Category Archives: Allmänt

Democracy in Africa

Africa still has a long distance to walk on the road to democracy. But overall it seems as the world’s poorest and least free continent seems to be making some progress, as the following graph suggests.  The Center for Systemic Peace has created a popular data set called Polity that measures democracy and autocracy in the world. The data set focuses on political institutions, and each country gets a score on several factors which results in a democracy score (from 0 to 10) and an autocracy score (from 0 to 10). A high democracy score suggests that the country is democratic whereas a high autocracy score implies an autocratic regime. By subtracting the autocracy score from the democracy score one will get a “combined Polity IV score” between -10 (least democratic) and 10 (most democratic). In Europe, a score of 10 is not uncommon. The graph therefore suggests that Africa, with an average score around 1, still has much work to do. At the same time, it seems as African countries on average have made some progress for the past two decades.

Democracy in Africa

Two notes regarding the graph. First, the average score does not take into account the growing number of states, and possible missing observations. The observation for year 2010 reflects the average score for 51 states, whereas the observation for year 1960 consists of data from only 27 states. Second, no population weights are included. Consequently, Equatorial Guinea and Nigeria have the same impact on the average score.

Simon Hedlin

On discount rates

What is a really feasible discount rate? The issue of choosing a discount rate, for example in models predicting costs of climate change, is not easy. There is also a risk that one may choose a discount rate that is too low, which would cause us to instead overestimate the costs. Pondering these questions easily makes one think of an accessible paper by William Nordhaus written in 2007 in which he argues that the Stern Review on the Economics of Climate Change uses a discount rate that is too low. Nordhaus claims that the Stern Review’s estimate of overall costs of climate change being equal to the world losing 5% of global GDP each year from now on is dependent on a near-zero discount rate and a very specific utility function.

In this debate there are several relevant perspectives. One of them is economic. In some cases we might actually underestimate the costs, for example when it comes to permanent losses of biodiversity. On the other hand, in other cases we risk overestimating costs, often due to undervalue the rate of technological and economic progress.

The issue of discounting does also have a clear philosophical dimensions. How much are future generations worth? As long as there is an existing risk of extinction of our species there should probably be some form of discount rate due to this uncertainty. But how large should this discount rate be? What is appropriate? How much is the generation of our children worth? And what about their children?

One could also raise the inconvenient question of whether it would be easier for future generations to pay for the harm we cause the environment simply because they likely will be much wealthier than people living today. This argument is one that was discussed by The Economist in a summary of the “Stern-Nordhaus debate.”

A little more recently, Larry Karp has done some interesting research on discounting, and he finds that discounting over time is not constant. This is usually called “hyperbolic discounting,” which implies that our discounting preferences are dependent on the time frame, and generally we are willing to spend almost as much on our great great grandchildren’s generation as on our great grandchildren’s generation because it is so far into the future. This would imply a non-linear relationship over time, as opposed to the linear and time-consistent relationship that is usually assumed. This is an example of how experimental evidence and psychological insights, pioneered by Daniel Kahneman and others, can contribute to economic theory. Hyperbolic discounting is likely to be a topic paid much attention over the coming years.

And finally, two other recommended readings on the choice of discount rate are a blog post by Gary Becker, and a more recent working paper by Lawrence H. Goulder and Roberton C. Williams III.

Simon Hedlin

The economics of coral reefs

A recent paper in the Proceedings of the National Academy of Sciences of the United States of America (PNAS) discusses the decline of the coral cover on the Great Barrier Reef. It is estimated that in less time than the past 30 years, the coral cover has declined by more than 50 percent. Three of the major causal factors are believed to be tropical storms, bleaching and crown-of-thorns starfish (COTS).

Bleaching is probably directly related to global warming as higher temperatures triggers it. The frequency of tropical storms does likely also have some relationship to climate change. The increased presence of COTS is largely a consequence of water pollution and of agricultural fertilizers that are washed out in the sea. To save the corals on the Great Barrier Reef, the authors argue that improved water quality and control mechanisms are needed. This strategy will only be successful, however, “if climatic conditions are stabilized, as losses due to bleaching and cyclones will otherwise increase.”

