Author: Brett Romero (Page 5 of 11)

Uber vs Taxis – The Taxi Perspective

August 15, 2015 / Brett Romero / 0 Comments

Previously, in Part I, we looked at some of the major ways that Uber had improved the market for people who use taxis and/or ride sharing[1]. This week we are going to look at the less rosy side of ride sharing services.

When you consider the main player in ride sharing, Uber, there seems to be a general agreement that they are improving the situation for everyone. The customer is happier because they are getting better service than they were from a taxi. The drivers (who in the Uber model are also the owners) are happier because they are making all this extra cash. How can this be? If the reason taxi services are so intolerable is because taxi owners are squeezing all the profit they can out of the business, how can Uber drivers be making more money and offering a better service?

As we saw last week, part of the answer lies in some genuine innovations that Uber brought to the market. These innovations help their drivers to be more efficient and maximize the time spent with a customer in the car. But, as we also saw, most of these advantages have already been replicated by taxi services[2]. If taxis are replicating most of Uber’s technology based advantages, what advantages are left to explain the seemingly unstoppable spread of Uber?

Unfair Advantages

The taxi industry in most countries and cities is a highly regulated industry. Although it varies by location, the rules and regulations that are in place typically include requiring drivers to carry a commercial drivers license, more expensive insurance policies, more regular vehicle checks, regular health checks for drivers, as well as various fees and taxes. As this article from the Boston Globe highlights, all this results in a significant overhead for the taxi owners and their drivers.

Many Uber and Lyft drivers on the other hand avoid most or all of these extra costs. This allows drivers to operate at a lower cost than traditional taxis and still be profitable – which is the main complaint of most existing taxi owners and drivers. There is a strong argument to be made that the rules and regulations in many cities are overly onerous and should be reformed, but that doesn’t change the fact that people who are following those rules are at a significant disadvantage. It is also hard to think of another example where a company operating outside existing laws has such popular support. Imagine for a second if this was a finance company flouting the rules[3] to build market share – what would people’s reaction be?

Lack of Insurance

Of biggest concern in these avoided expenses is the lack of appropriate insurance. In a survey conducted on the therideshareguy.com, almost 90% of the 500+ respondents didn’t currently have insurance that would cover them as a commercial driver. This is hardly a representative sample[4], but it does suggest a significant number of drivers are driving uninsured.

It should be noted that in many cases this isn’t just a case of people not purchasing insurance. In many states (and countries), there is no legitimate insurance available for ride share drivers. Additionally, even in places where it is available, there is often a lack of clarity as to when the driver is and isn’t covered. However, none of this negates the fact that a major expense, one that taxi owners are forced to wear, is being avoided.

Subsidies

Aside from avoiding costs, there is another slightly underhanded tactic that Uber and Lyft are using to undermine taxis and attract new drivers to their service – providing subsidies to drivers.

How this typically works is that Uber/Lyft will provide a guarantee to their drivers that they will make $X per hour driving for the service[5]. When the drivers don’t (or can’t) make that much through driving alone, Uber/Lyft provides a top up. This account of driving for Lyft reveals just how big those subsidies can be worth – in this case the driver received $1,500 in pay for a period in which he only made $600 in actual fares.

In many cases, these subsidies are required to help offset the reductions in fares that Uber and Lyft use to attract more customers to the service. Chart 1 and Chart 2 show recent reductions in average fares in Chicago and New York City. It should be noted that in both cases, the drivers’ earnings per hour increased on average, but at the expense of significantly more trips taken.

Chart 1 – Reductions in Uber Fares Chicago 2013 to 2014

Source: http://newsroom.uber.com/2015/01/beating-the-winter-slump-price-cuts-for-riders-with-guaranteed-earnings-for-drivers/

Chart 2 – Reductions in Uber Fares in New York City 2012 to 2014

Source: http://newsroom.uber.com/nyc/2014/10/three-septembers-of-uberx-in-new-york-city/

Chart 3 – Increase in Uber Driver Earnings in New York City 2012 to 2014

Source: http://newsroom.uber.com/nyc/2014/10/three-septembers-of-uberx-in-new-york-city/

As great as this sounds for drivers and customers, the problem is that this clearly isn’t a sustainable business model for ridesharing services. It is being used to attract new drivers and grow the business. But the impact of this is that it very difficult for any incumbents in the marketplace to remain competitive.

Think about an analogous scenario that most people in the US or Australia will be familiar with – supermarkets. A big chain (Walmart in the US, Coles or Woolies in Australia) moves into a small town, opens up a big new supermarket, and starts selling products at a loss. Great for consumers right? In this case, most people recognize this for what it is – predatory pricing designed to drive the incumbents out of business.

So what is the difference with Uber and Lyft doing this and driving the taxi services out of business? If you are about to argue that Uber is a start up competing against a rich, well-funded and protected taxi industry, let’s just remember who the competitors are. On one side we have Uber, a company recently valued at $50 billion and that has now raised almost $10 billion in funding. On the other side, there is a group of mostly small business owners, many of whom have probably borrowed against their house to buy their taxi license.

Bad Accounting

The final unfair advantage is one that is more incidental than a deliberate strategy. This advantage specifically benefits Uber and Lyft, rather than their drivers and arises from rideshare drivers’ lack of experience in the commercial driving business. Basically, many Uber and Lyft drivers simply aren’t accounting for all their costs correctly and, as a result, there is an oversupply of drivers.

The mistake many drivers are making is that they aren’t properly taking into account the long-term costs of the service they are providing. In addition to the cost of the gas/petrol, significant costs are incurred through the increased maintenance requirements for the car. These include the extra: sets of tires; oil changes; brake pads; timing belt replacements; and so on.

On top of increased maintenance costs, arguably the biggest expense being ignored by many drivers is the increased depreciation of their vehicles worth. By some estimates, a taxi doing 60 hours of driving a week in NYC (which probably has shorter average rides than most cities) does just over 46,000 miles (75,000 kms) a year. At that rate, just one or two years of driving for Uber or Lyft is going to put a serious dent in the resale value of your new Camry. And let’s not even start on how that shiny 5 year/100,000 mile warranty ran out after year 2 and your gearbox just threw a cog.

Finally, going back to the lack of appropriate insurance held by many rideshare drivers, there is a risk of large expenses incurred through an accident. If we assume the probability of an accident is greater than zero for any given drive, uninsured drivers should be factoring in an expected cost of an accident[6] into the costs of their business.

Once these costs are properly accounted for, many drivers are reporting incomes below or at minimum wage level. To make things worse, as this piece from uberdriverdiaries.com points out, this is a minimum wage job where you have to supply a $20,000+ piece of equipment.

Unfortunately, many drivers will learn the hard way that driving wasn’t as profitable as they thought it was. In some cases it is possible that driving will actually cost the driver more than they made. At some point though, probably after the subsidies end, there is going to be a major consolidation in the number of drivers working for these services as they arrive at this realization.

What Happens Next?

At the moment, rideshare companies Uber and Lyft are in extreme expansion mode and there is a huge amount of excitement around them. Unfortunately for taxi owners and drivers, this is not likely to end soon, and relying on regulators to enforce caps seems misguided. Even in cites where rideshare services have been banned, Uber has already shown it is willing to undermine those attempts to take its drivers off the road by paying drivers fines. You could argue that paying all their drivers fines may not be sustainable business model in the long term, but a company last valued at $50 billion probably figures they can keep paying fines longer than taxi owners can go without getting rides.

At some point, there will probably be some changes to align regulations for taxi drivers and rideshare services. This will probably make life more difficult (read: expensive) for rideshare drivers, but also life easier for taxi owners. But at least it should put everyone on an equal playing field.

What is likely to happen after that is a big consolidation. As mentioned above, once ride share drivers are brought back into the regulatory regime, and are forced to face the reality of the full costs of the service they provide, one of two outcomes are likely:

They stop driving altogether, or
They cut costs to stay profitable (cheaper and older cars, maintenance short cuts, no more chocolates and water bottles).

In short, the rideshare drivers that do stay in the market start to look and feel a lot more like taxis. There are already complaints in some more established markets that this is starting to happen.

Ultimately, the market will reach an equilibrium. For consumers, that is likely to be a world with a better, technology assisted, experience than was available 5 years ago. It probably also means slightly cheaper rides than the old taxi monopoly was providing, simply because the number of cars on the road is no longer capped. Thanks to the concept of surge pricing, you are also likely to spend far less time waiting in lines at taxi ranks, even at peak times – but you will pay extra for the convenience.

For the drivers and owners, driving is likely to become less profitable. In the future, driving probably becomes the equivalent of a minimum wage job[7]. Maybe the idea of working for something like minimum wage, but with the flexibility to choose your hours and work from your own car is not such a bad deal, but it is very different from the experience many rideshare drivers are having today.

Taxi Visualizations

Finally, I wanted to leave you with a couple of very cool visualizations of data obtained from taxi drivers.

The first is an app that tracks a taxi driver in New York City as they pick up and drop of passengers over a 24 hour period:

http://nyctaxi.herokuapp.com

The second shows all taxi pick ups and drop offs in New York City over the course of 24 hours in a hypnotic visualization. The fascinating thing is seeing the peak times at different times of the day, with midtown particularly busy during the day, while the Lower East Side and the Meatpacking district peak in the early hours of the morning. This visualization (and many more) can be accessed here:

http://www.nyctaxiviz.com

[1] “Ride sharing” is a bit of a misnomer – you have to pay after all – but this is the commonly used name for these services.

[2] Whether they are being used is a separate question.

[3] Let’s face it, rules and regulations in the financial industry are an order of magnitude more onerous than for taxi services.

[4] The people reading that article are probably doing so because they are looking for insurance. But there are also plenty of people who wouldn’t even be conscientious enough to look in the first place.

