What is the cost of safety?

Mihaela writes*

For thirty years El Salvador has been under the control of two gangs, MS-13 and Barrio 18. Leaders had tried to dismantle the gangs and put an end to their reign of terror over the general public. However, only one leader has been successful so far in bringing safety to the country, President Nayib Bukele who has been in power since 2019.

It all began in March of 2022, when Bukele declared a national state of emergency sending the military to the streets, suspending constitutional rights, and most notably, carrying out mass imprisonments of anyone who even seemed to be affiliated with a gang, which brought the incarceration numbers to eighty thousand. He embraced mano dura (iron fist) crime policies that were aggressive — even overwhelming. While considered a dictator, his approval rating from locals stands at 91%.

Other Latin American leaders hope to adopt similar policies and have said that ‘he has accomplished a miracle’. Furthermore, crime rates have dramatically decreased from 51 per 100,000 in 2018 to 2.4 in 2022 since he adopted his new policies. This makes El Salvador the safest and most rapidly developing country in Latin America, as of today.

A graph comparing El Salvador’s and the US’s murder rates per 100,000 people since 2016

The country’s GDP per capita has also shown a promising increase between 2020, when it stood at US$4000, and 2023 ($5,400). A reason for the GDP increase can be explained by The Economist’s findings on how much gangs actually cost the economy of El Salvador. The total cost was said to be around 16% of the nation’s GDP, and it included the extra spending on security per household, bribes, and the loss of those who were deterred from working.

At first glance, this all seems to be a huge turnaround for the living standards in the country as well as its overall development. However, keeping 1% of the population imprisoned is bound to come with adverse and hidden costs to the country. Firstly, this came at a high cost for human rights. There were reports of the wrongful arrests of minors and adults alike, as well as reports of mistreatment and unexplained deaths of prisoners in the custody of the mass prisons.

Furthermore, there have been concerns about the country’s democratic backsliding and the lack of protection against the government’s abuse of power over its people. It’s also important to note that under Bukele’s economy, the country is experiencing higher levels of extreme poverty and increased inflation. The president inherited a weak economy and a state controlled by gangs. It’s expected that growth won’t be linear due to uneven development, but what is the right price for safety?

Bottom Line: El Salvador has become far safer and the economy has grown under Bukele, but that progress is undermined by weakening human rights and a lack of fundamental economic reforms. How long will the Bukele boom last?

* Please help my Real Donut Economics** students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

** Why “Real”? In short, because (a) Raworth’s claims to being a “21st century economist” denies that all of her ideas were presented by others in the 20th century and (b) she presents no viable mechanisms (besides “be nice”) for achieving equality and sustainability. My students are more realistic. In long? Read this.

Work less and save the planet?

Števo writes*

Every adult who enters their first full-time job quickly understands that time is our most important asset. Weekends always seem short, rest is rare, and work suddenly devours a massive part of our life. In 1930, John Maynard Keynes predicted a fifteen-hour workweek by 2030. That result would release us from these pressures, but it does not seem likely.

That said, the ±40-hour workweek has become the norm in many countries, and average yearly working hours are falling. On the other hand, this trend has stagnated or completely halted for full-time workers in many western countries over the last 40 years.

Instead of more leisure time, citizens embrace consumerism, politicians strive to grow GDP, and “being busy“ has become a status symbol of the higher classes. Today, with sustainability at the forefront of many political discussions, some are exploring the possibility of a shorter workweek as a solution to both lowering out footprint on the planet while also freeing more time for ourselves. Some studies show that countries and households with longer working hours have larger climate footprints, but would decreasing our work time really deliver sustainability?

There are many caveats and possible ways to reduce working hours. If there is a top-down decrease in the working week, for example through a four-day workweek, shorter workday or more vacation days, it is important whether the wage will stay constant or decrease proportionally. If it were lowered, people would be forced to consume less, in theory decreasing production and our material footprint; but less income is also associated with austerity, which would hurt “precariats” who are already economically struggling. If salary stays the same, then the environmental impact would depend on people’s use of their leisure time.  Would they spend it cooking organic meals at home, or on more fast food or on a holiday in the Maldives?

