Author: Awareness News

Gamification in Behavioral Economics 

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Reading time: 5 minutes

Game mechanics that drive people to Action

Behavioral science is openly related to psychology, economics, and marketing. However, not as many individuals make the same relation with game design or software engineering. Where can we set borders? In reality, there is a broad set of tools and frameworks used in behavioral economics that benefit from other sciences. In this article, we aim to address the increasingly important engineering area Game Mechanics, and its applications to the educational sector. 

Definition of Gamification: “The addition of game elements to non-game activities”, is particularly effective for increasing people’s engagement, motivation, or improving learning. 
(Deterding et al., 2011) 

First of all, why gamify something? Especially in economics, where we already have game theory, cost-benefit analysis, and other theoretical frameworks that facilitate complex reasonings and aid in perfecting the decision-making process, it may seem redundant. Nevertheless, the objective of gamification is substantially different. The main purpose lies in engaging and leading the consumer, and not so much in dictating their action. As a result, more and more real-life problems are being adapted to game situations where the consumer/user is nudged towards a specific path. Essentially, it leverages fun to create motivation, just like in addicting video games. 

In every job that must be done, there is an element of fun. You find the fun, and – SNAP – the job’s a game! – Mary Poppins 

In conventional behavioral economics (if we already arrived there), the focal point of any consultancy project is the experiment. The solution to a problem, being it in marketing, human resources, or any other area, passes through understanding what behavior an organization wants to stimulate in its target group or society. This is precisely why corporations are searching for better solutions through gamification. Certain human psychological actions are difficult to stimulate through “normal” methods and even harder to predict from game theory or related tools that perceive the representative agent as rational. 

Let’s take Duolingo.com for example. If the reader has ever tried to learn a foreign language independently (without any teacher, book, or guide), then probably has encountered this user-friendly website. Duolingo was founded 10 years ago and today is a publicly-traded company valued at USD 161.7 million, with more than 400 employees, 500 million users, and 106 different language courses in 40 different languages1. But, if the reader has ever tried to learn a foreign language independently, then probably has found it not as captivating or easy as it may seem. How did Duolingo achieve this level of success? Can we restrict its merit to simply better or more disciplined users? 

Well, the internet plays an important part in today’s world of education, but game mechanics might also be a source of success in this case. The difference between learning a language from a regular website and Duolingo lies in how the language is taught. The latter brings about different features that the reader may not encounter often, such as storytelling, goal framing, badges, points, levels, and other virtual incentives that promote the user to be disciplined and maximize their learning experience. The key lies in turning actions and exercises into fun challenges and creating a story behind the user’s progress so that he stays addicted to the “game” and finding out what is next. These gamified features transform the user’s involvement and the nature of the task at hand (from boring L to exciting J). 

This concept may appear to the reader as simple, straightforward, or even common. However, behind these ideas and their application, there is a team of designers, whose objective is to put themselves in the users’ point of view and trace their mental steps. Where would they quit? There is the need, as in any problem-solving situation, to identify and understand the problem, conceptualize the right game mechanic, and finally test it to figure out if the correct mental aspects of the user’s cognitive perception were addressed. In fact, this is a complex process. Amongst all the known (and unknown) biases, being able to understand the real drivers of a specific human choice is a behavioral trial by itself, thus this synergy between behavioral science and gamification enhances the strengths of both areas. 

Like Duolingo, many other non-game situations are being transformed by fun, consequently increasing motivation and creativity. Yet, we should never take this as a closed subject. Taking Education, for example, it has been a static, unchanged sector for several decades, that stimulates risk aversion. As Scott Hebert said in his 2018 Ted Talk on gamification uses for education, “the Education system is a system in an engagement crisis”. Children are in school to learn, and shouldn’t be scared to fail or be creative and innovative. We should encourage autonomy and make learning fun so that the behavior and opinion towards school takes a positive and rewarding turn. The setup of a non-game question needs to address the participants (as different individuals), their expectations, and all the time-sensitive and contextual factors, hence it is clear that children’s opinions on how to learn should be taken into consideration. Only then can their behavior be effectively altered over time, possibly creating a new generation of learners. 

In sum, gamification constructs a setting where the user is led towards a specific outcome, like learning a new language or a new subject in school, through the construction of a fun, engaging, and playful setting. At the end of it all, it is a win-win. 

Sources: John Bell’s Website, Nudge Unit , Dr. Zac Fitz-Walter, The Power of Gamification in Education

Ana Clara Malta

Scientific revision: Patrícia Cruz

China’s Victory on Absolute Poverty

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Reading time: 6 minutes

On the 25th of February 2021, President Xi Jinping of the People’s Republic of China (PRC) announced that China had achieved an outright victory in eliminating absolute poverty in the country by lifting 770 million people out of poverty in the past 40 years. It was also stated that over 70 percent of the total global reduction in absolute poverty was attributed to Chinese efforts, for the same time frame.  

Nevertheless, there has been plenty of scepticism from western media regarding these achievements, especially concerning potential differences between what the World Bank and the PRC consider to be absolute poverty. With this article, our aim will be to analyse the veracity of these claims by examining the statistics concerning China’s poverty alleviation efforts, while also assessing what policy measures were adopted to reduce abject poverty. 

What does the PRC consider to be poverty? Concerning China’s poverty line, there have been three different standards employed by the Chinese government to characterise poverty: the 1978, the 2008 and the 2010 ones, the latter being 2300 yuan per person per year, meaning 6,3 yuan ($0,94) per day. For the World Bank, the most recent standard for poverty sits at $1,90 per day (at 2011 Purchasing Power Parity (PPP)). Unfortunately, for the untrained eye and sensational media, this glaring 1 dollar difference implies that it exists a discrepancy in criteria between the two institutions. However, this thought process has a crucial failure: it fails to put China’s poverty line value in 2011 PPP prices. 

Figure 1 – China’s 2010 poverty line at constant prices

From the graph above, it can be observed that China’s poverty line value is not a constant 2300 yuan for each year, but rather one that has adapted to price changes, with a poverty value of 2536 yuan per year, equivalent to 6,95 yuan per day, for 2011. According to the 2011 PPP, 1$ would be equivalent to 3,52 yuan, meaning that China’s poverty line would be approximately 2,00$ day (2011 PPP), which is in fact a higher value than the World Bank’s. 

Figure 2 – China’s Population living in poverty throughout the years (2010 standard) 

Regarding the second claim made, the data indicates that it was in fact in China where most poverty alleviation occurred: in the 1980–2018 timeframe, the 750 million Chinese who were lifted out of poverty represent approximately 63% of the total change in the poverty population, which went from 1926 million people in 1980 to 698,4 in 2010 (at the $1,90 Standard). 

One might still think that the 1,90$ standard is still too unambitious for a person to be considered lifted out of absolute poverty, because even if an individual does earn this minimum amount of money, he/she might still not have access to clean water or proper medical care. In fact, while the World Bank claims that in 2018 there were around 700 million people living in extreme poverty, the UN reported a whopping 1,5 billion people as being food insecure and unable to conduct normal human activity. 

Two assurances and three guarantees

Consequently, the Chinese government, when establishing the 2010 poverty line, deemed essential to include in the poverty alleviation objectives the “two assurances and three guarantees”: the two assurances, also called the two no worries, being adequate access to proper food and clothing, which would be assured if the 1,90$ benchmark was to be achieved, whereas the three guarantees are the following ones: 

The access to compulsory education, which was boosted by investing in new public-school facilities in poorer regions, especially for pre-school children who lack the independence to go to distant schools on their own. In addition, the PRC government established a subsidy program where families only gained access to extra income if their children attended compulsory schooling.  