[5] Typically, there are various conditions applied that lock the driver in, such as a minimum number of hours worked in a week, 90%+ of rides accepted and so on.

[6] The probability of an accident occurring on that drive multiplied by the expected cost to the driver of that accident.

[7] As individual contractors, Uber and Lyft drivers aren’t subject to minimum wage requirements, but drivers will only continue to drive if they can make more than they could bussing tables or flipping burgers.

Women in the Workplace – Where is Everyone?

August 13, 2015 / Brett Romero / 0 Comments

Cross posted from OpenDataKosovo.org:

Continuing our series on Gender Inequality and Corruption in Kosovo, in Part IV we are going to build on Part III and use our understanding of the participation rate to compare the participation rate in Kosovo across a range of countries, as well as look at the reasons for non-participation (“inactivity”). If you don’t understand what a participation rate is (SPOILER: it is not the same as the unemployment rate), or just want to make sure you get the full picture, please go back and read Part III.

Click on the chart below to interact with the data!

Sunburst chart created by Festina Ismali

Comparing Participation Rates

Comparing participation rates across countries provides insight into broad demographic trends and the specific employment situation in a country relative to other countries. For most high income nations, the participation rate tends to be around 60%. That is, 6 out of every 10 people of working age are actively engaged in the employment market (whether they currently have a job or not). While that may sound low, this accounts for parents who stay home to raise children, students, retirees and discouraged workers[1].

Once we leave high income countries, there is a much larger range of participation rates. Many very poor low income nations in Asia and Africa have extremely high participation rates of well over 80%. This is driven by pure necessity as, in many cases, there is simply no option for one partner to stay home, retire, or even for young people to continue studying.

Conversely, we also see many countries with very low participation rates of just over 40%. In some cases, these countries are involved in ongoing conflicts or are post-conflict countries (Syria, Iraq and Afghanistan all had participation rates below 50% in 2013). But in other cases, the cause is harder to identify.

Unfortunately, Kosovo is one of these harder to understand cases. In 2013, Kosovo had the second lowest participation rate of any country in the World Bank database, at 40.5%. In 2014 that number picked up slightly to 41.6%, but that was still low enough to keep Kosovo in the bottom 10, based on 2013 figures. Notably, Kosovo’s low participation rate has actually decreased substantially over the past decade (see Chart 1). In 2002, the participation rate stood at 52.8%. If that participation rate applied today, there would be an extra 134,600 people in the labour force – an increase of 26.9%.

Chart 1 – Participation Rate in Kosovo 2002 to 2014

Looking at Chart 1, another data point that immediately stands out is the low participation rate for women. In fact, with a participation rate for women of 21.1% in 2013, Kosovo has one of the lowest participation rates for women in the world. In terms of the rankings, Kosovo places between Saudi Arabia (20.2%) and Lebanon (23.3%). Looking around the region, Kosovo is also a significantly outlier (see Chart 2).

Chart 2 – Female Participation Rate for Selected Countries 2002 to 2013

Methodology Matters

Previously, in Part III, we mentioned that there were some more detailed criteria for determining whether a person is considered ‘employed’ in Kosovo. Specifically, there is one particular criteria that may partially explain Kosovo’s notably lower participation compared to its neighbors (and everyone else).

In the 2014 Kosovo Labour Force Survey, a specific methodological difference with Albania is highlighted. In Kosovo, people who work on a family run farm are not considered employed if the produce of the farm is not considered an “important source of consumption” (let’s call these people ‘family farm workers’). In contrast, these same people in Albania are classified as employed. From the 2014 Kosovo Labour Force Survey Results paper (emphasis mine):

“It is important to note that when respondents answer code 5B[2], that they do some agricultural activity but it is not an important contribution, this is not counted as employed. In 2014 69% of this group were categorized as inactive and 31% as unemployed. An important contribution is a subjective term and could depend on overall household income.”

The key takeaway here is that there is a significant population of family farm workers that are currently being classified as inactive, when in fact they are working. This at least partially explains the low participation rate in Kosovo.

Unfortunately, the paper does not provide enough information to be able to determine how many people are family farm workers. As such, we are unable to quantify exactly how much impact adding family farm workers back into the labour force would have on the headline participation rate.

Even if we could though, this would not be fully correct either (welcome to the surprisingly complex world of labour market statistics). Many family farm workers probably do not consider themselves employed – working 1 hour a week[3] on a family farm is a pretty low bar after all. The fact that 31% of them qualified as unemployed, meaning they actively sought other work, reveals that this is not homogenous group of full time farm workers being incorrectly classified.

Worrying Trends

Methodological anomalies aside, there is also a concerning trend in the data – the participation rate for women in Kosovo has been declining for much of the past decade[4]. Despite the improving economy and significant international development assistance, the participation rate for women fell from over 34.5% in 2002 to 21.4% in 2014. There is some good news – the fall appears to have bottomed out, with 2013 and 2014 both recording higher participation rates for women than the low point in 2012 (17.8%!).

This slight uptick in recent years could be the impact of numerous initiatives to get women into the workforce in Kosovo. These range from the prioritization of grants for projects that provide jobs for women, to supporting women in registering property in their own names to help provide collateral for loans. There has also been a push by Kosovo’s first and current female President to boost participation among women. Several more years of data will be required to determine whether this is the beginning of a more substantial trend or simply noise in the data.

In the meantime, let’s get a better understanding of the current labour market by looking at a break down (see Table 1), provided in the 2014 Kosovo Labour Force Survey, of the inactive population sorted by reason for not participating.

Table 1 – Inactive Persons by Category

	(A) Men	(B) Women	(C) = (B) minus (A)
	1,000s	1,000s	(C1) 1,000s	(C2) % of total
Looking after children or incapacitated adults	0.1	14.3	14.2	5.8%
Own illness or disability	13.3	8.6	-4.7	-1.9%
Other personal or family responsibilities	13.5	233.4	219.9	90.2%
In education or training	104.7	97.3	-7.4	-3.0%
Retired	6.9	5	-1.9	-0.8%
Believes that no work is available	49.5	78.9	29.4	12.1%
Waiting to go back to work (laid-off people)	0.8	0.5	-0.3	-0.1%
Other reasons	20.7	16.2	-4.5	-1.8%
No reason given	1.9	3.4	1.5	0.6%
Total	229.2	473.0	243.8	100.0%

Looking at the breakdown, there is one category in particular in which there was a large discrepancy between the sexes – ‘Other personal or family responsibilities’. In this category, 233,400 were women, amounting to 38.8% of the total population of working age women. By contrast, only 13,500 were men, amounting to 2.2% of the total population of working age men. The table also shows the calculated difference between the number of inactive women and men (see column C1). Looking at these calculated differences, we see that for the total calculated difference across all categories (243,800 – see ‘Total’ row in column C1), 219,900, or over 90%, arose from this category. This breakdown is also shown in Chart 3 below.

Chart 3 – Inactive People by Category of Inactivity – 2014

Going back to the family farm workers discussed earlier, we expect that those classified as inactive would be included in the ‘Other personal or family responsibilities’ category. However, if a significant number of women in this category were family farm workers and this was a full time role, we would also expect to see large numbers of men in the same category. The fact that we do not suggests that many men who are family farm workers also have other more formal jobs and lends support to the decision to exclude family farm workers from the employed population.

The other category where we see a meaningful gap between the sexes is the ‘Believes that no work is available’ category. As mentioned earlier, these are the people that are considered discouraged workers (i.e. those that would take a job, but are no longer actively looking). Why would significantly more women be discouraged than men? Typically, discouraged workers are the end product of long and unsuccessful searches for employment. At times of high unemployment, it will often be the case that the number of discouraged workers will also increase. Seeing that women are more likely to be discouraged than men suggests they are having a more difficult time finding employment.

To confirm this hypothesis, we need to look at unemployment rates. This will be the focus of the next piece in this series – Part V.

[1] People who would like a job but who haven’t actively sought work in the past 4 weeks

[2] Code 5b text: “Worked (at least one hour) on a farm owned or rented by you or a member of your household (even unpaid) whether in cultivating crops or in other farm maintenance tasks, or you have cared for livestock belonging to you or a member of your household (if the whole production is only for own consumption and this production does not constitute an important contribution to the total consumption of the household.”

[3] Employed are considered all the persons who have worked even for one hour with a respective salary or profit during the reference week.

[4] There is no mention of when the current methodology was implemented, but it is possible that the large drop in participation rate between 2009 and 2012 was due to a change.

Uber vs Taxi – The Uber Perspective

August 9, 2015 / Brett Romero / 0 Comments

Inspired by a recent piece by Oliver Blanchard I was put onto by a friend[1] (warning: it is a very long piece and gets very ranty), I thought I would put together some thoughts on the “Sharing Economy”, and in particular Uber. As there is a bit of ground to cover, I’ll split this into two parts. This first part will look at how Uber has improved taxi services and why taxi services may never be able to close that gap. The second part will look at some of the unfair advantages Uber has and why those advantages probably won’t last.

Before we dive into it though, I first want to say the economist in me loves the idea behind Uber and similar services such as Airbnb. They take some of the most valuable assets that most people will own (e.g. houses and cars) and helps their owners to derive economic value from them when they would otherwise be sitting idle. From the perspective of the wider economy, this is undoubtedly a good thing. Cars in particular are something that we spend a lot of money purchasing and maintaining, yet, end up sitting in a garage or parking lot for close to 90% of their existence.

How Uber Changed the Market

Since its founding in March 2009, there has always been a lot of hype around Uber. From their official launch in San Francisco in early 2011, they rapidly expanded to numerous other cities around the US and made their first move internationally to Paris in December 2011. As of today, Uber is available in 58 countries worldwide, and at a recent capital raising the company was valued in the ballpark of $50 billion. If publicly listed at that value, Uber would be among the largest 100 companies in the S&P500. Charts 1 and 2 show some of the explosive growth in driver numbers from a recent Uber paper.