Reading this paper reminds one of the project called The Economics of Ecosystems and Biodiversity (TEEB). Coral reefs have earlier been estimated to be worth $30 billion per year in tourism, protection of commercial fish species, and protection of coasts from storms. However, a meta-analysis of some 80 studies indicates that the real number probably is closer to $172 billion per year.

Estimating the economic value of our ecosystems and biodiversity is a step in the right direction. But the cost of environmental degradation should also to some extent be internalized in common economic models and data. If we cannot subtract, for instance, the cost of the destruction of the Great Barrier Reef from annual calculations of GDP, we will not have a clear image of the actual economic development.

Simon Hedlin

Uncompetitiveness in a graph

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An inverted environmental Kuznets curve?

The so-called environmental Kuznets curve (named after economist Simon Kuznets) is based on a hypothesis that environmental quality and economic development are related in such a way that their relationship produces an inverted-U curve.  Supposedly, countries with lower levels of income emit low levels of pollutants. When they industrialize and become richer their emissions will increase up to a certain point when countries either start to invest in the environment or switch to less resource intensive means of production, which leads to falling emissions. In a graph where emissions are plotted on the vertical axis and economic development (usually income per capita) is plotted on the horizontal axis, this would lead to a curve resembling an inverted U. The empirical evidence for the existence of such a curve is mixed. Richard Carson  finds that it is in fact effective regulation and diffusion of technological change that cause environmental quality to go up, and that these two factors are associated with higher income levels. If Carson is correct, it would imply that the underlying reasons behind an environmental Kuznets curve are all but clear.

A very simple empirical test also casts doubts on the existence of such a curve. For this test all data available in the World Bank’s database – in total for 68 countries – was used to estimate the relationship between so-called biochemical oxygen demand (BOD), and income per capita (in purchasing power parities (PPP) and constant international dollars). BOD refers to the amount of oxygen that bacteria in water will consume in breaking down waste. This is a standard water-treatment test for the presence of organic pollutants. BOD satisfies both the condition of being a local pollutant and of having short-term costs – two conditions normally claimed to be required for an environmental Kuznets curve to exist.

In a linear regression test with time-lag, PPP per capita is associated with a reduction in BOD a decade later. However, when a quadratic term for PPP is introduced into the model, it seemed as if the relationship was quadratic rather than linear. But in sharp contrast to environmental Kuznets curves, this relationship is plotted as a normal U, not an inverted one. This test thus suggests an “inverted environmental Kuznets curve.”

inverted environmental kuznets curve

It should be noted as a significant caveat that data on both BOD and PPP are sketchy, but this test at least suggests that BOD falls sharply with higher levels of income per capita until a certain point when BOD starts rising again. It could be something worth looking into further.

Simon Hedlin

Personal page at Columbia University

Thought this might be useful in the future: http://www.columbia.edu/~sh3174/

Simon Hedlin

Do coffee drinkers live longer?

An interesting study published in The New England Journal of Medicine finds that coffee drinking among the study’s participants was associated with lower risks of mortality. The study does, however, not reveal whether the suggested relationship is a casual one or simply a correlation. If coffee drinking would have an inverse impact on mortality, it is possible that it affects the brain in a positive way. But it is also plausible that healthy persons for some reason have higher coffee-intakes. Or that coffee drinking correlates with exercising, thus having an indirect effect on mortality.

Simon Hedlin

O Brothers, Where Art Ye? Young men are leaving the US labour force

Following April’s jobs report, there has been much discussion about America’s declining labour force participation rate. Brad DeLong, for instance, writes:

Given the current state of the employment-to-population ratio, we would predict that the current labor-force participation rate would be 1.5% points below its natural rate. That gives us a predicted labor-force participation rate today of 64.3%-64.7%. Instead, our labor-force participation rate is 63.6%.

That is a gap of 0.7%-1.1% points of the adult population: people who really ought to be in the labor force right now, but who are not.

Evan Soltas breaks down the numbers of the decline according to various factors, including gender. And as many people, for instance Mark J. Perry, have noted, the decline in the labour force participation rate is partly due to the fact that men are leaving the labour market.