The access to basic medical care, which, once again, was boosted by investing in new health care facilities and in the number of medical personnel employed by the state. For remote impoverished villages, a program was created where poor families were ensured at least a visit from a state physician each month.  

Figure 3 – Chinese Government’s investment in Poverty alleviation measures 

Finally, the access to secure housing, as most of the previously impoverished counties, in this past decade, were in mountainous regions, such as the Sichuan or Yunnan provinces, which have limited potential for economic growth. These citizens’ decrepit homes, which lacked access to essential amenities, combined with their low incomes derived from old-fashioned agricultural practices, possessed a significant challenge to their lives’ improvement. Thus, the Chinese government subsidised the construction of new houses where the access to clean water and electricity was assured in areas with less arduous conditions, allowing these citizens to relocate to them for free. 

Figure 4 – Newly built relocation homes for Sichuan’s impoverished families

The Job-Placement

Evidently, when establishing these new communities, the necessity to create new job opportunities for the relocated citizens arose. For those that were re-established in different rural areas, they were able to maintain their agricultural practices, albeit with renewed tools and machinery funded by local governments. For those that were moved into urban areas, most were able to find new jobs in the secondary sector, many of which were propelled by the e-commerce sector.

The prevalence of e-commerce in China means that it has never been so easy for local firms to ship their products to other parts of China, which increases their potential consumer pool and allows for remote regions to have more profitable firms. As such, local governments were able to cooperate with the private sector in establishing new factories to employ these relocated citizens. 

This job-placement example demonstrates what has been a continuous process in Chinese society for the past 40 years: the organised cooperation between the government/public sector and private enterprises. As a market-socialist nation, China’s economy is organized in a considerably different way than Western Countries’: if not for the prevalence of Public State Enterprises in the economy, then the regulatory hand of the Chinese government vastly outweighs the West’s, who more often adopts a laisse-faire style approach to solving economic problems. 

Nonetheless, despite running these government projects, China’s debt-to-GDP ratio has remained at relatively low levels, although it has recently risen, mainly due to COVID19. Likewise, its GDP growth rate has remained positive throughout this period, meaning that these types of projects are not some sort of far-fetched utopian idea, but rather they are feasible projects that tackle poverty problems at their core. 

Figure 5 – China’s real GDP per capita (at 2017 dollars PPP)  

China as an example to follow 

In conclusion, it is vital for policymakers, especially those working in the field of development economics, to understand how China’s implemented policies could be adopted in other parts of the world, because, as it stands, it was in China where most progress has occurred. Furthermore, as the UN 2030 goal is to eliminate absolute poverty, the effective way to achieve it will surely involve getting a better grasp on past data and policy decisions guiding the world towards a better future. 

Sources: The World Bank, National Bureau of Statistics of China, The Guardian, Beijing Review, BBC, CGTN, Council Pacific Affairs, Xinhua News Agency 

André Rodrigues

The ugly truth about palm oil

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Reading time: 5 minutes

Palm oil is a silent presence in most of our daily lives. It can be found from bread to ice cream, from toothpaste to chips and from soap to fuel, but do we really know the truth about it? 

Palm oil is an edible vegetable oil original of a palm tree named Elaeis guineensis, native from Africa, even though most plantations nowadays are in south-east Asia, with Indonesia and Malaysia representing 85% of global production. Due to its characteristics, such as high saturation, oxidation resistance, stability at high temperatures, low cost and versatility, it is widely adopted on a globe scale.  

It can be found in more than a half of packaged products consumed in the US, in 70% of personal care items and it can be used as animal feed, as a biofuel or as cooking oil, and it is estimated that we consume, in a global average, 8kg of palm oil per year, making it the most used and demanded vegetable oil in the world.  

On the one hand, this crop is the most efficient when compared with others, such as soy, coconut or sunflower. Also, its costs of production are lower than every other animal or vegetable oil, making it very cheap and accessible to the consumer, allowing it to be the used widely as a cooking oil in Asia, where the economic and demographic growth would lead to the increase in demand in the future (today India, China and Indonesia account for 40% of the world’s consumption). In the west, it was adopted in some diets, because it is healthier than other fats, and its use as a biofuel corresponds to more than half of its importation into Europe. 

To supply all the palm oil demand with alternative vegetable oil, it would take almost five times more land than coconut, sunflower and rapeseed, and more than eight times soy. Due to this, palm oil supplies 35% of the world’s vegetable oil, on just 10% of the land. Thus, the suppliers were encouraged to increase production, and, for that purpose, they counted with the support of private funds, bank loans and the IMF (International Monetary Fund). 

This industry has a considerable impact on the economies of its producers, accounting for 13,7% of Malaysia’s gross national income, and it is the product more exported by Indonesia, the world’s top producer, accounting for nearly 40% of the worldwide production, providing employment to over two million Indonesians directly. 

Between 1995 and 2015, its annual production quadrupled, from 15.2m tonnes to 62.6m tonnes and by 2050, it is expected to quadruple again, reaching 240m tonnes, which lead the production to spread through Africa and Latin America. This production expansion promoted an increase in employment in this sector and, consequently, could lead to a decrease in poverty. However, this is not what has been happening. 

The workers in Malaysia and Indonesia complain about gender inequality: “The women on the plantations have no rights, not even the right to a salary in many cases” says Herwin Nasution, president of SERBUNDO, a trade union alliance representing mainly agricultural workers in Indonesia. The inexistence of an official employment contract makes these workers vulnerable to illegal conditions, turning the plantations into a place where labour exploitation and human rights abuse are a reality, and where, sometimes, child labour is found.  

In fact, the working conditions are very poor, with long shifts, limited access to clean water and use of toxic chemicals without adequate protective equipment, and the workers receive no support from their employees regarding health insurance, maternity license or school facilities.  

Additionally, palm oil production has a devastating impact on the environment. In order to produce the palm trees, tropical forests were burned and cut down, in one of the regions of the globe with more biodiversity and making it responsible for about 8% of the world’s deforestation between 1990 and 2008 (only in Indonesia there was recorded a loss of 25.6 million hectares of tree cover, during the period from 2001 to 2018). By burning these forests, greenhouse gas is released, namely CO2, having a severe contribution to global warming, and it is the main reason why Indonesia is the third country in the world with more gas emissions. Moreover, the intensive cultivation method without planning or care for the environment could lead to soil erosion and water pollution.  

Furthermore, it destroys the habitat of hundreds of species, even when it is considered illegal, as it happened in Riau, Indonesia, one of the most affected regions, where 84% of elephants living there died after losing 65% of its forest, in the last quarter a century. But Bornean Pygmy elephants weren’t the only ones affected by the deforestation. More than 100,000 Bornean orangutans, a critically endangered species, died between 1999 and 2015, and almost 75% of Tesso Nilo National Park in Sumatra, that secured the habitat for the endangered Sumatran tiger is now covered with illegal palm oil plantations.  

You could think that a way to solve this would be if we stopped producing or consuming it, and instead started buying other vegetable oils, such as soy. However, the problem would remain, because the need to make way to the plantation would stay the same. Also, these other plantations would need more land than palm oil, making these alternatives possibly worse, and, besides that, none of them would be a perfect substitute since none of them has the same versatility, utility or functionality as palm oil.

Despite this, the palm oil problem could still be lessened. The solution to this problem could be to change the way it is produced to a more sustainable one, that respects the rights of workers, recognizes the responsibility with the environment and uses the effluents and waste to other activities, along with the increase of inspections in order to close all the illegal plantations. The consumer could distinguish the products produced in a sustainable way through the RSPO (Roundtable on Sustainable Palm Oil) certificate (around 20% of the world’s production), that forbids deforestation and promotes the conservation of these highly diverse habitats.

