Author: Awareness News

Oil War 2020

April 7, 2020January 24, 2021by Awareness NewsLeave a comment

Oil, a three-letter word that embodies the most important source of energy since the 1950s, the lifeblood of modern societies. As the main energy supply, this commodity reshaped not only the power industry, but also how we live, supplying 40% of the world’s energy demand. Therefore, oil continues to survive the constant attempts to shift energy consumption into more sustainable alternatives based on renewable sources, remaining the most-traded non-financial commodity worldwide. The fact that, nowadays, one cannot imagine a world without crude oil, and its inexistence would lead to a screeching slump in modern societies, increases its value, emphasizing its prominence in the global economy.

The United States, Russia and Saudi Arabia arise as crude oil’s largest producers and, in 2019, jointly produced approximately 33 million barrels per day, 54% of total world production. According to IBISWorld, a leading Business Intelligence company, the oil and gas sector’s revenues amounted to approximately $3.3 trillion last year, and with a 2019 Global GDP of around $87 trillion, the oil and gas drilling sector by itself represents around 3,8% of the world economy. It is evident that the 3 main players in this complex industry compete for the monopoly of one the most profitable markets, but one cannot enter this game without caution, since the oil’s biggest sharks will be ready to counter-attack.

With the world markets slowing down due to the most recent crisis caused by the coronavirus pandemic, demand on crude oil has decreased drastically, as isolation measures have tightened around the world.

The members of the Organization of the Petroleum Exporting Countries (OPEC) and the invited country Russia, gathered in a meeting concerning the market demand on the industry after the virus situation. Russia has been allied with Saudi Arabia and the organization since 2016 with the aim to balance its production levels with other countries and keep prices relatively stable.

In this meeting, Saudi Arabia positioned itself and suggested cutting production levels in order to hedge price decreases during these times. However, Putin’s nation was against the proposed measure as they believed it was too early to cut production, the organization failed to reach an agreement between the parties involved, effectively ending the partnership. Some insist that the country is availing oneself of the Asian demand to increase its market share, others agree that it wants to keep prices low to fight the American shale oil industry, which has been growing in the past years. One thing is certain, Russia is indeed worried about its market share and believes that at the moment it is better to be against the Saudis than opting to cooperate. Saudi Arabia counterstroke, announcing they would increase their production to its highest, almost 13 million barrels per day, as well as price discounts in Europe and the United States.

On the 8th of March, the prices started to tumble and the next day they plummeted more than 30%, the worst loss since 1991, and the Russian currency depreciated to its lowest since 2016. For now, the Saudi-Russian alliance is paused, and the war has begun. The Saudis believe they will be able to sustain profits, as their production costs are very low, while Russia claims the ability to sustain prices between 25$ and 30$ for several years due to its National Wealth Fund. Nevertheless, these countries will now experience a thinner margin, despite gaining some revenues alongside customers. From a game theory perspective, we are assisting a prisoner’s dilemma situation where either party may end up hurt after this move since market share will not necessarily be gained and cooperation would better position themselves.

On the 2nd April, Donald Trump claimed that a deal was expected to be reached soon and that production cuts were already in order after affirming that he talked with the leaders of both countries. This prompted a one-day rally in oil futures of 10%, but neither countries committed to supply cuts and the Russian Government denied the claims made by the US President.

On Sunday, April 5th, Saudi Arabia, Russia and other giant oil producers from OPEC made progress in reaching a deal to stem oil prices, despite the difficulty in arranging a meeting and the continuous exchange of accusations between the two leaders. This deal would also involve the US, as they became the biggest oil producer of the last years since the shale revolution and have a great impact on this industry. Together, the members would be proposed to cut their oil production by 10%, but Donald Trump has shown little willingness to do so. The US has even threatened the use of sanctions and tariffs to push the two countries to solve the conflict.

“If the Americans don’t take part, the problem which existed before for the Russians and Saudis will remain — that they cut output while the U.S ramps it up, and that makes the whole thing impossible”

— Fyodor Lukyanov, head of the Council on Foreign and Defence Policy

Energy companies are suffering the most from oil wars and this may have a damaging effect on the credit markets as well, since they have been very active in the bond market in the past decade and investors were always keen to lend more and more. This borrowing was done using junk-rated bonds and it is remarked that these companies account for 11 per cent of the US high-yield market. Being rated BB or lower, these issuers are at higher risks of default and the current oil war aligned with a decreasing global demand may cause further downgrades and raise the costs of borrowing. With such a heavy representation on the junk bond market, this shock may not stop at low-rated debt and even impact “safer” debt.

Investors reacted as they have been adjusting to the coronavirus outbreak and shifted funds for the usual safe havens. On the 9th March, the sharp oil price drop prompted a decrease of 7% in the S&P 500 in the first minutes of trade. This sell-off was accompanied by a raise in the price of gold and related ETFs and an increase in the purchase of US Treasury Bonds, represented by a decrease in the US Treasury yields.

At this stage it is quite unclear to predict any short-term agreement between both parties, however, what is clear is that current prices are bad for producers whilst being well received for consumers. What this means is that, in theory, oil importing countries will benefit from this price decrease, considering that one of their main raw materials used, became drastically cheaper. However, this benefit will obviously not be maximized due to all constraints being imposed by governments worldwide during the COVID-19 pandemic, which, ultimately will make this decrease in prices a small tool to respond to the economic impact caused by the viral disease. Furthermore, not everything is bright for importing countries. Let’s take Portugal as an example, which has Galp, which refines imported Brent oil from Brazil and Angola before selling the final good to retailers, as one of its largest companies. Galp had set an average break-even price of 25 € and is still able to sell at current prices, however, as seen in the last few weeks, its price has been right around that value, even reaching the 21€ quotation. As seen, Portugal is not a producer nor an exporter of the raw material, yet, by having companies in its manufacturing chain like Galp, is still exposed to this war that influences prices worldwide and can lead to lay-offs and even shutdowns.

On the other hand, we have the petroleum exporting countries being harmed by not only the influx of supply as the decrease in demand. Some are being forced to decrease prices while also increasing production, to not lose their market share, while others are considering a step-back in production until prices begin to rise. One example being the case of the US which produces, in mass, Shale Oil, which is more expensive to produce. Also, countries that cannot step-back due to an already unstable financial situation as Venezuela, Ecuador and others third-world countries are being dragged into a fight they just cannot handle, especially considering that, unlike Russia, they do not hold a meaningful foreign exchange reserve to back up these abnormal losses, so, debt defaults are beginning to look a reality.

The markets and investors are not happy having to deal with an oil war and a virus outbreak and, if Russia and Saudi Arabia take long to solve this conflict, Governments and Central Banks may not be able to save world economy.

Sources: CNBC, Investopedia, TIME, Bloomberg, Financial Times, Vox, ABC news

João Ribeiro Martim Leong

Francisco Nunes Matilde Mota

State of emergency: What now?

April 4, 2020January 26, 2021by Awareness NewsLeave a comment

On the 18th of March of this year, Portugal’s President Marcelo Rebelo de Sousa declared the state of emergency, immediately, to the extent of all Portuguese territory, following other European countries that also opted to declare it, such as Spain, France, Italy and Germany (to name a few from the total of 25 countries that already announced it worldwide).