Mike Konczal quotes Ben Bernanke saying that we are “no longer getting increased participation from women /…/ society ages and also, for other reasons, male participation has been declining over time.”

Catherine Rampell reaches the same conclusion:

The main reason the labor force has been declining in the last couple of decades, then, is that men have been dropping out in droves.

Rampell has posted two interesting graphs, where the first shows the labour force participation rate among adults aged 25-54, and the second shows the long-term trend of men aged 25-54 leaving the labour market.

The following figures take off where her second graph ends, focusing on the differences for men in various age groups:

This chart shows foremost two things: 1) the labour force participation rate varies widely between the age groups, and 2) the only age group for which we find a large decline is men aged 15-24.

If we draw another graph using 1990 as an index year, the second point becomes clearer:

So for two age groups, the labour force participation rates among men have actually increased over time, for two other groups they have – in relative terms – decreased a little, and for the youngest men it has declined severely compared with 1990. Here it is also interesting to note the clear positive relationship between age and change in labour force participation rate.

But what about the youth? Pete Seeger’s old lyrics do indeed come in handy here: “Where have all the young men gone?”

(Feel free to use all figures in this post as you wish.)

Simon Hedlin

From Here to Austerity

There is now not only a debate on whether austerity for Europe is good or not, but also on whether austerity in Europe exists or not. In a blog post by Veronique de Rugy at the Mercatus Center titled ‘Fiscal Austerity in Europe Doesn’t Mean Large Spending Cuts‘, she claims that many European countries “haven’t significantly reduced spending since “austerity” supposedly started in 2008″. Ryan Avent at The Economist did then writte a reply titled ‘Yes, there is austerity‘ in which he argues that “[t]he supposed absence of austerity in Ms de Rugy’s figures is mostly a product of poor graph scaling and a reliance on nominal, absolute figures”.

The following graph takes a slightly other approach to the issue, and shows not just what is today, but also what is expected tomorrow:

(Feel free to use this figure for your own purposes, but please do not forget to mention this blog as the source.)

Simon Hedlin

Gone with the Wind: America’s vanishing labour force

At first, the falling unemployment rate in the United States may have seemed to be only positive news when the April numbers were released a few days ago. However, as Mark Gongloff at Huffington Post noted, the decline was partly because the labour force participation rate “dropped to 63.6 percent, the lowest since December 1981″. In fact, even in absolute numbers, the American labour force is currently shrinking. The Economist makes the same correct analysis, and points out that compared with the Congression Budget Office’s (CBO) estimate back in 2008, the actual size of the labour force in 2012 is smaller by five million people :

True, the slide in the unemployment rate – a full percentage point since September – owes mostly to rising employment (as measured by the household survey). But the decline in unemployment has been helped by the failure of the labour force to grow more quickly. /…/ Yet in January, 2008, the Congressional Budget Office reckoned it would be some 5m larger by now, or 159.5m /…/”

In addition to a slow-growing labour force with a falling labour force participation rate, there is another growing problem: a relatively smaller potential workforce.

In last week’s issue of The Economist, there was an interesting article about the United States and China. It metaphorically hypothesized that had China been dipped in the river Styx to be given invulnerability, the country would perhaps had been “held” in its demography:

Alongside the other many problems it faces, China too has its deadly point of unseen weakness: demography. /…/ Between 2010 and 2050 China’s workforce will shrink as a share of the population by 11 percentage points, from 72% to 61%—a huge contraction, even allowing for the fact that the workforce share is exceptionally large now. That means China’s old-age dependency ratio (which compares the number of people over 65 with those aged 15 to 64) will soar. At the moment the ratio is 11—roughly half America’s level of 20. But by 2050, China’s old-age ratio will have risen fourfold to 42, surpassing America’s.

True, China’s demographic prospects from an economic viewpoint do indeed look glum. Considering several important factors such as population growth, median age and old-age dependency rate, America’s position does in comparison look better. But it is important to note the “in comparison”, because as stated, America has its own demographic issues. And aside from the fact that the labour force participation rate is falling, the number of persons in working-age (aged 15-64) in relation to the number of children and seniors is rapidly contracting, as this graph shows.