The awareness regarding this topic has increased and, as a consequence, several companies and countries demand the production of this vegetable oil to have a certification of sustainability or are applying measures against it. In Norway, all importations of this oil as biofuel were banned, and in the UK, the supermarket chain Iceland started a campaign[1] to ban palm oil from their label products until it is proven to be of sustainable origin. In some cases, we can already see the results, such as in the UK, where 75% of the total palm oil imported was sustainable, by 2016.  

With development economies pursuing an exponential growth in palm oil production, such as Colombia, where fields that were formerly used to coca plantation or to raise cattle are converted to palm trees plantations, making it more sustainable, a new tomorrow to palm oil production arises.

[1] An example of this campaign is the following advertisement: https://www.youtube.com/watch?v=oA10-oZi4Xc

Sources: The Guardian, Org, WorldWildlife, Statista, Dialogochino, Cell, BBC

Mariana Gomes

European Football | Cash is king in the king of sports

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Reading time: 7 minutes

Football is king in Europe; it is a sport that moves millions of die-hard fans as well as billions of euros every year, 28.9 in 2019 to be precise. Despite the fact that the COVID-19 pandemic took a major hit on the finances of most football clubs, the revenue of the big five leagues (England, Germany, Spain, Italy and France) is expected to reach a new record of 18.2 billion euros in 2021.

Even tough business seems prosperous, there are a number of problems to be addressed, and the Super League, the international competition announced earlier this year that quickly fell apart, suggests that the elite of football wants to solve only their own problems. It is, however, important not to forget that this competition points to a huge problem in modern football – the growing asymmetries within the sport.  

How did we get here?

Disregarding the health-driven financial crisis lived today, Football’s health has been struggling for a while now, as there has been an overall overspending by teams, mainly from larger clubs, either on the acquisition fees or payroll. Moreover, most domestic leagues have become uncompetitive and monotonous and, there has been a lack of commercial interest in most of the “smaller” confronts.

The importance of the competitions and broadcasting’s income for the clubs and their rapid growth have led to major “financial confronts” outside the pitch, with every club looking for the best talent out there. This has been transformed into skyrocketing wages and transfer fees between clubs, with the average Premier League transfer fee having more than tripled since 2007, to an average of more than £16 million. 

Figure 2 – Average Premier League Transfer Fee
Source: Chronicle Live

This has been made possible by overleveraging clubs, through debt or the help of wealthy owners, who can invest large sums of money in hope titles. In fact, only one of the 12 initial clubs in the Super League is free of debt, with several of them having a large net debt as of 2021, which, by not being accompanied by positive profits, keeps increasing from season to season. This has led to enormous asymmetries between those who can sustain said debts, or have wealthy owners who can bail them, and those who rely solely on their revenues from more conventional sources.

Figure 3 – Net Debt of Super League Founding Member
Source: Bloomberg

On the other hand, leagues have been struggling with commercial interest on some of their games, especially those between smaller teams. TV broadcasting rights and sponsorships, which play an important role on clubs’ revenues, also help perpetuate the differences between teams, with some in leagues where there is no “unified type” of TV rights selloff seeing a larger disparity, whereas in the Premier League or Bundesliga there is a more centralized and organized revenue sharing.

This reality leads to the final problem Football is facing: most domestic leagues are becoming uncompetitive. Looking at Top-5 leagues, only the Premier League has constantly 6 teams fighting for the title, whereas the others either have 2 main competitors (La Liga and Bundesliga), or even a single competitor that stands immensely (Serie A and Ligue 1). This era has become more and more polarized between title candidates, and the others, with the second group playing on an unleveled playing ground, and only in some rare occasions being able to surprise the recurrent candidates. This diminishes the spectacle of football, and only helps perpetuate the problems in Football, the inequalities and the surviving difficulties small teams suffer recurrently.

Figure 4  – Market Size of Professional Football Leagues in Europe from 2017 to 2019, by league type (in billion euros)
Source: Statista

How did COVID-19 put the Super League on the table again?

The COVID-19 pandemic affected our lives in every possible dimension, with football not being an exception. According to KPMG, the pandemic had a $5 billion impact on the sport, with the biggest clubs alone having $1 billion losses in revenues.

Figure 5 – Aggregate revenue in European top divisions (in EUR million)
Source: KPMG and UEFA

With the major European clubs taking major hits to their finances because of COVID-19, the plan of a European Super League (ESL) came abruptly to the foreground this April, in an attempt to ramp up revenues.

What is the plan, then?

According to the official ESL plan put out in mid-April, 12 major European clubs (+3 that would be announced) would join as Founding Clubs and the competition would consist of a closed tournament between those teams and 5 other teams in rotating slots that would be chosen each season.

This plan has major implications for the economics of European football:

Firstly, each founding member would have received around $400 million for the founding of the ESL. Secondly, revenues coming from broadcasting and advertising would be much more concentrated on the ESL founding member-clubs, because such a league would siphon off much of the attention from the Champions League and other competitions in Europe. Furthermore, as an essentially walled-off competition, the ESL would hurt revenues of smaller clubs which would be left out of the ESL’s elite roster, thus losing access to the millions of the European stage.

Finally, it could have large impacts on the wages paid to players and on the clubs’ finances, as many large clubs spend considerable percentages of their revenues on players’ wages to attract the best players in the world, and ultimately win titles.

Figure 6 – Wage burden of clubs looking to join the new Super League
Source: FT

The new ESL founding clubs would commit to spending limits of 55% on wages. This would reduce competitive behaviour between these large clubs, leading to lower wages for players and more profits for clubs.

The potential negative effects on smaller clubs and the fact that the 15 founding clubs would have their place in the ESL guaranteed, no matter what, led to outrage from both football fans and football confederations, who claimed that this would further increase the inequality between clubs and would hurt the spirit of the sport. The UEFA went further threatening sanctions against the clubs who would undertake the project, namely barring clubs from all its competitions and preventing their players from representing their national teams.

Eventually, as pressures from the backlash increased against the large clubs, even from politicians, English clubs began to pull out from the ESL project and the ESL put out a statement saying that the project was “suspended”.

What does the future hold for European Football?

Though the Super League was killed off earlier this year, it does not mean that European Football will stay the same, as a new format of the Champions League is to come into effect in 2024. Moreover, an all-new tournament is coming in 2021, the UEFA Europa Conference League, a third-tier competition. The new Champions League will adopt a swiss-style model instead of the traditional group stage, and there will be a single league in which teams play 10 games each against “teams of their level” to qualify for the knock-out stage. This new format addresses some complaints of the biggest clubs regarding the quality of the matches, as the best teams will face each other more frequently. Furthermore, the addition of 4 more teams to the competition serves the same purpose as the Conference League, that is allowing for more teams to have a chance in the European stage, hopefully making the sport more competitive, which is what fans look for. The problems that football faces today are not exclusive to the sport. We have witnessed sports introducing significant changes in order to remain relevant. Formula 1 is a great example, as the sport has changed itself over the years, managing to attract a new generation of fans in return. F1, perhaps the most expensive sport in the world in which money means titles, recently announced budget caps, as well as sliding scale for car development, which intends to create a level playing field for teams and ultimately make the sport more interesting for fans.

Figure 7 – F1 rebranded itself in 2017 to attract new fans
Source: F1

Football faces the same challenges as F1 in terms of competitiveness and the difficulty to resonate with a new generation of fans that, due to social media, is more interested in the accomplishments of players such as Ronaldo or Messi than in their teams’. Consequently, football must constantly reinvent itself too, without losing the essence that made it what it is today.