Since November 1975, after a revolutionary attempt from communist forces to implement a far-left dictatorship, the State of Emergency hasn’t been declared in Portugal. 45 years elapsed and due to the COVID-19 pandemic, Portugal was forced to announce the State of Emergency, in order to restrict the spread of the virus.

What measures can Portugal take to face national catastrophes?

There are 4 mechanisms, consecrated in the Portuguese Law, in order to deal with national catastrophes. From the least to the most severe, we have the state of alert, last used in the summer of 2019 during the protests of truck drivers of hazardous content, which only means that national civil protection and national security forces are ready to attain any request from the government. The state of public calamity, announced two weeks ago by the municipality of Ovar, implies a reduction of economic activity, limitations to the number of inhabitants in public places and the establishment of a safety perimeter. Lastly, the two most severe mechanisms, the state of emergency and the state of siege.

After all, what does the state of emergency imply? What’s the constitutional interpretation? What are the boundaries that define it and that distinguishes it from the state of siege?

What is the state of emergency?

The state of emergency allows the government to suspend certain rights, freedoms and guarantees in order to deal with an exceptional situation. In Portugal, the state of emergency is declared by the President, initially requiring permission from Parliament and then approval from the Council of Ministers. According to the Constitution, it cannot last more than 15 days (although it can be renovated) and it cannot suspend certain rights, such as the right to life or the right to defend oneself in court.

In this particular emergency – an epidemic – there are two particular rights whose suspension could be useful: The right to free movement and the right to private initiative. Suspending the right to free movement allows the government to impose quarantine and curfews, to forbid people from leaving their houses for non-essential trips (or to forbid elderly people from leaving their houses for any reason), and to limit entry and exit in Portugal, by cancelling flights to and from critical countries and controlling the border. Suspending the right to private initiative allows the government, among other things, to forbid non-essential commercial establishments from opening, to force essential ones (such as pharmacies, supermarkets or medical supplies factories) to stay open, and to take control of private companies (for example, to temporarily integrate private hospitals in the public healthcare system). The state of emergency declared in Portugal also suspends the freedom of assembly, allowing the government to forbid large public gatherings such as protests, concerts or religious ceremonies.

Criticism

Some have opposed the declaration of the state of emergency, fearing that the President is opening a dangerous precedent for the suspension of rights and freedoms. These worries are not unwarranted: historically, there are many incidents in several different countries of the state of emergency being abused. For example, in Germany between the two world wars, the state of emergency was declared quite often, usually by governments who didn’t have a majority in Parliament and used the state of emergency to legislate without democratic control. This culminated when, after a fire destroyed the German Parliament, Adolf Hitler blamed the fire on communist rebels and used it as an excuse to declare the state of emergency, imposing the dictatorial regime that lasted until the end of WWII. This is only one of many historical examples of the state of emergency being the start of a dictatorship. While it is difficult to argue that Portugal is currently facing any risk of that nature, these historical examples are the reason why many people are very cautious about supporting the declaration of the state of emergency.

State of siege

On the opposite end of the spectrum, some have claimed that, in Portugal’s current situation, a state of emergency is not enough, and a state of siege should be declared. The state of siege is one degree of severity above the state of emergency. According to Portuguese Law, the state of emergency can be declared due to any public calamity or threat of public calamity, while the state of siege can only be declared in the event of acts of force (such as military invasions) or rebellions. In a state of emergency, rights and freedoms can only be partially suspended, while in a state of siege they can be completely suspended – for example, the current state of emergency suspends the right to strike only for workers in healthcare and vital sectors of the economy; in a state of siege, all strikes could be forbidden. In a state of emergency, the powers of civil authorities can be reinforced, and the armed forces can be tasked with supporting those authorities; in a state of siege, all police forces are put under the authority of the Chief of the General Staff of the Armed Forces, and all civil administrations must provide the armed forces any information they request.

Portugal is facing one of the moments of greatest uncertainty in its modern history.

Fighting an unknown enemy poses difficult challenges and raises important questions. Only in the end will the country be capable of scrutinising the choices made and to discuss a future approach towards a similar crisis. Until then, we shall stand as one.

Sources: Observador,Jornal Sol, ECO

Portuguese Law (in Portuguese):

Constituição da República Portuguesa (Portuguese Constitution), namely articles 19 and 138

Regime do Estado de Sítio e do Estado de Emergência – Lei n.º 44/86, de 30 de setembro

Decreto do Presidente da República n.º 14-A/2020

Europe’s man on the moon moment: the Green Deal

March 31, 2020January 26, 2021by Awareness NewsLeave a comment

The creation

First presented in December 2019, the European Green Deal is the EU’s current most ambitious project or, as Ursula von der Leyen – European Commission’s President – called it, “Europe’s man on the moon moment”. Aimed at transforming Europe into the first climate neutral continent by 2050, simply put, the Green Deal is the EU’s new growth strategy. It’s designed to transform Europe into a modern, resource-efficient and competitive economy, a roadmap to make the EU’s economy sustainable.

[Read more about the policies that are being adopted here].

But what’s so different from all the previous attempts to tackle climate change?

The EU is finally transforming all its climate promises into legal obligations for member states (European Climate Law)
It was finally understood that, rather than being mitigated by focusing only on certain industries and a few isolated measures, climate change requires an articulated and integrated system that considers a product’s life cycle, strengthens competitiveness while protecting the environment, gives new rights to consumers and tries to ensure that the resources used are kept in the EU economy for as long as possible (Circular Economy Action Plan)
Because it’s imperative that all European countries take part in this initiative, the Green Deal predicts financial assistance to those countries that face various limitations in the green transition, (European Green Deal Investment Plan and the Just Transition Mechanism) in an attempt to ensure that everything runs smoothly and that all member states are on board.

The transition

Despite its idealistic goals, the Green Deal has been suffering severe criticism and has been presented with various obstacles to its achievement.

What was initially designed as an incentive to make industrial and coal-intensive countries (e.g. Poland, Romania, Germany) sign up the EU’s 2050 climate targets, turned now into one of the most defining features of the European Green Deal: the Just Transition Mechanism, designed to help coal-dependent workers and regions transition to new areas of economic activity. Still, Poland has repeatedly refused to sign the climate targets and take part in this environmental initiative, thus jeopardizing its eligibility to the financial aid provided through this Mechanism.

A list of 100 regions eligible for this financial aid has already been published, with Germany topping the list, followed by Poland. These regions meet criteria based on carbon-intensive jobs, fossil fuel industrial activity and GDP per capita. But another potential threat arises: how can the EU guarantee that funds aren’t misused by national governments in projects that serve their own interests, risking these regions’ access to the funding?

Even though the Green Deal is a priority for the EU, it certainly isn’t for some relatively poorer member states, such as Romania, whose priorities concern infrastructure, education and health systems. Other countries might feel the same way, leading to tensions and conflicts of interest inside the Union, with the possibility of not being able to cope with targets (and most likely sanctions) imposed by the EU later on.