(Feel free to use this figure for your own purposes, but please do not forget to mention this blog as the source.)

So to sum up this post in three points:

1) America’s labour force is growing at a slower rate
2) America’s labour force participation rate is falling
3) America’s potential labour force (persons in working-age) is shrinking relative the size of the rest of the population

1) implies slower economic growth, 2) means fewer workers are active on the labour market relative to the number of people who are likely to need support, and 3) will likely make the effects of 2) worse.

Hypothetically, with a faster growing labour force and a constant labour force participation rate, 3) alone would still constitute a worrying development. Thus, if these three issues are not taken seriously, America might really be heading for trouble.

Simon Hedlin

Track and yield: all students benefit from teaching at one’s own level

The leader of the Swedish Social Democrats, Stefan Löfven, says that he wants to make it Swedish law that student groups are mixed so that the most ambitious students should be prevalent in all school classes. The reason, he argues, is that it would reduce inequality. It seems as the main issue according to Löfven is performance inequality amongst students – not the fact that many students underperform.

Either way, he ought to read Esther Duflo et al. (2011) ‘Peer Effects, Teacher Incentives, and the Impact of Tracking: Evidence from a Randomized Evaluation in Kenya’, American Economic Review, 101 (5): 1739-1774. This paper demonstrates well through which mechanisms and under what circumstances tracking students may just benefit everybody:

“This paper provides experimental evidence that students at all levels of the initial achievement spectrum benefited from being tracked into classes by initial achievement. /…/ Together, these results suggest that peers affect students both directly and indirectly by influencing teacher behavior, in particular teacher effort and choice of target teaching level.”

It seems logical that the well-being of the students increases if peers are sorted into groups and classes with like-minded people who have similar ambitions and perform at a similar level. It is also likely that students will be more motivated to study if they are not way behind or way ahead the rest of the class in terms of performance. But most importantly, tracking enables teachers to adjust their level according to the needs of the group.

If all students in a school class perform more equally, the teacher will be able to teach at a level and a pace that fits most, if not all, of the students. It is therefore not surprising that Duflo et al. find in their experimental study that tracking benefits students all across the spectrum, both higher- and lower-achieving peers.

A paper by Lars Lefgren ((2004) ‘Educational Peer Effects and the Chicago Public Schools’, Journal of Urban Economics, 56 (2): 161-191) shows that schools using tracking do not have larger differences in performance between higher- and lower-achieving students, which suggests that Löfven’s proposal alone would have little or no effect on the inequality he says that he wants to fight.

There is also another argument to be made for tracking, which has been raised by Thomas Piketty: tracking could result in more resources being devoted to underachieving students, promoting a catch-up. This argument, however, is sometimes rejected by claiming that there is a trade-off. But as Duflo et al. write in another article:

It is often suggested that there is a trade-off between the value of targeting resources to weaker students, and the costs imposed on them by separating them from stronger students. We find no evidence for such a trade-off in this context.

Simon Hedlin

Not quite there yet

Most people who have taken a Principles of Economics 101 course are familiar with the convergence hypothesis, i.e. that poorer economies in terms of per capita should grow at faster rates than wealthier economies eventually resulting in a convergence. Few would probably defend the absolute version of the convergence hypothesis today, but if there is somebody who does, the following graph will at least show that we are not quite there yet.

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(Feel free to use this figure for your own purposes, but please do not forget to mention this blog as the source.)

Simon Hedlin

Excess or shortage of politicians?

Should a more democratic state have more parliamentarians per capita, or does increased competition between politicians lead to better outcomes of political decision-making?

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin

Red meat and mortality

A new study published in Archives of Internal Medicine ((2012) ‘Red Meat Consumption and Mortality: Results From 2 Prospective Cohort Studies’, 172 (7): pp. 555-563) links red meat to higher mortality. Red meat consumption was found to be associated with increased risk of cardiovascular disease (CVD) and cancer mortality. Compared with some other studies, however, the results of this one may not comfort vegetarians and vegans as it did not find an increase in mortality for consumption of either fish or poultry. Read more about the study here.

