the government failing to make the future payments associated with its debt obligations, either because it is unwilling or unable to do so, with risky investments being linked with low credit ratings and high interest rates. The level of risk assigned to each country will be determined taking into consideration the country’s economic and political environment, assessing several important indicators such as the country’s debt service ratio, variance of its export revenue, domestic money supply growth, among others. Overall, a good or bad credit rating could make or break a country’s economy, being a key factor in attracting foreign direct investment.

These credit ratings are assigned by independent credit rating agencies, with the three most widely known being Moody’s, S&P Global and Fitch Ratings. Each of these credit agencies will attribute a credit rating to the investment in question expressed in letter grade format, in accordance with their personal measurement scale: in alphabetical order, usually from A to D (best to worse), with specific intermediate categories for each agency. For example, S&P attributes a BBB- (or higher) rating to countries it considers to be within investment grade and Moody’s does so for Baa3 (or higher) rated bonds. Any rating of BB+ (or lower) for S&P and Ba1 (and below) for Moody’s falls to speculative grade, commonly referred to as the “junk” bonds territory.

Credit ratings are most definitely not static and may change all the time based on the newest data available on a multitude of political and economic factors, as the recent case of Russia government bonds´ credit rating steep downfall showcases. In fact, in just a few weeks, given the recent turn of events – with Russia´s economic panorama suffering a major hit facing the tight trade restrictions from the West and being essentially cut-off from Western financing – all major rating agencies have downgraded the country´s status by considerable significant notches from its secure position in the “stable” B territory, fearing Russia´s inability (and even to a certain extent its willingness) to service its debt. The situation further escalated upon President Putin´s announcement of the possibility of a “redenomination of foreign-currency sovereign debt payments into local currency for creditors in specified countries”, prompting the rating agencies to believe “that a sovereign default is imminent”, as illustrated by Fitch´s C rating and Moody´s equivalent Ca score, both only one level above default.

The impact of the Russian Invasion

The invasion of Ukraine has seriously influenced Russia’s economic and monetary landscape, mainly due to the package of sanctions applied by several European Union countries and the United States. Indeed, Putin admitted that such sanctions “effectively declare Russia default”, as they imply an increasing probability of default on its public debt (20% of its GDP). Nevertheless, what frightens Putin is not this amount, but the current lack of payment capacity.

Firstly, the sanctions applied to Russia, which include its exclusion from the SWIFT banking system and the blocked access to western financial markets, place this country in a possible economic drowning situation. In fact, according to the public finance sustainability theory, debt is only sustainable if the GDP growth rate is higher than the interest rate. Therefore, given all the economic and commercial exclusion to which Russia is currently exposed, it is possible that its GDP growth will not be satisfactory enough, consequently increasing its financial susceptibility and its risk of default. Besides the economic point of view, other sanctions applied imply the freezing of Russian assets located in institutions outside Russia, such as foreign exchange reserves and Russian bonds, which strongly limits the Russian capacity to pay its obligations.

Furthermore, apart from all the economic implications that trigger the default, another reason is closely linked with the monetary problems faced by Russia. For now, since the invasion of Ukraine, the ruble has devalued by around 40% against the dollar, once again compromising Russia’s monetary capacity to pay its debt. Then, the problem starts when its $480 billion foreign debt is denominated in US currency, so it must be paid in dollars. In fact, according to international declarations by financial institutions, the inability to pay debts in the original currency is formally considered as default. Moreover, nominally paying in rubles will get much more expensive for Russia given its huge drop in recent weeks.

Conclusion

Against the general feeling that Russia wouldn’t be able to make its next bond payment due on March 16 (with a 30-day grace period), it was able to do so. Still, it seems to just be delaying the inevitable given the weak economic outlook and the impact of sanctions.

What this will represent for the world economy is still murky but seeing as only a relatively small sum of the nation´s debt is held by foreigners; all points out to the country´s potential default not posing a major systemic risk to the global financial system.

Sources: Reuters, Fortune, IMF Elibrary, Carnegie Endowment For International Peace.

Diogo Almeida

João Baptista

Sara Robalo

Inês Lindoso

João Correia

Equal, but different: what’s up with inequality?