Unfortunately, this doesn’t stop here. Between extractive, energy-intensive and automobile industries, 11 million jobs will be directly impacted by this Deal, even if they don’t necessarily disappear. Clear directions and measures are needed (which don’t yet exist), especially if most of these jobs are concentrated in Eastern Europe, which could cause a migration wave in the next decades, possibly deepening the existing gap along the East-West divide, increasing social and economic discrepancies and escalating tensions inside Europe. On the other hand, the reality is that markets are changing – and fast. A new green industry revolution is coming and the likelihood of coal mining in Europe being economically viable by 2050 is indeed very small.

The funding

No matter how badly the European Commission wants to achieve carbon-neutrality while leaving no country behind, it’s not possible to do so without funding. Essentially, this financing would come from five different sources:

a) EU budget: the Commission will allocate 25% (compared to the previous 20%) of its budget to climate and environmental expenditures, aiming to raise approximately €503 billion in this decade.

b) National co-financing: the Commission hopes that this money mobilization will trigger national governments to unleash an additional €114 billion on environmental projects over the next ten years.

c) InvestEU: It’s estimated to raise around €279 billion, throughout this decade, through private and public investments, thanks to an EU Budget guarantee to the European Investment Bank and other national promotional banks when they invest in “green” projects.

d) EU Emissions Trading System funds: the Union proposes to devote 20% of the revenues from the auctioning of EU Emissions Trading System (ETS) to the EU budget, for an estimated value of €25 billion over the next 10 years.

e) Just Transition Mechanism: it’s expected to generate around €145 billion until 2030, plus there’s €7.5 billion of “fresh money” already available.

However much the European Commission is moving in the right direction, it may have been too unrealistic when presenting these numbers: many specialists agree that €500 billion is a bit of a stretch and an amount that couldn’t possibly close the investment gap. Some even believe that this can hardly be called “investment” since much of the funding will be spent on traditional policies (such as farm subsidies) and there is little oversight and almost no room for innovation in this budget. On top of that, the current methodology of how expenditures are accounted for as contributing to climate targets is very flawed and needs to be reviewed.

InvestEU- the Green Deal’s main funding source- possesses some hitches worth highlighting: given that the EIB has already committed to increase its climate-related financing from 25% to 50%, it’s worth considering the opportunity cost in allocating further funds to it, as these funds could be better used by other EU programmes. Let’s also not forget that there is always the possibility that carbon financiers game the system, meaning EU cash fails to trigger truly green investment from the private sector.

Finally, as for national co-funding, there might not be many incentives for countries to increase their financing towards green projects. If countries are finding it hard to stay on track with the 2050 climate neutrality objective, how will they be able to divert funds to co-fund the Green Deal?

Overall, by itself, the plan will most probably not be sufficient to deliver the investments needed for the European Green Deal. Nevertheless, the Green Deal is still a work in progress and in a very early stage of implementation; only the next months will tell how the Commission will further develop, adapt and implement this initiative. Until then, stay tuned, stay informed, stay aware.

Sources: Euractiv, Bruegel, The Guardian, Financial Times, European Commission

Moore’s Law

March 29, 2020February 9, 2021by Awareness NewsLeave a comment

In 1975, Gordan Moore was asked to write for a special Edition of Electronic Magazine about the future of silicon components during the next decade. Integrated circuits (we explain what these are below), known today as computer chips, were discovered in the late 1950s and had just begun being tested. When analysing the achievements made by his company, Intel, and others in the previous years, Moore observed that the number of transistors per microprocessor, as well as other electronic components, had doubled each year, and he __projected that this rate of growth would continue into the future. This prediction became known as Moore’s Law, which states that the number of transistors in an integrated circuit doubles about every 2 years.

Moore’s main goal was to transmit the idea that integrated circuits would lower the costs of technology: the larger the number of components, the lower the cost per component, therefore decreasing the price of computers and other electronic devices. According to the law, which became an industry goal and consequently a self-fulfilling prophecy, processor speeds would increase exponentially, because transistors would scale down so that more units could be packed together on a computer chip. The more transistors, the easier and quicker electrons could move between them, therefore increasing a computer’s efficiency and speed. So as the number of transistors on an integrated circuit has doubled every 24 months, computing power has doubled about every 18 months.

Moore’s Law was regarded as a «Rule of Thumb», rather than a Law: the technological industry intended to keep up with its growth rate and so settled a road map based on the continuous innovation of transistors and chips in line with Moore’s Law. Because of the increasing demand for devices, manufacturers and producers strive to innovate and create next-generation chips, less they become obsolete in the face of innovating competition.

Many devices that we use nowadays owe their existence to the evolution of integrated circuits; Moore himself stated that «Integrated circuits will lead to such wonders as […] personal communications equipment», currently known as mobile phones. Our laptops and electronic wristwatches, medical imaging and digital processing technologies were made possible because of Moore’s Law. In fact, it has been argued that Moore’s Law is one of the main drivers of the economic growth seen in the last 50 years, as it has led to tremendous gains in productivity.

However, over the past decade the pace innovation has slowed down, with Moore himself predicting the end of his law by 2025. To explain why, here is a small primer on transistors:

A transistor, while a simple invention in concept, is one of the foundations of our modern technological society. Without it, you would not be reading this article. Your phone probably has more than 1 Billion transistors, which are microscopic and manufactured with incredible precision on a thin wafer of silicon. A transistor is like a switch, or gate, that either blocks or lets a small current of electrons pass through it. It’s the billions of combinations of these gates opening and closing that permits a computer to perform all its tasks from basic arithmetic calculations to displaying this text on your screen.

Transistors today are around 10 to 20 nanometres. That’s only around 100 times larger than an oxygen molecule so small that engineers have run into problems that they cannot economically fix – quantum tunnelling. At sizes so small, the laws of quantum mechanics take hold and electrons start to obey different rules, where sometimes they simply cross a closed transistor, corrupting the data in the process. This problem has no economical solution now and so we have reached the death of Moore’s Law.

The end of Moore’s Law has long been considered an inevitability. Gordon Moore himself set a conservative timeframe in his original 1965 paper, estimating that his observed rule would remain “constant for at least ten years”. And its death has been proclaimed many times since. Only the ingenuity of the industry has kept it alive for so long.

But this endgame does not signify an end for the advancement of computational power. Several alternative possibilities lie on the horizon, and these range from the simple and intuitive to the fantastical possibilities brought by the advent of quantum computing.

On the intuitive side, we could focus on creating specialized chips for certain tasks. The processor that powers your device (smartphone or computer) is a “beefy” unit, capable of undertaking a wide variety of tasks, albeit at the cost of efficiency. For very specific tasks, specialized chips may be created. Other solutions may lay anywhere, from finding other materials to creating improvements in software to take advantage of current architecture – did you know that Excel does not take advantage of the extra cores in your computer to handle those heavier, 20.000 row tasks? Although these types of improvements can still take us a long way, at least a forty-fold increase in computing power (around 5 years of innovation), they can only take us so far. When it comes to transitioning to other materials, Graphene has been touted as a possible replacement, but the research is still in the early stages.

On the more futuristic side, quantum computing could usher a new age of technology to rival that of the integrated circuit. Last year, Google published a paper on Nature claiming to have solved a task in under 4 minutes that would have taken a modern supercomputer, the processing equivalent to “around 100.000 desktop computers”, over 10.000 years. There are also studies looking into conceptually abstract possibilities like using DNA to perform arithmetic and logic operations, as well as storage.

