War has erupted in Europe, the international rulebook torn up. Vladimir Putin’s invasion of Ukraine is a stark reminder of the region’s turbulent geopolitical and economic history. Rules and expert guidance are essential if this crisis is to be navigated swiftly.
Newsletter from 25 February 2022
Yesterday, the world woke up to the news of war in Europe, with Vladimir Putin announcing a ‘special military operation’ in Ukraine’s Donbas region, just before 6am Moscow time. Although tensions have been mounting steadily over the past few weeks, confirmation of the invasion is nonetheless shocking.
Listening to BBC Radio 4’s Today programme early on Thursday morning, one of the stories broadcast from Kyiv was a report on panic buying. Already, people living in the capital were flocking to supermarkets, fuel stations, and – most disturbingly – firearms shops. Global or geopolitical events do have severe economic implications for people on the ground. In Ukraine, food, petrol and ammunition have never been in higher demand.
But the economic consequences of the Russian invasion go far beyond the shopfronts of Kyiv, Donetsk and Luhansk. Earlier this week, a range of international sanctions were levied against the Kremlin, including Germany announcing the suspension of the Nord Stream 2. The undersea pipeline – which was due to run gas from Vyborg in Northwest Russia to Lubmin just north of Berlin – offered a literal and symbolic connection between Russia and the West: a means for trade and energy supply, a channel of cooperation. But this economic tie has, at least for now, been severed.
The macroeconomy has been affected too. As the first missiles struck during the early hours of Thursday morning, the Russian rouble tumbled and oil prices spiked, climbing to over $100 per barrel for the first time since 2014. Simultaneously, global stock markets fell.
Eastern Europe has experienced extreme economic turmoil because of geopolitical shifts before. As recently as the early 1990s, hyperinflation in Yugoslavia reached 313,000,000%, which meant that prices were doubling every 34 hours. Economic instability was closely associated with the country’s disintegration – and the series of wars that followed brought widespread and long-lasting suffering for an entire generation of people. As similar events unfold in Ukraine, we sincerely hope the personal and economic costs are not too great.
At a time when international law is once again being broken, several articles posted on the Economics Observatory website this week stress the importance of rules in the face of big policy challenges. They argue that decision-makers should be guided by frameworks informed by sound economic thinking. Climate change, Covid-19 and Scottish independence are all issues that require expert guidance, and the right rules at the right time will be critical to navigating these uncertain waters.
Tightening business regulation
On Tuesday, we posted a piece by Michelle Kilfoyle on the likely effects of mandatory corporate reporting on sustainability. She argues that making firms become more transparent in their reporting has the potential to deliver social, environmental and financial rewards. But mandatory reporting is not a panacea. Rather, its success rests on carefully considered standards and the credible (and costly) enforcement of these rules.
According to data collected by accountancy giant KPMG, in 2020, 96% of the world’s largest 250 companies and 80% of large firms worldwide reported on their sustainability performance. Yet far more still needs to be done if we are to combat climate change. It is one thing to make businesses declare their environmental and social impacts, but another challenge to ensure that they then curb their harmful behaviour.
Michelle highlights that a key factor in achieving this is promoting competition. With more public information available on what other businesses are doing in the name of sustainability, compulsory corporate social responsibility reporting could foster competition between firms, as well as helping them to learn from one another.
There is already evidence that this works. In 2010, the United States made emissions reporting mandatory for thousands of factories. In response, these facilities reduced their greenhouse emissions by 7.9%. While the rules did not directly control company behaviour, the increase in transparency put pressure on polluters to clean up their operations for fear of falling behind their peers.
In strictness and in health
Perhaps the most high-profile rules over the last two years have been the Covid-19 restrictions. Since March 2020, people across the UK have lived under varying degrees of regulation. From stay-at-home orders to social distancing, not since the Second World War has everyday life been so closely bound by policy.
Protecting health has come at a cost. The measures introduced to curb the spread of the virus have had substantial negative effects of the economy – effects that are still being felt today. On Wednesday, Stuart McIntyre (University of Strathclyde) explored the latest regional GDP data from the Office for National Statistics (ONS), which cover economic activity across the UK up to the end of the second quarter of 2021.
These data highlight how different parts of the country are still experiencing a range of challenges, even as the worst of the pandemic appears to be behind us.
Figure 1: Q2 2021 levels of activity relative to 2019, by region and industry (100 = back at 2019 levels of activity)
Figure 1 shows the change in economic activity in each region and nation relative to 2019. The data show that activity associated with hotels, restaurants and cafes was still only around 60% of its 2019 level in the second quarter of 2021. At the same time, in most other parts of the country, similar activity was closer to 80% of its 2019 level. Just as rules and restrictions have varied across the UK at different stages, so have the effects.
What the data show most clearly is that the rules introduced to protect public health have left the UK economy with a number of scars. While not all the regional and sectoral struggles can be attributed directly to lockdown measures, the latest GDP data provide a striking picture of the pandemic’s long-run consequences.
Winds of change
On Thursday, we published an article by Andrew Cumbers (University of Glasgow), Sheila Dow (University of Stirling/University of Victoria, Canada) and Robert McMaster (University of Glasgow) examining the political economy perspectives of Scotland’s future. The authors argue that while the economics of Scottish independence are important, they must be viewed as just one part of a process that will change the whole country. The economic concerns surrounding Scotland’s future should stand alongside concerns with social and moral priorities.
The referendums on Scottish independence in 2014 and on Brexit in 2016 presented problems for mainstream economics. The mistake, they said, was to assume that institutional relationships were fixed. The whole point of any possible constitutional change is that institutional relationships also change. In terms of the Union, the contents of the rulebook have been cast into doubt.
The concluding section of Thursday’s article helps bring us back to where we started. Andrew, Sheila and Robert argue that the economic debate concerning independence needs to be viewed as part of a process that will change institutions, governance, power relations and behaviour. Each of these changes, in turn, will have substantial economic consequences.
Many of the profound political and social changes of recent history have often happened against the consensus of economic thinking at the time. While the threat of further Russian aggression has been looming since 2014, the arrival of war in Europe is deeply unsettling. For many people the economic ties between Russia and the West should have been too strong, market forces too potent and stability too profitable. But this consensus view appears to have come undone. How the war will go on to affect people’s personal, political and economic security around the world remains to be seen.