Another option to reduce working hours would involve taxes that would internalize the negative externalities (spill over costs) from unsustainable consumption. The resulting higher prices would lower consumption and thus production, which would decrease working hours or even increase unemployment.

A third option would combine government support for better work-life balance with a revolution in social norms, so that people decided to both work and consume less.

Even if we could get lower production without harming the poor and a sustainable use of extra leisure time, there’s still another problem: fossil fuels. Cheap fossil fuels have really boosted productivity and efficiency in our economy. In a post-fossil world, certain sectors would need more work, i.e., “what capital will no longer do, humans will have to do.”

Bottom Line: Working less would reduce environmental stress, but it’s hard to see how to reduce working hours without big changes in social norms, lifestyles and preferences.

* Please help my Real Donut Economics** students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

** Why “Real”? In short, because (a) Raworth’s claims to being a “21st century economist” denies that all of her ideas were presented by others in the 20th century and (b) she presents no viable mechanisms (besides “be nice”) for achieving equality and sustainability. My students are more realistic. In long? Read this.

Paradise lost to overdevelopment

Hansika writes*

King’s Day is usually a cause for celebration across the Kingdom of the Netherlands yet for many Aruban locals, it signified a day to protest against the unregulated growth of hotels. Protestors marched on April 27th, 2024, to oppose Aruba’s mass tourism, which they argue was damaging the environment, the economy and their quality of life (Billy, 2024).

The problem: Hotel construction in Aruba has been vast, and each additional hotels adds to the burden on the island’s infrastructure and fragile environment. For example, high levels of pollution and sewage produced by the hotels leak into the surrounding areas, causing smog and contaminating fresh water sources nearby. Many of these hotels have also privatized beaches that were previously open to the public. Such hidden costs are not paid by the hotel nor the tourists that use their facilities, but local communities. A negative externality graph illustrates this problem.

As hotel expansion exceeds the socially optimal price (Po) and quantity (Qo), the marginal private cost (MPC) surpasses the marginal social cost (MSC). MPC refers to the direct costs to businesses such as utilities and labor, while MSC refers adds costs to society such as environmental harm and land loss. The blue triangle between MPC and MSC represents deadweight loss, i.e., the economic inefficiency caused by excess hotel construction, which falls on society.

Moreover, the majority of these hotels are all-inclusive, which encourages tourists to spend money on hotel activities, rather than local ones—a risky model in a country where tourism is the backbone of its economy. In Aruba, tourism accounts for more than 70% of its GDP, yet the economic benefits are limited, fostering dependency on hotel construction instead of local businesses (López, 2024). As tourism expands, external costs, such as those mentioned above, increase, and lead to the overconsumption of tourism-related goods and services. These costs fall on local communities while the benefits go to hotel developers.

Furthermore, the Dutch Caribbean islands do not represent themselves on international platforms as The Netherlands is supposed to speak on behalf of the whole Kingdom. This has caused relations between the two to deteriorate as climate priorities have diverged. For example, an NGO in Bonaire has sued the Dutch government for the latter’s perceived failure to protect the island from climate change (Holzhausen, 2024).

Bottom line: Demonstrations across the Dutch Caribbean islands emphasize how the local population are fighting not only for the environmental integrity of their islands, but also for their economic sovereignty.

* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Can we really have it all?

Ayala writes*

When I first started to read about Thailand’s “Sufficiency Economy Policy (SEP), I thought they had figured it out. It seems ideal. The SEP addresses a key problem — overconsumption — and emphasizes the importance of finding a middle path of self-reliance. It stands on the principles of moderation, reasonableness, and self-immunity, and does so by interacting with economic and development activities from the individual level to the community and national ones (Piboolsravut, 2004).

More specifically, the SEP encourages grassroot contributions to local, sustainable development (Schaffar, 2018). This for example can be seen from Naipinit et. al.‘s case study of how the SEP was implemented in four Thai villages. According to it, 80% of the villagers surveyed responded that they grow food solely for their own consumption, reflecting the concept of resilience that is integral to the policy. Moreover, by saving money on buying luxury goods, they can invest in protections from different crisis. It was also shown that in these villages’ social networks are strong and that locals work together to benefit their own community, resulting in both high-level products and in increased well-being (Naipinit et. al., 2014).

It is important to note that much of the SEP’s success can be attributed to its alignment with Thai informal institutions that build on Buddhism. The idea of sustainability in Buddhism involves the interconnectedness of the economy, society, and the environment (Song, 2020). This cultural link means that local institutions help support the SEP.

On the other hand, I found some criticism of the SEP. Schaffar suggested that the SEP has recently been used to justify Thailand’s dictatorship. The regime has gained its legitimacy by leading innovative development ideas, including the sufficiency economy and their commitment to the SDGs. They argue that their control stabilizes the economy (Schaffar, 2018). Moreover, it seems that much of the burden of living a sufficient lifestyle is directed towards the poorer populations, which are already living off quite minimal consumption (Elinoff, 2014).

Bottom line: I am no longer convinced that Thailand’s Sufficiency Economy Policy is a success story, but it does represent a step in the right direction.

* Please help my Real Donut Economics** students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

** Why “Real”? In short, because (a) Raworth’s claims to being a “21st century economist” denies that all of her ideas were presented by others in the 20th century and (b) she presents no viable mechanisms (besides “be nice”) for achieving equality and sustainability. My students are more realistic. In long? Read this.

Polish couriers win against COVID-19

Dominika writes*

As e-commerce is on the rise, and many firms are stepping away from the classic model of physical stores, it is no surprise that there would also be modernizations in the courier services that deliver online purchases (Szelag, 2016) .

During the COVID-19 Pandemic we experienced a huge rise in shopping online as restrictions, lockdowns and safety regulations forced people to shop from home. This led to a large increase in the use of courier services (Czerwinska, 2023). The courier industry also had to adapt to the contactless system imposed on them by regulations. Although parcel lockers have been around for years, no contact regulations boosted their popularity above forecasts (Czerwinska, 2023).

One such courier firm that greatly benefited from the demand for parcel lockers is the Polish firm InPost. Founded in 1999, InPost has growing international reach in Europe, and has become the leading courier service in Poland (InPost). Their parcel lockers offer an easy way to send and receive parcels 24/7. In response to the challenges that the courier companies were about to face because of the COVID-19 Pandemic, InPost introduced changes to their services that would both ensure better safety for their staff and also expand their reach. Anticipating a rise in demand for courier services they expanded their network of parcel lockers (Czerwinska, 2023). According to their 2020 annual report, they increased their count of lockers by 78% and by an additional 63% the following year (InPost).

The pandemic years turned out to be very successful for the company as their foreshadowing and quick action allowed them to prosper till today. InPost’s automated system was convenient and safe (Czerwinska, 2023), and now the company has an even stronger market position.

Bottom line: InPost’s COVID-19 innovations served society as well as the company.

* Please help my Real Donut Economics** students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

** Why “Real”? In short, because (a) Raworth’s claims to being a “21st century economist” denies that all of her ideas were presented by others in the 20th century and (b) she presents no viable mechanisms (besides “be nice”) for achieving equality and sustainability. My students are more realistic. In long? Read this.

True pricing: effects on competition

Sarah writes*

Although Trump has once again pulled the U.S. out of the Paris Climate Agreement, American firms still face consequences in EU markets. Numerous countries are still committed to non-legally binding climate targets, but the EU demands full adherence to its Green Deal policies. Non-compliance could bring legal and financial repercussions. Thus, businesses within the EU must evolve their models to align with environmental and social regulations. If national authorities fail to guide them through the transition, many may crash. Yet, many member states are lagging behind, requiring grassroots approaches to drive faster change.

One of those grassroot initiatives is the True Price Institute, a Public Benefit Organisation, that promotes the reflection of negative externalities in price mechanisms (True Price, n.d.). From April to June in 2023, they held an experiment at three different Albert Heijn (AH) supermarkets spread throughout the Netherlands (True Price & AH To Go, 2023). Customers received the following two options: to pay the price of coffee that they were used to, or a few cents extra. By increasing the price, the institute included the social and environmental costs of milk and coffee, which are both linked to exhaustive production processes. But did it really work? And how did customers respond?

Based on online survey responses and data analysis from the experiment, we might observe a gap between words and actions. While 36% of respondents expressed willingness to pay a few extra cents, only 15% of actual customers did pay more (True Price & AH To Go, 2023). Although the drop may reflect the difference between survey respondents and actual shoppers, the result also makes logical sense. The Dutch are known for being “gierig” (frugal). Plus, even when made aware of negative externalities, it may still be difficult for individuals to grasp the impact of their personal choices.

Although the report is optimistic about these results, it is clear that consumer choice alone will not drive sufficient change. Implementing a true pricing mechanism requires top-down support. To create strong incentives for sustainable transformation, companies must shift their perspectives. If they do not comply with the EU Green Deal, they will eventually be forced to internalize social and environmental costs at a much higher price. Instead, businesses should facilitate a smoother transition now to prevent economic shocks later. And that assumes we have more time — which we don’t.

For example, large companies will be required to report on non-financial directives starting in 2024 under the CSRD regulation (European Commission, n.d.). Previously, companies only had to report on their financial activities. However, to monitor alignment with social and environmental directives, the EU is demanding early accountability. (“Early” means relative to 2050 rather than in terms of climate action.)

True Price et al., 2014 have modeled how market shares might change as firms internalize those external costs:

According to their report, true pricing will strengthen innovation, reputation, and risk management — all of which offer comparative advantages on firms.

Once the EU has built its labor force for the sustainable transition, where will the U.S. stand? If the EU becomes more expensive, will it gradually reduce trade with the U.S. to improve its own market efficiency? And what if other major economies, such as China, follow suit?

Bottom line: Time will tell, but one thing’s for sure: Pay now or pay more later.

* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

A profitable and vicious triangular trade

Nathan writes*

France’s prosperity during the 18th century was mainly fueled by the colonial triangular trade. It was a vast trading system that linked Europe, Africa, and the French Antilles. One could argue that economists such as Adam Smith and David Ricardo based their concepts of “absolute advantage” and “comparative advantage” on this system. It is however important to emphasize the fact that it was built on a foundation of human exploitation, a reality that cannot be overlooked.

This system was self-sustaining: French merchants brought textiles, alcohol, and weapons to Africa, where they bought enslaved people to transport to the French Antilles, where they were traded for sugar, coffee, cotton, and tobacco, which was then brought back for sale on the Continent. Then the cycle began again.

France therefore linked three distinct markets with different demands for manufactured goods, labor, and commodities. Each part of the world specialized. Thanks to “low marginal costs” (slaves), French ports greatly expanded and industrialized. Those ports then built more and better ships, which increased trade flows even further, reinforcing the gains from trade. At the same time, the entire French economy flourished costs fell and colonial demand increased. The state and monarchy collected greater tax and tariff revenues at home and in its colonies. It is important to note a lot of this revenue supported lavish aristocratic lifestyles rather than the common French citizen, which led to problems later.

France’s financial sector also developed during this period. Transatlantic trading was risky; many ships sank. Banking and insurance companies flourished in Paris and the port cities as companies sought to reduce the risks of sinking vessels, spoiled goods and the death and diseases that struck the crew and slaves during transport. Financial market became more sophisticated.

These developments did not, however, affect everyone. As stated above, tax revenues were not used to develop the country; they only benefitted the richest bourgeoisie, nobles and merchants. The majority of the population  — rural, farmers — faced deeper social inequalities. This should go without saying, but this trade also happened at a great ethical and human cost considering how people were enslaved and treated.

Bottom Line: France’s triangular trade helped it become a global economic power in the 18th century. It fueled urban growth, strengthened industries, expanded financial networks, and led to strong institutions regulating and insuring trade. On the other hand, it left a lasting legacy of exploitation and inequality. Its consequences can still be seen in France’s economic and social structure and the social and economic problems in its ex-colonies.

* Please help my Real Donut Economics** students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

** Why “Real”? In short, because (a) Raworth’s claims to being a “21st century economist” denies that all of her ideas were presented by others in the 20th century and (b) she presents no viable mechanisms (besides “be nice”) for achieving equality and sustainability. My students are more realistic. In long? Read this.

Amazon and economies of scale

Demir writes*

In microeconomics, economies of scale occur when firms reduce average costs per unit as production expands. Graph 1 illustrates this through the long-run average cost curve (LRAC), which declines as output increases from Q to Q₂, showing cost efficiency gains from reduced labour costs, improving efficiency and overall technological advantages one might have (Wikipedia).

By moving from Q to Q2, the firm lowers per-unit costs from C to C1, which allows it to better compete on price. When economies of scale are so extensive that a single firm can serve the entire market at a lower cost than multiple competitors, a natural monopoly may form. This typically occurs in industries with high fixed costs and significant cost reductions from increased output, allowing one dominant firm to outcompete smaller rivals (Wikipedia). This situation might occur if Q₂ is close to total quantity demanded in the market, which means that smaller competitors will not be able to enter the market and compete on cost.

Amazon leverages its economies of scale in automation, bulk purchasing, and logistics to lower prices and dominate markets. But how did Amazon achieve such market domination?

From warehouse robotics to dynamic pricing algorithms, Amazon automates key operations, reducing labour costs and improving efficiency. These systems optimise pricing in real-time, allowing Amazon to offer the most competitive prices. Amazon’s purchasing power allows it to buy goods at lower prices than competitors. Suppliers, reliant on Amazon’s vast customer base, offer significant discounts that smaller retailers cannot access. Third-party sellers can use Fulfillment by Amazon (FBA) for logistics, thereby reinforcing economies of scale in speed, price and reach.

While its e-commerce business operates on thin margins, profits from Amazon Web Services (AWS) subsidizes retail operations. Amazon’s 200 million-plus Prime members spend twice as much as non-members, further reinforcing economies of scale. Amazon’s logistics dominance raises concerns about natural monopoly status. Its cost advantages make it nearly impossible for competitors to match its efficiency. Many retailers now depend on Amazon’s distribution network instead of building their own. While this benefits consumers through low prices, it also risks future price increases if competition erodes. Governments are beginning to scrutinise Amazon’s market power, raising questions about potential regulatory intervention (Shah & St John 2021).

Bottom Line: Amazon’s ability to offer low prices, fast delivery, and an extensive product range is a direct result of economies of scale. Its bulk purchasing, automation, logistics network, and AWS revenue create an unbeatable cost advantage. As Amazon continues expanding, the debate over its influence will shape the future of e-commerce regulation.

* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

The illegal mafia-entrepreneur nexus

Anna writes*

Stereotypically, the Italian mafia is associated with drugs, gambling, prostitution, and violence. But is organized crime only dealing with illicit activities? Unfortunately, not. In the last decades, the line between illegal organizations and legal business has blurred due to organized criminals’ increasing involvement with business owners, within and beyond Italian borders. In 2007, for example, mafia affiliates took over FirstPlus Financial Group, a Texas company. Illegal and extortive means were used to loot legitimate business profits.

Organized criminals are profit-maximizing actors. However, mafiosi are not ordinary entrepreneurs. Rather, they are providers of the trust and protection “commodities.” These criminals have the ability to transform their connections with economically and politically legitimate actors – social capital – into economic resources in exchange for service provision. Namely, the mafia can provide the essential trust and protection to enable commercial transactions in contexts with weak formal institutions and high entrance barriers to the credit market. Therefore, the mafia becomes a form of social insurance and economic stabilizer, especially in the most vulnerable territories. For instance, after the 2008 financial crisis, the Italian provinces with a comparatively higher presence of organized crime experienced the lowest decline in the number of new enterprises. Mafia control ensured that local economic exchanges could continue. It also ensured that the mafia were paid post-crisis, as they delivered both the demand for protection — and its supply.

Small business owners need protection from the mafia’s threats and the ensuing economic uncertainty. They passively suffer from extortion and pressure to pay pizzo — either in money or obligation (such as protecting or employing a mafia ally). The mafia has diversified personalized relations that vary with the type of entrepreneur. Some businesspeople preemptively seek protection, which they perceive as an unavoidable cost of doing business. Entrepreneurs in a stronger positions get access to illicit finance and protection in exchange for their pizzo.

Figure 1: Plot of the percentage of profits paid as pizzo in function of the firm’s size, measured by its revenues. Source

Evidence shows that the pizzo-profits ratio shrinks as business size increases, falling from 40% of profits for small firms to 2% for the largest enterprises. This parallel taxation system finances other mafia activities. Threats of violence enforce compliance. Among its dire negative externalities, this system hinders the economic development, since smaller firms pay for protection instead of growth. Larger firms, on the other hand, actively cooperate with the mafia to negotiate reciprocal advantages, further supporting the criminals and weakening development.

Bottom line: The mafia is a profit-maximizing actor who pursues its self-interest by extorting rather than adding value as a business. This entrepreneur-criminal nexus operates in the “grey area” between legal and illegal activities and hampers local economic development.

* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Free riding global security

Arı writes*

Global security requires collective action. The security dilemmas that realist international relation theorists emphasize are essentially cases of more complex prisoner’s dilemmas, i.e., a “common security” where one state’s security depends on both friends and foes. In simpler words, “I cannot feel secure if my neighbor or my enemy feels insecure.” This definition contradicts the realist idea of security as a zero sum game, which also means that collective action can produce a win-win outcome. Sadly, this common security approach ignores the profits of war.

Revenues from the top 100 arms firms totaled $632 billion in 2023. These revenues belong to private military companies situated around the world who have no interest in maintaining global security but every incentive to promote conflict.

The companies that profit from war also lobby for state policies that increase arms sales. For example, in the US, private military companies have spent $2.5 billion on lobbying and $285 million on election campaigns in the past two decades. Most of these lobbyists have occupied powerful positions in the government from Pentagon to the White House. The arms companies’ back door to policy makers is against the best interest of  citizens and global security. Most US arms sales go to allies, such NATO members, which may not destabilize security, but sales to Philippines, Saudi Arabia, the UAE, Egypt, and Nigeria fuel instability in conflict-prone regions.

Profiting from war also takes place in countries that are actively involved in conflicts, such as Russia and Israel. In 2023, the top two defense companies in Russia saw a 40% increase in their combined revenues that totaled $25.5 billion. Three arms companies in Israel sold $13.6 billion in weapons. These profits create incentives to sustain conflicts.

Bottom Line: As revenues grow, arms dealers have even more leverage to promote policies that increase instability, conflict and profits. Their free riding weakens global security and destroys the lives of people experiencing conflict.

* Please help my Real Donut Economics** students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

** Why “Real”? In short, because (a) Raworth’s claims to being a “21st century economist” denies that all of her ideas were presented by others in the 20th century and (b) she presents no viable mechanisms (besides “be nice”) for achieving equality and sustainability. My students are more realistic. In long? Read this.