Football is at a crosswalk; the sport must remain relevant in the modern era of entertainment and social media, while still being a profitable business. The innovations brought by UEFA show that the sport is evolving. However, that alone will not make it. Certainly, the smaller teams will get a bigger pie of the money and the elite better matches, though that will be verified only in the short run.

Sources: Bloomberg, Chronicle Live, FiveThirtyEight, Financial Times, KPMG, The New York Times, Statista, UEFA

Tiago Rebelo

João Baptista

Jorge Lousada

Are robots taking our jobs?

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Reading time: 6 minutes

A brief overview of technological disruption on industries

The automation of activities via technological breakthrough is no novelty to society. It no longer strikes us as surprising the fact that pilots only steer the plane themselves for around 10% of the course, or that money is drawn from ATMs rather than from a bank teller, as opposed to what happened a few decades ago. However, as we experience AI and machine learning development at an ever-accelerated pace, the future of many industries and employment as we know it may be at stake.

Overall, economies had to adapt to maximise the value they get from the digital disruption phenomenon, but at a micro level how did businesses across industries changed? First, they transferred some of their power to consumers, making their needs the main focus of the company. Also, they changed the way they operated, shifting to a more agile and sharp way of acting, simplifying the decision-making process and making their dynamics more competitive. And lastly, firms reinvented their operating models, using advanced analytical tools in order to reduce costs and to drive revenue, while improving insights.

Recently, AI has been subject to groundbreaking discoveries, accounting for significant advances in many sectors and placing us in the middle of the fourth industrial revolution. As the world’s top enterprises strive for the best AI in order to capture its vast market (Amazon with Alexa, Apple with Siri, IBM with Watson, and countless other examples), we observe time and again a wider scope of industries that are possible to restructure and enhance via technology – healthcare, retail,  manufacturing, finance, customer service and transportation, only to name a few.

As more companies adopt artificial intelligence for revenue boost and cost reduction, global AI startup funding has been growing vertiginously over the past years. The ease with which manipulation of AI capabilities can be done allows each industry to tailor it to their value chains and, consequently, increase efficiency.

Source: McKinsey

What’s more, machine learning is also a tool increasingly more explored by corporations, from financial services to entertainment. PayPal, for instance, makes use of machine learning to analyse and compare users’ activity in order to detect legitimate and fraudulent transactions, namely money laundering. Netflix makes use of intelligent machine learning algorithms that compare viewing activity in order to make recommendations on what to binge-watch next. These sorts of tasks involve the quick analysis of big data, a task in which humans cannot compete with machines.

One of the sectors that is already being revolutionized by technology is transportation, and one does not even have to go as far as Tesla to mention automated vehicles. As Mobicascais rolls-out its first automated bus, the future of self-sufficient public transportation  is imminent. And it does not stop here: with multiple trials on autonomous ships, mining trucks and aircrafts, the only thing stopping driverless vehicles from becoming mainstream is regulation.

When it comes to manufacturing, the automotive sector is historically known for using cutting-edge technology to improve efficiency. While Industry 4.0 technology brought considerable gains in productivity, ranging from production design to quality control, being able to keep up with increasing consumer demands for more choice, it has also been able to mitigate the fear that this industry belongs to the robots. Breakthroughs in the field of robotic technology brought the so-called “co-bots”, artificial intelligent robots that are much lighter and agile – thus safer for humans to work around – and, more importantly, they are trained rather than programmed. A study conducted by the MIT in alliance with BMW found robot-human teams to be 85% more productive than either of them alone, and the manufacturing industry is responding, tending towards a common-ground future for man and machine.

By affecting industries, automation is bound to change labour. In fact, this has been a trend for decades now and the further development of AI will inevitably change the workplace and how we work, which will bring positive and negative consequences. The global impact, however, is still unknown.

In the US, since the 80s, computers have led to 3.5 million jobs destroyed, according to a McKinsey study. Nevertheless, in that same time frame, over 19 million jobs were created as a result of the personal computer, as technology increased productivity and spending power, which consequently created new demand and new jobs. Technology has changed labour, not destroyed it. As the service sector gained weight, so did the median household income, as a result of some low-paying and low-skill jobs being replaced. Also, automation led to vast improvements in terms of quality of life, hours of work as well as replacing repetitive tasks, meaning its impact extends beyond just economic indicators.

AI, machine learning and other recent technologies stand to change the labour market similarly to how computers did, although to a further degree. The World Economic Forum claims that from 2018 to 2022 automation will destroy 75 million jobs, but, as was seen previously, 133 million jobs will emerge in that period due to the same event. However, when talking of automation and job destruction, it is important to distinguish between occupations and activities. According to McKinsey, 45% of activities performed can be automated by adapting currently demonstrated technologies. When it comes to occupations that may be fully automated that figure is only 5%. This scenario is far less drastic, because the change affects primarily tasks rather than occupations themselves. Nonetheless, 60% of occupations could have 30% or more of their constituent activities automated, which means the vast majority of professions will still suffer significant changes, namely job redefinition along with transformation of business processes.

The difference from previous seen automation lies in the incidence. Whereas the industrial revolution led to mainly low-skill tasks disappearing and the computer age  affected workers more in the skilled middle, such as travel agents, this time technology will also affect high-paid occupations, such as executives and physicians. Machine learning and AI’s expertise will exceed humans’ and, as a result, more demanding tasks and decisions can be automated, making even high-skill professionals subject to the phenomenon, something not seen before. As profound as these changes may seem, they will not occur all at once, instead AI will slowly move into the workplace gradually replacing humans.

All in all, additionally to affecting companies financially, automation will deeply affect workers financially, because as labour becomes a less important factor in production, a majority of citizens may find the value of their labour insufficient to pay for a socially acceptable standard of living, which will require society to come up with solutions to prevent a part of the population from falling behind. AI and machine learning are successful as long as they create value for human lives. To safeguard human labour from becoming obsolete and inequality from increasing, it is vital that governments take an active role when it comes to defining policy. While it is important to stimulate investment in R&D, it is crucial to adopt a “humans first” position. Although it may be difficult to predict in which direction technological disruption may point towards, it will surely be impossible to go back from it, so legislation must be shaped in a way that advances in technology focused solely on corporate profit and disregard human capital are forfeit.

Sources: McKinsey, Statista, MarketLine, Forbes

Written by Diogo Alves, Lourenço Paramés and Tiago Rebelo

Scientific revision: Patrícia Cruz

German elections

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Reading time: 6 minutes

In September of this year, German voters will head to the polls to elect a new Bundestag or German Federal Parliament. However, for the first time in 16 years, they will not be able to vote for Angela Merkel, who announced in 2018, she would not run for a fifth consecutive term. Angela Merkel was the first female Chancellor of Germany and has been widely described as the de facto leader of Europe. If the reader wishes to know more about the legacy Merkel leaves behind, both in Germany and the European Union, we have written two articles that discuss this very topic. You can find part one here [Merkel Part 1] and part two here [Merkel Part 2]. So, if Merkel is out, who will be the next Chancellor of Germany? Let us look at the three front-runners.

Main candidates

Figure 1 – Armin Laschet; Source: FR.d; Taken by Federico Gambarini

Armin Laschet is a 60-year-old former layer and journalist. He is currently the State Premier of North Rhine-Westphalia, the most populous state in Germany. Laschet is the current leader of the center-right party, Christian Democratic Union of Germany (CDU), and he will head to the elections under a political alliance between CDU and the Christian Social Union of Bavaria (CSU), the latter being a sister party of the CDU that operates in the German state of Bavaria. Angela Merkel was the leader of this political alliance in the elections from 2005 to 2017, so the reader can think of Laschet as her successor.