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Reading time: 6 minutes

Concerns about inequality are not a novelty and we see signs of it everywhere. Some billionaires are flying to space while some people scramble for money to make ends meet. We see voices of support for more progressive tax systems and even talks of universal basic income to support the poor, while others claim tax burdens are already too high. Inequality is right in front of us and independently of how big we consider this to be problematic, it is endemic in the developed world.

Ever since the 1980’s there has been an increasing gap between the rich and the poor. The top 10% have been receiving more income compared to the bottom 50% of the population in North America. Without any intervention of the tax system to correct asymmetries, the top 10% in North America in 2020 earned more than the triple of what half of North Americans combined did. The data we present shows inequality has been increasing since the 80s, but in fact, this trend can be observed ever since the post-war period. Yet, albeit less serious, this is also an issue in Western Europe. In this corner of the world we see that, before intervention through the tax system, in 2020 the top 10% received already 1.75 times more than the entire bottom 50%.

Why have income inequalities increased?

Naturally, there is not one simple cause for this phenomenon. Although there might be some appeal to the idea that capital income can benefit the richest and help increase socioeconomic cleavages, it is likely that the current trend of increasing inequality is, at least for now, due to deep differences in labor earnings as well (Piketty 2006, Piketty & Saez 2014). 

 One possibility is that the technological progress of the last decades, in part caused by the introduction of information technologies, increased the demand for highly specialized skills that were then compensated with higher wages. Therefore, high-skilled wages increased at a higher pace than low-skilled wages and so the income gap between highly educated workers and the rest of the population widened. 

 Nevertheless, if we look at the very top incomes such as the top 1% we might consider other factors. Particularly in the US, top executive compensation has been increasing and even though CEOs undoubtedly have highly sought-out skills, they also have the bargaining power that regular workers do not have when negotiating their wage or accepting job offers. Standard economic theory would predict workers receive a wage equal to their marginal product of labor, but companies don’t have benchmarks on which to expect how much a CEO will contribute to their production activities. Consequently, incomplete information can leave some room for top executives to bargain greater wages (Piketty et al., 2014).

Inequality in Portugal 

Although data stops at 2017 and from there onwards we only have extrapolated data, it seems that the Portuguese case has two relevant features. First, compared with the aggregated data for Western Europe, inequalities are greater in Portugal as in the last decade the top 10% received twice the pre-tax national income that accrued to the bottom 50%. 

However, contrarily to the aggregated data observed for the United States and Western Europe, it seems that the trend of increasing inequality in Portugal observed since the 1980s has slowed down, started falling in 2005, and has stabilized in the last decade. Whether this is a short-term phenomenon or not is still uncertain, and it will depend on the policy stance of the government. 

In short, even though a pessimistic account might identify Portugal as having inequality levels above those of Western Europe, the inequality growth spur has been calmed down for now.

Inequalities go far beyond income

It is often the case that we use income to assess inequalities because it is a unidimensional measure that is easy to understand. However, inequalities go way beyond what people receive at the end of the month. Income inequalities are associated with other asymmetries which might be even more concerning. 

Families of high socioeconomic status can often provide more stimulating environments for their children to grow. Consequently, children from disfavored backgrounds might lack resources such as cognitive stimulation and appropriate interaction with family members that are vital at early stages in life where key cognitive and behavioral traits are being developed.

One finding is that children from wealthy families have more cognitive capabilities than their peers in families of lower socioeconomic backgrounds. By age 6 socioeconomic status is already associated with math capabilities, and evidence suggests the school system is not particularly effective at fighting them over time (Heckman, 2006). If any measure needs to be taken, it might be more effective to start at a very young age. The environment in which a child grows during their first years of life has structural influences on their development and consequently on long-term life outcomes. 

Taken from Heckman (2006), using data from Carneiro & Heckman (2003)

How early is very early? As soon as the child is born, the environment is already exerting its effect. Even when kids are 3 years old, we can already see a relationship between socioeconomic status and cognitive capacities being formed. In particular, 3-year-olds from poorer families have worse verbal skills and even though attending kindergarten can help them improve their skills they still fall behind their peers (Becker, 2011). 

Inequalities in family income are also associated with different long term health outcomes. Children born in poorer families tend to have not only poorer health compared to their wealthier peers when they are young, but these differences persist and even widen in magnitude as they become older. In other words, income inequalities might not only be related to differences in health levels but might also be widening the health inequality gap even further (Case, 2002; Heckman 2007).