Chart 1 – Total Active Drivers

Chart 2 – Active Drivers by City

Aside from the rapid growth, one of the more impressive things about Uber is the amount of good will there seems to be towards Uber. Despite ‘disrupting’ an industry that has been around for decades and taking an aggressive approach to protecting its drivers and business model, the only people who seem to have anything bad to say about Uber are taxi drivers. Outside that obviously vested interest, there seems to be the general consensus that Uber is improving the situation for everyone. The customer is happier because they are getting much better service than they were from a taxi, and the drivers are happier because they are making all this extra cash. To work out why that is, let’s take a look at some of the key ways Uber has improved the taxi experience.

1. Getting a ride is now easy

Having an app that allows people to request a car at the tap of a button and know exactly when it will turn up is a big improvement for customers. No more automated phones services forcing you to scream “OPERATOR!” into the phone. No waiting on the side of the road trying to flag down a cab. No waiting for 2 hours in line at the taxi rank at 2am on a Saturday night. And finally, no sitting in silence in your home waiting for the honk of the horn to make sure you don’t miss the taxi you ordered.

2. So is getting to your destination

The app also allows you to enter a destination, which is then used to determine the best route and guides the driver. This again is a big improvement over the taxi experience in most countries. No waiting for the driver to type the address into his circa-1996 dashboard GPS – if he has one at all. No missing the freeway exit because you weren’t paying attention. No more risk of been taken on ‘the scenic route’ because you are from out of town.

3. Bad drivers and passengers get penalized

As a customer, think about the things you dislike about taxis. Now consider how many of those things are as a result of taxi drivers having to deal with bad passengers. Clunky plastic screens separating drivers from passengers. Inability to sit in the front seat of the cab at all in some cases. Cars that haven’t been cleaned in the past 6 months. The overall surliness of drivers.

Having a system where drivers rate their passengers and have the ability to refuse rides to people with low ratings, creates a lot of positive incentives for both driver and passenger. Passengers can no longer act like douche bags towards the driver or trash the cab without affecting their ability to get a taxi in the future. Drivers can maintain nicer cabs knowing their passengers are likely to be well behaved.

On the flip side, passengers rating their drivers also creates positives incentives for drivers to be much more helpful to their customers. As a result, Uber drivers are generally much more pleasant, cheerful, helpful and generous towards their customers. In my own personal Uber experience we have had drivers provide free water bottles, chocolates and other goodies.

4. Surge pricing means you rarely have to wait long

This is a controversial one, but I firmly believe this is positive, and anyone who has spent hours waiting for a taxi should as well.

The reason you had to wait so long for a taxi is because there are spikes in demand for taxi services and little to no increase in supply to meet that demand. There are two main reasons for that:

In almost all cities, the number of taxi licenses available is capped
If there are any taxis currently off duty, there is no incentive for the driver/owner to clock back on

Uber avoids both these problems. By not capping the number of drivers in a given city, Uber ensures there are plenty of spare drivers around when needed. By significantly increasing the rates drivers can charge in periods of peak demand, Uber also provides a strong incentive for drivers to get in their cars and start picking up passengers at 2am on a cold morning.

Surge pricing has drawn criticism and negative press in some parts, but reading the details of some of these stories, it really is difficult to have too much sympathy. Some will argue surge pricing is taking advantage of desperate people, but they are misunderstanding the options. The two options available in that moment are not an expensive ride at surge prices and a normal priced ride. The two options are an expensive ride at surge prices or no ride at all.

Now, that said, there is an argument to be made for stopping surge prices in disaster situations. But the best way to do that is not to stop providing drivers with higher prices to pick up people in those situations, but to change who is paying for it. Whether this is the government, Uber or some third party is a separate discussion.

Playing Catchup

If we look at the four advantages that Uber has (as listed above), and add in the fact that in many cities Uber is significantly cheaper than the taxi services, it makes a pretty compelling case that taxi services are in big trouble. Following the news and seeing taxi driver strikes[2], taxi lobbyists pushing for cities to outlaw Uber and police spending significant resources pulling over and fining Uber drivers, it can look like the last desperate throws of the dice for a dying industry.

However, in the face of this threat to their business, there has been some positive outcomes for taxi owners. Apps (Hailo and myTaxi) are now available that put taxis on par with Uber for 3 of the 4 advantages listed above. You can now order a taxi easily from an app, provide a destination and have access to a ratings system.

It is also not difficult to picture a world where taxi services start using some form of surge pricing to encourage drivers to be on the road at peak hours. To some degree this is already in place with many services charging higher rates at different times and days. But the problem is surge pricing only really works if you have a bunch of drivers off duty at any given time that can be, through monetary incentive, convinced to clock on and start picking up passengers.

This gets us to the underlying problem facing taxi services – the capping of the number of available taxi licenses. Capping taxi licenses has led to a situation where each taxi license is extremely valuable because of the amount of cash it can generate. In New York City for example, the cost of a single license peaked at over $1 million in recent years. Because of the cost of a license, and its consistent appreciation in value over the past few decades, for many taxi owners, their taxi license represents their retirement savings. Now, due to competition from Uber, many cities (Sydney, Toronto and many others) are seeing the cost of taxi licenses falling.

You could argue taxi owners should have been smarter and diversified their investment. However, the fact is they made an investment decision on the basis of the rules as they stood at the time, and have since been severely undermined. Besides, they would hardly be the first people to invest all their savings in one overpriced asset class.

Leaving aside judgements on investment decisions though, it is difficult to see a scenario where taxi owners end up the winners in this battle. Now that people have experienced the higher level of service that can be provided by services like Uber, they will be very reluctant to go back to the old way of doing business. Taxi services can (and have) improved as a response to Uber, but unfortunately, as long as taxi services want to cling to the idea of a capped number of taxi licenses, customers will continue to be frustrated by a lack of availability at key times.

All that isn’t to say Uber has everything worked out or that shouldn’t be criticized for their own failings and dodgy practices. In fact Uber faces several large problems of its own. To find out more about those, tune in next week.

[1] Thank you Bek Chew

[2] Seriously, it’s like they want everyone to hate them

Women in the Workplace – Understanding the Data

August 5, 2015 / Brett Romero / 0 Comments

Cross Posted from OpenDataKosovo.org:

Continuing our series on Gender Inequality and Corruption in Kosovo (see Part I and Part II), in Part III and the next few parts, we are going to take a detailed look at the problems women face in the labour market in Kosovo.

To do this, we will be using information from several sources, including data on participation rates, by gender, from the Gender Statistics database at the World Bank, and a range of labour market statistics from various Kosovo Labour Force Surveys, released by the Kosovo Agency of Statistics.

High Level Concepts

Before diving into the statistics, let’s first visualize and explain some of the high level concepts in labour market statistics.

Chart 1 – Population Breakdown 2014

At the highest level, the section of the population that is relevant when looking at labour market statistics is people who are of working age and are able to work. In Kosovo, this population includes all people aged 15 to 64 and is known as the ‘working age population’.

Labour Force and Inactive Populations

At the next level, the working age population can be broken down into two main subgroups – those that are considered in the labour force (i.e. ‘participating’) and those that are ‘inactive’. It is important to note that someone who is ‘inactive’ is not the same as someone who is ‘unemployed’. In Kosovo, to be considered ‘actively looking for work’ (and therefore be classified in the labour force) the following criteria must be met. The person must be:

currently available for work, that is, available for paid employment or self- employment within two weeks; and
seeking work, that is, have taken specific steps in the previous four weeks to seek paid employment or self-employment.

If either of the above criteria is not met, the person is classified as inactive.

Calculating the Participation Rate

Once the population is classified as either in the labour force or inactive, it is possible to calculate the participation rate, one of the key labour market statistics. The participation rate measures the labour force population (people employed and/or actively looking for work) as a percentage of the working age population.

In Kosovo, the participation rates in 2014 were as follows:

Male Participation Rate (2014): 61.8%
Female Participation Rate (2014): 21.4%
Overall Participation Rate (2014): 41.6%

Unlike the unemployment rate, described below, the participation rate tends to provide more stable and reliable data than the unemployment rate, as it is not affected by short-term fluctuations and the business cycle.

Employed vs. Unemployed

Analyzing the population further, the ‘labour force’ can be subdivided into two populations – those that are employed and those that are unemployed. In most cases it is obvious whether someone is employed or not, but in some situations it may not be so clear (e.g. when a person is working for the family business in an unpaid capacity). To handle these scenarios, the agency tasked with compiling the labour market statistics in each country typically has a specific definition (or definitions) of what qualifies as employment. In Kosovo, to be classified as ‘employed’ a person must meet the following high-level criteria:

“People who during the reference week performed some work for wage or salary, or profit or family gain, in cash or in kind or were temporarily absent from their jobs.”

In addition, the Kosovo Agency of Statistics includes some more detailed criteria in their methodology that clarifies when work done on family owned farms classifies as employment. This will become important later.

Calculating the Unemployment Rate

Having separated the employed from the unemployed, it is now possible to calculate the unemployment rate. To do this, we divide the number of unemployed people by the total number of people in the labour force.

In Kosovo, the unemployment rates in 2014 were as follows:

Male Unemployment Rate (2014): 33.1%
Female Unemployment Rate (2014): 41.6%
Overall Unemployment Rate (2014): 35.3%

The unemployment rate is useful as a more immediate indicator of conditions in the economy. The obvious information is provides is an indicator of how many people without a job are currently looking for employment. But, in addition, it also provides information about how much spare capacity an economy has, the risk that inflation may pick up, whether structural issues are keeping people out of work and so on.

Chart 1 – Participation and Unemployment Rates by Gender 2014

What is Next?