Figure 2 – Annalena Baerbock; Source: buchreport.de

Annalena Baerbock is a 40-year-old member of the Bundestag, and co-leader of the center-left party alliance called the Greens. In April, the Baerbock was announced as the Greens’ candidate for Chancellor for this year’s federal elections, which was the first time the Greens announced a sole candidate for Germany’s head of government. She has been a member of parliament since 2013 but has never held any public office.

Figure 3 – Olaf Scholz; Source: globsec.org

Olaf Scholz, 62-years-old is the current Vice-Chancellor and Minister of Finance of Germany. He is the nominee of the center-left Social Democratic Party of Germany (SDP) for Chancellor. He has been part of the SDP since 1975 and has had a long political career. He is seen as being part of the more conservative wing of the SDP. Scholz is by far the most experienced candidate of the three.

What do the polls tell us?

As for the time of writing, it is still early to tell who will win the elections in September. The current polls show the Greens of Annalena Baerbock ahead in the polls. Despite her lack of political experience, Baerbock’s smooth nomination process and message of reshaping German politics have resonated with voters. In second in the polls and within the margin of error comes Armin Laschet’s CDU/CSU bloc. The long political battle between the two parties of this alliance to choose the nominee for Chancellor and widespread accusations of corruption against some CDU members of parliament have damaged the image of the bloc in the public sphere. In third, and quite far away from both the Greens and the CDU/CSU block, is Olaf Scholz’s SDP. Despite being either the largest or second largest party in every election since the end of WWII, the SDP has been on a declining trend over the last 16 years and had its worst result since 1932 on the last Federal elections. If the party does not manage to recover, it will have its worst electoral performance since 1887 (134 years ago).

The numbers now show that the winner in September will be either Baerbock or Laschet, however, both parties are polling quite far away from winning an absolute majority in the Bundestag. Therefore, either one will face the challenging task of forming a coalition able to govern Germany until 2026.

Consequences on for the EU

However, the Chancellor of Germany is often described as the de facto leader of Europe, so it is important to understand what type of policies the two favorite candidates defend for the EU.

Figure 4 – Time’s Magazine Cover from January 11th 2020

Both candidates are pro-European, with Laschet recently saying that “in any global problem-solving, we need multilateral solutions, we need a European Germany.” However, their views towards Europe are quite different.

Armin Laschet is one of Merkel’s closest political allies so his policies towards the EU and other European countries will follow in the steps of his predecessor. He is a strong defender of Merkel’s stance on the Covid-19 recovery package and controversial migration policy. He has also defended a closer relationship between Germany and France, and an attempt to improve diplomatic relations between the EU and Russia. In his program, “Impulse 2021”, Laschet states the importance of completing the Single Market, increasing the use of qualified majority voting, and reinforcing the European Border and Coast Guard Agency.

On the other hand, the election of Annalena Baerbock could dramatically change the EU and its relationship with the rest of the continent and the rest of the world. First, Baerbock has defended the reform of the German “debt brake” that prohibits the government from having a structural deficit above 0.35% of GDP, saying it leads to low public investment, which in turn, hurts the competitivity of the German economy, additionally it makes it harder for the country to fight global warming. This change in fiscal policy could translate into a less strict approach by Germany towards fiscal responsibility being forced upon highly indebted European countries, such as Italy and Greece. The Greens have also defended making the EU’s recovery package permanent, and that the Stability and Growth Pact is excessive and should be reformed. For the readers who do not know, the Stability and Growth Pact is a set of fiscal rules which state EU countries cannot have budget deficits above 3% of GDP and the national debt cannot surpass 60% of GDP. As of 2021, only 13 of the 27 member states meet both criteria, and Germany is not one of them. Baerbock’s dedicated support for action against global warming will also likely lead to a more climate-focused EU, she has even supported a transatlantic Green Deal. As for Russia, Baerbock defends the suspension of Nord Stream 2, a project set to deliver Russian natural gas to Germany through the Baltic Sea, and defends a tougher stance against Putin’s actions on Ukraine. Regarding China, the Greens see a necessity for Europe to cooperate with the country to fight climate change, however, the party advocates for EU sanctions on China over its treatment of the Uighurs minority. The reader can learn more about China’s violations of human rights against Uighurs in this previous article [Uighurs] we have written about the topic. The Greens have also shown opposition against the EU’s recently concluded Comprehensive Investment Agreement (CAI) with Beijing and seeks to block Huawei’s participation in Europe’s switch to 5G.  

As already mentioned in this article, it is still too early to know what will happen in this year’s election, and Laschet’s or Baerbock’s ability to change the European Union’s domestic and foreign policy will depend not only on their electoral result but on what sort of coalition they will be able to form to govern Germany. However, there is one thing we know for certain, with Merkel’s exit, come 2022, Germany and the EU will have a new leader.

Sources: The Wall Street Journal, Rusi, Politico, BBC, CNBC, DW, The Economist, Financial Times, The Times

Francisco Pereira

João Sande e Castro

Pedro Afonso Estorninho

The Asian Tigers: Successful Economic Development in the XXth Century

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Introduction 

After the Second World War, East Asia was facing multiple political and economic problems. Few would predict that four countries in the region would be the best example of successful development: Hong Kong, Singapore, Taiwan, and South Korea embarked on an unprecedented economic transition. In the beginning of the 1960s they were all low-income countries. Rapid and sustained economic growth and equal income distribution provided for by intelligent industrial policy, with some state intervention turned them into some of the world’s richest countries by the end of the century. 

In this article we will present the decisive economic and political factors in each of four tigers’ trajectory, and what they teach us about economic development.  

Evolution of Real GDP per capita in
all four Asian Tigers

Hong Kong’s Positive Non-interventionism 

         The city of Honk Kong was a British protectorate until 1997. Thus, its economic development in the 20th century was made under colonial rule. The economy was devastated after the Japanese occupation in WWII and the embargo from China during the Korean War. Nevertheless, it was able to produce an industrial take-off in the 1950s. The reasons for this take-off are twofold: first, the city benefited from capital and know-how brought from refugees from communist China; secondly, the colonial authorities opted for a liberal approach to policymaking. 

Sir John Cowperthwaite (1915-2006), Financial Secretary of Hong Kong (1961-1971)

The authorities, headed by Sir John Cowperthwaite (financial minister from 1951 to 1971), chose a laissez-faire policy, with openness to trade and to capital flows, low taxes, balanced budgets and the creation of the necessary institutional conditions for agents to operate in free, competitive markets. At the same time, the government intervened in the supply of public goods, strong and efficient regulation, and some welfare measures such as supply of housing. 

         These institutional conditions provided a framework for a rapid economic growth in the 1950s through the 1970s that was heavily based on industry. Structural changes were brought by China’s relative openness after Deng Xiaoping’s reforms. From the 1970s onwards Hong Kong’s economy moved from an industrial economy to an economy based on trade and value-added services, with a particular emphasis on financial services. 

         Today Hong Kong is one of the technological, financial, and trading centers in the world. Its economic results are sound and believed to continue to be so in the future. After the 1997 handover, it has become more economic integrated with China. However, the economic freedom and progress coexisted with lack of democracy and basic freedoms both during Britain’s rule and today. 

Singapore: Growth without Freedom 

         The city of Singapore gained its independence from Britain in 1963 and it seceded from Malaysia in 1965. At the time it was an underdeveloped city, with most of its inhabitants living in poverty while unemployment soared. Furthermore, it was a small state lacking natural resources, and basic economic and well-being infrastructure. 

