The Pandora Papers

Reading time: 6 minutes

Tax revenue keeps civilization afloat but not all taxpayers play by the same set of rules. While some wealthy and well-connected people have avoided paying trillions of dollars in taxes, you are left to cover the bill.

            The Pandora Papers are a leak of almost 12 million documents that uncovered hidden wealth, tax avoidance and money laundering by some of the world’s rich and powerful. These include the King of Jordan, the presidents of Ukraine, Ecuador and Kenya, the prime minister of Czech Republic, and more than 130 billionaires from Russia, the United States, Turkey, and other nations. This leak comes years after the well-known Panama Papers.

            This is made possible by tax heavens. These are generally countries or places with low or no corporate taxes that typically limit public disclosure about companies and their owners. Independent countries like Panama, some areas within countries like the U.S. state of Delaware, or territories like the Cayman Islands are examples of such.

Figure 1 – Number of politicians named in the Pandora Papers per country.
Source: Statista

What is offshoring: technicalities and legalities

When investigations such as this come to light, talks about tax evasion or money laundering inevitably lead to discussions about the practice of offshoring and its legalities and technicalities. Offshoring can be succinctly defined as the practice of moving economic activities (be it a company or a bank account, etc.) from the country of origin towards a foreign jurisdiction overseas, separate from the one where the beneficial owner resides. Therefore, in its simplest form, as the name indicates, offshoring is primarily a geographic activity of moving operations from one country to another. However, the legal intricacies and moral aspects that revolve around it make it an activity quite frowned upon in the international community. 

Offshoring offers a number of enticing advantages to those who practice it, such as simpler corporate regulations and possibly lower costs for companies going offshore, as well as better asset and lawsuit protection. Moreover, and perhaps the biggest reason why people choose to move their enterprises and records of less than morally righteous business deals to countries such as Panama or the British Virgin Islands has to do with the tax benefits those countries provide to outsiders, as well as a promise of financial privacy and confidentiality that many appreciate in order to keep their financial transactions under the radar.

Concerning these taxation benefits, most of the so called “Tax Heavens”, terribly appealing to offshoring practices, allow these foreign entities to usufruct from an entirely different fiscal system from the national one, having to pay much less taxes (and in some particular cases none at all) and to collect tax-free capital gains from the operations conducted.

However, and as ludicrous as it may seem, the issue lies in the fact that this practice of moving operations from one country to another mostly to pay less taxes is entirely legal in many cases. In fact, despite all the scandal surrounding the Papers, most of those indicated are not infringing any law – rather they just opt to adhere to a judiciary and fiscal system quite different from the one in their home country. Hence, while tax evasion is illegal, tax avoidance by moving to a different jurisdiction is entirely legal, only not very morally accepted by society.

Why is this practice legal then?

That is a rather difficult question to answer as these offshore tax heavens have existed for many decades and not much seems to have been done to end them, despite all the investigations that have revolved around them in the past few years. In the end, it is very much the issue that many of the power players who could actually have a say in putting a stop to these practices – such as politicians and influential personalities – are also those that benefit the most from it, making it clear that it is really not much in their interest to limit offshoring in the near future.

From the Panama Papers to the Pandora Papers

The Pandora papers are similar to its predecessor, the Panama Papers, in that they both revealed the inner workings of offshore loopholes and shed light on many of the dealings that some high-profile, well-known figures engaged in.

Both the Panama and the Pandora papers consist of millions of files, 2.6 TB and 2.94 TB worth of information, respectively, which included legal and financial documents detailing many of the activities and property purchases of high-profile individuals, including billionaires, politicians, and world-leaders.

The Pandora papers were obtained and compiled by the International Consortium of Investigative Journalists (ICIJ) from a variety of different sources of information: 14 in total. ´

Meanwhile, its predecessor, the Panama Papers, came from a single source: Mossack Fonseca. Mossack Fonseca was a law firm and provider of corporate services, located in Panama (therefore, Panama Papers) that specialized in offshore financial services and that, before the leak, had a very relevant position in the industry. Because of this, it had access to large amounts of documents and files that detailed the activity that went on within the offshore dealings of many individuals. In 2016, a whistle-blower, whose identity is still unknown, leaked many of Mossack Fonseca’s documents to the International Consortium of Investigative Journalists.

While offshore activities are not, by themselves, illegal, they can be used to disguise and hide criminal activities. As a result, with the help of the information detailed in the Panama Papers, crime authorities in many different jurisdictions were able to uncover criminal activity and arrest and prosecute many suspects: In the U.S., the Panama Papers allowed the IRS to uncover several cases of tax evasion through offshore dealings, ultimately leading to the arrest of several people; U.S. authorities also found several cases of fraud. The Canada Revenue Agency also claims to have discovered 35 different cases of tax evasion. In late 2020, Germany issued two international arrest warrants for Juergen Mossack and Ramon Fonseca (the founders of Mossack Fonseca) for their involvements in the criminal activities of Mossack Fonseca, although they are unlikely to be extradited.

However, these types of investigations and legal procedures often take years to culminate in an arrest or a conviction and, so, we can expect that the Panama Papers will continue to aid authorities in investigations for many years to come. That will likely also be the case for the more recent Pandora Papers.

A possible solution – The Global Minimum Tax

A possible solution to tax heavens might be through a global minimum tax. A global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has already been agreed by 136 countries. The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) in sales globally. Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits. A second track of the overhaul would allow countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue. Applying a similar version to individuals might just do the trick to combat tax avoidance by wealthy individuals.


Offshoring allows companies and individuals to take advantage of low or no corporate taxes and limit public disclosure about companies and their owners. These practices are legal, but they pose a fundamental morality question. Offshoring practices provide benefits for the countries being used as the offshoring destination while negatively impacting the ones from which the money is being taken out off. This might create social unrest on these practices as taxpayers feel like not all citizens/companies are paying their fair share.

Sources: DW, Forbes, ICIJ, The Guardian.

Diogo Almeida

João Baptista

Jonathan Magzal

Inês Lindoso

João Correia

Does Europe have any energy left?

Reading time: 6 minutes

Europe is facing a record-breaking surge in energy prices after coming from historical lows in the second quarter of 2020. A series of market, geographic and political factors are weighting in and creating the perfect conditions for further rises. This not only threatens the post pandemic recovery and the European green transition but will certainly impact households’ income. Data from Eurostat showed that, in Europe, 37% of the total household energy consumption in 2016 was Natural Gas, with Dutch TTF Gas Futures up more than 350% this year. Electricity and petroleum products are also up 70% and 60% year to date. The trend observed in energy prices can have a serious impact on Portuguese households that pay some of the highest energy prices as percentage of income in Europe.

What factors are driving the surge in energy prices?

The Electricity Market

To understand the reasons behind climbing electricity prices it is important to grasp the basis of how the electricity market works in most of Europe. At the first level, we have production of electricity. In this part of the market, producers of electricity and sellers of electricity trade in the wholesale market. For the Iberian Peninsula this market is the MIBEL (Mercado Ibérico de Electricidade). At an intermediate stage, electricity needs to be distributed. Usually, there are single, state-regulated entities which handle the necessary infrastructure for the electricity grid. At a final stage, there is the retail of electricity, where electricity companies sell to final consumers.

The recent rapid rise in electricity price to consumers is mostly due to price increases in the wholesale market. This market is structured in a way where renewable energies are normally firstly supplied given their low costs per unit of electricity produced while sources like natural gas, coal and fuel oil are only supplied after since they are more costly.