In the next article, we will take a look at how the participation rate (for both males and females) in Kosovo compares across the region and internationally. In the meantime, please feel free to play around with the interactive visualization below, which shows the entire working age population of Kosovo broken down into its various subgroups.

Click on the chart below to interact with the data!

Sunburst chart created by Festina Ismali

4 Reasons Fiat Money is a Great Idea and One Catch

August 3, 2015 / Brett Romero / 0 Comments

In the world of economics and finance there are many complex topics that are poorly understood in the wider community. Differential calculus, options trading and multiple regression to take three examples. However, money and the monetary system is another topic I would quickly add to this list. The difference when it comes to money, however, is the number of people who believe they do understand the system. This leads to a range of misunderstandings including:

Money in modern economies is still exchangeable for gold
Printing of money will always lead to high levels of inflation
Balancing a household budget is a suitable analogy for balancing the budget of a Government
Paper money is worthless and doomed to fail

There is a lot of myths to dispel in that list. In this article we are going to tackle the question of why money works, even when not tied to a physical commodity (known as “fiat money”[1]). To do this, let’s start by imagining a world where there is no money. Instead of paying for things for money, everyone now has to barter for goods. What issues would people have in this system?

1. Coincidence of Wants

In a world where everyone has to barter to exchange goods, the first problem you are likely to encounter is described as the coincidence of wants. Imagine you are a pig farmer and, sick of eating pork for every meal (hard to imagine I know), you decide you would like to trade a pig for some wheat. The first hurdle is finding a wheat farmer who actually wants a pig. This is the coincidence – that you have pigs and want wheat, and that someone else has wheat and wants pigs and that both these wants occur at the same time.

Even in a simple agrarian village with only a limited number of food related products, you can already see the difficulties that will arise. Wheat is only available at certain times of the year and that will not coincide with the production of many other products. Some people may simply not like certain products, making it difficult for people producing those products to do any trading with them.

Introducing money into this scenario cleanly solves this problem by providing something to trade for what everybody wants at any given time.

2. Divisibility of Money

The second major problem in a barter system is the indivisibility of goods. Let’s go back to the pig farmer example and imagine again you want to trade pig for wheat. Assuming we find someone who wants to trade with us, how much of each do we actually trade? A pig is probably worth quite a large quantity of wheat, so what do I do if I only want a little bit of wheat? I’d have to kill my pig, give some of it to the wheat farmer, then hope I could find someone to buy the other parts of my pig. What about people producing even larger goods that can’t be sold in parts at all, such as a horse trainer or a house builder? They would constantly be forced to trade their goods for huge quantities of other goods.

Money solves this problem because it has the property of divisibility. I can sell a pig for $100, then split that money up to buy as many different types of goods as I want.

3. A Store of Value

The third problem in our moneyless world is that many of the goods we trade have limited lifespans. As a wheat farmer, if I have a good year and have extra wheat, what can I do with my extra wheat? I need to trade it for something or it will go off and be wasted.

In the past, this was such a problem, nearly every culture developed ways to preserve seasonal produce. Think about how many cultures have cured meats (prosciutto, jerky, spec), preserved fish (bacalao, pickled herring), pickled vegetables (cucumbers, onions, beans, peppers, achar) and fruit preserves and jams. Many of the most popular foods today were developed largely as a way to store produce over extended time periods in the days before freezers and refrigeration.

Although money doesn’t stop food spoiling, it does allow a farmer to sell off their seasonal produce for something that does not need to be preserved. That money can then be spent as needed in the future to purchase other goods. In the simple world of our example, that may simply mean buying preserved goods during the winter to survive until the next season. In a more complicated world it helps us do many things including to save for more expensive purchases such as a TV, a car, a house or our retirement.

4. Practicality

Continuing to build on the farming example, let’s imagine that the people of this particular farming village are trying to decide on a given (non-money) product that will become the unit of trade for everyone. Keeping in mind the points above, what would be the best options?

It would need to be something that could be easily divisible, which rules out livestock and any large objects such as furniture, tractors, houses and so on. It has to be something that doesn’t go off or require preservation, which rules out vegetables, fruits, grains and so on. What if they decided to use something that met these basic conditions like salt or honey?

Here we run into another issue that is neatly solved by money – practicality. Even trading in a commodity such as salt or honey would face a number of hurdles:

Every transaction would need to be weighed or measured out to ensure the quantity exchanged is correct
People would have to carry around honey or salt to complete transactions, and for large transactions, that could be a significant burden
There would need to be some measure of the quality of the commodity being traded. How pure is the honey or salt? Do salts from certain places carry more value? Has the honey been diluted?
People would have to find ways to store large amounts of these commodities in a such a way that they are safe and don’t get stolen, eaten or washed away

Problems 3 and 4 could be alleviated by some third party fulfilling the role of a salt or honey bank. This bank could verify the quality of the commodity and store large quantities of these commodities on behalf of their customers (for a small fee of course). It could even provide facilities allowing customers to access their deposits. This could be done by allowing access to the commodity itself, or by issuing some sort of official document or paper that the holder could bring to the bank to exchange for the commodity (it’s starting to sound pretty close to money at this point right?). But even in this case, the commodity would still need to be stored somewhere physically.

All these concerns are things we don’t have to worry about in a world with money. Notes and coins are extremely portable, meaning people can carry even very large amounts in small leather foldy things (let’s call them “wallets”). They come in predefined amounts which mean they don’t have to be measured out and quantities can be quickly verified. Finally, in a fiat money system, the vast majority of money doesn’t need to be physically stored, it is stored as numbers in a bank account.

The Catch

The catch in a fiat monetary system is that it is essentially a system built on mutual trust. For me to accept money as payment for goods I am selling or services I am providing, I must believe that I will be able to trade that money for goods and services, of approximately the same value, in the future. The person I purchase those goods or services from, in turn, must also believe the same thing, and so on down the line. If, at any given point, people in general stopped believing money would be able to be traded for goods or services in the future, the fiat money system would collapse very quickly.

We can see some examples of this in the real world in countries where hyperinflation and/or currency controls have occurred. In most cases, the local currency often becomes close to worthless as people substitute to either a more stable currency (typically the US dollar) or hard commodities. Luckily, these occurrences have usually been limited to small and poorly run economies and have not seriously impacted the legitimacy of the fiat money system overall.

What would happen if the population of a major developed economy stopped believing their currency would be accepted in the future? At that stage all bets are off. There is a substantial community of people that does have this concern, and are preparing for this scenario by buying hard commodities such as precious metals. But realistically, they should also be buying guns, canned food and digging a shelter in the backyard, because a failure of the monetary system would be a complete catastrophe.

Overall

Looking at the above points, we can see there are a large number of advantages to fiat money. Many of the transactions we undertake every day would become extremely burdensome in the absence of money. A lot of larger business transactions would be impossible in a barter system. Although money introduces some its own complications, it is hard to argue that the world would be anywhere near as complex or advanced if we had persisted with a barter system or a commodity based trade system.

Money in Three Charts

To finish off, let’s take a look at some stats on the values and volume of currency on issue for the worlds reserve currency, the US dollar. All the underlying data and more is available at the Federal Reserve website for those interested. I’m trying out some new interactive charts so please click, play and let me know what you think!

Chart 1 – Value of US Currency in Circulation by Denomination

Chart 2 – Volume of US Currency in Circulation by Denomination

Chart 3 – Comparison of Different Measures of Money Supply

For those that are unfamiliar, there are different ways of measuring the total money supply. The following chart compares 3 different measures – M1 money supply, M2 money supply and cash. This data is from the Federal Reserve of St. Louis website.

[1] Fiat money is money that derives it value only from Government rule or regulation. This is as opposed to commodity or representative money which is tied to the value of an underlying commodity.

Greece Crisis – Update

July 14, 2015 / Brett Romero / 0 Comments

Update #2 – July 14, 2015

After the comprehensive win for the ‘NO’ campaign in the Greek referendum, negotiations reopened between the Greek government and the institutions. One notable difference this time around was the distancing of the IMF from the process, as Greece has technically already defaulted on their IMF debt.
Despite a ‘NO’ vote being sold in Greece as strengthening their hand in negotiations, the people negotiating on behalf of the institutions were not buying this line. What quickly became clear was that even if Greece completely capitulated and accepted the terms of the reform package offered pre-referendum, that would no longer be enough for a deal. The most commonly cited reason for the hardened stance was that the institutions no longer trusted the Greek government to undertake the reforms it was signing up to.
During the week, it began to look increasingly likely that no deal would be made. At one point, every country in the shared currency zone except France and Cyprus was pushing for a Greek exit ahead of the final discussion to take place on Sunday night.
After marathon negotiations, on Monday morning (13 July 2015), it appeared a deal had been reached. This deal is more or less the reform package demanded before the election (raising the pension age, raising the rate of VAT and other changes), but with one key addition. Greece will now be forced to place 50 billion euros worth of state owned assets into a fund. The fund will be managed by KfW, a German government owned development bank where German Finance Minister Wolfgang Schäuble is Chairman of the Board. Despite the apparent conflicts of interest, this setup is designed to allow the creditors to sell off those assets to pay off debt.
The deal has been been met with dismay by most people in Greece (and many observers). Immediately after the deal was announced, the number one trending hashtag worldwide was #ThisIsACoup.
The final hurdle at this stage is Greek Prime Minister Alexis Tsipras passing the needed reforms through the Greek parliament. Many members of his own party have already vowed to vote against the reforms. However, it is expected that with assistance from the other major parties, passage should be possible.
New elections are expected after the complete capitulation by Tsipras. Despite the apparent failure, many Greeks are behind their government, arguing that they at least made an honest attempt to improve the situation. However, once the new austerity measures are passed, the harsh reality is sure to hurt Syriza’s popularity. The tragedy of the situation is that it was a thinly veiled intention of European leaders to remove Syriza from power by humiliating the Greek people, and they look likely to succeed.