Simon Hedlin

Linear projection of Europe’s spending on the Common Agricultural Policy (CAP)

The data used could be found here and here.

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin

“Du måste kunna berätta en historia”

Idag publiceras en artikel i Dagens Nyheter (Jobbdelen, s. 6-7) om ett lunchmöte där jag i egenskap av nationalekonomistudent ställde frågor till Annika Winsth på Nordea om vad en chefekonom gör.Image

Simon Hedlin

On measuring poverty: 400 million new poor?

Reading a study by Sanjay G. Reddy and Camelia Minoiu ((2007) ‘Has World Poverty Really Fallen?’, Review of Income and Wealth, 53 (3): pp. 484-502) reminds one of how hard it is measure poverty. When it comes to measuring global poverty, there is an obvious risk of sampling bias, not least because the poor are so difficult to count. Reddy and Minoiu claim that because of the vast uncertainty involved in making certain assumptions and using different indicators, since 1990 “global poverty may or may not have increased”.

The lacking quality of global poverty statistics is also highlighted in an article by Shaohua Chen and Martin Ravallion ((2010) ‘The Developing World is Poorer than We Thought, But No Less Successful in the Fight Against Poverty ‘, The Quarterly Journal of Economics, 125 (4): pp. 1577-1625). Using a new data set based on new price surveys, they find that the absolute poverty in 2005 was much higher than originally estimated. Although Chen and Ravallion maintain the position that the developing world has been very successful in pushing poverty rates downwards, the absolute levels of poverty seem to be much higher. The old international poverty line constructed by using the 1993 International Comparison Program (ICP), indicated that there were approximately 1 billion poor people in 2005. Using a new poverty line based on the 2005 ICP instead, estimates global poverty in 2005 to 1.4 billion people. Hence, If Chen and Ravallion are correct, the world in 2005 just got another 400 million poor people.

Simon Hedlin

Rerum cognoscere causas

Skriver i senaste numret av Liberal Debatt om korrelation och kausalitet i statistiken:

President Jed Bartlet i TV-serien ”The West Wing” använder i den första säsongens andra episod uttrycket ”post hoc, ergo propter hoc” för att förklara det felslut som består i att man låter tidsföljd gälla som orsaksföljd. Översatt till svenska betyder det latinska uttrycket ungefär ”efter detta, alltså till följd av detta”. Bara för att det börjar regna efter att någon har dansat regndans betyder det inte att det är regndansen som har orsakat regnet. Passande nog har karaktären president Bartlet en examen från universitet London School of Economics som råkar ha som motto: ”rerum cognoscere causas”, alltså ungefär ”att förstå orsakerna till händelser”. Det är ju som bekant skillnad på samband och orsakssamband.

Det har idag blivit populärt att rita diagram av nedanstående typ. På ena axeln har man en variabel. På den andra axeln har man en annan variabel. Sedan försöker man hitta ett samband eller frånvaro av densamma för att kunna bevisa en tes.

Just denna graf visar sambandet mellan antalet pandor och den totala BNP:n i Kina från 1988 till 2004. Korrelationen är tydlig. Men kausaliteten? Visst skulle man kunna hävda att en större ekonomi möjliggör större satsningar på djurvård, vilket leder till fler pandor. Men utan en djupare analys skulle det lika gärna kunna handla om att fler pandor ökar människors spirituella välbefinnande, vilket i sin tur ökar produktiviteten. En annan möjlighet är att det finns en tredje variabel Z som påverkar såväl antalet pandor som den totala produktionen. Eller så kanske det inte finns något samband alls.

Och även i de de fall då det finns ett orsakssamband bör man vara försiktig. Anta att vi vet att det finns ett positivt samband mellan giftermål och lycka och anta att det rör sig om ett orsakssamband. Blir människor lyckligare av att gifta sig eller är det helt enkelt så att det är få som vill gifta sig med olyckliga personer? Är gifta människor oftare lyckliga eller är lyckliga människor oftare gifta?