Although we will probably never have personal quantum or “DNA” computers, because their upkeep costs and upfront investment are prohibitively high, a world in which a handful of companies offer processing solutions to anyone via cloud computing, much like we see today, sounds plausible.

What impact could the end of Moore’s Law have on the economy? How can we bring about the age of AI if we do not have the hardware to support software innovation? We can only wait and see what happens.

Sources: Intel, Washington Post, Nature, 311 Institute, MIT Technological Review, NY Times, Wikipedia

Daniel André João Vaz Guedes

Maria Mendes

From flies in urinals to higher savings rates: How nudging influences our decisions

March 28, 2020January 26, 2021by Awareness NewsLeave a comment

“A choice architect has the responsibility for organizing the context in which people make decisions.”

— Richard H. Thaler, Nudge: Improving Decisions About Health, Wealth, and Happiness

Nudging has been the start point of many economic studies, in particular in the area of behavioral economics as it explores the way people´s decisions could significantly change in a predictable way by modifying the context of such decisions in a very subtle form. The concept was first introduced by the Nobel Prize winner Richard Thaler and Professor Cass Sunstein. Thaler, however, stressed the point that nudging should be used for good, with the goal of improving society’s welfare, but has his wish become a reality?

It all started at Amsterdam’s Schiphol Airport where Thaler´s discoveries were first explored by a simple experience aiming to solve a very real problem: the cleaning manager intended to reduce the “spillage” around urinals in order to reduce the cleaning expenses on the airports´ bathrooms.

Where does Thaler´s nudging theory come into play? Well, to the surprise of many the solution suggested was to “paint” a small fly near the drains of the urinals. Many may (and did) find it ridiculous and childish but actually it was a very credible and simple solution following the reasoning of human (particularly, men’s) behaviour. The goal was to “guide” men in to reducing spillage (without even noticing) and the results were an impressive 80% reduction in spillage and a consequent 8% reduction in cleaning costs. The raw truth is that men can’t help themselves and start aiming at the fly.

This is one of the most famous examples of the nudge theory, as it respects the most important principles that guide its use. Firstly, all nudging should be transparent and never intended to mislead (a common prevented practice – just like with publicity & advertisements since it can in fact be used to manipulate human behaviour). Secondly, it should be really easy to opt-out of the nudge (it is not mandatory for anyone). And thirdly, the behaviour encouraged should aim at improving the welfare of those being nudged (once more, no harm is intended).

Not only relevant for small problems, but also in various other areas, this theory has impacted and been adopted by governments all over the world. Over the last decade, many countries have seen and tested the effects of nudging – aiming at lower costs and better exploitation of long-lasting benefits – and the results have been astonishing. Whether the goal is to promote a healthier lifestyle by displaying healthy food at eye level in supermarkets – the impact of ordering and context framing – or increasing the savings rate of the population by automatically enrolling people in a savings plan, the results have been mostly positive.

Another example that illustrates the impact of a nudge lies in organ donations: In countries where enrollment is necessary for those who want to donate organs after dying, the percentage of people that go through with the process is very low. On the other hand, in countries where organ donation is an opt-out option (that is, people are automatically enrolled), the acceptance rates are extremely high.

This enormous difference can be explained by what is called the default effect. Socially speaking, people tend to be change averse and avoid anything that poses extra effort and so accept the proposed default option even though they have the ability to reject it at any time.

This being said, one can probably anticipate that Thaler´s wish to use nudge for good, isn’t entirely respected as private entities are also trying to explore human psychology and use the nudge effect for profit purposes, appealing consumers to either buy or to use their products more often.

Think about these two cases in particular, Spotify and Netflix. If you don’t have a premium subscription in Spotify you may be tired of listening to something like “Don’t have premium? Try now a 1-month free trial!”. As you may know, this very tempting offer requires the allured clients to give their credit card information to be saved for the period after the free trial. Surely, after the free month, the consumer is given the choice to give up the premium account and not pay anything, but the statistics prove that many stay immersed in the inertia of the default effect and simply don’t have the energy to quit, leading them to a monthly payment that they wouldn’t otherwise have if Spotify hadn’t given the nudge. In the Netflix case, their nudge is even more camouflaged. By simply having an automatic count down to the next episode, they encourage people to go for the path of least resistance and keep watching.

It is important to highlight that in both cases, consumers weren’t forced to do anything, they were simply guided towards an option. Notwithstanding, this suggested (consumerist) human behaviour falls a bit short on doing good and has been a matter of concern to the authors of the theory.

“Whenever I’m asked to autograph a copy of Nudge, the book I wrote with Cass Sunstein, the Harvard law professor, I sign it, Nudge for good. Unfortunately, that is meant as a plea, not an expectation”

— Thaler to confess to the New York Times

Whether we notice it, or not, nudging is present in many of our daily lives and its influence can lead us to make choices that we wouldn’t otherwise. One could consider nudging anything like a simple buzz from a phone, a “ding” from a microwave or even a jingle played by the washing machine, warning and leading us to its use. The effects, however, go way beyond mere sounds and as people start realising that they could be being manipulated without even noticing, they start to distrust even the things that lead them to better choices, harming, this way, the true purpose of the theory. Regardless, it will continue to be part of our lives and it is our role as citizens to be aware of its potential but also of its limitations, so that we can make the most of such a powerful tool.

Sources:

Financial Times
NY Times
Washington Post
Book “Nudge” by Richard Thaler and Cass Sunstein

Scientific Revision: Ana Clara Malta, Behavioral Economics Team Leader

Political Polarization in the U.S.

March 25, 2020February 9, 2021by Awareness NewsLeave a comment

Aftermath of Antifa protests that led to the cancellation of right-wing Milo Yiannopoulos’s talk at UC Berkeley on the 1st February, 2017.

“(…) each individual among the many has a share of virtue and prudence, and when they meet together, they become in a manner one man, who has many feet, and hands, and senses (…) Hence the many are better judges than a single man of music and poetry; for some understand one part, and some another, and among them they understand the whole.”

— Aristotle, Politics

In his work Politics, Aristotle, while discussing whether the supreme power in the state should belong to the multitude or to the few, argues that the principle of predominance of the many, as opposed to an oligarchy, is, even with all its flaws, grounded in an idea which often presents itself almost self-evidentially to us: that good-faith deliberation of many people is worthwhile since individuals can share knowledge and incorporate the best arguments of every side and, thereby, reach a conclusion/judgement which is more in accordance with reality.

Is it reasonable to expect that all deliberation will have this constructive, moderating effect on what people believe? In a group of people in which participants are exposed to a plurality of views and opinions, the necessary weighing of different arguments can occur. However, groups can be homogeneous in opinions; what will be the outcome of deliberation then?

An interesting study by the University of Chicago Law School on group polarization had several groups of individuals from two counties in Colorado (one majority conservative and one majority democrat) deliberate on certain issues (such as affirmative action and global warming) and ranked their pre- and post-deliberation opinions. It found a consistent tendency for individuals to move toward their group’s pre-deliberation tendency, i.e. liberals became more liberal and conservatives more conservative.

The researchers argue, for instance, that informational influences are one of the factors that can explain this behavior. These come about due to the fact that, in any group with an initial pre-disposition, the number of arguments presented in favor of that the initial tendency will be bigger than those in the opposite direction; due to this biased argument pool, individuals are more likely to polarize and, with that, become more confident in their views. Adding to this, corroboration by like-minded people further increased individual’s assurance in their world-view. Factors like reputational concerns are likely also at play; usually, people care about being perceived favorably by others and may adjust their beliefs, even if only slightly, to better fit in with the group. (see Asch Conformity Experiment)

What are the implications of these results?

As it turns out, the geographical political segregation we see in the U.S. would seem to indicate that polarization will, as a matter of course, occur. Indeed, with large proportions of democrats in urban centers and with republicans dominating less densely populated areas, the above-described dynamics will occur and we would expect to see an increase in the opinion divide between liberals and conservatives. The data bears this out:

The Pew Research Center publishes many polls and reports on U.S.’ public opinion, political polarization and partisan divide; In addition to their 2017 report, which shows many metrics detailing the increasing divide between parties and people, they published an interactive chart very clearly corroborating our expectations.

Source: Pew Research Center. If you have trouble viewing the chart please visit the original website.

While geographical political segregation is undoubtedly a large potentiator of these tendencies, and certainly worrying due to the vicious cycle it creates, there’s another more recent factor worth mentioning: The Internet. At a first glance, one might think that, by freeing people’s interactions from the shackles of distance, the arrival of the world wide web could work against polarization. However, this effect will be lessened and perhaps completely nullified if people choose to isolate themselves on partisan lines online.

The question arises:

Are human beings’ homophilic tendencies observed online?

We should first understand that, with the spread of the Internet came the ability to access inordinate amounts of information; thereby, its selection became all the more vital. Of course, even before the arrival of the web, you could select what newspaper to read but information personalization was exponentiated greatly in the digital age. It is, as such, possible for individuals to cocoon themselves in informational and ideological bubbles where polarization can occur, just like what was observed in Colorado. Let’s look at a real example:

A study on Twitter’s political polarization gathered data on many users’ political interactions and analyzed the retweet and mentions networks that existed. It found two separate communities in the retweet network with a high degree of partisan division:

A 2019 poll from Berkeley IGS shows that conservatives living in California (a very democrat-leaning state) are much more likely to having considered leaving the state than liberals; one of the most stated main reasons for this is the state’s political culture. Conservatives leaving the state, therefore, will make it more likely that other conservatives also move out. — A *2019 poll from Berkeley IGS* shows that conservatives living in California (a very democrat-leaning state) are much more likely to having considered leaving the state than liberals; one of the most stated main reasons for this is the state’s political culture. Conservatives leaving the state, therefore, will make it more likely that other conservatives also move out.

On the other hand, when analyzing mentions, they found that this network did not reveal, as seen in the case of retweets, an obvious political division. Instead, there was a higher degree of heterogeneity. However, the researchers contend that, even though ideologically-opposed individuals interact with each other through the mentions network, this should not be interpreted as a cure for the issue of Twitter polarization. Indeed, since political discourse on the platform is already highly partisan and disconnected from normal, face-to-face interactions, they argue that “these interactions might actually serve to exacerbate the problem of polarization by reinforcing pre-existing political biases”.

The potential consequences of an increasing ideological divide between members of a society might warrant worry. For example, animosity between republicans and democrats in the U.S. has been increasing, as shown by a recent Pew Research Center report.

This, combined with the occurrence of events such as the Charlottesville protests or the UC Berkeley protests, hints at a weakening social fabric as a symptom of the widening chasm.

Considering what we’ve seen so far, it would seem that polarization is fated to continue its course, especially since it is not clear what can and should done at an institutional level to face this problem. However, one thing is for sure: fomenting a culture in which individuals understand the benefits of learning from each other and, therefore, value meaningful, mutually-advantageous discourse can certainly go a long way in countering the above-described trend. Furthermore, crisply distinguishing between political disagreements/arguments and normal social interactions is of the utmost importance if we want to maintain cohesion in a society afflicted by a large ideological split.

Sources:

CNN
abc News
Pew Research Center
FiveThirtyEight
What Happened on Deliberation Day, University of Chicago Law School Chicago Unbound, Journal Articles
Political Polarization on Twitter, M. D. Conover, J. Ratkiewicz, M. Francisco, B. Gonc¸alves, A. Flammini, F. Menczer
Leaving California: Half of State’s Voters Have Been Considering This, Berkeley IGS Poll

Yemen’s Forgotten War

March 22, 2020January 26, 2021by Awareness NewsLeave a comment

Over 100.000 people killed since 2015

Over 2.2 million children malnourished

Over 19.000 airstrikes

Historical Background

In 1990, the Republic of Yemen was formed through the unification of the People’s Democratic Republic of Yemen (South) and the Yemen Arab Republic (North), under the joint governance of Ali Abdullah Saleh of North Yemen and Ali Salim al-Beidh of South Yemen. Since then, there has been persistent political and social unrest, predominantly in the northern provinces.

In 1993, al-Beidh left the new government claiming the latter marginalized and ignored the needs of the southern people, leading, in 1994, to the rise of a Civil War. He tried to cease the unification by reinstating the Democratic Republic of Yemen, an attempt that failed within less than two months and led to his expulsion from Yemen. After the Civil War, national unity was maintained under the presidency of Saleh, until a 2011 Arab Spring’s(1) popular revolution led to his resignation a year later, leaving power to Abdrabbuh Mansour Hadi, the vice-president.

The 2015 ongoing Civil War

While peace was expected to be restored, President Hadi faced Al-Qaeda attacks, military loyalty to Saleh, corruption, food insecurity and the South separatist movements. After the 2014/15 coup d’état(2), Hadi became an ally of the separatist movement to fight the Houthis, a broad tribal alliance belonging to the Shia minority, which emerged in the 1980s and later developed into a militia. This militia firmly opposed former President Saleh’s rule up to his resignation in 2012, yet joined forces with him and his troops to depose President Hadi.

The Saudis, who supported the presidency of Hadi, found this transfer of power illegitimate and formed a coalition consisting of nine West Asian and African countries (3). The main objectives of this coalition were to restore the presidency of Hadi, preventing Yemen from fragmenting under factions, and controlling the growing influence of Iran in the region. The Saudi-led intervention consisted in bombing suspected rebel hideouts. The US and UK have assisted the Saudi led coalition via intelligence briefings, military supplies and some drone attacks. Western involvement has the goal of preventing terrorism. The “War on Terror” has been the US’s main diplomatic goal in the Middle East, with Josh Earnest, Obama’s White House Press Secretary, saying back in 2015:

“… the goal of US policy in Yemen is to make sure that Yemen cannot be a safe haven that extremists can use to attack the west and to attack the United States”

An airstrike hit a school bus filled with children

UN reports have verified the death of at least 7500 civilians as of September 2019, most of them caused by coalition air strikes. Some estimates indicate a death toll of civilians of approximately 12,000, while 100,000 people have been killed since the beginning of the war. Houthi rebels have also been accused of using banned antipersonnel landmines, recruiting children, killing and wounding civilians by firing artillery indiscriminately at cities such as Taizz and Aden. These numbers, however, do not reflect people who have died as a result of starvation and illness brought on by the on-going humanitarian crisis.