One interesting revelation that has come out in recent days is in relation to German Finance Minister Wolfgang Schäuble. What has become clear is that he has favored the path of forcing Greece out of the Eurozone entirely since at least 2012. Revelations from the 2014 memoir of US Treasury Secretary Timothy Geithner, Stress Test, have recently surfaced about a meeting in 2012 with Schäuble (emphasis mine):

“A few days later, I flew to meet Wolfgang Schäuble for lunch during his vacation at a resort in Sylt, a North Sea island known as Germany’s Martha’s Vineyard. Schäuble was engaging, but I left Sylt feeling more worried than ever. He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy. The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks. At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union. The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall. I found the argument terrifying,”

This insight into Schäuble’s thinking reveals the core issue at the heart of the shared currency zone – Germany’s economic dominance. The Euro is essentially the new Deutschmark and this has a lot of side effects. Southern European nations benefit from being able to borrow at cheaper rates than they have historically, allowing governments to upgrade infrastructure and provide a stronger social safety net for their people. As it has turned out though, they also spent a lot of borrowed money on things that made them less competitive economically, such as large public sector salaries and very generous pension schemes.

Germany on the other hand benefits from having the Euro weighed down by those nations, making German exports extremely competitive internationally. It also benefits from the increased wealth of those southern European nations (even though it turned out to be mostly debt financed) who could spend more money on artificially cheap German exports.

Everyone was happy with the arrangement when things were going well, but when the crisis hit, the underlying inequalities were exposed. And despite the complex nature of the monetary union, there are only two basic ways the underlying structural issues in the shared currency zone can be resolved:

Germany agrees to permanent and ongoing wealth transfers to the less efficient European nations in the same way richer states in the US subsidize poorer ones.
Germany forces the rest of Europe to become more like Germany.

It is obvious which option appeals more to German politicians – convincing Germans to hand over their taxes to what they largely see as their lazy, poorly run neighbors is basically a non-starter.

Option 2 is more or less what has been happening and the results are clear – it caused huge economic disruption in those countries, particularly as the reforms were implemented during times of economic turmoil. But there is a fundamental question of democracy at play here. Obviously Greece (and to a lesser extent the rest of southern Europe) was not doing a particularly good job of managing its own economy. The question is are we OK with a world where unelected figures can force economic reforms on a country – even if they are beneficial in the long run – directly against the will of the people?

I will leave the final quote to Arnulf Baring, a German author and historian (amongst other things), who was strongly opposed to the introduction of the Euro. In his 1997 book, Scheitert Deutschland? (Does Germany Fail?), he made the following amazingly accurate prediction about the future of the Eurozone:

“They [populistic media and politicians] will say that we are subsidizing scroungers, lazing on mediterranean beaches. Monetary union, in the end, will result in a giant blackmailing operation. When we Germans demand monetary discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More, they will perceive us as a kind of economic policeman. We risk again becoming the most hated people in Europe.”

Update #1 – July 4, 2015

The latest polling on the referendum is showing that it is too close to call. Both sides are polling approximately 43% with about 14% of Greeks undecided as to which way they will vote.
Friday saw rallies in Athens for both campaigns ahead of a campaign free day on Saturday. Both had huge attendances but as one observer described: “[The] ‘NO’ rally is pure passion trying to look formal. ‘YES’ rally is something formal trying to look passionate.”
The Greek finance minister Yanis Varoufakis has declared that he would rather cut his arm off than accept a further bailout. Varoufakis confirmed Syriza would agree to the conditions of the bailout, should the ‘Yes’ campaign prevail, but also pledged to step down if this occurred.
The IMF on Thursday released a review of Greece’s debt, which many in the ‘No’ campaign are taking as a big win, given that the report includes an admission that Greece’s current debt is unsustainable. The report also revealed the ongoing disagreement between the IMF and Brussels regarding the best way forward for Greece. In apparent confirmation of the damage these revelations could cause, Eurozone countries are reported to have attempted to halt the release of the document before the referendum.

Original Piece – July 2, 2015

The debt crisis in Greece has been evolving quickly over the past few days, with several interesting developments. If this is the first you have heard about it or you haven’t been following the issue closely, I strongly recommend going back and starting here. For those that are up to date, here are the key updates so far this week:

The European Central Bank (ECB) has not cut off emergency funding to banks in Greece as it was feared it might, but has decided against raising the amount of funding it will provide. The main story here is the banking sector in Greece avoids an immediate collapse and Greece will be able to survive until the referendum this weekend. But, by not raising the amount of funding, they have put Greek banks in a position where, if they ran in business-as-usual mode, they would not be able to keep up with the demand for Euro’s and would run out of cash.
As a result, the Greek government has imposed capital controls and declared a bank holiday for this week. Banks will not open (with an exception for pensioners on Thursday) and people will only be able to take out 60 euros a day from ATMs. This is to ensure banks in Greece can stay viable until the referendum.
In terms of the referendum, the expected result is unclear at this point. The latest polling is showing the ‘No’ (OXI) vote is ahead with 55% planning to vote ‘No’ to accepting the bailout under the current conditions, with only 33% planning to vote ‘Yes’ (NAI). But the gap has been closing as the situation has deteriorated. This picture contrasts with betting markets (yep, you can pretty much bet on anything) currently indicating a 66% chance of a ‘Yes’ vote.
In the meantime, the Greek Prime Minister Alexis Tsipras has been campaigning strongly for a ‘No’ vote in the referendum. Tsipras is not out there on his own though. Two Nobel Laureates in Economics in Paul Krugman and Joseph Stiglitz have expressed their support for Syria’s decision and a ‘No’ vote, also adding a good helping of criticism for the role the creditors have played in getting to this point.
However, in the meantime Syriza have still been attempting to continue negotiations with the creditors and yesterday (Wednesday) made further concessions in order to try to secure a deal. The concessions made were agreeing to certain cuts to pensions (despite what you might have heard, the creditors are demanding further cuts) but on a delayed schedule, and agreeing to most of the VAT increases but maintaining an exemption for the islands. It should be noted that any deal reached at this point would not cancel the referendum, but would cause Syriza to reverse their current course and start campaigning for a ‘Yes’ vote.
The creditors have basically slammed the door on further negotiations though, indicating that no further negotiations are possible before the referendum. This move is widely perceived as Europe calling Syriza’s bluff, but there is probably more to it than that. There have been further claims that no new deal is possible at all while Syriza remains in power. Indications are that regardless of the outcome of the referendum, the Eurozone will continue attempts to force new elections in Greece. Of course, this overlooks the fact that the only reason a marginal party like Syriza got into power in the first place was due to the extreme austerity forced upon Greece, but whatever. For outside observers, no matter what you think about who is to blame for this crisis, the completely undisguised attempts by Europe to destroy a democratically elected government because they don’t like their politics should make you very angry.
Finally, based on the reaction from bond and equity markets this week, the financial contagion from a collapse in the Greek economy would appear to be limited. That said, the political contagion could live on for a long time. The behavior (see point above) of the institutions (and the people heading them) that are supposed to be run for the benefit of all Europeans has revealed how politicized they have become. Even in the scenario where Greece somehow stays in the Eurozone, significant damage has been done to the European project and to the goodwill that existed for it. If you haven’t already, I highly recommend reading Alexis Andreou’s fantastic insight into how a lot of young Europeans are likely to be feeling.

The situation is changing fairly rapidly at the moment, so I will continue to add updates here as things change.

Piketty Takes A Swing at Germany

July 8, 2015 / Brett Romero / 0 Comments

Thomas Piketty, a French economist who found fame through his book Capital in the Twenty-First Century, recently conducted an interview with German magazine Die Zeit. After being translated, the transcript of the interview went viral with quotes showing up in the front pages of news sites all over the world. And for good reason, Piketty pulls no punches in his view of the crisis and the stupidity of ignoring the lessons of the past… again. This should be mandatory reading for anyone commenting on the crisis.

This version of the interview, which was originally in German, was translated by Gavin Schalliol. He has now taken down the translation while he sorts out copyright issues. Here is the full text:

DIE ZEIT: Should we Germans be happy that even the French government is aligned with the German dogma of austerity?

Thomas Piketty: Absolutely not. This is neither a reason for France, nor Germany, and especially not for Europe, to be happy. I am much more afraid that the conservatives, especially in Germany, are about to destroy Europe and the European idea, all because of their shocking ignorance of history.

ZEIT: But we Germans have already reckoned with our own history.

Piketty: But not when it comes to repaying debts! Germany’s past, in this respect, should be of great significance to today’s Germans. Look at the history of national debt: Great Britain, Germany, and France were all once in the situation of today’s Greece, and in fact had been far more indebted. The first lesson that we can take from the history of government debt is that we are not facing a brand new problem. There have been many ways to repay debts, and not just one, which is what Berlin and Paris would have the Greeks believe.

ZEIT: But shouldn’t they repay their debts?

Piketty: My book recounts the history of income and wealth, including that of nations. What struck me while I was writing is that Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.

ZEIT: But surely we can’t draw the conclusion that we can do no better today?

Piketty: When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.

ZEIT: Are you trying to depict states that don’t pay back their debts as winners?

Piketty: Germany is just such a state. But wait: history shows us two ways for an indebted state to leave delinquency. One was demonstrated by the British Empire in the 19th century after its expensive wars with Napoleon. It is the slow method that is now being recommended to Greece. The Empire repaid its debts through strict budgetary discipline. This worked, but it took an extremely long time. For over 100 years, the British gave up two to three percent of their economy to repay its debts, which was more than they spent on schools and education. That didn’t have to happen, and it shouldn’t happen today. The second method is much faster. Germany proved it in the 20th century. Essentially, it consists of three components: inflation, a special tax on private wealth, and debt relief.

