Is a $1 billion Grand Prix worth it?

Emma writes*

The specular 2021 Formula 1 season has resulted in skyrocketing popularity. The final race of the season in Abu Dhabi had 29 percent more viewers than the year before (Ruiz, 2022). Many cities want to benefit from F1 popularity by hosting a Grand Prix, which, local stakeholders claim, will boost their economies (Storm, 2019).

Hosting a Grand Prix costs a lot of public money (All Things F1, 2022). Is that spending worth it, in terms of boosting the local economy? A Formula 1 Grand Prix takes at least three days involving practice sessions, a qualifying session and many media events. The city also needs a suitable circuit, either a street circuit or permanent circuit. A permanent circuit costs $270 million on average but Abu Dhabi’s Yas Marina Circuit cost $1 billion. Street circuits are cheaper and quicker to construct, but their annual costs for converting back and forth are higher (Prydderch, 2022). A 2017 study by Forbes listed other costs for staffing, grandstands, barriers, buildings, insurance, and the hosting fee. In all, Forbes estimates that hosting a Grand Prix costs $1 billion per year.

The race promotor (often is the local government) pays these costs (All Things F1, 2022). Local governments argue that an F1 event will boost tourism, promote the city and boost the local economy (Storm et al., 2020). Ticket sales of (up to) $33 million only cover a fraction of costs. A Grand Prix also generates revenue for local businesses as local and foreign spectators spend money on hotels, food, drinks, and transportation (Remenyik & Molnar, 2017). The Grand Prix in Austin, Texas, increased local receipts by a three-year total $2.8 billion from 2012 to 2015 (Storm et al., 2020), which didn’t cover estimated annual costs of $1 billion. Perhaps a “multiplier effect” added to benefits by that’s hard to measure.

Bottom line: Formula 1 Races can benefit the local economy in terms of monetary costs and benefits, but maybe not.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Debt for nature: a win-win swap?

Max writes*

The global strain of public debt crossed $100 trillion at the end of 2020. While developing countries account for a fraction of this sum, they face the highest risk of debt distress due to higher financial scrutiny.  This enforces a feedback loop that does little to stimulate their growth or development.  The growing financialization of environmental goods in recent years has offered a promising lifeline for developing countries endowed with nature reserves in the form of “debt for nature” swaps (DFNs). As the name suggests, a debtor is granted a discount on their debts in exchange for a commitment to conservancy.  In the 2021 case of Belize, this meant a 12% nominal reduction in public debt.  The benefits to the debtor are clear-cut but what do the creditors stand to gain?

In recent years, the parties involved in DFNs expanded from rich creditor governments to include commercial bondholders.  In line with the growing popularity of environmental, social, and governance (ESG) in recent years, investors are jumping on these deals with an eagerness to tap new sources of income.  They are interested because of a new potential for financial returns.  To get a better understanding of how investors get their money’s worth, the case of Belize will be analyzed.

The DFNs were facilitated with the help of The Nature Conservancy (TNC), a US-based environmental NGO, the Belize Blue Investment Company (BBIC), which is a subsidiary of TNC, and Credit Suisse (CS), referred to as the “middlemen” from now on. The deal assumed a tripartite model wherein the middlemen paid off the bondholders of the “Superbond 3,” which in 2021 was trading 40% below its face value and carried high default risk.  On the secondary market, the bondholders were willing to accept the 40% discount because it was better than a default.

As a result, the Belize government’s debt fell by $363 million, but they agreed to a new, non-fixed 6% interest rate loan that would have to be paid back in 19 years. This critical step, which represents a profit opportunity for investors, was what allowed CS to raise funds to pay off the “Superbond 3” bondholders and assure investors. Since the DFNs were made in collaboration with the BBIC, through the Development Finance Cooperation, the US government promised to protect investors if the Belize government defaulted.  This is in addition to $28 million that will be paid out to CS and TNC in legal and advisory fees.