Yemen’s Houthi rebel group has recruited more than 30,000 child soldiers

The UN considers Yemen to be the largest humanitarian crisis in the world, with 14 million people at risk of starvation, 2.2 million children being acutely malnourished, as well as 462,000 children suffering from severe acute malnutrition, according to UNICEF. There have been repeated outbreaks of deadly diseases such as cholera and all sides in this conflict have blocked and impeded access to humanitarian aid. The Saudi-led coalition has delayed and diverted fuel tankers, closed critical ports and stopped goods from entering Houthi-controlled areas. By doing this, fuel needed to power generators and pump water to homes has not reached its destination, worsening the already dire conditions within Yemen. Houthi forces have also been accused of confiscating food and medical supplies destined for the Yemeni population. Burdensome restrictions on aid workers have also interfered with the delivery of foreign aid.

There are also instances of aid workers being arbitrarily detained, kidnapped and killed while performing humanitarian operations throughout Yemen.

A quarter of all civilians killed in air raids were women and children

Saudi Arabia and Iran’s involvement

Western involvement is not of the same kind as previous military interventions in the Middle East. Therefore, the most important presence in the war comes from the two biggest middle-eastern powers: Iran and Saudi Arabia. The two countries have been bitter rivals since the Iranian Islamic Revolution of 1979. Although they never entered into direct military confrontations, they engaged in various proxy wars.

What is happening in Yemen is similar to what happened in Iraq during the American invasion of 2003. With the power vacuum, the country became a stage for a proxy war between the two regional powers. Yemen is a neighbor and a former satellite of Saudi Arabia. Iran backed the Houthi coup d’état in 2014-2015 and their militias, whereas the Saudis helped the central government.

Saudi Arabia hopes to keep Iran out of the Arabian Peninsula and to stop the increasing influence Iran seems to be gaining all over the Middle East.

Consequences of a forgotten war

The chaos in Yemen has resulted in two migrant flows into neighboring countries, that has spilled violence and refugees into the Arabian Peninsula and the Horn of Africa. Refugee flows coming from Africa have reversed, which in turn has only fragilized even further these countries that are already extremely impoverished and dealing with their own internal political conflicts.

The possibility of a break-up of the country is very likely, as the Iranian backed separatists have managed to achieve a strong enough position to force the remaining powers to accept it.

The war has also increased the hostilities between Iran and Saudi Arabia, worsening the stability of the regions’ security, which was already extremely fragile.

For peace to be a realistic goal, there needs to be agreements among national and international players involved in the war. This political settlement, can only be created through extensive dialogue, not continued warfare. To resolve Yemen’s multi-sided civil war, players with polarizing and conflicting interest will have to compromise for the greater good of the Yemeni population, which does not seem very likely in a near future.

While no compromise is made, the ones who suffer are the civilians in Yemen, specially the children who have been witnessing the terrors of war their whole lives, plagued by famine, diseases, poverty and the constant fear of being hit by an air strike or artillery shell. These people have lived in a continuous state of warfare for the last 5 years, with no foreseeable end in sight, and must continue with their daily lives, hoping one day they can return to normality.

(1) The Arab Spring is the name given to a series of protests and revolts spreading through many North African and Middle Eastern countries, starting in 2011, with the goal of establishing democratic regimes. The revolts lead to several regime changes. However, the outcomes were more instability, war and the persistence of repression in the region.

(2) 2014/15 coup d’état: An alliance between the Houthis and forces loyal to former president Saleh took control of the Yemeni capital Sana’a and deposed the interim president Hadi, who was forced to flee to Saudi Arabia.

(3) This coalition, also called Arab coalition, includes forces from Saudi Arabia, Egypt, Morocco, Jordan, Sudan, UAE, Kuwait, Qatar and Bahrain. Djibouti, Eritrea, Somalia made their military bases, airspace and territorial waters available for the coalition, while the US and UK have provided intelligence and logistical support.

Sources: BBC, Yemen Data Project, Anadolu Agency, The Bureau of Investigative Journalism, Reuters, DW, United Nations, Al Jazeera, Human Rights Watch.

Ana Salgado Christian Weber

Rui Ramalhão João Sande e Castro

Corona, an Economic Virus

March 17, 2020January 26, 2021by Awareness News3 Comments

As it is noticeable, we have just entered a downturn cycle in the economy. The uncertainty on the markets, the general panic, sudden decrease in consumption, production and investment are primary presages of economic dark times, and it is up to all of us to prepare for the upcoming storm. The next months won’t be easy and irreversible economic losses have already contributed to an approaching feasible collapse in the global economy.

The coronavirus isn´t only responsible for contaminating our health, this contagious virus has and will certainly play a big role in the future of worldwide economies.

EU’s real GDP was expected to grow around 1,4% in 2020, after the hit of the pandemic COVID-19 EU´s output may fall to 0% or even reach a negative growth. Even the Chinese economy, which has been continuously growing in the past decades, was anticipated to grow around 2% more than what it will predictably grow after the spread of the virus and the USA’s real GDP may grow less 1% than previously expected. Overall global GDP growth may fall from 2.5% to between 2% and -1.5%, depending if there is a quick recovery on the economy or a global slowdown.

All industries in the global economy are being contaminated by the virus and the duration of the predicted recovery fluctuates, depending on the economic sector.

As expected, tourism will take the longest time to recover.It is foreseen that it will only restart in the 4th quarter of 2020 (in October), imposing a threat for various countries. A good example is Portugal, whose GDP is highly dependent on the industry, having represented 14,6% of the portuguese GDP in 2018. On the other hand, consumer electronics and consumer products are the sectors that are anticipated to have the fastest economic recovery. Their global downturn reversal is estimated to be in the 2nd quarter of 2020 (April).

Even though there will certainly be an economic global slowdown in the economy many specialists argue that the economic incidence of covid-19 is merely conjunctural. Since it´s repercussions aren’t enrooted in the economy, a severe recession isn’t bound to happen, “markets will recover”.

If we reflect on it, an appearance of the epidemic coronavirus will pose as a temporary shock in the economy and it is one that is far from being neglected.

Let us take into consideration the 08 financial crisis, a great recession derived from an inundation of continuous bank runs, lack of credit crunch and condensed investment in toxic assets. Within the recession downtimes there was a high level of leverage in the financial market which turned rather more difficult the monetary response of the central banks. Many even argue that the prolonged and inaccurate response of Central Banks took a big part in the colossal breakdown of the economy.

In the feasible upcoming coronavirus crisis, governments and central banks are already concerned with how to prepare for it, how to mitigate the alarming consequences this global pandemic seems to be able to induce in the economy, and how to aim for a “surely recovery”.

It is definitely extremely hard to predict the right measures to fight such an erratic enemy, thankfully many allies have already started to plan ahead.

Central banks are taking out the big guns. The Fed just announced this last Sunday, March 15, 2020 , that it will lower interest rates to 0%, the first time since the financial crisis of 08, and that it will buy at least $700 billion in government and mortgage-related bonds.The drastic low interest rates are expected to remain until the US economy recovers from the coronavirus economic slowdown.