The weak wind speeds in most of Europe during 2021 has reduced much of the available energy supply in renewables, making the price jump to higher levels of the supply schedule. In addition, the extra demand for natural gas, coal, and fuel, has raised the prices of these commodities considerably, leading to a further increase in the cost of producing electricity with these resources.

Germany, for instance, which is phasing out its nuclear power plants until 2022, has had to rely more on energy production using coal, whose price has greatly increased. In addition, the price of carbon emission allowances in Europe (EUA – EU Allowances) has also greatly increased. The need for burning fossil fuels and the increase in the cut of supply per year, dictated in July by the European Comission, have ratched up the demand for these allowances.

Natural Gas has also seen a surge in price due to high demand as industrial production surges. The price was also ramped up by natural disasters and geopolitical factors with Russia State-owned company Gazprom withdrawing some of its gas reserves located in the EU.     

Installing new renewable energy capacity can grasp as a possible solution yet it is unlikely to be an effective strategy to combat high energy prices in the short-run since it requires time to implement.

Figure 1 – European electricity markets price per MWh. Source: AleaSoft

The Oil Market

When it comes to what is undoubtedly the most used fossil fuel around the world, oil prices have been accompanying the increasing price trend that almost all energy sources have been experiencing all over the world lately. In oil’s specific case, this phenomenon can be clearly explained by the demand and supply forces/dynamics at play.  

On the consumer’s side of the equation, demand has been gradually growing after many months of stagnation during covid lockdowns in most countries. Indeed, with the recent lift of COVID restrictions, particularly in the US and the EU, there has been a boost in consumer’s demand for petrol fuel. Nevertheless, consumption levels are still significantly behind pre pandemic levels, with major oil-dependent industries such as air travel still slowly recovering.  

Combined with this scenario, on the supply side, OPEC+ producers have yet to improve much from the huge supply cut that was agreed upon last year to face off the drastic reduction in demand. Therefore, supply levels are still far below what would be the optimal level to respond to the current boost in demand, contributing henceforth to a spike in prices. Whether this restriction comes mostly from a strategic viewpoint so as to keep prices high, from recent disputes in OPEC+ meetings which have led to impasses in defining the quantity to be supplied by each member or to the impossibility of raising production due to underinvestment issues in countries like Nigeria and Angola is not entirely clear – most likely, it’s a combination of all of those three. Nonetheless, there is no doubt that this has greatly contributed to market instability and uncertainty, adding to the already high pressure on prices.

  Figure 2 – Brent Crude Oil Prices. Source: DailyFX

How do Portuguese Energy Prices compare with the EU?

Even though energy prices of EU countries differ from one another due to specific factors such as geographic location, taxation, network charges, environmental protection cost or severe weather conditions, the recent surge in prices was seen across all Europe. This surge was mainly driven by an increase in price of the raw commodity, which affects rather similarly all EU countries.

Analyzing the electricity price in EU over the last 10 years we can observe a general growth trend. In Portugal its price has increased 13%, with the UK having the most significant increase of 39%. On the opposite side there is Hungary that saw electricity prices fall 34% during this period.

In 2020, Portugal occupied the 14th place in terms of electricity prices without accounting for taxes and charges, below the EU-27 average. However, accounting for taxes and charges takes Portugal to the 8th place, barely below the European average. For Portuguese households, the taxes and charges on their energy bills accounts for almost half of the final price.

    Figure 3 – Electricity prices for domestic customers. Source: EDP

In the gasoline market the story is similar. In 2021, 60% of the price of gasoline is coming from taxes. This places Portugal among the top six for EU countries in terms of absolute value of taxes per liter.

The increase in the commodities’ price directly affects the living standards of the Portuguese population. As seen before, the prices practiced in Portugal are in line with the EU-27 average, yet one important factor is that the Portuguese purchasing power is below the European average. If we compare electricity prices with purchase power, Portugal has the 5th highest price in EU.


Despite the impressive surge in energy prices, it may just be the beginnings of a bigger move. The interactions between supply and demand, and the geopolitical factors may continue to have an imperative roll on the development of these prices in Europe. Also, Central Banks policies can also impact the dynamics seen in the energy markets. A weaker Euro will mean higher commodities prices, ceteris paribus.

The current prices of these commodities are already significant when compared to Portuguese households’ income and a persistence in this trend in prices may strain their budgets. Not only, but also Portuguese companies will suffer from the increase in costs and the consequent reduction in margins. This fact can be especially important given the predominance of low added value sectors in the Portuguese economy.

Sources: Busines, EDP, Markets Insider, Reuters

Diogo Almeida

João Baptista

Inês Lindoso

João Correia

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

Reading time: 7 minutes

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

The Hidden Champions of Germany

Reading time: 6 minutes

Germany’s success has been built on its SMEs, but why do they succeed? Will the pandemic put an end to this remarkable journey?

Today, Germany is the 4th largest economy in the world in terms of nominal GDP, enjoying the biggest current account surplus on Earth, in absolute terms, even greater than that of China’s, and a high level of quality of life. It is, therefore, no wonder that it is seen as a role model for aspirating economies to follow. However, unlike many others, the engine of the German economy is not the big multinationals, even though it is home to quite large corporations, such as Siemens, Bosch, Daimler and Allianz. Rather, what allows the German economy to have an edge are its Mittelstand.

The Mittelstand are small- and medium-sized companies, which often only employ up to 500 workers. In fact, while Germany only counts for 28 of the global 500 biggest companies worldwide, in terms of niche markets – the main focus of the Mittlestand strength – the economic giant is most definitely a market leader, accounting for around 48% of these small “hidden champions”. They are given this nickname, because, although the markets in which they operate are not very large and they themselves are not well known, they are the market leaders of these niche fields. Examples of Mittelstand include sausage packaging, cabin pressure control systems for passenger jets, realistic 3D anatomical models, food for ornamental fish and shoe manufacturing machines.

Furthermore, the Mittelstand are normally family businesses which are mostly export-driven, being the main contributor for Germany´s long-standing positive trade balance. These small- and medium-sized firms account for around 99% of the total companies in Germany and employ close to 60% of the total employed workforce of the country. Moreover, these approximate 3.3 million firms are responsible for about 35% of the total country turnover. 

Figure 1 – SME shares 2018 in Germany; Source – Federation of German Industries (BDI – Bundesverband der Deutschen Industrie)

Why the Mittelstand Succeed

First of all, they focus on customer satisfaction, they are committed to establishing a long-lasting relationship with their customers, striving to attend to their wishes and not solely focusing on the profit side of the trade.

Secondly, they invest a lot in state-of-the-art technology, deploying significant resourceson innovation and differentiation. Indeed, data shows that Mittelstand enterprises have five times more patents per employee than large businesses, but that these are also five times less costly. Innovation and efficiency are key to continue leading the market.

Thirdly, they are less focused on immediate and short-run profit, instead opting to think carefully on their business choices, maintaining high equity ratios and sometimes foregoing short-term success for perhaps a lower, but steadier and longer lasting growth. In fact, most prefer not to rely on debt as a means for growth preferring to avoid it and grow more slowly, in a more “sustainable” manner. This aversion to debt may arise due to deep rooted cultural factors, as the word for guilt and debt is the same in German, “schuld”.

Moreover, they also value the workplace, with their workers being a detrimental part of their business. As such, they employ a lot of resources into guaranteeing a healthy working environment, striving to keep their employees motivated and, hence, promoting productivity gains.

Besides, this appreciation of the workforce is also seen in the effort they put into apprenticeship programs, a lot of which are aimed at newly graduates looking for an entry in the job market. In most countries, there are either very qualified college educated workers or very low skilled ones, and not much in between. In Germany, thanks to the close connection between high school education and the Mittelstand, there is a sizable medium-skilled workforce, ideal for complex manufacturing jobs.

Furthermore, in Germany, it is also common for labor unions and workers to have a greater saying in how companies are managed. In fact, large companies with more than 2,000 workers are required to have union representatives on their administrative boards. This shows that, in Germany, there is greater cohesion and connectiveness between workers and management, allowing companies to sometimes take tough decisions, such as reducing salaries in times of crisis without as much unrest, as workers are more aware of the firm’s difficulties.

Finally, the fact that most of these firms are passed down from many generations serves as a guarantee that the future owners were born into the trade and are well aware of the goals of the company, as well as of the structure of their operations, ensuring a great knowledge of the market in question.

Challenges for the Mittelstand

However, as competitive as the Mittelstand are, they also face a myriad of challenges. The pandemic, in particular, is pushing these hidden giants to the brink. Here are some of them:

The Mittelstand do not have as much bargaining power with their suppliers as their larger, publicly listed rivals may have, which may lead to lower profit margins.

Secondly, due to increasing globalization and freedom of exchange of goods and services between countries, the Mittelstand are facing growing international competition, especially as China transitions its economy to the production of more added-value goods.

An ageing German population is also a cause for concern, as this will mean fewer consumers for the internal market and a smaller labor force from which to recruit young and talented workers, which may reduce the total production capacity of the Mittelstand and also stifle the fervorous innovation these companies need to stay on top. German companies are actually already facing shortages of skilled labor.   

Sometimes, the family business characteristic can also be a disadvantage, as it may lead to problems of succession or even disputes among future potential heirs of the business.

The Mittelstand face a growing challenge regarding the digitalization of the economy too, and increasingly important technologies, such as AI and Big Data, have not yet been adopted at a wide range. Overall, there is still much to be done if these companies want to stay on top when the Industry 4.0 takes flight.

Nonetheless, all the challenges referenced so far have been ones that the Mittelstand had been facing even before Covid. As suggested before, however, the pandemic is bringing a new array of challenges.

Figure 2 – Top issues of business associations; Source: IfM Bonn 2020

Among them, lack of liquidity has been of particular concern, as business activity has greatly fallen and, unfortunately, due to the slow resolution of the pandemic, businesses have not recovered much. Although lay-off programs and other support measures from the German government have mitigated some of these problems, the fact is that they are no full replacement for normal business activity.

Due to the spread of the virus, companies have also been forced to shut down their facilities, which has caused halts to their production. Some firms have been able to cope with this shutdowns better than others, though, as industries that mainly rely on the so-called “white collar” workers have been able to maintain part of their activity through remote working models. Models that have also come with their fair share of challenges with regards to adaptation one must admit, but still these companies have performed better than the many that rely on blue collar workers.

Finally, the Mittelstand have also had to cope with pressure on their supply chains, as these too have been subject to restrictions, therefore causing delays and problems in terms of acquisition of inputs and for the export of products. Going forward, many of these firms are rethinking their supply chains by possibly decreasing their reliance on overseas suppliers and switching to more local networks to a greater degree than before.

Final Remarks

Although the large German corporations may catch everyone’s eye, Germany’s success lays in the giants one does not see. The Mittelstand focus their attention on niche markets, too small for the big companies to get involved in, but too complex for the average smaller company. Their achievements are the result of many factors, but the challenges they face are equally as many. Nevertheless, one ought not to bet against them not coming out on top of those.

Sources: BBC, BDI, Entrepreneurial Living, Financial Times, IfM Bonn, McKinsey and Company, Harvard Business Review, PwC Reuters, The Economist

Rodolfo Carrasquinho

Inês Lindoso

Jorge Lousada

Economic and societal effects of military conscription

Every once in a while, there comes a time when the debate of whether we should bring back obligatory military service resurfaces in the mainstream societal discourse. However, opinions aside, what are the economic and societal effects of a conscription system?

Following the end of the Second World War, the number of countries that implement conscription (also referred to as the draft, or obligatory military service) has declined considerably. While most OECD countries have transitioned to all-volunteer militaries, many countries still have active conscription programs. In Europe, for instance, countries like Greece, Denmark, Austria, Lithuania, and Switzerland have some degree of mandatory service for males. Even as recently as 2017, Sweden reintroduced conscription due to fears caused by the Russian annexation of Crimea and its military exercises conducted at the border of Baltic states.

Figure 1 – Distribution of countries that still have some sort of conscription system; Source: Pew Research Center

Although the effect of geopolitical threats on reintroduction/continuation of conscription regimes in Europe is an interesting topic, we would like to take a broader look at some of the economic and societal consequences of obligatory service and discuss some of its advantages and disadvantages.

The true costs

 Proponents of conscription argue that a draft lowers personnel costs considerably, when comparing with an all-volunteer military. While it is true that the budgetary costs of conscription-based militaries are lower, this ignores all the economic costs that are imposed by this regime.

 In fact, the economic costs of drafting an individual will be equal to the value of his foregone production, were he not drafted, in addition to any disutility that may be caused to him by his service. These economic costs can be sizeable and even exceed the budgetary costs of a conscription-manned military. According to a paper that analysed the now-extinct Belgian draft, the authors estimated economic costs to be at least double the budgetary costs.

 In general, manning a country’s armed forces with conscription amounts to front-loading much of the costs onto the conscripts, as opposed to spreading costs more evenly and equitably through taxes, as it is done with an all-volunteer military. Furthermore, the artificially lowered price of draftees’ labour can lead to an inefficient organization of the armed forces, due to unduly high labour-to-capital ratios. These high ratios can manifest themselves as excessively manned army-units, for example.

Effects on human capital

We should also keep in mind that the economic costs that we previously mentioned were merely static (relating only to the time an individual spends in obligatory service). There are also dynamic effects caused by the draft (which relate to effects on periods after the draft). This is because drafting occurs at a very specific period of the lives of individuals (18-26 years of age) when they are making decisions about their education and when they begin to accumulate work experience. In essence, drafting coincides with a crucial period for the accumulation of human capital, which will have ramifications for the rest of the individual’s life. Therefore, conscription can have a negative dynamic effect on society in so far as it jeopardizes individuals’ accumulation of human capital.

 This is where advocates of the draft may argue that conscription, in fact, allows conscripts to accumulate valuable human capital due to the development of soft skills, such as team-work or personal discipline during their service. This argument has some merit. Indeed, a paper that studied the effect of the Portuguese peacetime draft found a positive impact of 4-5% on wages of conscripted men with only primary education.

 Furthermore, Israel’s military became a catalyst for the creation of specialized start-ups in fields like cyber-security, since it allows for the development of important technical skills and serves as a networking place, important for the creation of these new companies.

 Both examples illustrate the potential for the military to be a place for the accumulation of human capital by its service members.

 It is true that the military, as in the case of Israel, can be a good place for the acquisition of specialized skillsets that allow individuals to be more productive and innovative. It is also true that conscription can benefit low-education individuals by providing them with opportunities to accumulate human capital that they might not have access to otherwise.