         Inspired by the example of Israel, the government of Singapore tried to reap gains from trade and globalization to develop its economy. The government embarked on a set of policies designed to attract foreign direct investment and develop and liberalize trade in the region. Taxes were low, incentives given to investors and the rule of law was strictly enforced. In a couple of years most production units were owned by foreign investors, particularly American and Japanese ones. In the 1960s and 1970s, the country’s GDP grew at an annual double-digit rate. To industrial economic dynamism Singapore created was further enhanced with investment in education, particularly on technical skills. 

      

 Lee Kuan Yew (1923-2015), Prime Minister of Singapore (1959-1990)

   Singapore produced real structural reforms that created a resilient economy that dealt with relatively ease with the Asian Financial Crisis of 1997-98, the Dot-Com bubble and the 2008 Crisis. Today the city-state is one of the world’s trading and financial services centers, with many exporting high-tech industries. Furthermore, it shows many good results in quality-of-life indicators. 

         However, development came at a cost. The reforms were made by a strong government, under the leadership of the People’s Action Party since the late-1950s. Particularly, the reforms are associated with the person of Lee Kuan Yew, prime minister from 1959 to 1990. The business-friendly measures were coupled with a strong authoritarian government that constantly curtailed individual freedoms. Prosperity came at the cost of democracy, which is not the most desirable model to emulate. 

Taiwan: an active government 

Taiwan became an independent country after the Chinese Civil War, which opposed nationalists and communists. As the communist regime of Mao Tse-tung was implemented, the Chinese business elite was forced to flee to Taiwan, bringing capital and economic power to the island.  

The miracle of Taiwan’s economic growth was only possible due to an active posture of the government, which encouraged enterprising and development of the economy, providing several incentives.  

The plan for this growth consisted of transforming an economy based on agriculture to manufacturers, namely in the textile industry, modernizing the stages of production and trying to make it self-sufficient. The support of the government was fundamental since it supported the investment and capital acquired. This plan proved to be a huge success, as it drove Taiwan’s economy, shifting from the primary sector to the services sector, increasing exports and attracting investors.  

Another factor to consider in this process was that the labour force was extensive and very cheap, as the degree of education was not very high in most of the population, lowering the costs of production and allowing an establishment in the world’s market with competitive prices. Besides that, Taiwan also invested in the consumption and production of electronics, namely in integrated circuits. As the know-how and quality of the products increased, it boosted Taiwan’s economy, receiving plenty of foreign capital and exporting most of the production.  

South Korea: an exemplary case of diverging paths 

South Korea’s case is interesting, because, unlike the other three nations, it is noticeably larger and borders one of the worst cases of regime failure – North Korea. 

General Park Chung-hee (1917-1979), ruler of South Korea (1963-1979)

The Korean peninsula was home to a mostly agrarian society prior to World War II, making it one of the poorest in Asia. With the end of the world war, Cold War followed, and the Korean war broke out in full force, pitting the communist forces of the North (backed by China and the Soviet Union) against the US-led troops in the South. This was a defining moment in the Korean economy, leading to a coup by South Korea general Park Chung-hee in 1961. Chung-hee was a de facto dictator; however, the country flourished with him spearheading efforts to transition from an agrarian to industrial economy. His iron-fisted rule ensured controlled growth in the early 1960s. A lot of South Korea’s early prosperity stems from foreign aid provided by the United States – the chaebols, family-ran corporations, the backbone of the Korean economy, benefited greatly from these donations, in addition to tax breaks and easy financing. This period, between the 1960s to the 1970s, led to the consolidation of household names, such as Samsung, LG, and Hyundai. 

During the Asian Tigers growth period, South Korea’s GDP grew at an exceptional average of 8% per year – one of the fastest in Asia. Contrary to its neighbor to the north, South Korea adopted an export-heavy economy, which contributed to this growth as the West turned to Asia for its industrial and electronic goods. South Korea also had a booming steel industry, with some of the largest shipbuilding yards in the world. 

Conclusion 

The ascension of the Asian Tigers would shape our world, changing the dynamics of the worlds’ economy and the balance of power in South-East Asia. 

There were differences, for instance Hong-Kong adopted a policy of laissez-faire, with a very reduced intervention from the government, unlike Taiwan, Singapore, and South Korea where that entity played a major role, controlling the reshape the economy. Despite the variety of measures and different approaches, the ultimate result was an astonishing economic growth. 

This series of economic growth is an example to follow, as they show how, with the right measures, adapted to each situation, economies can flourish in a sustainable way.  

Sources: 

American Economic Association; BBC; Berkeley Economic Review; Borgen Magazine; Corporate Finance Institute; CNN; Economic History Association; E-International Relations; Food Research Institute Studies; Geographical Association; Ichiro Sugimoto; Investopedia; International Development Society – King’s College London; Journal of Comparative Economics; Kellogg Institue; MacroTrends; Montreal Economic Institue; St. Louis FED; Taiwan Today; The China Quarterly; The Economist; ThoughtCo; VoxEU; Wikipedia; WorldAtlas; World Bank; ZBW. 

Team

Rui Ramalhão

Guilherme Barroca

Mariana Gomes

Crisis after crisis, a short story of Argentina’s economy

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Argentina seems to be constantly in a crisis and COVID-19 has not improved that record. Nonetheless, the untapped potential of the country remains there.

There are many countries which owe their success to their abundance of natural resources or geographic characteristics. However, there are also many which, despite all their natural fortunes, seem to be unable to fulfil their potential. There should not be a lot of countries embodying this reality as well as Argentina. The country is blessed with hundreds of thousands of square miles of extraordinarily fertile lands, as well as oil and natural gas reserves. Besides this, the country also has sizeable mining reserves of copper, aluminium, zinc and lithium. There is an old saying amongst economists that “throughout history, there have been only four kinds of economies in the world: advanced, developing, Japan and Argentina”, and, although Japan is no longer the bustling economy it once was, the South American country still remains very much economically unstable.

Argentina’s Belle Époque

Figure 1 – Streets of Buenos Aires in the early 20th century

Albeit struggling, Argentina has not always been economically troubled. In fact, in the late 19th and early 20th centuries the country was quite prosperous. This period was an era of rapid economic growth with large inflows of capital and labour from overseas, as a result of the expansion of the agricultural frontier, fueled by a surge in the world demand for commodities, particularly, cattle meat. This led to the country entering the 20th century as one of the wealthiest places on Earth. In 1913, the country’s GDP per capita was larger than France or Germany and was almost as large as that of Canada. However, it must be said it was also a very unequal society.

A story of economic instability

In spite of the expansion, as it often happens with commodity dependent economies, the boom was not to last and, by 1913, fortunes were already changing, starting with a major downturn that emerged in the London capital market and that spilled over to Argentina. The next year, WWI started, greatly constraining capital and goods markets, leading to a major recession.

Some years later, in 1929, the world was hit by the Great Depression, which led to further instability in external markets. Surprisingly, though, it was a shock that had a relatively mild effect on Argentina, when compared to the US, with unemployment never going above 10%. From 1929 to 1932, the country’s real domestic output “only” fell by 14% and, by 1935, it had already surpassed its 1929 level. Nonetheless, the Great Depression has ultimately led to a halt in the country’s relative prosperity, as it culminated in a military junta taking power in 1930, which would be a recurring theme throughout the 20th century. Throughout the 1930s and WWII, the economy would continue to be sluggish.