ZEIT: So you’re telling us that the German Wirtschaftswunder [“economic miracle”] was based on the same kind of debt relief that we deny Greece today?

Piketty: Exactly. After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead, both of our states employed the second method with the three components that I mentioned, including debt relief. Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.

ZEIT: That happened because people recognized that the high reparations demanded of Germany after World War I were one of the causes of the Second World War. People wanted to forgive Germany’s sins this time!

Piketty: Nonsense! This had nothing to do with moral clarity; it was a rational political and economic decision. They correctly recognized that, after large crises that created huge debt loads, at some point people need to look toward the future. We cannot demand that new generations must pay for decades for the mistakes of their parents. The Greeks have, without a doubt, made big mistakes. Until 2009, the government in Athens forged its books. But despite this, the younger generation of Greeks carries no more responsibility for the mistakes of its elders than the younger generation of Germans did in the 1950s and 1960s. We need to look ahead. Europe was founded on debt forgiveness and investment in the future. Not on the idea of endless penance. We need to remember this.

ZEIT: The end of the Second World War was a breakdown of civilization. Europe was a killing field. Today is different.

Piketty: To deny the historical parallels to the postwar period would be wrong. Let’s think about the financial crisis of 2008/2009. This wasn’t just any crisis. It was the biggest financial crisis since 1929. So the comparison is quite valid. This is equally true for the Greek economy: between 2009 and 2015, its GDP has fallen by 25%. This is comparable to the recessions in Germany and France between 1929 and 1935.

ZEIT: Many Germans believe that the Greeks still have not recognized their mistakes and want to continue their free-spending ways.

Piketty: If we had told you Germans in the 1950s that you have not properly recognized your failures, you would still be repaying your debts. Luckily, we were more intelligent than that.

ZEIT: The German Minister of Finance, on the other hand, seems to believe that a Greek exit from the Eurozone could foster greater unity within Europe.

Piketty: If we start kicking states out, then the crisis of confidence in which the Eurozone finds itself today will only worsen. Financial markets will immediately turn on the next country. This would be the beginning of a long, drawn-out period of agony, in whose grasp we risk sacrificing Europe’s social model, its democracy, indeed its civilization on the altar of a conservative, irrational austerity policy.

ZEIT: Do you believe that we Germans aren’t generous enough?

Piketty: What are you talking about? Generous? Currently, Germany is profiting from Greece as it extends loans at comparatively high interest rates.

ZEIT: What solution would you suggest for this crisis?

Piketty: We need a conference on all of Europe’s debts, just like after World War II. A restructuring of all debt, not just in Greece but in several European countries, is inevitable. Just now, we’ve lost six months in the completely intransparent negotiations with Athens. The Eurogroup’s notion that Greece will reach a budgetary surplus of 4% of GDP and will pay back its debts within 30 to 40 years is still on the table. Allegedly, they will reach one percent surplus in 2015, then two percent in 2016, and three and a half percent in 2017. Completely ridiculous! This will never happen. Yet we keep postponing the necessary debate until the cows come home.

ZEIT: And what would happen after the major debt cuts?

Piketty: A new European institution would be required to determine the maximum allowable budget deficit in order to prevent the regrowth of debt. For example, this could be a commmittee in the European Parliament consisting of legislators from national parliaments. Budgetary decisions should not be off-limits to legislatures. To undermine European democracy, which is what Germany is doing today by insisting that states remain in penury under mechanisms that Berlin itself is muscling through, is a grievous mistake.

ZEIT: Your president, François Hollande, recently failed to criticize the fiscal pact.

Piketty: This does not improve anything. If, in past years, decisions in Europe had been reached in more democratic ways, the current austerity policy in Europe would be less strict.

ZEIT: But no political party in France is participating. National sovereignty is considered holy.

Piketty: Indeed, in Germany many more people are entertaining thoughts of reestablishing European democracy, in contrast to France with its countless believers in sovereignty. What’s more, our president still portrays himself as a prisoner of the failed 2005 referendum on a European Constitution, which failed in France. François Hollande does not understand that a lot has changed because of the financial crisis. We have to overcome our own national egoism.

ZEIT: What sort of national egoism do you see in Germany?

Piketty: I think that Germany was greatly shaped by its reunification. It was long feared that it would lead to economic stagnation. But then reunification turned out to be a great success thanks to a functioning social safety net and an intact industrial sector. Meanwhile, Germany has become so proud of its success that it dispenses lectures to all other countries. This is a little infantile. Of course, I understand how important the successful reunification was to the personal history of Chancellor Angela Merkel. But now Germany has to rethink things. Otherwise, its position on the debt crisis will be a grave danger to Europe.

ZEIT: What advice do you have for the Chancellor?

Piketty: Those who want to chase Greece out of the Eurozone today will end up on the trash heap of history. If the Chancellor wants to secure her place in the history books, just like [Helmut] Kohl did during reunification, then she must forge a solution to the Greek question, including a debt conference where we can start with a clean slate. But with renewed, much stronger fiscal discipline.

Corruption in Kosovo: A Comparative Analysis

July 6, 2015 / Brett Romero / 0 Comments

Cross posted from OpenDataKosovo.org:

Previously in Part I of this series, we looked at corruption in Kosovo from the perspective of Kosovo civil servants, as documented in a United Nations Development Programme (UNDP) report entitled Gender Equality Related Corruption Risks and Vulnerabilities in Civil Service in Kosovo[1].

In Part II we are now going to look at global corruption perception statistics compiled by Transparency International to consider how Kosovo compares internationally.

An International Comparison of Corruption

Transparency International is an organization that works to reduce corruption[2] through increasing the transparency of Governments around the world. Arguably Transparency International’s most well known contribution is the Corruption Perceptions Index (CPI), an index measuring “the perceived levels of public sector corruption worldwide”. In 2014[3] the CPI was calculated by aggregating 12 indices and data sources collected from 11 different independent institutions specializing in governance and business climate analysis over the past 24 months. The 2014 CPI covered 175 countries, including Kosovo.

In addition to the CPI, Transparency International does its own survey and data collection in the form of the Global Corruption Barometer (GCB survey). The GCB survey focuses on the public’s opinion of corruption within their own country, and in 2013 (the latest edition of the GCB available at the time of writing) collected the opinions of over 114,000 people across 107 countries – including Kosovo.

So what did these two reports show?

Results

In the CPI, Kosovo performs poorly, placing 110th out of 175 countries with a score of 33 out of 100 (unchanged from 2013). To give some perspective, Kosovo finished equal 110th with 4 other countries – Albania, Ecuador, Ethiopia, and Malawi. This placed it behind Argentina (107th), Mexico (103rd), China (100th), India (85th) and Greece (69th), countries that are often associated with high levels of corruption. Finally, this was the lowest ranking for any country in the Balkans region (tied with Albania).

Chart 1 – GCB Survey Q6 – Perceptions of Corruption by Institution for 6 Countries

The GCB survey, however, shows that the people in Kosovo have a different perception of corruption in several areas to that reported in the CPI. Based on the responses to question 6[4] (see Chart 1) and question 7[5] (see Chart 2) of the GCB survey, people in Kosovo are somewhat more optimistic about the levels of corruption in their country than the low rating on the CPI might indicate. Kosovo scores well in several areas:

Only 16% of people reported having paid a bribe in the last 12 months. This placed Kosovo 35th out of the 95 countries that provided a response to question 7.
46% of Kosovars generally believe their public institutions to be corrupt or extremely corrupt. This sounds high but actually puts Kosovo ahead of the US (47%) and only slightly behind Germany (40%). The results for certain institutions were even better:
- The Military is believed to be corrupt or extremely corrupt by only 8% of those interviewed – only four countries had a lower percentage than Kosovo on this part of question 6.
- NGOs and Religious bodies were also seen as uncorrupt by large majorities.
- 44% of people believed public officials and civil servants were corrupt, placing Kosovo ahead of Germany, France and the US, among others.

Chart 2 – GCB Survey Q7 – Reports of Bribes Paid by Institution for 6 Countries

But not all the results were positive. Questions 1[6], 4[7] and 5[8] in the GCB survey in particular highlight a more pessimistic outlook:

In response to question 1, 66% of Kosovars stated that they believed corruption had increased over the past 2 years, while only 8% believed it had decreased.
In response to question 4, 74% of Kosovars stated they believed their Government is run by large entities largely or entirely for their own benefit.
In response to question 5, only 11% of Kosovars surveyed believed the actions of their Government in the fight against corruption are effective.

What does all this mean? Why does Kosovo perform so poorly on the CPI, and on some GCB survey questions, but on other questions the perceived level of corruption of people in Kosovo is comparable to some developed nations?

Perceptions vs. Reality

One of the issues when looking at the results of the GCB survey is that the responses to most of these questions are subjective. What constitutes corruption or extreme corruption varies by country and culture based on what people are used to living with. What someone in South Asia or sub-Saharan Africa considers standard practice and harmless may be considered unbelievably corrupt by people in other parts of the world.

These different standards are really highlighted when we compare the percentage of people believing an institution is corrupt with the number of people reporting to have paid a bribe to that institution, using questions 6 and 7 of the GCB survey. There are four institutions that appear as options for both questions, allowing us to make a direct comparison:

Education
Judiciary
Medical and Health, and
Police

In the comparison (see Chart 3), we find numerous examples where the percentage of people that reported paying bribes was higher than the percentage of people who believed the institution was corrupt. The implication of this finding is that significant numbers of people in these countries believe that paying a bribe is not a sign of corruption.