We can think this might lead to feedback loops, as poor families raise individuals with lower capabilities and worse health, which then makes them weaker in the labor market. As a consequence, they receive lower incomes, and the cycle continues. On the other hand, more affluent families can guarantee a better path to help their children attain higher wages in the future. Hence, it is natural to wonder if higher income inequality now will not be, in itself, a cause of higher income inequality in the future.

So what?

 We have seen that inequality in incomes has been around for the last decades and likely came to stay unless any action is taken. Moreover, even though current debates both in the media and in public society are often about differences in income, it is much more than that. Inequality is a very broad phenomenon, but indeed income inequalities are related with many other differences we observe in society. 

 Yet, we can always ask: why care? This is where no clear answer exists. We all have different preferences and views for what we consider to be tolerable levels of inequality, and so the debate can never be just about economics. Our concerns of equity and fairness must come into play too and the discussion can never be settled through facts alone. The decision of whether we want to stay in the age of inequality or leave it is not only a question of which actions to take, but also on whether there is collective will to take them.

References:

  • Becker, B. (2011). Social disparities in children’s vocabulary in early childhood. Does pre‐school education help to close the gap? 1. The British journal of sociology, 62(1), 69-88.
  • Heckman, J. J. (2006). Skill formation and the economics of investing in disadvantaged children. Science, 312(5782), 1900-1902.
  • Heckman, J. J. (2007). The economics, technology, and neuroscience of human capability formation. Proceedings of the national Academy of Sciences, 104(33), 13250-13255.
  • Heckman, J., & Carneiro, P. (2003). Human Capital Policy. In J. Heckman & A. Krueger (Eds.), Inequality in America: What Role for Human Capital Policies? (pp. 77–240). MIT Press Books, 1.
  • Piketty, T., & Saez, E. (2006). The evolution of top incomes: a historical and international perspective. American economic review, 96(2), 200-205.
  • Piketty, T., & Saez, E. (2014). Inequality in the long run. Science, 344(6186), 838-843.
  • Piketty, T., Saez, E., & Stantcheva, S. (2014). Optimal taxation of top labor incomes: A tale of three elasticities. American economic journal: economic policy, 6(1), 230-71.
  • Case, A., Lubotsky, D., & Paxson, C. (2002). Economic status and health in childhood: The origins of the gradient. American Economic Review, 92(5), 1308-1334.

Nuno Gomes

The uncertain end of Boris! How could it happen and what comes next?

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Over the past few months, United Kingdom Prime Minister Boris Johnson has been facing intense criticism over the allegations of numerous parties being held in Downing Street while the country was in lockdown or under restrictions that banned indoor socializing between households. Johnson has tried to dampen the impact of these scandals, either by insisting that they were a work event or that he only attended for less than 10 minutes. Later on, he apologized for attending a gathering in the Downing Street Garden during the first lockdown. However, the revelation of a party that was held the night before the funeral of Prince Philip, at which the Queen was forced to sit alone due to coronavirus restrictions, has sparked nationwide outrage and increased the pressure on Johnson to resign or even be dismissed.

Boris Johnson apologizing at the House of Commons
Queen Elizabeth at her husband’s funeral

Under which circumstances may Boris Johnson be dismissed?

1. Motion of no confidence in Parliament

A motion of no confidence is a method of testing whether the Prime Minister still has the support of the House of Commons, having therefore the power to trigger a general election, which could result in a new Prime Minister appointed.

Under the current rules, if a motion of no confidence is voted favourably by the majority of the members of the Parliament, the Government will then have 14 days to try to win back the confidence of the members who voted against the government, while, at the same time, the opposition parties may attempt to form their own government. After 14 days, if neither the present Government gathers enough support from the Parliament nor the opposition parties have been able to form an alternative Government, an early general election is automatically called.

It is important to note that losing a confidence vote does not necessarily mean that the current Prime Minister will be forced out since they could once again win the general elections. Nevertheless, the current voting intentions predicted by the polls show the Labour Party beating Johnson’s Conservative Party by a significant margin, meaning that the above-mentioned most likely would not apply in this case. 

Poll by Politico: House of Commons’ voting intentions

As of the time of writing this article, a motion of no confidence on the Government of Boris Johnson has already been tabled by the Liberal Party. However, it is unlikely to succeed due to the 80-seat majority that the Conservative Party currently has in the House of Commons. Despite being very unlikely for members of Johnson’s own party to vote favourably to this motion, since MPs tend to follow party lines on a vote that can topple the government, it is not unthinkable. In fact, it did happen in 1979, when Prime Minister James Callaghan lost a confidence vote and was later beat in the general election by Margaret Thatcher. 