This increased instability eventually resulted in Juan Perón – a military general whose ideas still influence Argentinian politics to this day – taking power in 1946. His tenure was marked by flirtations with fascism, combined with the idea of self-reliance and import substitution of industrial goods. Nevertheless, even though the economy continued to grow, this growth was slower than that overall registered across the world and the quality of life of the average population declined. In the end, the regime lost popularity and was eventually overthrown.

“Instability” is the word that best describes the rest of the 20th century for Argentina. Throughout this time period, the country experienced constant upheaval, with weak democratic governments and military juntas being overthrown as quickly as they would rise. Needless to say, the country entered in a period of stagnation, only made worse by recurring inflation crises.

Troubles with inflation led Argentina to adopt a fixed exchange regime with a peg to the US dollar in 1992, which was accompanied by increased openness to trade and market reforms. For a short period of time, things seemed to be heading in the right direction, since the peg helped the country stabilize prices and get rid of high inflation, with large capital inflows following.

Unfortunately, the 90s also saw major recessions in Latin American economies that negatively impacted Argentina. Eventually, the country would find itself forced to drop its peg in 2001, leading, once again, to high inflation and to the worst economic crisis in the country’s history. GDP fell by nearly 20% in 4 years, unemployment reached 25%, the peso depreciated by 70% and the government defaulted on its debt. Savings of entire working-lives were wiped out, contributing to a dollarization that is still largely present.

Figure 2 – GDP per capita of Argentina as percentage of US GDP per capita. In the early 20th century, Argentina was close to US levels of GDP per capita, but since then it has only strained further away from the North American nation.

Fortunately, Argentina did recover from 2003 onwards, thanks to expansionary policies and, especially, to a surge in commodity exports and prices, with the economy nearly doubling by 2011. The following years were not as fortunate, though, and, by 2018, the government found itself asking for IMF intervention once more, as it had already done in 2001.

How is the Argentine economy currently doing?

With COVID-19 now impacting the economy as well, Argentina has struggled to recover. During 2020, the country suffered a new series of demand-side shocks, causing an already struggling economy to plummet, in one of the largest retractions in 2020 – GDP declined by 9,9%. The effects were also felt in the labor market, with nearly a third of the country’s workforce unemployed or that has given up on finding work. To counteract the impacts of the crisis, the Government implemented an emergency package, in order to protect the most vulnerable and support companies during lockdown.

Figure 3 – Inflation in Argentina throughout the past 25 years. Recent levels of inflation have been especially high, even surpassing the levels experienced following the break of its currency peg in 2001.

Meanwhile, as inflation nears 40% and its central bank is short on dollars, Argentina faces renewed pressures to devaluate its currency. Furthermore, the $30 billion bail-out that benefited the country in 2018 are part of the total of $44 billion in loans that the country owes to the International Monetary Fund and that President Alberto Fernández and his government are trying to renegotiate.

President Fernández has a chance to implement reforms to create opportunities for renewed investment, job creation and economic growth, but the delicate situation of Argentina implies extensive due diligence by investors to understand the country’s political risk dynamics and outlook.

What are the future preventive measures for the coming years?

As aforementioned, the risks associated with the political and economic outlooks have kept investors’ attentions out of Argentina.  Fernandez’s only chance to return to meaningful growth in the medium-term is to provide investors, both domestic and foreign, with legal and macroeconomic assurance.

One of the key elements to do so is a successful renegotiation of the IMF bailout in 2021. This should set a clear path for the reduction of the fiscal deficit and the gradual removal of major operating constraints on businesses. Among those are liberating the ARS/USD exchange rate, as well as capital and import controls, even if slowly. Deeper changes involving significant tax and labor reforms to improve doing business in the country should also be considered.

Final Remarks

With a history of political and economic instability, Argentina faces, once again, a tumultuous period, as the effect of the pandemic spreads through the economy. But there might be some light at the end of the tunnel. Rising commodities prices may give Argentina some breathing room to survive the devastating effects of the pandemic crisis and the renegotiation of the IMF bailout may be the first step of a series of reforms in public and monetary policy which may bring back the prosperity once seen in early 20th century.

Sources: Bloomberg, El País, Forbes, IMF, History Channel, Wikipedia, World Bank

Rodolfo Carrasquinho

João Diogo Correia

Raquel Novo

US Prision

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Reading time: 6 minutes

The US has the largest prison population in the world, as well as the largest prison population per capita. The incarceration rate in the US is six times higher than the EU average, while the sentence times are on average three times longer than in the EU.

These statistics came as a consequence of decades of policies and has increased the disparities between the United States and other economically developed countries. According to academic and activist Angela Davis, as mass incarceration has increased, the prison system has shifted from being about criminality towards economic factors.

US’s mass incarceration problem

In June 1971, President Nixon declared officially a “War on Drugs”, stating that drug abuse was the US’ “public enemy number one”. This followed a sharp increase in recreational drug use in the 1960s and marked a key moment in the development of the US Prison System.  Nixon increased the funding of drug-control agencies and proposed strict sentances for drug crimes.

The critical moment, however, came during Reagan’s second term, where a bi-partisan Congress approved the Anti-Drug Abuse Act of 1986. This law substantially increased the number of drug offenses with mandatory minimum sentences. It also penalized disproportionately drugs that were typically associated with the black community, such as crack cocaine, as compared to drugs that were typically associated with white communities such as powder cocaine. The act, for example, mandated a minimum sentence of 5 years without parole for the possession of 5 grams of crack, while the same sentence would only be applied for 500 grams of powdered cocaine.

As expected, following the approval of this Act, there was a sharp increase in drug offense imprisonment, as well as an increase in the racial disproportion of said arrestees. The number of incarcerations for nonviolent drug offenses increased from approximately 50.000 in 1980, to 400.000 in 1997.

Comparison between systems

The European Prison rules are a set of legally non-binding standards drawn up by the Council of Europe. The members of the Council include all countries in continental Europe, except Belarus and Kosovo, and countries are expected to comply with its rules.

The main difference between the American Prison System and the largest European Prison Systems is their general goal. Germany’s Prison Act states, for example, that “the sole aim of incarceration is to enable prisoners to lead a life of social responsibility free of crime upon release”, while the American Prison System focuses on punishing inmates. According to a report commissioned by the U.S. Department of Justice, the prison system has responded to escalating crime rates by enacting highly punitive policies and laws. This has led to great disparity in incarceration rates, the European average in 2018 was 103,2 prisoners per 100.000 people, whereas in the US this number reached 655 prisoners per 100.000 in 2019.

In Europe, prisoners keep their right to vote, are allowed to receive welfare benefits and in some instances get the chance to spend some time away from prison (not uncommon in the Netherlands for prisoners to go home for the weekends). Family visits in the US happen in guarded visiting rooms, the prisoners generally forfeit their right to vote and (in some states) are not allowed to serve as juries.

In the US, little consideration is given to minor offenders, with some States trialling teenagers as young as 16 as adults. In some European countries, those under 21 are trialed in youth courts as to consider developing morals and psychologically or if crimes are considered “typically juvenile”.

Figure 1: Aftermath of a prison riot in California in 2009

The Economics of the American Prison System

The total annual expenditure of the US government on prisons and jails amounts to $84.6 billion, and, after adjusting for inflation, has quadrupled since 1982. There are therefore people with significant economic interests in maintaining mass incarceration. CoreCivic, the US’ second largest private corrections company, is traded at the NYSE and is a component of the S&P600. From 1999 to 2010, CoreCivic spent on average $1.4 million per year on lobbying on a federal and state level. An August 2016 report by the U.S. Department of Justice asserts that privately operated federal facilities are less safe and more punitive than other federal prisons.