Chart 3 – Comparison of Perceived Corruption with Bribes Paid

Kosovo and most developed nations were examples of the opposite case – they generally reported relatively high numbers of people who believed the four comparable institutions were corrupt, and relatively low percentages of people reporting bribes being paid. Bribery, of course, is not the only form of corruption, and this result could simply be an indicator that different forms of corruption are more prevalent in these countries. But it could also be an indicator that people in some countries are particularly cynical about the fidelity of their institutions.

To get a better sense of how concerned people really are about corruption, lets now take a look at some of the responses to other questions in the survey.

Is a Person’s Willingness to Take Action a Better Indicator?

One of the questions asked on the survey that could potentially reveal some further information was question 10 – “Are you willing to get involved in the fight against corruption?” Respondents were then provided with a range of activities, both active and passive, and were requested to indicate whether they would be willing to participate.

At a high level, the responses to this question appear to show an inverse correlation between the value of the CPI for a country and how willing people in that country were to do something active to fight corruption. In other words, the higher the percentage of people willing to do something active to fight corruption, the lower the CPI index for that country (i.e. a higher level of corruption).

Using a statistical model (such as regression), we can check whether this relationship is real and how strong it is. However to do this, we need to consider countries with regimes that punish dissent and crack down on protests and/or organizations that might try to combat corruption. In these countries, you would expect to have a low percentage of people willing to take action against corruption despite corruption being high.

To account for this, we need to have some sort of indicator of how worried people are about speaking out in their country. The best piece of information that we have from the GCB survey that can serve this purpose was the question asking if the respondent would be willing to report corruption.

Using these two pieces of information, we can try to test the following hypotheses:

A high percentage of people willing to take action against corruption in a given country is indicative of a high level of corruption.
A low percentage of people willing to take action against corruption in a given country, but a high level willing to report corruption is indicative of a low level of corruption.
A low percentage of people willing to take action against corruption in a given country, and a low level willing to report corruption is indicative of a high level of corruption in a repressive regime.

Based on these hypotheses, we also expect that there would be no (or very few) cases where there is high percentage of people willing to take action against corruption and a low level of people willing to report corruption.

Building a Model

Using our two pieces of information described above, and with the assumption that the CPI is the most accurate indicator of the true level of corruption within a country[9], we can build a model to predict CPI for each country and test our hypotheses. The formula for this model will be as follows:

Where:

Yi = the actual value of CPI for country i

β0 = a constant

Xi1 = the percentage of people willing to do something active to fight corruption[10] in country i

β1 = a constant applied to Xi1

Xi2 = the percentage of people willing report an incidence of corruption in country i

β2 = a constant applied to Xi2

εi = the residual or error

Using ordinary least squares (OLS) and the data for the 101 countries for which the CPI and the two variables (X1 and X2) described above are provided, the results of the model is as follows:

	β0	β1	β2
Coefficient	27.9735	-0.8417	0.8798
Standard Error	4.8427	0.0705	0.0738
R2	66.7%

The first thing to note is that the coefficients support the three hypotheses we mentioned above:

A strongly negative coefficient β1 indicates that the larger the percentage of people willing to do something active to fight corruption, the lower the predicted CPI.
A strongly positive coefficient β2 indicates that the larger the percentage of people willing to report corruption, the higher the predicted CPI.

General Insights

Aside from providing support for our hypotheses, the other thing this model reveals is the countries that are not very well explained by this model. Chart 4 shows the CPI predicted by the model as compared to the actual CPI value for 2014.

Chart 4 – Predicted CPI vs. Actual CPI by Country

At a high level, we can split the chart into two parts:

Points below and to the right of the line reflect countries where the actual level of the CPI was lower than the predicted level
Points above and to the left of the line reflect countries where the actual level of the CPI was higher than the predicted level.

Starting with the first group – countries that were more corrupt than the model predicted – these cases appear to fall into two categories:

Conflict Affected Countries – In these cases, of which Sudan is the most extreme example, there was typically a low percentage of people willing to do something active to fight corruption, and therefore the CPI was predicted to be significantly higher than it is in reality. This is likely to be due the citizenry of these countries facing more immediate problems. This pattern was seen across Sudan, Afghanistan, Iraq, Libya and South Sudan.
Other – In these cases, of which Russia was the best example, there was generally a high percentage of people willing to report corruption (86% for Russia) and a relatively low percentage of people willing to do something active to fight corruption (47% in Russia). As a result the model predicted a relatively high CPI. The explanation for this is not as clear as above, but the evidence would seem to suggest that the people in these countries are either not aware of the high level of corruption present in their country, or that they have a significantly different opinion as to what constitutes corruption.

Contrasting with the above cases, we can also see there are countries above and to the left of the line in Chart 4. This represents countries that were less corrupt than the model predicted. In these cases the responses to the two questions were indicative of a country with a higher level of corruption than actually existed. The following were two interesting cases:

Finland – the model was thrown off by a surprisingly low percentage of people willing to report corruption. Of the respondents from Finland, only 65% of people surveyed reported they would be willing to report corruption – a surprisingly low percentage for a country with a CPI value of 89. In fact, Finland and Japan were the only countries with a CPI above 60 that reported a percentage below 80% for this question.
The United States – neither of the data points used for the US in the model were hugely abnormal for countries in the same CPI range. 80% of people said they would be willing to report corruption (a little lower than you would expect) and 50% said they be willing to do something active to fight corruption (a little higher than you would expect). Both of these potentially show a slightly higher level of mistrust in government than other developed nations, something that does tie in with the politics of large parts of the US.

Unlike the above examples, Kosovo appeared fairly typical for the model. Let’s now take a deeper look into the results of the model for Kosovo.

Insights for Kosovo

For Kosovo, the model was able to fairly accurately predict the CPI using the two variables described. Kosovo has both a high percentage of people willing to do something active to fight corruption (80%) and a high percentage of people willing to report corruption (84%). As a result, the model predicted a high level of corruption in Kosovo, a CPI of 35, which was just below the actual CPI value of 33.

However, aside from proving the accuracy of the model in this case, these high values reveal important information about the people of Kosovo. It reveals Kosovars do believe corruption is an issue, and that they are willing to do something about it.

Summary

Overall, there are positives and negatives for Kosovo that can be taken from the Transparency International data. On the negative side, the CPI highlights that corruption is a significant issue in Kosovo. Even in a region with consistently low CPI scores (the best performer is Slovenia with a score of 58) Kosovo is a significant underperformer. The most disappointing aspect of this underperformance is that Kosovo has had the significant advantage of 15 years of assistance from various international agencies in setting up infrastructure for good governance.

That said, there is a big positive that comes from the GCB survey data, and it is also potentially an important clue as to the best way forward for Kosovo and the international organizations involved in the region. That positive is that the people of Kosovo appear to be aware of the issues of corruption in their country, and more importantly, they are very willing to take an active role to fight it. Compared to Albania, a country with the same CPI as Kosovo, almost twice the percentage of survey respondents stated they were willing to do something active to fight corruption in Kosovo (80% vs. 44%), and significantly more people said they were willing to report corruption (84% vs. 51%).

What this suggests is that, if harnessed effectively, anti-corruption efforts in Kosovo could be very popular, and therefore powerful. But the right strategies have to be implemented and publicized to garner public support.

Somewhat unsurprisingly, we believe a key strategy has to be raising awareness of how data can be used to reduce corruption and bring about change. This can apply equally to data that is currently collected by government agencies but isn’t publically released, or new datasets that the public can assist in collecting. With the right data and right analysis, these datasets can help to improve governance in numerous ways including:

exposing systematic corruption
identifying gaps in anti‑corruption controls, and
better targeting of anti-corruption efforts.

Using this open data approach also helps reduce reliance on the bravery of individual whistleblowers. Although whistleblowers are often vital in helping to identify incidents and even patterns of corruption, the fact is that, even in developed nations, they will always risk retaliation and other subtler forms of retribution (reduced career prospects, being ostracized by their peers and generally being perceived as untrustworthy).

Overall, what the results of the Transparency International data shows us is that, with better coordination and targeting of anti-corruption efforts, there is the potential to actively involve large numbers of Kosovars. If that can be achieved and funneled into meaningful strategies, the future of Kosovo could be very bright indeed.

Have any suggestions for ways data could be used to fight corruption? Disagree completely? Feel free to leave your thoughts in the comments!

[1] Gender Equality Related Corruption Risks and Vulnerabilities in Civil Service Kosovo, United Nations Development Programme. November 2014. Gender Corruption final Eng.pdf

[2] Defined by Transparency International ‘… as “the abuse of entrusted power for private gain”. Corruption can be classified as grand, petty and political, depending on the amounts of money lost and the sector where it occurs.’

[3] The methodology for compiling the CPI is reviewed on a yearly basis with data sources added and removed as needed.

[4] “To what extent do you see the following categories in this country affected by corruption?” – responses of “corrupt” or “extremely corrupt” recorded as a positive response.

[5] “In your contact or contacts with the institutions have you or anyone living in your household paid a bribe in any form in the past 12 months?“

[6] “Over the past 2 years, how has the level of corruption in this country changed?”

[7] “To what extent is this country’s government run by a few big entities acting in their own best interests?”

[8] “How effective do you think your government’s actions are in the fight against corruption?”

[9] By their own admission, Transparency International’s CPI is not a perfect measure of corruption. Corruption by its nature is hidden and so there is no objective measure of the true level of corruption. However, the CPI is currently the most respected measure of corruption available and so we make the assumption that it is also the most accurate for the purposes of constructing this model.

[10] Taken as the average of the percentage of people who said they would take part in a peaceful protest and the percentage of people who said they would join an organization that works to reduce corruption as an active member

Greece Says ‘OXI’!

July 5, 2015 / Brett Romero / 0 Comments

And how! With over a third of the vote counted, it looks like ‘Oxi’ (‘No’ to accepting the conditions of the creditors latest offer) will win in somewhat of a landslide. Current numbers are showing over 60% of Greeks voted ‘No’. No matter whether you think this is the right choice or not, you have to admire the bravery of the Greek people choosing what is almost certainly the high risk option. So what happens next?