 However, most conscripts never reach a level of specialization close to the one that is needed to create a start-up like the ones in the Israeli example. Furthermore, as economic activities evolve, and the jobs associated with them become more complex, educational requirements become longer and harder to achieve. This means that, going forward, the potential benefits of conscription will increasingly be overshadowed by the value of the education/experience that conscripts are forced to forego, and which they need to stay competitive in an ever more educated world.

 Also worth mentioning is a Dutch study that took advantage of a change in the drafting age of young men, which had the effect of exempting an entire birth cohort from obligatory military service in the Netherlands. The authors found that the draft had negative effects on individuals’ educational attainment and earnings.

 Contrary to the findings of this previous study, an interesting effect that the draft can have on educational choices and attainment is reported by a paper that analyses the effects of Germany’s re-introduction of conscription in 1937. The authors found a positive impact of conscription on the probability of individuals getting a college degree. The authors argue that this is likely due to draft-avoidance behaviour. Indeed, it was possible for young men to enrol in college in Germany, as a temporary safe-haven from the draft. After finishing their degree, the now-older men would be much less likely to be drafted. These types of effects of conscription on educational demand have also been documented in the United States and France.

Conscription does not reduce conflict

Supporters of the draft may also argue that an army manned by conscripts will decrease unnecessary belligerent behaviours by states, as this would impose casualties on all groups of society. However, this argument is empirically unsubstantiated. As Poutvaraa and Vagener, in their analysis of the economics and politics of conscription, put it:

Between 1800 and 1945, basically all wars in Europe were fought with conscript armies, and democratic countries like the U.S. and France even later used conscript military in unpopular colonial wars in Vietnam and Algeria.

Figure 2 – U.S. congressman drawing the first capsule for the Selective Service draft, during the Vietnam War, Dec 1, 1969; Source: Wikipedia

Final Remarks

There are many more economic and political dynamics related to this topic that could be discussed, though at the expense of making the article too long. However, we can say with some confidence that, all in all, peacetime conscription has a negative effect on economic performance in countries, and that this effect will, most likely, become more pronounced as time goes on.

Sources: Bloomberg, Bauer, Paloyo & Schmidt (2014), Card & Cardoso (2012), Financial Times, Hubers and Webbink (2015), Keller, Poutvara & Wagner (2006) Meyersmans & Kerstens (1991), Poutvaara & Wagener (2007).

Rodolfo Carrasquinho

João Baptista

Raquel Novo

Alexandre Bentes

Is London’s status as Europe’s main financial hub under threat?

Reading time: 6 minutes

For years, London has been the primary financial centre in Europe, but Brexit may allow Amsterdam and others to have a go at that title.

On the 1st of January of 2021, the United Kingdom (UK) finally left the EU. Immediate consequences could already be seen in the first days of UK’s exit. However, only now are we starting to have enough data to assess the true consequences of Brexit. One of the most interesting is the fact that London is no longer the largest share trading centre in Europe, having been surpassed by Amsterdam in January, which begs the question: “Is London’s status as the continent’s main financial hub under threat?”.

Before delving into the question, it is important to understand why London has been the dominant financial centre in Europe in the first place.

How did it happen?

First, it is worth disclosing that the city has always been an important trading hub, ever since the Roman founding, and, in the 19th, century, it was the political centre of the largest empire in History. But this is where most people get something wrong, as London is the composition of two cities that have their own two, distinct political entities. There is London, the one everyone thinks of as London, and then there is the less well-known City of London which is entirely surrounded by the former. The latter was founded by the Romans, and it has acquired a myriad of special privileges throughout its existence, due to its importance to the various kingdoms and nations that followed the collapse of the Roman Empire, privileges that it maintains to this day. In fact, the City had so much influence that, in the Middle Ages, Edward, the Confessor, built a new seat of royal power around an abbey he had founded in Westminster, in order to draw away power and wealth from the City. For centuries, the two cities were geographically quite distinct, only becoming indistinguishable in the 16th century.

Figure 1 – Map showcasing the City of London being surrounded by its wider sister, London. Source: Wikipedia

However, the old city of London still maintains some privileges, some of them being that certain laws passed in Parliament do not apply to it. This special status is one of the reasons why so many financial services concentrate in this small area, as it has much more friendly business regulations than the rest of Europe.

On top of that, business regulations in the UK are more like the US’s than those in continental Europe, allowing for different practices in the Private Equity market, for example, and more easily attracting the financial juggernauts across the Atlantic. Combined with the language bridge, it is almost as if they are doing business in America, whilst being in Europe. Furthermore, its location allows for investors and traders to catch the end of the Asian trading day and the beginning of Wall Street’s, a privileged position in terms of currency exchange trade. Moreover, the fact that so many financial institutions decide to operate in London only attracts more institutions, as they can better harness economies of scale, by having almost all necessary complementary services and skilled human resources concentrated in the city.

The Impact of Brexit

Now, Brexit is threatening London’s envied position, as it is putting more constraints in the flows of capital and financial assets to and from the European bloc. In fact, the EU expects banks to move their euro denominated trades into the bloc by 2022, and some have already complied.

Furthermore, the UK’s financial services sector was able to provide these services to their many clients in the EU, thanks to the system of passporting for members of the European Economic Area (EEA), until Brexit was concluded.

This system consists of several different passports for various service categories that financial institutions can apply for and that allow them to provide these services to any member of the EEA. These passports also allow institutions to setup branches in the territory of other member states with much greater ease and simplicity than would otherwise be possible. Many financial institutions rely on several different passports at once to provide the range of different services that their clients depend on.

After Brexit, with the UK’s exit from the single market, the passporting system is no longer available to the UK’s financial institutions. Instead, they will need to depend on individual licensing in each EEA country they wish to operate in. These licenses, often, are not as comprehensive or as easy to obtain as the previous passporting system. Furthermore, it forces institutions to setup branches in other countries that they might not otherwise need, creating needless costs and inefficiencies.

Figure 2 – Areal picture of the City of London and its surroundings. Source: Evan Evans Tours

Nevertheless, there is a potential agreement that would solve some of the problems the loss of passporting brings, which is an “equivalence” agreement in which Brussels and London would both agree to recognize some aspects of the other party’s financial supervision rules as equivalent to their own, and that would alleviate some of the frictions that have been registered since the start of the year. However, so far, there has been no agreement on equivalence.

Due to this, London’s trading markets of shares were hurt in January, as EU-based financial institutions were unable to trade, due to the lack of equivalence. Subsequently, trading of shares and other instruments has been flowing out of London into other European and American markets, with Amsterdam emerging as a clear winner and surpassing the City in share trading volume. “The city’s sudden dominance in European equity transactions goes back to Brexit contingency plans drawn up months ago. Both Cboe and the London Stock Exchange Group Plc’s Turquoise platform chose the Netherlands as their alternative site for EU share trading”, Bloomberg states, which is likely due to its business-friendly environment. Notwithstanding this, the more probable outcome in the long run is that many of the European operations that were previously done in London will be spread out through many cities besides Amsterdam, such as Frankfurt, Milan, Paris, Madrid. There probably won´t one single winner.

Figure 3 – Average daily trading volume per city in billions of euros. Source: Financial Times

A potential agreement on equivalence would not return to the City the ease of access to EU markets it had with the passporting system, as it covers fewer areas and services and is a unilateral agreement that could be withdrawn by the EU at any time. But even the prospect of full equivalence that many UK-based financial firms are hoping for is unlikely, since the EU wants to assert its financial independence and fears the UK may try to deviate its financial rules from those of the EU.