Hence, the debt was restructured and not forgiven; however, $24 million was made available for a national marine trust fund in addition to a promise of $4 million in investment to the fund by the Belize government.  This represents a direct investment in the country’s tourism industry which accounts for 40% of economic activity.

Bottom-line: You can’t eat the cake and have it. The DFN with the Belize government has unlocked new funds for environmental conservancy and prevented a looming default. However, the government is now on the hook for more debt, that it might not be able to repay.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

A gender gap in financial literacy

Benthe writes*

Even though women have outnumbered men in Dutch universities since 2006, and girls on average score higher than boys on the national high school entrance exam, the female financial literacy (FL) rate is lower than the male FL rate across all age groups in The Netherlands.

The OECD considers a person ‘financially literate’ if they possess knowledge about the most important financial concepts and risks, and have the skills to apply this knowledge to make effective decisions in various financial contexts. FL is generally measured through three questions on interest rates, inflation, and risk diversification. Bucher-Koenen et al., (2017) found that while 55.1% of Dutch men answered all three questions correctly and would be considered financially literate, only 35% of women passed the financial literacy test. Women also performed worse on all three individual questions:

This discrepancy in male and female FL scores has some unfavorable consequences. For example, women’s lower level of financial knowledge means women are less likely to invest responsibly in the stock market, own company shares, and accumulate financial wealth. As such, women also benefit less from capital growth, leading to increased gender inequalities in wealth accumulation over time.

Additionally, being financially illiterate decreases someone’s likelihood of planning for retirement and having savings. Consequently, the FL gender gap, combined with other factors like longer life-expectancies and lower earnings, explain why women have a higher risk of (old age) poverty.

Who or what is to blame? Tinghög et al. (2021) argue that social stereotypes of women being worse at handling money contribute to the FL gender gap. This happens because of a psychological phenomenon called stereotype threat: when women are primed with the idea that their gender is worse at handling money, this will cause them to also make worse financial decisions. Among 13- to 15-year-old girls, financial literacy deteriorated as stereotype strength increased. At the same time, financial literacy for boys increased with the strength of the stereotypes they had.

These stereotypes are perpetuated in the media and at the dinner table. In a Sterling Bank summary of 300 magazine articles, 65% of financial articles targeted at women defined girls as “excessive spenders” who should splurge less or depend on financial support. Among articles aimed at men, 70% stressed the importance of monetary success and financial literacy and 60% gave investing advice. At home, parents are more likely to discuss investing with their sons than with their daughters because they often view their sons as “future financial providers.”

Bottom Line: Dutch women are less financially literate than men, which contributes to the gender difference in wealth accumulation and puts women at a higher risk of poverty. Research suggests that the image of women as big spenders who are bad at handling money contributes to this gender gap in financial literacy.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Beyond Petroleum, Beyond Bullsh*t?

Josephine writes*

In 2001, British Petroleum rebranded to “Beyond Petroleum” promising to be a key player in the global low carbon energy transition. What does corporate environmental responsibility (CER) look like for an oil and gas company? Should these companies be held to different CER standards given the intrinsic paradox of being a “green extractor of crude oil”?

Taking a closer look at one company – now “Beyond Petroleum” – can help us understand how an oil company reports on its environmental, social, and governance (ESG) impacts and whether there are deeds behind their words, or if it is just “old wine in new bottles”?

Sir John Browne was President at the time of the $200 million rebranding and is also a vocal advocate for clean energy (Matejek & Gössling, 2014). Browne followed up on his words with deeds, such as investing in solar power and “pull[ing] BP out of its involvement with developing Canadian tar sands” which is “an energy-intensive process with a carbon footprint several times that of conventional oil” (Pearce, 2008). Only a few years later under new leadership (after Browne was ousted for being gay), BP bought its way back into the Canadian tar sands (Pearce, 2008).

But, isn’t BP one of the “better” oil companies?

While it’s true that BP was the “first oil company to publicly accept the scientific reality of man-made climate change”, it is still one of the largest individual carbon emitters, with a long emitting history (Matejek & Gössling, 2014). BP’s sustainability strategy has also helped them appear different and “better” than other traditional oil companies which increased their profits (even when their investments didn’t change). For example, corporate greening provides differentiation and “competitive advantage especially in sectors that are not directly associated with environmental responsibility” such as an oil company (Matejek & Gössling, 2014). To date, BP’s core business in petroleum still surpasses its tentative investments in renewable energy (Matejek & Gössling, 2014). So, at the end of the day, BP is not beyond oil.

Evolving under different leadership and since its rebranding in 2000, BP has gone through different waves of expanding and retracting its renewable energy transition commitments. For example, following the Deepwater Horizon oil spill in 2010, BP came under extreme scrutiny, especially being “legally responsible for operational safety on the oil rig” (Matejek & Gössling, 2014). Their sustainability strategy following this event was “widely accepted at first, only to find themselves dismissed as corporate greenwashing now” (Matejek & Gössling, 2014). Where will BP transition towards now?

BP’s new wave of sustainability strategies includes five aims that are boldly published on their website (with titles in blue curly letters so that everyone can understand them).

Let’s break down a few of these aims to see if they really are understandable.

  1. “Aim 1: Net Zero Operations”
  2. “Aim 2: Net Zero Production”

These two aims communicate BP’s goals in making their operations and production net zero which only relate to two out of three aspects of total GHG emissions (also known as Scope emissions). To a general audience, this incomplete picture would not be communicated (Scope 1, Scope 2, Scope who?). Thus, their definition of net zero has a massive flaw and excludes from the picture how its fuels are consumed and used (Scope 3).

In general, BP’s narrative remains conveniently vague. While they have profited from an enhanced green image, there is confusion on whether “Beyond Petroleum” is just a slogan or a statement of corporate goals that  can be criticized accordingly.

Bottom line: Oil and gas companies know corporate sustainability reporting is confusing and use it to their advantage to sustain ignorance.

Interested to learn more? Listen to these podcast episodes:

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

The illusion of the right to health

Alexia writes*

In 1988, the Brazilian Constitution recognized health as a universal right that must be guaranteed by the State as their duty to every citizen. This recognition initiated the formulation of the Unified Health System (SUS) which aims to offer free medical care to anyone in Brazilian territory. The implementation of this system was hampered by the presence of a neoliberal influence at the time, which meant that besides implementing the SUS, the State also supported the development of the private health sector. In the current national system, however, there are problems of underfunding and inequality in access to health in richer regions compared to poor regions. Within this narrative, one problematic trend stands out: the Brazilian middle class gravitate towards solely the private sector. There are two main issues related to this trend.

First, the middle class seeks private facilities for even mild health concerns, as these are more efficient and often provide better basic healthcare services. Thus, they have no incentive to fight for better public health care. The middle class stigmatizes the SUS as primarily aimed at serving the poor. In addition, the stigma is also directed towards the healthcare itself, as middle-class people claim that the private sector better meets their demands. Most individuals of this social strata do not recognize the SUS as part of their rights, and thus capable of improvement in response to criticism. Public services are, therefore, used only by poorer people who are the most silenced voices in the media and in public opinion. Their silence has lead to a system that suffers from underfunding and inefficiency, with long treatment lines and overwhelmed hospitals and staff.

Second, the middle class turn to the public health system  for help with expensive medicine and treatments that are not covered by their insurance, burdening the SUS with greater costs while the private sector deals with “lighter” health issues. Vaccinations and other programs of collective interest are also offered by SUS, which is obliged to meet any and all health needs. Private health care does not have such an obligation so it has been strengthening while SUS has been weakening.

SUS does not have enough support, personnel or money to offer a better quality service to the population. Those most impacted by this scenario are the poor, who are the majority of the population and who cannot afford private insurance and are dependent on the SUS. In face of crises such as the Coronavirus pandemic in which fair access to effective health care is essential, these issues are critical.

Bottom Line: The public health system in Brazil is under threat as the middle class defects to private services rather than defending their national system, which leads to failing healthcare for the nation’s poor.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

The newest Pacific Alliance member

Juliette writes*

Ecuador is likely to become a full member of the Pacific Alliance in the coming months. Pacific Alliance currently holds four member states: Chile, Colombia, Peru, and Mexico. The Pacific Alliance was set up in 2013 to further the economic integration with the Latin American and Asia-Pacific regions through policies regarding trade openness, academic mobility, tourist mobility, and to increase in the global competitiveness of these states. Ecuador’s decision to become a full member of the Pacific Alliance is according to the President of Ecuador justified because it as an Andean Nation they are a “natural partner of the bloc.”

This path to join the market-led Pacific Alliance is a new direction for Ecuador, signaling political and economic change on the horizon. Previously, the leftist president of Ecuador, Correa, was adamantly opposed to joining the Alliance. Hence, President Correa justified in 2013 that Ecuador would be a member of ALBA, which is a trade alliance by the socialist Latin American regions. These two opposing trading blocs reflect the different political ideologies in Latin America as there are “two opposing visions of the world: neoliberalism and free trade versus those that believe in socialism and the guarantee of rights; those that believe not in free trade zones but zones free of hunger and free of poverty”.

However, after Correa’s presidency ended in 2017, President Moreno swiftly reformed the trade orientation to no longer be a member of ALBA and take steps to initially becoming an associate member of the Pacific Alliance, the more neoclassical market-driven regional bloc of the Latin America Region. The future step to Ecuador’s full membership in the Pacific Alliance is to have a bilateral free-trade agreement with each member state, of which the final negotiations with Mexico will be closing in the next months. Due to the current pressure for post-pandemic economic recovery and movement towards sustainable development, the time and conditions are currently ripe for Ecuador to become a member of the Pacific Alliance.

Joining this young but strong regional integration bloc offers great promise for a small Pacific country like Ecuador to further its economic growth and development. First, becoming a full member and having access to open markets is advantageous to Ecuador’s value chains as 1,700 Ecuadorian companies export goods like oil, bananas, canned fish, etc. to the Pacific Alliance, lowering the cost of production. Second, becoming a member of the Pacific Alliance would add to Ecuador’s international competitiveness because it would allow them to achieve economies of scale and productive efficiency for export products as they enter a larger market as a small country. Third, the Pacific Alliance promises growth prospects for Ecuador as the bloc is expected to be the fourth-largest contributor fourth-largest contributor to world growth in the coming five years.

Bottom-line: Ecuador’s membership in the Pacific Alliance would signal a change in its development path. Previously Ecuador’s economic development was dominated by Leftist and protectionist policies, but today, policy demonstrates a desire for deep regional integration, productive efficiency, and trade openness.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

How taxes undermine progress

Start with the obvious: Follow the money.

Then consider how money motivates action: Academics will study anything that has research money attached; thieves go to banks “because that’s where they keep the money;” prostitutes “spend time” with clients who “spend money;” California has endless retail stores because cities — starved of property taxes due to Prop 13 — can collect local sales taxes.

So that’s why we should pay attention to how governments “earn” their money, e.g., oil royalties (leading to a democracy deficit because the government doesn’t need to tax citizens), income taxes (so encourage work to get more taxes), cigarette taxes* (please smoke so we can fund schools), or consumption (sales or VAT) taxes that leads governments to encourage consumption.

But what if you want democracy, less work, less lung cancer and/or less consumption? Then you want to tax in a way that does not change behavior (see this post) but still raises revenues. A property tax (read this post) or wealth tax (property is a good proxy) does that because both are “fundamental” (everywhere) and “good” (in terms of social progress), and neither change your decisions “on the margin”

Nobody ever says “Gee, I want to be poorer today,” but plenty of people say “Gee, I don’t want to work today” or “maybe I should’t smoke that next one.”

My one-handed conclusion is that government policy should encourage what we want, not what we don’t.

* Arjen Lubach explains [in Dutch] how the Dutch government won’t ban cigarettes because it wants to save money from smokers dying