The ECB is also expanding money supply in the economy, buying financial assets with newly created money. However, their fixed interest rates have been on negative territory since 11 of june of 2014, therefore the central bank has no room to lower interest rates.

It becomes clear that European government’s fiscal policy will play a big role in safeguarding the economies. For the approaching months it will definitely be crucial that assertive fiscal policies are created, in order to safeguard employment and ensure direct credit to companies, with the intent that solvency and liquidity issues are avoided.

Acknowledging that the coronavirus outbreak is an exogenous temporary shock in the economy and that global entities are already taking measures to safeguard its repercussions, independently if the recovery process may elongate, there is hope that our economy won’t suffer an irreversible collapse and fall into the next big recession. Nonetheless, we should be aware that an economic downturn is advancing, it is time for governments to strengthen their weapons and get ready for the shooting.

Sources:

European Commission, McKinsey & Company, Washington post, BBC news, INE, NY Times, Economic Times, European Central Bank- Euro system

The Portuguese Environment for Startups

March 16, 2020January 26, 2021by Awareness NewsLeave a comment

Portugal lists as one of the European countries most severely hampered by the 2008 global recession. Following the austerity measures implemented in 2011 as a consequence of the country’s economic precarity, unemployment boomed and triggered all-time high emigration in the following years, particularly among younger and highly qualified people, leading to the so-called brain drain. This phenomenon greatly dampened Portugal’s more innovative sectors, making the country lag other economies regarding innovation, and consequently the startup ecosystem.

More recently, in 2016, the Portuguese government implemented StartUp Portugal, a startup acceleration initiative aimed at rejuvenating the country’s industries, boosting economic growth and fostering foreign investment, as well as creating an international hub for innovation.

Still in 2016, Prime Minister António Costa announced in the first edition of Web Summit in Lisbon a €200M fund to co-invest alongside VCs (venture capital) in local startups and foreign enterprises that reallocate to Portugal. Moreover, this event alone (which has been contractually ensured to remain in the country until 2028) has been creating fiscal revenue of over €45M and stimulating venture capital injection into local initiatives. This resulted in venture capital investments of around €44M in that year which, despite not being comparable to the vast majority of the top entrepreneurial countries, was a big increase from the €29M in 2015.

Indeed, a report conducted by Startup Europe Partnership stated that the Portuguese startup ecosystem is growing twice as fast as the European average. The cases of unicorns Farfetch, the online luxury retail platform, the cloud-based call-centre software Talkdesk or the low-code platform for private application creation Outsystems, reiterate the fertility of the Portuguese soil for the creation of valuable global market conquerors.

This month, the American startup accelerator Techstars partnered up with Semapa Next, in order to invest and enhance ten Portuguese newly founded companies that are bringing digital transformation to the areas of Industrial & Environmental Tech and Smart Transportation. This program clearly depicts how accelerators and venture-capital investors are increasingly focusing their efforts on startups that seek competitive advantage through the development of innovative technologies. Among the chosen are “Apres”, a data-driven company that focuses on providing AI solutions to enterprises, and “Qsee”, which devotes itself to the development of advanced analytics to address critical challenges in quality and productivity throughout the production process of firms.

Today, Portugal has a more developed entrepreneurial ecosystem and as a result is becoming a hub for innovation and startups, ranking at #31 on the Global Innovation Index. This progress is a consequence of factors such as Education, Expertise, and Support. The startup ecosystem benefits from a qualified workforce, as well as high quality Universities, with special focus on business and science, also emphasising on entrepreneurship. In fact, Portuguese universities such as Nova SBE, Universidade Católica SBE and Instituto Superior Técnico are ranked amongst the best in their areas of expertise.

Furthermore, partnerships between universities and their respective sectors, which provide students with a more “hands-on” experience, benefit not only students, but also startups, especially those in the growth stage, as more often than not they need access to specialist knowledge, which they lack in-house.

When it comes to support for startups, Portugal is characterised by a great number of initiatives. The number of incubators and accelerators, for instance, has grown to more than 150 throughout the country. They prove to be successful as well: the Lisbon Challenge was named as one of the top accelerators in Europe, and incubators like Startup Lisboa are also key players. Besides the typical startup amenities, there is a wide offer of services for starting and growing companies, ranging from co-working spaces and support services for intellectual property and product development. Consequently, Lisbon is listed in the top 5 best performing startup communities in Europe.

Despite the support in non-financial resources, the country still lacks monetary investment. Difficulty in raising funds helps to explain the higher percentage of startups in the earlier stages of development and the fewer in more advanced stages, in comparison with the European average.

Distribution of startups by development stage, 2018. Source: Statista

So far, remarkable improvements have been observable in the startup ecosystem in Portugal, but there is still a long way to go until we reach the same level of entrepreneurship development as our European peers. Venture capital is a valuable source of investment for newly founded companies and, as of 2019, Portugal was still ranked at the bottom (out of 28 countries) in VC funds raised per capita, at only $4 per capita, This value doesn’t even come close to the $771 per capita raised by Luxembourg. In terms of job creation, on average, each Portuguese startup employs 8.8 people, when the European average is 12.8. This fact may compromise the growth of the national enterprises.

Evaluating the stage of development of Portuguese recently-founded companies, the majority of them (51.3%), are in the “Startup stage”, meaning they have completed a marketable product or service and report first revenues/users, and that is the most prominent stage of development for a large proportion of European countries. It is also noticeable that there are still many companies in early stages of development, the “Seed stage”, which accounted for 16.7% of the startups in 2018. These values follow the European trend.

5 startups to look out for

This atmosphere has resulted in a myriad of exciting innovation. As a result, Tech5 was created, with the aim of serving as a community for the most promising startups in Europe and Israel. Each year, the top 5 startups of each participating country are chosen and brought to Founders Day, an event that brings these companies, top-tier investors and global press altogether. The criteria for selection are based on performance, investment rounds, growth, media coverage and social impact, among other factors. This year’s finalists were:

20tree.ai (founded in 2018, raised $120k): with resort to satellite imagery, AI and computing power, 20tree.ai provides an in-depth analysis of natural resources to companies, in order to ensure a sustained and productive exploration of such resources. From their platforms, they are able to provide insights on growth predictions, harvesting analysis, plagues, damages, predictions on short and long-term impacts, as well as asset monitoring and much more.
Barkyn (founded in 2017): an e-commerce website focused on man’s best friend. The platform allows for the creation and purchase of food adapted solely for each dog’s needs with the aid of an expert. Moreover, online veterinary appointments are also a feature of the startup.
DefinedCrowd (founded in 2015, raised $12.9M): DefinedCrowd is an artificial intelligence service to train and accelerate data through a combination of human-in-the-loop procedures and machine-learning techniques.
Jscrambler (founded in 2014, raised $2.3M): the startup serves the purpose of bringing security solutions for webpages and apps, ensuring tailor-made decisions based on data extraction to ensure maximum compatibility, performance and protection.
SWORD Health (founded in 2013, raided $14.1M): the first digital therapist ever, this program allows for physical therapy to be performed at home, while ensuring real-time feedback from the digital therapist and analysis of the rehabilitation process from clinical teams.