2. Conservative Party´s internal motion of no confidence 

Boris Johnson may also be dismissed from the Prime Minister position in the case he loses a vote of no confidence on his leadership of the Conservative Party. For this vote to be triggered, 15% of the Conservative MPs (54 currently) must write a letter to the head of the 1922 Committee, Graham Brady. Afterwards, every Conservative member of the Parliament (359) would vote on this motion, and, in the case of at least 180 favourable votes, Johnson would be forced to resign, and a new leader would be chosen by the party. 

Although it is not known by the public how many letters have already been sent to Graham Brady, as of the time of writing this article, 9 Conservative MPs have publicly announced that they have sent a letter requesting a no-confidence vote, and another 6 have called for the Prime Minister’s resignation. Furthermore, a vote has not yet been called, thus we can conclude that the 54 letters threshold has not been met yet. However, it is believed that the number of those who have written letters but have not yet disclosed is close to the 54-requirement. 

There is also a 3rd option, where Boris Johnson presents his resignation from his position as Prime Minister. However, Johnson has proven in the past to be resilient when facing calls to quit, and there are no signs from his statements regarding the scandal that he intends to resign. 

Next in line for the Conservative Party’s leadership 

In the case Boris Johnson is dismissed by either one of the above-mentioned circumstances, a leadership contest would be called. Any member of the Parliament, besides the ousted Prime Minister, can run for the party’s leadership, as long as they have the support of 8 other members of the Parliament. In the first stage of the contest, Conservative MPs will hold several rounds of votes, where the candidates with the lowest number of votes drop out until there are only two contenders left. In the second stage, all members of the party vote on the final two candidates. 

Conservative Party’s leadership contest process

According to a poll developed by YouGov, which surveyed 1005 Conservative Party members, the favorite potential candidates to be their next leader are Rishi Sunak and Liz Truss. 

Poll by YouGov: favorite candidates for the next Conservative Party’s leadership

Rishi Sunak

Rishi Sunak is seen as the rising star in the Conservative Party. He is 41 years old and is currently serving as Finance Minister. Sunak attended both Oxford and Sandford and worked in investment banking before turning into politics in 2015 when he was elected to Parliament. In case Sunak replaces Boris Johnson as Prime Minister, he would be the first person of color to hold the office. It is important to note that, despite being currently the favorite among party members to win an eventual leadership contest, Sunak is not as popular among the Conservative Party’s members that would vote on the first stage of the leadership contest – members of the Parliament.

Liz Truss

Liz Truss is 46 years old and currently holds the position of Foreign Secretary. As a member of the Conservative Party, she has served under 3 Prime Ministers: David Cameron, Theresa May, and Boris Johnson. Truss studied at Oxford University and worked in the energy and telecommunications industries before entering politics. She has been a member of Parliament since 2010. Although Truss is not the favourite contender among the wide Conservative Party membership, she is believed to be the favourite among the members of the Parliament – who vote on the first stage of the leadership contest. Tactical voting by her supporters in this stage could mean that her main opponent, Rishi Sunak, would not be able to gather enough support to reach the second stage, which seems to be the only way Trust could come out victorious in the end. 

Consequences of a new Prime Minister

According to a poll conducted by YouGov, Boris Johnson has become increasingly unpopular among the English Public since around June of 2020, which has only gotten worse with this “Partygate” scandal. Therefore, a new Prime Minister could result in a narrowing of the lead in the polls of the Labour Party.

Poll by YouGov: How well is Boris Johnson doing as Prime Minister?

Due to the Conservative Party being currently behind in the polls, it is not likely that the new Prime Minister would call for an early election once they take office, as it could result in losing seats in the Parliament or even losing the premiership to the Labour Party.

As a result, an early election should not be expected, and consequently, UK electors should only be able to actively express their view with regards to this Government’s performance until May of 2024. It remains only to be seen whether the Conservative Party can use this time to win back English people’s confidence.

Sources: Politico, The Washington Post, CNN, The New York Times, YouGov.

Scientific revision: Patrícia Cruz

André Rodrigues

João Sande e Castro

Maria Silva