Still, even though it may seem that the EU can only gain with this outcome, one cannot forget that the EU’s financial activities were mainly conducted in London for a reason, and, with Brexit, firms’ access to capital markets and liquidity will not be as straightforward as it was prior to it. These added inefficiencies could hurt the EU, but the extent of the harm is still uncertain.

Final remarks

Despite Brexit, London will most likely remain a very important financial centre, perhaps even maintaining the status as Europe’s main financial hub, but the gap between it and its rivals will be smaller. Moreover, an agreement on equivalence in certain specific sectors is a likely option, but, given the more protectionist attitude of the EU, it is not probable this will be an agreement that ensures full equivalence.

All in all, the fears of London’s financial centre disappearing altogether are a bit exaggerated, but the city will also not come out unscathed, as many would hope. London is not just an important financial hub for Europe. It is important for the whole world, forming a crucial part of the current daily financial cycle of the globe, that encompasses other squares, like Tokyo and New York. But its importance for Europe will most likely decrease in the long run. As usual, reality is neither black nor white, but greyish.

Sources: Bloomberg, Financial Times, Investopedia,, The New York Times, Wikipedia.

Rodolfo Carrasquinho

João Baptista

Four Golden Rules to Achieve Lasting Economic Growth

Reading time: 7 minutes

Economic growth is verified once in a while in virtually every country across the globe. As a matter of fact, economic growth as it is is almost as unavoidable as an economic recession at least in a point in time. What is truly hard to achieve is lasting economic growth, as it demands some features which seldom coexist in a country. In this article, four of them are analyzed, in an attempt to shed a light on why some economies thrive, while others seem doomed to failure.

Economic diversification

When Botswana grew at an average rate of 13% per year during the 1970s and 1980s, soon after conquering independence from the United Kingdom, people thought they were in face of the ultimate economic miracle (Graph 1). Economic expansion in the Southeast African country just seemed unstoppable. This period coincided, however, with a world high in the price of diamonds, which the Botswanan economy heavily relied on (diamonds account for about 60% of government revenue). When prices fell in the 1990s, they were not able to sustain the remarkable expansion they had registered until then.

Graph 1 – Constant GDP per capita annual growth for Botswana (1960-2019)
Source: Federal Reserve Economic Data

In turn, other countries such as Angola and Venezuela, have shown a great dependence from oil prices to improve their general living standards, facing deep recessions whenever there was a trough in this market.  

Graph 2 – Constant GDP per capita annual growth for Venezuela (1980-2014) and Angola (1980-2020) vs. annual growth of Brent Crude (1990-2020)
Source: Federal Reserve Economic Data

As a matter of fact, these countries have other structural problems, which will be explored throughout the article, but it is undeniable that the lack of economic diversification exposes them to large fluctuations in commodities’ prices.  

On the other hand, if we look at a set of developed countries which are also world leaders in oil reserves, such as the United States, Canada or Norway, one can understand that they are much more insulated from the evolution of commodities’ prices (Graph 3). Even though one can spot a significant correlation between the growth rate of these countries’ GDP and the trough in oil prices in 2008 and 2009, for instance, this does not imply causality, as this was also the time of the great financial crisis. Furthermore, all these countries were able to grow steadily, for example, in the beginning of the century, when the oil price was everything but favorable. This must mean they have other sources of growth, as opposed to countries like Venezuela or Angola. When an economy is not diversified, people are subject to wider income variations, leading to social unrest and, therefore, to greater difficulty in implementing the so-needed structural reforms.

Graph 3 – Constant GDP per capita annual growth for the United States, Canada and Norway (1960-2019) vs. annual growth of Brent Crude (1990-2020)
Source: Federal Reserve Economic Data

These conclusions allow us to hereby distinguish Group 1 (Botswana, Venezuela, Angola) from Group 2 (United States, Canada, Norway) countries.

Productivity expansion

Beyond resource endowment dependence, Group 1 countries exhibit stagnant productivity levels. Despite widely discussed among economists, the true nature of the term productivity is fairly unclear to the common reader.

Taught in virtually every business school, Robert Solow (1987 Economics Nobel Prize) came up with a model which allows one to better understand the concept. Put simply, he argued that a country’s GDP could increase via mere labor (workers) and capital (machines) accumulation. Nonetheless, he sustained that long-term economic growth could only be achieved as long as the output each worker or machine produced increased as well – that corresponds to a productivity improvement. Otherwise, growth would not be sustainable in the long run, as inputs depreciate, meaning they lose value (e.g.: the likelihood of a machine needing to be fixed increases with its useful life). Productivity is, therefore, a measure of efficiency of production, which, when high, can lead to greater profits for businesses and income for individuals. Conversely, when low, a country cannot aim at achieving lasting growth.

Comparing Group 1-alike countries (this time, focusing temporarily on Ecuador and Nigeria, due to the lack of data for Angola and Botswana) with Group 2 countries, one can clearly observe that growth in labor productivity is once more very dissimilar (Graph 4). This difference is also embodied in the remarkable dissimilarity in absolute productivity levels, but that fact directly departures from different growth rates. In fact, in the 1970s, absolute levels were not that different – a great divergence only arose when Group 2 nations consistently outperformed Group 1 countries.

Graph 4 – Productivity per hour worked in the United States, Canada, Norway, Venezuela, Ecuador and Nigeria (1970-2017)
Source: Our World in Data

Incipient productivity growth is, therefore, one of the reasons why some countries do not thrive, but it is also a direct consequence of another flaw – lack of openness to trade.

Openness to trade

The benefits of free trade go back to David Ricardo. He defended that it allowed countries to specialize and increase their productivity, translating into a higher national welfare. More specifically, trade made it possible for countries to access goods which otherwise would not be reachable and sell products whose production they were relatively more productive in (concept of comparative advantage). The greatest advantage from international trade is, nevertheless, the exposure of national firms to greater competition, forcing them to constantly improve production processes, which has a direct positive impact on productivity.

When comparing Group 1 with Group 2 countries, one can, once again, identify quite decisive differences between them in this regard. This time, however, Botswana is spotted half-way through to Group 2 countries. The African country exports mainly beef and diamonds and, although the products it sells abroad are not particularly diverse, it does not seem eager to avoid foreign, more efficient firms to access domestic markets. The same cannot be said regarding Venezuela or Angola, where barriers to trade are enormous. Speaking about Venezuela, oil exports have been steadily decreasing since the highs of 2014. Also, the fact that the country has the world’s largest oil reserves makes gasoline shortage today a bit ironic. On the other hand, Group 2 countries have historically been great supporters of international trade, allowing firms to access cheaper raw materials and to find new markets. Consequently, this set of countries proves it is possible to be blessed with natural resources, while still having organized societies and developed industrial and service sectors. All in all, embracing world trade is highly correlated with long-term economic growth. In reality, the great economic boom after World War II was mainly pushed by an increase in the relative importance of exports in the global scenery, as shown by Graph 5.      

Graph 5 – Value of exported goods as a share of GDP
Source: Our World in Data

Inclusive institutions

Despite being needed to achieve economic diversification, productivity growth and greater openness to trade, structural reforms are only possible to implement as long as national institutions support them. This is a major problem in Group 1 countries, especially in Venezuela and Angola. Indeed, there is a notorious lack of democratic institutions in these countries, which are also characterized by high corruption levels.

As a matter of fact, in the 2019 Corruption Perceptions Index, which ranks countries in terms of corruption from 0 (very corrupt) to 100 (very clean), they registered very low values, while the United States, Canada and Norway scored relatively higher values (Graph 6). Botswana is in the middle. It is, therefore, of no coincidence that Botswana is the best-performing country among Group 1 countries.

Graph 6 – Institutions’ inclusiveness as measured by corruption and economic freedom
Data sources: The Heritage Foundation, Transparency International

Overall, corruption results in lower levels of capital productivity. As corrupt government favor private interests, it often gets stuck in a state of inefficiency (no incentives to control costs), led by wasteful rent-seeking (manipulate economic conditions to generate profit) and distorted public decision-making. The side-payments involved and hidden within each transaction create an unstable amount of uncertainty, which not only serves as an incentive not to engage in economic exchanges and disincentivizes investment, but promotes of these corrupt transactions. Moreover, the misaligned incentives result in an inefficient allocation of resources.

Another dimension in which institutions can be evaluated is through the 2020 Economic Freedom Index, where results are similar to those regarding corruption (Graph 6). In this regard, empirical data support the fact that liberalization induces growth, despite significant gaps in the levels of productivity and economic freedom index between groups of countries. So, the patterns verified across these countries are once more consistent with the existing data.

This reaffirms the importance of inclusive institutions – a term coined by Acemoglu and Robinson in Why Nations Fail – where property rights are respected, justice is effective and government spending is wise and clean-fingered. Only institutions providing the right incentives to individuals and businesses can bring continuous prosperity.

Heading towards lasting economic growth

Sustainable prosperity directly relies on economic diversification, productivity expansion and international trade. However, these three golden rules demand a fourth – inclusive institutions. This explains why some people get very rich and other struggle to accumulate some wealth across the globe. As long as institutional flaws persist, so will economic stagnation. This is perhaps the most important problem developing countries face nowadays.

Sources: Federal Reserve Economic Data, JSTOR, Our World in Data, ResearchGate, Statista, The Heritage Foundation, The Independent

Gonçalo Silva

Mariana Soares

Nuno Sampayo

Rodolfo Carrasquinho

Breaking the gender glass ceiling in South Korea

In the 1960’s, South Korea’s fertility rate displayed an impressive and even slightly concerning population growth, leading the government to implement restrictive population policies. Nowadays, the scenario is significantly different, with the country’s fertility being one of the lowest worldwide. Combining that with an increasingly ageing population, South Korea is currently facing a decline in its population growth, with the natural replacement of generations being at stake. This concerning new demographic paradigm has led the government to take action, committing to increase the country’s birth rate, albeit unsuccessfully.

With these failed attempts, the solution may revolve around changing the women’s role in society, incentivising an active participation in the job market, granting them the same rights and benefits to those of men.

However, this raises the question: is South Korea’s society ready for such a drastic change?

Historical roots

South Korea was established as a nation with the division of the Korean Peninsula after World War II. In the aftermath, an invasion by North Korea of its southern counterpart´s borders triggered an armed conflict between the two, which was only solved by 1953 through the signing of an armistice agreement. Today, South Korea is one of East Asia’s most influential countries, with an economy ranking just behind Japan and China and a population of around 51 million people, of which more than 25 million are established in its capital, Seoul.

In recent years, South Korea has experienced a rapid industrial growth, as well as a vast economic modernization, contributing to the shrinking of the income gap that for many years separated it from the developed Occidental economies and, in some cases, to overcome some of them in GDP per capita (Graph 1). Nevertheless, even if in economic terms this gap is now practically non-existent, when it comes to gender equality and the women’s role in society, South Korea is still very far from the Western standards.

Graph 1 – Real GDP per capita comparison    Source: Federal Reserve Economic Data

Graph 1 – Real GDP per capita comparison

Source: Federal Reserve Economic Data

Window-dressing gender action

With the ever-growing role of women in society after the late 1960s, as they increasingly sought and integrated the job market and pursued higher levels of education, the government enacted the Equal Employment Act in 1987, in order to guarantee equal and fair treatment across the two sexes. However, this proved to be ineffective in practice, as women continued to be victim of lower wages and sexual harassment in the workspace. As a matter of fact, South Korea is still today the worst-performing OECD country in terms of gender wage gap (median wage earnings of women are, on average, 32,5% lower than men’s, as shown by Graph 2).

Graph 2 - Gender wage gap across OECD countries (difference between median men’s and women’s wages)    Source: OECD Data

Graph 2 – Gender wage gap across OECD countries (difference between median men’s and women’s wages)

Source: OECD Data

This discrimination in the labour market is still deeply rooted on the misconception that women are less desirable as employees, as they may require maternity leave in the future as well as leave to take care of their children, should they fall ill. Related to this is the patriarchal view that women are the ones responsible for the care of domestic affairs, leaving men to work to provide for the family. While efforts have been made in changing this current of thought (particularly, with the 2005 decision of South Korea’s Constitutional Court to abolish “hoju”, a family registry system that identified the head of household as a male and that obliged family members to be registered under him), it is still far from reaching the desired effects. In fact, the World Economic Forum and a United Nations report have recently ranked South Korea´s gender empowerment among the lowest in the developed world.

Therefore, this discrimination of women in the job market, centered around their role in the society, has forced many women to choose between professional success and family life, with many opting to forego entirely marriage and children. This is part of a rising social phenomenon in South Korea called the Sampo Generation, with the word ‘sampo’ meaning giving up three things: relationships, marriage and children.

A demographic winter

As a result of the Sampo phenomenon, birth and fertility rates plummeted in recent years, causing demographics in South Korea to take a concerning tumble. In fact, South Korea’s fertility rate has been declining steadily, not being able to reach the minimum threshold (2.1 children per woman, so as to ensure the replacement of the generation) for more than 30 years, nowadays reaching only 1.1 children per woman (an astounding contrast with the impressive rates registered in the 1960s, as seen in Graph 3).

Graph 3 - Total Fertility Rate in South Korea (1955-2020)    Source: Worldometer

Graph 3 – Total Fertility Rate in South Korea (1955-2020)

Source: Worldometer

Moreover, longevity has also been improving in South Korea, with the country displaying one of the highest life expectancies in the world (around 82 years old), a value that the United Nations predict will continue to grow, estimating that, by the end of the century, an average baby born in South Korea will live to the age of 92.

This two effects combined result in an ageing population, with a population growth rate that has been significantly decreasing over the years (Graph 4), a fact that reinforces the notion that, even though a reduction in the country’s population is not yet a reality in the short-run, it seems to be an unavoidable scenario in the long run (Graph 5).

Graph 4 - Rate of population growth in South Korea (1960-2020)    Data source:

Graph 4 – Rate of population growth in South Korea (1960-2020)

Data source:

Graph 5 - Estimated population of South Korea (2021-2050)    Data source:

Graph 5 – Estimated population of South Korea (2021-2050)

Data source:

Promoting population rejuvenation

In order to combat this concerning demographic framework, various measures have been taken by the government in recent years, with a significant $70bn made available to be channelled into incentivising childbirth, marking it as one of the largest childbirth incentives worldwide, encompassing subsidies, facilities, as well as multiple perks for working parents and large families. For instance, in regards to subsidies, 500 000 won (around $500) are awarded to expectant parents so as to help covering prenatal expenses, as well as a monthly allowance  of around 200 000 won ($200) during the infant’s 1st year.

Also, in recent years, the government has been working in providing free day-care services for everyone, implementing more flexible pick up and drop off hours,, as well as allowing for exceptions in which children of both working parents are attributed priority in long day-care waiting lists.

In addition to all these national measures, some specific cities, like Seoul, have applied localised measures such as subsidising fertility treatments, providing free parking or even offering housing assistance.

However, as of today, these measures appear to have had little impact in boosting birth rates. This is probably due to the fact that the issue of the problem lies not in monetary concerns, but on the deeply rooted mentality of South Korea’s society, which attributes primacy of work over family, making it hard for women to conciliate the two realities (inevitably leading them to choose one over the other).


Paving the way through the correction of a historical problem

The solution to this demographic problem seems to revolve around increasing women’s participation in the labour force, actively incentivising it by granting them the same salary rights as men, as well as offering more benefits for working mothers. In fact, this can only be achieved if women are allowed the proper balance between work and family, leaving them enough time to dedicate to their children, as well as granting them the maternity leave they are entitled to and also not using that matter as a discriminatory selection criterion in job interviews.

In sum, while this seems to be the best course of action to take in order to invert the current demographic situation, there is still a long path ahead when it comes to women empowerment in South Korea. In fact, even if some legal action has been taken towards the goal of gender equality, in practice, this change is yet to be felt.

Bridging the gender gap as the sole way of reinventing South Korea

As long as society’s mentality remains unchanged, it is unlikely that the government will succeed in combining an increase in women’s participation in the labour force with a rise in birth rates, dooming the country to suffer the consequences of a long economic and demographic winter.

Sources:, BBC, Bloomberg, History, JSTOR, Kostat,, The Economist, Wilson Center, World Bank, Worldometer

Is there hidden inflation in a sea of deflation?

Economists around the world are rightfully concerned about inflation trends. Headline inflation does not tell the full story, though.

Extraordinary times, unconventional measures, doubtful results

With the recent economic woes caused by the pandemic, governments and central banks have been called for an unprecedented role of support to the economy, so as to limit the damage it has ravaged. Central banks, in particular, have come up with enormous economic stimulus packages, only comparable to the ones used following the Great Recession of 2008. One of the objectives of these institutions is price stability, normally measured with inflation – a quantitative measure of the rate at which the average price level of a basket of selected goods and services, primarily of interest to consumers, in an economy increases over some period of time –, which has seen great disruption.

At the moment, however, in the Euro Area, countries are experiencing deflation, the opposite of inflation, that is, a decrease in the price level. This is often seen as a bad indicator for the economy, as deflation could cause consumers and firms to delay consumption and investment decisions, so as to buy the same goods and services at a cheaper price in the future, which can lead to increased unemployment and, therefore, to an even greater reduction of consumption, pushing production and unemployment down even further. Thus, it is of no surprise that it is also seen as a sign that wages are not increasing or even worse, decreasing. Because if salaries are stagnant or diminishing this will negatively affect the consumers demand for goods, which could sometimes help to explain part of said deflation. This is the reason why central banks target an inflation rate around 2-3%, neither too high nor too low.

In order to combat this low inflation and bring liquidity to financial markets, so as to allow firms to more easily find credit to finance their day-to-day operations and their short-term cash flow strains, the European Central Bank (ECB) has embarked on a massive stimulus program.

Nonetheless, the purpose of this article is to assess whether or not the reported headline deflation, measured by the Consumer Price Index (CPI), seen in the indicators is not perhaps “hiding” inflation of substantially important goods for consumers and, therefore, turning  the well-intended actions of the ECB and other Central Banks to bring inflation up in order to help households, ending up hurting them.

Hidden inflation?

One of such “hidden” inflation phenomena can be seen primarily in the price evolution of food products, as seen in the graphs below.

Source: Trading Economics

Source: Trading Economics

Source: Trading Economics

Source: Trading Economics

 As it can be observed, food products inflation in the US has not always been above CPI inflation throughout the past year, but there was a large spike of the former, right when COVID-19 started spreading around the world and lockdowns began being enforced, which ground to a halt almost all economic activity.

Whilst CPI inflation decelerated, food inflation experienced the opposite. Focusing on the Euro Area in particular, even though there were some differences (in the Netherlands and Germany, the CPI has actually grown since March), in most countries, the correlation between CPI and food inflation was considerably negative, reinforcing the notion that the two evolved oppositely. Consequently, it would seem plausible that central banks could be emphasizing too much the low rates of inflation as measured by the CPI, but ignoring the increase in prices for food products, which are considered essential goods and represent a significant amount of an average household’s disposable income. So, central banks could be hurting households whilst trying to help them. And there is a valid argument to be made here, as in times of crises people tend to buy more food products as a proportion of their income and low-income families have a greater percentage of their income being spent on these products.

Breaking down inflation

Nevertheless, before making any hastily conclusions, we should first acknowledge that there are sectoral differences in inflation, meaning that different sectors in the economy tend to experience different inflation levels. For example, in terms of inflation, goods can be divided into non-tradable goods and tradable ones. The former group includes goods that can only be consumed in the economy in which they are produced in or that are not able to be exported or imported and, thus, face less exposure to international markets and price fluctuations. The latter group encompasses goods that are free to be traded between countries and are, thus, more susceptible to international price fluctuations. In the case of non-tradable goods, their prices can be greatly influenced by increases in productivity in the tradable sector, because such improvements will lead to higher wages. Also, as the intrinsically less globalized sector is more dependent on labour, it will result in higher prices of the produced goods.

However, one only ought to go to the nearest supermarket and check the origins of products on the stalls to realize the food sector is most likely a tradable goods sector, as much of the food we consume is imported from elsewhere, meaning it is exposed to international shocks, such as the one we are currently experiencing. But it is a special subsector, in the sense that, in developed countries, it enjoys a certain degree of isolation from the outside world, due to the higher health and safety requirements of these countries. Moreover, it is traditionally a sector that experiences higher inflation, because of the above-mentioned characteristic, but also due to an increase in living conditions in emerging countries, which are causing increases in demand, not fully matched by increases in the supply side. Besides this, the costs of storing, transporting and distributing have also risen and, in some cases, climate change has played a role in affecting the supply side (example: recurring droughts in California, that increase the costs of irrigation and loss of crops for farmers, largely as a result of the increased activity of the El Niño effect).

The effect of the pandemic on food prices

All this goes to show that inflation is traditionally higher in food products, but the levels that have been observed this year have been particularly high. This is majorly the result of the stress the pandemic has put on supply chains. As countries went into lockdowns, very little production was happening and trade between countries sharply decreased as well. As a matter of fact, in Europe, for instance, many nations closed their borders during March and April, which increased the costs and time of transporting goods between countries, resulting in an over-supply of some goods in some countries, which were destined to foreign markets, and in a shortage of other goods. Adding to this strain on supply chains, there is also the observed behaviour of consumers increasing sharply their spending on food products during crises, as they fear supply chains may be at risk or that prices might increase rapidly. However, this is almost a self-fulfilling prophecy, because, by increasing demand so dramatically in such a short period of time, consumers can make a “secure” supply chain of food, suddenly becoming overwhelmed due to the supply side not being able to meet such levels as rapidly.

Graph 3 – International trade has been suffering a severe hit in 2020     Source: World Trade Organization

Graph 3 – International trade has been suffering a severe hit in 2020 

Source: World Trade Organization

Besides the stress on the supply chain, farmers also have to deal with another problem resulting from the pandemic – the low availability of workers for harvesting crops –, either due to travel restrictions, little possibility of meeting the safety requirements or by people simply not feeling comfortable enough to work. This last occurrence has been especially problematic in the American and German meat industries, as slaughterhouses have had major out-breaks of COVID-19, which have caused prolonged and recurring shutdowns, contributing to even greater prices of meat comparing to other food categories, something notably concerning, as it is a very important part of average consumer diet.