Conclusion

Despite Portugal’s initial setback, due to the community and government’s hard work, what was once the country’s Achilles heel is now one of its most attractive factors. The startup ecosystem improved considerably, more and more money is being invested and, consequently, that hard work is beginning to show results. As the country starts to roll out its first unicorns, the future looks promising…

Sources: “An overview of the Portuguese Entrepreneurship Ecosystem”, Halbe & Koenraads. Financial Times, Startup Europe Partnetship, Dealroom.co, OECD, Tech5, Statista.

Diogo Alves Lourenço Paramés

Tiago Rebelo

Does a flat tax on personal income make sense?

March 13, 2020January 26, 2021by Awareness NewsLeave a comment

Throughout history, disparities about the definition of social justice, across regions, led countries to adopt different income-tax systems (1). Despite being the most accepted, the progressive way of taxes has been increasingly questioned by academics and political leaders, arguing that a flat-tax system would be a better fit for countries regarding fairness and economic dynamics.

What distinguishes a flat rate from a progressive rate?

Simply put, a flat income-tax system applies the same income-tax rate to all taxpayers, regardless of their income level. Contrarily, a progressive system increases the rate as the income level increases, where the income range can vary greatly, depending on the country.

On the one hand, those who defend the first method argue that it is unfair to charge higher-income individuals a greater tax rate. The rationale behind this position is that they should not be penalized for adding more value to the economy. On the other hand, supporters of the progressive system believe that income distribution before taxes is not fair, i.e., earnings do not necessarily match economic contribution. Furthermore, wealthier households are considered to have the moral duty to aid those struggling. In their view, adjustments are needed and desirable.

Historically, the progressive system has been prevailing in most developed Western countries. In the USA, for instance, only 9 states (Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah) out of 50 have a flat income-tax. In turn, only 8 of the 36 OECD member countries currently have a somewhat flat system (Czech Republic, Denmark, Estonia, Hungary, Iceland, Ireland, Poland and Sweden) (2).

In order to accurately address the origins and the main effects of a flat-tax system, some of the referred countries will be used as case-studies in this article.

What caused some countries to adopt a flat-tax system?

It is not a coincidence that most European countries which adopted a flat-tax system were once part of a bigger state. Estonia, for instance, which is perhaps the successful case in the adoption of a flat-tax (1994), was part of the USSR until its breakup in 1991, as well as Latvia (1994), Lithuania (1995) and Georgia (2005). In turn, Serbia and Montenegro, which adopted a flat tax in 2003 and 2007, respectively, are former members of Yugoslavia.

What these countries have in common is the lack of openness of their economies prior to their independence, as seen in the graph. Nowadays, approximately thirty years after the breakup of their previous federations, countries like Estonia and Serbia have shown an intensive internationalization process. Indeed, economic history tells us that global trade increases the welfare of nations. Therefore, it seems logical that former USSR and Yugoslavia members would aim at opening their economies so that they could thrive and catch up with Central and Western European more developed states.

In a report for The Heritage Foundation, Mart Laar, former liberal-conservative Prime Minister of Estonia (1992-1994; 1999-2002), explained that, when the USSR broke up and the country conquered its independence, the Russian ruble no longer had any value, Estonian industrial production declined by more than 30%, real wages fell by 45%, while inflation was running at more than 1000%. GDP per capita in the country was at $2,000, compared to the $14,370 attained by the Finnish neighbours. This Baltic country was totally devastated, after being pushed to the limit by Moscow, hence lacking urgent and impactful policies to invert its economic path.

Among a set of important measures to stabilize and boost the economy such as the introduction of an own currency (the kroon) which was pegged to the German mark, and balanced Government budgets, openness to global markets also played a significant role by fostering competition and attracting direct foreign investment. Nonetheless, the decisive move «to achieve a lasting breakthrough in Estonia’s development» would be the flat tax.

In the words of Laar, it was all about providing the right incentives to people:

“when people who had started companies realized that the tax system punished success, their enthusiasm to persevere and determine their own future declined considerably”

— Laar

Similarly, in Lithuania and Latvia, nations that share many characteristics with Estonia (these three would become known as Baltic Tigers), the flat tax was introduced to improve the economic outlook after Soviet ruling. Besides, they had to compete with Estonia for foreign investment, for which fiscal policy was a powerful tool. On the other hand, in Russia and Ukraine, the flat-tax was introduced mainly to incentivize higher-income households not to evade their taxes.

How does flat taxation impact economies and societies?

Despite all the positive results political leaders aimed at achieving with a flat-tax system, do/did they really happen? Looking at tax revenue, GDP per capita, income reporting and tax compliance and Gini Index, we can take some conclusions.

Regarding tax revenue, the year immediately after Russia changed from progressive (12%, 20% and 30% rates) to flat taxation (13% in 2001), personal income-tax revenues increased 26% in real terms and 2% as a percentage of GDP, a working paper of the IMF from 2005 concluded. In the case of all Baltic Tigers, Deena Greenberg, despite finding out in the paper The Flat Tax: An Examination of the Baltic States that tax revenue increased after the adoption of a flat tax, could not conclude that both were linked, leaving space for ambiguity as for the effect of flat taxation on personal income-tax revenue. Nevertheless, the fact that these countries decreased their tax rate after some years raises doubts on the effectiveness of this method.

Analysing the evolution of real GDP per capita of some European countries with flat taxation, there is a clear trend: all of them grow significantly in the first years after its introduction, but then growth rates slow down. However, this has more to do with their historical precedents and consequent policies (macro stabilization, property reforms, openness to trade) than with the adoption of the flat tax itself. They happened simultaneously, which may induce misleading conclusions. So, it doesn’t seem to be enough evidence that GDP per capita improvements in these countries over time are due to flat taxation.

In terms of income reporting and tax compliance, it is not clear that a flat tax improves the standards, as the study ‘Flattening’ tax evasion? (2019) concludes by analysing a set of transition European countries. The already referred working paper from the IMF (2005), though, points out that tax compliance in Russia increased after the introduction of a flat tax. Therefore, despite not being totally clear, we could admit some positive impact of a flat tax in tax compliance, especially in less developed countries, in which standards are low.

From an inequality point of view, the Gini Index gives us an accurate insight. The higher the index, the higher the inequality. In this regard, findings are that flat taxation is positively correlated with income inequality, as the following table shows.

All in all, income inequality ends up being a determinant when it comes to deciding which taxation system to use. Despite being correlated with economic improvements, there is no clear evidence that flat taxation plays a role in them. The fact that Slovakia (2013) and Latvia (2018) have recently abandoned their flat systems in favour of the progressive method should be a matter of reflection. Even though the social justice argument is debatable, the economic side does not seem to support flat-tax admirers.

(1) For the sake of this article, only personal income was considered.

(2) Although only Estonia has a perfectly flat tax system, the remaining countries are included in the list either because they consider very few income ranges or because higher tax rates are charged only to abnormally wealthy individuals.

Sources:

AMECO, Deena Greenberg, European Central Bank, European Commission, Global Tax News, International Monetary Fund, LSE Blogs, ProPublica, Taylor and Francis Online, The Balance, The Global Economy, The Heritage Foundation, The Slovak Spectator, Verena Fritz, World Bank