Recently, these companies have come under fire and are even facing lawsuits as allegations of forced and underpaid labor came to light. These reports allege that these companies are exploiting people who are in vulnerable situations to reap profits. The hourly pay for inmates working in the US can vary anywhere from $0.09 to $4.90, depending on the State, while four States do not pay inmates any form of salary. This only decreases their chances of success once they are released, as they have little to no savings, and oftentimes are ineligible for government benefit programs like welfare and food stamps.

Former inmates also face significant difficulties when trying to reenter the job market, as they face unemployment rates approximately five times higher than the general US population. This employer discrimination also affects disproportionately people of color and women. Formerly incarcerated black women face hardships finding employment, as their unemployment rate is almost seven times higher, at 43,6%, than the unemployment rate of their general population peers. The racial disproportionality regarding the incarcerated population, as well as the disadvantages they face once out of the Prison System will perpetuates racial inequalities, affecting particularly minority communities.

Figure 2: Prisoners at the Louisiana State Penitentiary working at a farm

The consequences of mass incarceration

The consequences of mass incarceration go far beyond the financial impact, they affect individuals and communities all over the US. A prison sentence oftentimes has the opposite effect of what it is intended to achieve. Instead of being rehabilitated and ready to integrate society, many former prisoners fall into a cycle of crime after their release, due to either being pulled into gang activity within the prison walls, or turning to illegal activities due to financial need. Mandatory sentencing has doomed the lives of people charged with low-level offenses, punishing them for the rest of their lives.

According to a research conducted by the Congressional Research Service, on average, over a five-year period, 76,6% of released inmates will return to prison.

The effect on communities is also extensive, affecting primarily minority communities as these are the ones with the highest incarceration rates, even though they have similar drug usage and drug trafficking rates as white communities. Residents of neighborhoods with high incarceration rates face a disproportionate level of stress, due to a combination of disrupted family and social networks, as well as increased rates of crime and infectious diseases such as HIV. Furthermore, studies have shown that this also takes a toll on mental health, as one study concluded that “The effect of neighborhood-level incarceration on mental health is similar for individuals with and without a history of incarceration.”.

Mass incarceration has had a negative impact on individuals and society, the policy choices of the last 50 years have helped perpetuate racial inequalities in minority communities. One possible way to overcome this issue, would be to transform the American Prison System from a punitive one, into a rehabilitative Prison System, as seen throughout the EU. The question that remains is, when will American lawmakers tackle this issue, ensuring the American Prison System becomes an efficient tool for rehabilitating felons, making them ready to integrate society.

Sources: American Civil Liberties Union, History Channel, Reuters, NPR, sentencingproject.org

Afonso Monteiro

Hugo Canau

Christian Weber

Hidden Risk– A Behavioral Economics perspective on gun control

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When we think of behavioral economics, we usually tend to relate it with producer and consumer decisions and the construction of economic models to better understand decision-making. However, its applications goes way beyond that. Throughout this article, we will try to explain how behavioral science can help fight a major issue of modern society: Gun control.

According to the most recent National Firearms Survey, there are approximately 4.6 million children in the United States that live in homes with at least one loaded and unlocked firearm. Despite the strong recommendation of the American Academy of Pediatrics for people to store it safely away from children, studies find that one in three US homes with a child under 18 years old has a firearm, of which 43% are unlocked and loaded. Thus, it is not surprising that firearm-related injury was the leading cause of deaths among children and adolescents in 2017, with the odds of a child being killed by a firearm being 36 times higher in the US than in any other high-income country.

Firearm-related injury was the leading cause of deaths among children and adolescents in 2017

In this article, we will apply behavioral economic theory to identify some of the cognitive biases that may explain the motives that lead millions of people in the US to purchase guns and, more precisely, that lead millions of parents to store firearms within their children reach. The main advantage of analyzing this critical issue is to understand both sides of the debate as to solve some ambiguities about the best way to minimize fear while maximizing personal and public safety. Moreover, it is important to educate legislators about the behavioral economics’ principles that may impact decision-making, so that they can implement strategies to enhance safer firearm storage practices and contribute to injury prevention efforts.

So, how can we explain the overpowering need to own guns in the U.S? Would you ever own a gun? For what purpose? Most people would answer that it is simply a way to protect oneself from someone else that owns a gun. However, this will inevitably result in an economics problem called the Tragedy of the Commons. It means that the individual has an incentive to consume a resource but at the expense of everyone else. One classic example is what would happen if every shepherd allowed their sheep to graze in a common area. If everyone thought that way, then it would result in harmful over consumption, essentially being detrimental to everyone.

To have an even better picture, we can use the study tool Game Theory in order to further analyze this issue. Hypothetically, imagine you were in an ideal world where the rest of the society was gun free, and everyone would feel relatively safe. Now, imagine that your friend has the idea of owning a gun because that will make him feel even safer. His individual payoff will increase but he is not taking into consideration the effect that this will have on others, namely that he is armed, and the rest is not. Hence, he is better off than the rest, leaving others worse off in comparison. In this particular case, it is obvious that the society as a whole is better off when no one owns a gun. However, from the moment that one single individual makes the decision of buying a weapon, everyone else feels that they could now benefit from deviating from the optimal point to society (no guns), leading to a snowball effect, where at the worst-case scenario everyone owns a gun.

Now, let’s imagine that you’re an entrepreneur who despite all the business knowledge, past good grades and amazing ideas, your past 6 attempts at creating a business restaurant have flopped. However, in the seventh attempt you feel it in your heart that this will be the one despite the endless advice to not pursue and stubbornness to admit defeat. What do you know? You failed for the seventh time. So, what happened? This is one of the various scenarios in which some people exhibit the optimism bias.

The optimism bias refers to “our tendency to overestimate our likelihood of experiencing positive events and underestimate our likelihood of experiencing negative effects.” This of course can be quite dangerous depending on the circumstances. Once again, this is one of the many biases that can make us irrational and ignore important information that can either make or break our outcome.

In terms of gun usage, optimism bias can shed light on many of the decisions and thoughts that gun owners make. For example, too much optimism can lead a gun owner to think that despite the various gun related crimes and even domestic accidents, being in those said dangers will never happen to them despite worryingly increasing every day.

In general, we have the tendency to underestimate our likelyhood of experiencing negative effects

Moreover, with the increasing mass shootings and gun violence in the United States, gun owners have become more aware of possible dangers and want to be protected. This leads them to unlocking their firearm and maintaining it loaded for the sake of individual safety and their family, ignoring the threat it may impose on the household members, especially children. So, why does this happen? Behavioral economics can explain this behavior as availability heuristic bias.  This can be defined as the propensity people might have to place more significance on events that are more easily remembered than ones that become harder to imagine. No parent wants to hurt their child but rather protect them, which unfortunately leads to accidents.

Present bias can also be related to these accidents as people have the tendency to give greater importance to events that are closer to the present rather than ones in the future. Individuals might view the immediate risk of gun accidents with children as lower than potential future benefits (protecting them from intruders), and this leads to the mistaken belief about possible advantages in the future against what something may cost today.

In this article we hope to raise awareness to a major issue of modern society, and how alternative methods such as behavioral economics can help explain this many times misinterpreted phenomenon.
Having this said, we also must recognize that firearms have been and will continue to be part of our society, as they have been around for over 650 years and, as of now, there are over 875 million guns in the world.
This begs the question, if firearms are staying, what must change? The simple answer is the usage of those firearms; however, this is easier said than done and first we must understand why we don’t use guns properly.
Throughout this article we try to present the multiple behavioral biases that shed light on the many times perceived “irrational” usage of guns and with this, give the first step to change behaviors: understand what we do and why we do it.

Madalena Andrade

Daniel Calado

Afonso Serrano