Next Steps

This is the part no one is sure about. Within Greece, Syriza has been campaigning for the ‘No’ vote on the basis that it will not result in a Greek exit from the Eurozone, but that it will strengthen the hand of the Greek government in negotiations with the creditors. While it certainly provides them with a strong mandate to turn down the current offer, getting a better deal depends on the creditors.

Outside Greece, popular opinion is that the creditors have too much to lose from making concessions to Greece. The fear is that if concessions are made this would encourage other countries, primarily Spain, Portugal and Ireland, to elect anti-austerity parties, similar to Syriza, and also request concessions.

This doesn’t mean further negotiations are pointless, there could be a middle ground. The bargaining positions of the two parties before the referendum were already very close, with Syriza then making further concessions after calling the referendum. It would seem conceivable that the creditors could quietly agree to the final offer from Syriza (or something close to it), lose a little bit of face, but still basically get their way. Will Merkel, Junker, Schäuble et al be able to stomach making any concessions at this point? That remains to be seen. If no deal is reached though, a Greek exit could be on the cards in the very near future.

What About Europe?

Regardless of what happens economically, the impact of this referendum appears certain to have ongoing political fallout. The level of excitement and the joyous reconnection with the democratic process that occurred in Greece, in addition to the result, is sure to resonate with people across Europe. In countries that have also been struggling with high unemployment and poor economic performance, largely as a result of austerity policies, people are sure to be taking particular notice. Although the economies of these countries are now performing significantly better than the Greek economy, and have more manageable debt burdens, the improved conditions are yet to be felt by the majority of people. In Spain, a country that has itself undergone high levels of very unpopular austerity, the economy has been growing strongly over the past year, but unemployment still sits above 20%.

For this reason, the governments in these countries (particularly Mariano Rajoy in Spain) were often the ones arguing the hardest for no concessions to be given to Greece. In what appears to be a purely political calculation, this stance was taken not with any thought for the suffering of people in Greece or their own countries, but to short circuit popular support for anti-austerity parties domestically. Those leaders will surely have some tough weeks (and probably years) ahead.

Greek Debt Crisis Enters Final Stage

June 27, 2015 / Brett Romero / 0 Comments

The never-ending saga of the Greek debt crisis appears to be finally entering its final phase this week. After 5 months of negotiations, Greece’s creditors, led by the IMF, have made a final offer to the Greek government, and it is an offer of more of the same – i.e. austerity. For its part, the Greek government needs to make a decision before Tuesday next week when it is expected to run out of cash.

Background

For those that have seen the headlines, but have not had the time to dig into what is actually happening in Greece, first a little background.

As early as 2010, it became clear that the Greek government was in trouble financially. It was running large deficits and was quickly accumulating a debt that bond markets increasingly believed were unlikely to be repaid. As a result, the yields on Greek Government bonds (the rate of interest that the Greek government has to pay to borrow money) began to spike, further increasing the risk that Greece would be unable to repay its debt.

To avert a crisis, the IMF, the European Commission and the European Central Bank (“the Troika”) provided loans to the Greek government to help pay off their existing debt. By doing this, these organizations essentially took the majority of Greek government debt off the books of a range of mostly German and French banks, and put it on their own books.

However, in exchange for the provision of these loans, the Troika insisted that the Greek government implement a series of measures to improve the budgetary situation. These measures mainly consisted of cuts to the public service and pensions, but also tax increases, and other measures. Generally these measures are referred to as “austerity measures”. Despite the warnings of many prominent economists that cutting government spending in a recession would cause further damage to the Greek economy, the measures were pushed through – as they were in a range of other countries.

Sadly, the warnings provided proved accurate. By January 2015, the Greek economy was suffering from 25%+ unemployment and GDP had fallen 25%, far more than had been forecasted by the Troika at the outset of austerity. As the economy shrunk, so did government revenues and so further cuts were required to try meet the surplus target.

In January this year, the Greek people tired of years of crushing austerity, elected what has been called a ‘far-left’ government[1]. Syriza, a party that for most of the recent past had been attracting less than 10% of the vote, was all of a sudden front and center, and with a clear mandate to renegotiate and bring an end to austerity – but also to keep Greece in the Eurozone.

What is Happening Now?

After 5 months of increasingly bitter negotiations between the Syriza government and the Troika, and with the deadline approaching (Tuesday next week), there were two final offers made.

For their part, the Greek government proposed a range of austerity measures that more or less met the Troika’s demands in terms of net budgetary impact. The difference was that they proposed smaller cuts to pensions with the gap being made up with a range of tax increases. Hilariously, the proposed measures were rebuffed over concerns it would hurt the growth of the Greek economy.

The Troika then made their final offer to Greece. Even after all the evidence of how destructive and counterproductive austerity, the offer was basically the same as the original demand. Many took this as a sign that the Troika are aiming to force Syriza out of government, or Greece out of the Eurozone.

What happened next appears to have caught most observers by surprise. On Friday night, the Greek Prime Minister Alex Tsipras announced he would take the final offer to a referendum to be held on July 5^th. Although this is sure to further aggravate the Troika (if that is even possible), this would actually appear to be a very clever move on the part of Syriza.

The biggest issue for Syriza since their election has been how they would manage to maintain their two key promises – to stay in the Eurozone and bring an end to austerity. After 5 months of failed negotiations, they have almost certainly proved beyond doubt that the Troika are not going to give any ground on austerity. By calling a referendum, they force the Greek people to choose what they want more – Eurozone membership or the freedom to run their own economy. Either the Greek people willingly accept further austerity in exchange for staying the Eurozone, or they accept exiting and take their chances on their own.

For their part, Syriza have made it clear they believe going on their own is the better option. As part of his announcement to the Greek people, Tsipras took the chance to lambast the institutions making up the Troika (translated from Greek):

“These proposals -– which directly violate the European social acquis and the fundamental rights to work, equality and dignity — prove that certain partners and members of the institutions are not interested in reaching a viable and beneficial agreement for all parties, but rather the humiliation of the Greek people.”

“Greek citizens, I call on you to decide –- with sovereignty and dignity as Greek history demands — whether we should accept the extortionate ultimatum that calls for strict and humiliating austerity without end, and without the prospect of ever standing on our own two feet, socially and financially.”

What Happens if the Greeks Choose to Exit?

No one knows for sure – but it won’t be pretty. Essentially, a chain of events will mean Greece will need to revert back to their own currency (essentially a new Drachma), which in itself leads to further impacts. The first and most serious of which is that the Greek government would need to impose capital controls – basically stopping people from moving their money out of Greece.

In anticipation of this measure, Greeks have been pulling Euros out of Greek banks at a record pace the last few weeks and either moving it offshore, or effectively stuffing their mattresses. After the announcement of the referendum, the pace further quickened with pictures flooding into Twitter of lines at ATMs on Saturday morning and reports that many ATMs had already run out of cash.

Looking further forward, after the change to a new currency, there is an expectation that it would depreciate very quickly against the Euro. As a result, vital imports like oil and medical supplies would suddenly become hugely more expensive causing problems in the health sector as well as for business in general. On the flip side, this depreciation should provide a boost to Greek exports (primarily tourism and agriculture). However, it is questionable how much benefit this can provide given the large internal devaluation that has already occurred.

The only possibly good news is that the Greek government is already running a primary budget surplus (surplus before the costs of borrowing are included). By defaulting on its existing debt, it would not need to issue new debt to meet payment obligations in the short run (although a depreciating currency could impact that). Longer term, by most measures, the Greek budget is actually in a strong structural surplus (i.e. if the economy wasn’t hugely depressed, the budget would be in a much better position than it currently is). If the Greeks could manage even a small amount of growth after leaving the Euro, they could find they are quickly running large surpluses.

For the Eurozone, a Greek exit is no longer the risk to financial stability that it once was, but it could be a risk to political stability. If Greece does exit the Eurozone, there will be several countries monitoring the situation very closely. Spain, Portugal and Ireland (not to mention Italy) have all undergone differing levels of austerity over the past 4-5 years, and all have seen very high levels of unemployment and significant falls in GDP as a result. If (and it is a big if) Greece exits the Eurozone AND manages to keep the country from falling apart completely, these other countries may be tempted to do something similar.

From there, the Eurozone project could completely unravel. And make no mistake; this would also be disastrous for the northern European economies, including Germany. Without the relatively unproductive southern European countries in the shared currency zone, the Euro would be expected to appreciate strongly, doing serious damage to Germany’s export driven economy and even more so to less efficient countries like France and Italy.

This scenario has led to some speculation that the Europeans will try to make any Greek exit as difficult as possible – to deter other countries from exiting. But this strategy has its own political ramifications. Essentially the European Union would start to look like a union held together by the threat of economic ruin rather than goodwill and mutual benefit. At that point, the question becomes what kind of union does Europe really have?

What Happens Next

Even though the Greeks have declared their intention to hold a referendum to decide on whether they will accept the bailout conditions, they don’t actually have enough cash to survive until the referendum date. As such, they are asking the creditors to provide an extension for a few days to get to the referendum.

Early indications are that they will be refused even this small extension (the creditors are really pissed off…). To do this would appear to be a dumb move politically and with very little gained financially, but it took a lot of dumb moves to get to this point, so nothing can be ruled out. If they do hold the line and deny Greece the extension, essentially everything gets moved forward. On Tuesday, assuming the European Central Bank stops providing liquidity (cash) to Greece’s banks, the Greek government would be forced to step in with a new currency and we will officially have the first example of a country leaving the Eurozone.

The Greeks have put the gun to their collective heads and shown they are ready to pull the trigger. The only question left is will Europe stop them, or hand them a bigger gun?