A final verdict

In conclusion, is there “hidden” inflation? Yes, there is, mainly in the products which are of most importance for consumers, which are also having to deal with higher unemployment and decreases in income. So, it is reasonable to ask if central banks are not perhaps too focused on overall inflation levels to be able to notice an already high inflation level that greatly affects families, which might be causing an inadequacy of stimulus programs to revamp inflation, in terms of improving people’s situation. Even so, as we have seen, it is mainly a matter of problems of the supply side in meeting demand, something that should be smoothed out in the coming months as producers tackle the problems of the new working environments and consumers realize that supply chains are not as in danger as previously feared.

Sources: Centre d’Etudes Prospectives et d’Informations Internationales, Economics Help, European Central Bank, Food and Agriculture Organization of the United Nations, Investopedia, Norges Bank, Taylor & Francis Online, The New York Times, Trading Economics, tutor2u, World Trade Organization.

Imposto Mortágua – a hated property tax in Portugal, but why?

Imposto Mortágua (Portuguese for Mortágua Tax)  is a type of property tax that was implemented in Portugal in 2017. Its formal denomination is AIMI, Adicional ao Imposto Municipal sobre Imóveis (Portuguese for Additional Property Tax). It gained popularity as Imposto Mortágua, due to the Portuguese congresswoman and economist who created this tax, named Mariana Mortágua. As such, what is this tax about?

In short, this is an additional tax to the common Portuguese property tax IMI (Imposto Municipal sobre Imóveis) in Portugal. It is only imposed on individuals and corporations with luxury properties – which can vary from urban housing buildings to construction fields. However, regarding corporations, this tax only considers property that is not being used for production, while households’ property used directly for housing is not accounted nor taxed too. Furthermore, all revenue collected from this tax is directly allocated to the Portuguese Social Security.

More specifically, AIMI is only imposed on citizens that own property whose tax equity value is above a certain threshold, this being 600,000 € in 2019 for non-married individuals and 1,200,000 € for married individuals benefiting from joint taxation. Moreover, this tax is progressive and, therefore, divided in three brackets, with tax rates ranging from 0,7% to 1,5%, coming from the less valuable properties to the more expensive ones, respectively. This information regards the year of 2019, and a more visual and detailed representation of this tax methodology can be seen in the figures below.


Figure 1 – Tax brackets and absolute amounts imposed on singular, non-married individuals, owning properties valued at that respective amount. The values on the left column show the possible Valor Patrimonial Tributário (Portuguese for Tax Equity Value) of a property (as one can see, properties valued at bellow than 600 000 € are not taxed), the values on the middle column show the marginal tax rate for each property value and the values on the right column show the absolute amount an individual has to pay, marginally.

Source: Banco Montepio


Figure 2 – Tax brackets and absolute amounts imposed on properties owned by married individuals with joint taxation.

The interpretation for this is equivalent to the one in Figure 1, except that the tax only applies to properties valued at more than 1 200 000 € owned by married individuals with joint taxation.

Source: Banco Montepio

It is also important to state that these tax rates, since they are marginal, are therefore imposed on the difference between the next threshold value and the extra income above the previous threshold/bracket. For example, on a singular household with a property valued at 1,100,000 €, the following taxation will be imposed: for the first 600,000 €0.7% will be deducted from 400 000 (i.e. 1,000,000 € – 600,000 €), and then on the extra 500 000 €, a marginal tax rate of 1% will be imposed on the 100 000 € (i.e. 1,200,000 – 1,100,000 €),. As such, the absolute amount paid by this household on a 1,100,000 € property will be:

(400,000 € * 0.7%) + (100,000 € * 1%) = 2,800 € + 1,000 € = 3,800 €.

This tax created an interesting phenomenon – it is highly disliked by the Portuguese population, despite the fact that the vast majority of the people not supporting it are not affected at all by the tax itself (indeed, less than 1% of all Portuguese taxpayers are obligated to pay AIMI).

As such, one might ask: but why? Is it a problem of just misinformation of the population about the tax methodology or are there more complex political economy behaviours underlying such phenomenon?

Evidence shows that taxes on wealth (such as AIMI) are known to combat inequality in a very effective way. Indeed, wealth inequality shows a much larger gap compared to income inequality. Therefore, if an economist/politician has as main priority the reduction of inequality, a wealth tax might be the way to go since it tackles the main problem of wealth inequality directly.

AIMI is a great example of this, since taxing property is one of the most effective ways to tax wealth – not only it taxes directly the rich, who might have large inheritances and wealth stocks that are generating no flow to the economy, nor contributing to economic growth in any way, but it is also very difficult (if even impossible) to deviate from this tax, since property cannot be moved. This means that the likelihood that this tax generates a reflexive outcome is very narrow.

As such, it is also important to clarify that wealth taxes are levied on the wealth stock (therefore, the total amount of net wealth a taxpayer owns), while an income tax is imposed on the flow from the wealth stock. The income earned from returns to wealth becomes part of the wealth tax base for the next year, as the wealth stock grows.

This might very well be the reason why people dislike Imposto Mortáguathey feel as though they are being double-taxed. Indeed, wealth is a stock generated by the accumulation of income flows throughout one’s life (and also possible inheritances generated from income flows of past generations) and such income flows have been, for the most part, heavily taxed by income taxes. Accordingly, many people disagree with the policy of taxing wealth, since they view it as though such wealth has been taxed already through the taxation of income flows that ultimately generated such wealth. Considering AIMI specifically, this reasoning may widely apply too. People might view their properties as an accumulation of the income they generated throughout life, that was taxed accordingly and, therefore, they believe that owning such properties should not be upon the obligation of paying an added tax.

Thus, coming back to the initial question of why AIMI was so disliked when created, one might believe the answer to be a combination of the following reasons – not only because of a general dislike for wealth taxes, as many people view it as being unfair, but also due to misinformation about the respective tax methodology, thus believing AIMI would apply to any individual owning any kind of property or land (which is not the case).

As such, one might question what are the motivations to apply such tax as Imposto Mortágua in Portugal. The answer relates to the trade-off the government makes between efficiency and equity considerations, being this a purely normative discussion and, therefore, harder to reach fair conclusions.

For every public policy the government makes, a trade-off must be done between the effect on market efficiency and the effect on income and wealth inequality that such policy would make. How to compute the optimal trade-off is a hard task to ask and one can even say it depends more on politics rather than economic reasoning. The creation of AIMI is, therefore, a policy that prioritizes the latter – its ultimate goal is to reduce wealth inequality in Portugal – but, as one can see, it comes with some consequential hurdles. Nevertheless, in 2019, this tax generated revenues of 151,560,000 €, which were around 8,52% of the state’s tax revenue. This might benefit the activity of Social Security, which could ultimately help lower classes by giving them the needed resources and, therefore, reduce inequality.

Concluding, morally speaking, it is very ambiguous to objectively state whether this public policy is good or bad for the country, since it mainly depends on one’s motivations. When creating Imposto Mortágua, the government considered the economic impacts and may have disregarded eventual discontents among the population. Nevertheless, the government believes its economic outcomes show a clear positive social impact for many citizens. But, as seen above, people’s expectations, motivations, and consequent behaviours are highly heterogeneous.

Sources: Banco Montepio, Economia ao Minuto,, Idealista, Portal das Finanças, Tax Foundation, ZAP Notícias