Simon Hedlin

Smoking Europe

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(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson

A holistic European Union

A duo comprising of former Latvian president Vaira Vike-Freiberga and former Portugese EU Commissioner Antonio Vitorino writes on Project Syndicate about the need for Polish and Swedish leadership in the European Union:

As the “big three” increasingly pursue their own narrowly defined national interests, however, other EU member states are emerging as leaders in key foreign-policy fields. For example, Sweden – the 14th largest member state in terms of population, and eighth in terms of GDP – under the leadership of Prime Minister Fredrik Reinfeldt and Foreign Minister Carl Bildt punches considerably above its weight. Last year, it increased annual aid to North Africa by SEK100 million (€11.1 million), proposed an EU mission to Tunisia just a week after the revolution to support democratic aspirations there, and was an early and strong backer of UN resolutions in support of the uprising in Libya.

Poland, too, is emerging as a foreign-policy leader. Prime Minister Donald Tusk and Foreign Minister Radek Sikorski have particularly taken the initiative on the EU’s strategy towards Russia, where Poland has largely overcome its differences with Germany and is now at the forefront of efforts to develop a genuinely comprehensive approach. Poland has also led on European defense (though it declined to take part in the military intervention in Libya). This reflects the strength of the Polish economy, which is expected to grow by more than 3% in 2012 – faster than almost anywhere else in the EU.

Peak workforce: How should Europe afford the future? Part 2

It strikes this blogger that the projections in the figure posted earlier today might not seem like a big deal. From sixty-something to fifty-something in share of total population in working-age. Why would it matter? Well, it does matter. A lot. The fifty-something needs to be put in relation to the sixty-something.

If there are six persons working in a company and one quits without being replaced the company loses one-sixth of its total workforce. That is a lot. And if the company in question needs to provide pension and other benefits to the sixth person, this will lead to great pressure on the remaining five workers. This is what happens when the workforce vanishes simultaneously as the ratio of people who do work divided by the people who do not work diminishes. Now multiply this problem by one hundred million and you have a rough idea of where Europe is expected to be heading in the coming decades.

So here is another version of the figure that shows the projections in percent relative to year 2010. It shows the pressures demography will put on the working-age population as they will in the future be 15% fewer in relation to the total population. Much fewer workers per non-working person, harshly speaking. And the size of the total workforce will decline by more than 20%. Is there anybody who thinks that the debts caused by 500 million people in working-age will be easier to repay when that number falls to 400 million?

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson

Peak workforce: How should Europe afford the future? Part 1

It is popular to talk about peaks, such as peak oil – the point in time when the maximum rate of global petroleum extraction is reached. But there is one important peak that there has been surprisingly little discussion about. That is peak workforce.

Demography has profound effects on the economy. As The Economist’s Buttonwood columnist importantly points out, a smaller workforce in absolute numbers will make the huge nominal government debts of today much harder to repay. Sluggish nominal GDP growth due to a diminishing labour force will not reduce nominal debt.

And as this blog argued the other day, the ratio of the total population who are in working-age, and thus capable to work, affects the possibility to provide for those who cannot or do not work.

Based on historical data for the past six decades years and based on projected data for the next six decades in Europe, it turns out that we, at the moment, seem to live in the best time of our lives, with respect to these demographic parameters.

Europe will not in the future see a workforce as large as the one today, and we are set to see a diminishing share of the population who are in working-age. If the projections are correct, the smaller labour force could have severe negative effects for all the European countries that are now heavily indebted. As stated, fewer people in working-age do not bode well for nominal GDP growth. Furthermore, the projected decrease in the share of the total population who are in working-age implies that, in the coming decades, the people who do work will have to work longer or more productively to provide for the growing share of people who do not work.

These demographic dilemmas pose a very relevant question: How should Europe afford the future?

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson

Best of the (European) class

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson

Demographic challenge ahead

After being inspired by a blog post by The Economist’s Buttonwood correspondent, I drew the following graph.

One picture raises more questions than a thousand words:

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson

Too big to fail – Is big a beauty or a beast?

When former IMF Chief Economist Simon Johnson travels around the United States making excellent presentations about the too-big-to-fail problem, he talks about the problem posed by the fact that the six largest American banks have total assets worth about 60 percent of national GDP.

The following graph shows the current situation in Sweden. All data has been gathered from respective annual reports.

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson