The Strait of Hormuz blockade, trade passes in the Panama Canal, and the cost of imported goods

The New Zealand Herald reported last month:

The war in the Middle East has boosted demand to move vital cargo through the Panama Canal to such an extent that one vessel carrying liquefied natural gas (LNG) paid US$4 million ($6.7m) to skip the line and avoid a wait that can take up to five days, according to an official report.

A surge in such payments has been recorded since the US-Israeli attacks on Iran began February 28, which led to the blockade of the Strait of Hormuz, a critical waterway for one-fifth of the world’s oil and natural gas exports from Gulf countries.

The impact on the price of transits through the Panama Canal is shown in the diagram below. Before the Strait of Hormuz was blockaded, the market for Panama Canal transits was in equilibrium, where demand DA meets supply SA. The equilibrium price was PA, and the quantity of transits was QA. The blockade increased the demand for Panama Canal transits from DA to DB, increasing the equilibrium price of transits from PA to PB, and increasing the quantity of transits from QA to QB.

This increase in the price of Panama Canal transits doesn't just affect the cost of transporting oil or natural gas. Other ships must also pay the higher price. That increases the cost of shipping, which will flow through to the prices of imported goods, as shown in the diagram below. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of imported goods traded of Q0. The higher cost of Panama Canal transits increases the 'costs of production' of imported goods, which decreases supply to S1. This increases the equilibrium price of imported goods to P1, and reduces the quantity of imported goods traded to Q1.

So, it's not just oil and natural gas prices that will be pushed up by the blockade of the Strait of Hormuz. The resulting higher shipping costs will flow through to all sorts of other goods that are traded internationally and require shipping, including and especially those passing through the Panama Canal.

This week in research #124

Here's what caught my eye in research over the past week:

• Greenaway-McGrevy (open access) evaluates the impact of this widespread zoning reform in Auckland on housing starts, and finds that upzoning approximately doubled new dwelling permits per capita within five years

In an otherwise quiet week I have some exciting news. The latest issue of Australasian Journal of Regional Studies (AJRS) has just been published (backdated to December 2025). This issue has four papers (all open access), as well as the editorial:

• Duong et al. examine output divergence and club convergence across 63 provinces in Vietnam during the study period 2010–2023. The question of whether subnational regions move along a single common development path is important because it can help us to understand spatial inequality. In the case of Vietnam, this paper demonstrates that Vietnamese provinces are sorting into convergence clubs, suggesting that subnational growth in Vietnam is shaped by location, investment, and proximity to major economic centres rather than by uniform national catch-up (this paper won the John Dickinson Memorial Award for the best paper published in AJRS in 2025)
• Kanthilanka and Kingwell explore the export grain supply chain across Australian states. They find that grain producers in Australia benefitted from an increase in the velocity of Australia’s export grain supply chains. However, this presents a risk of higher food inflation if a prolonged drought were to strike eastern Australia, unless there is greater investment in grain storage and increased grain production
• Dutta explores the rural urbanisation process and the development of rural non-agricultural activities in West Bengal, India, an area of substantial urban growth. They find that districts with better infrastructure have higher percentages of non-agricultural enterprises employing hired workers, reinforcing the link between infrastructure and non-agricultural activity growth
• Leutwiler examines economic development planning for the Katherine region of the Northern Territory of Australia from 2014 to 2021 and contrasts this with a place-based development approach. This analysis highlights that formal economic strategies in the Katherin region are focused primarily on industries and projects that increase revenue for higher levels of government and large corporations, rather than creating local employment. This paper is important, as it provides justification for place-based development that prioritises local employment, diversification, and more sustainable regional outcomes

Dollar General opening may be a symptom, not a cause, of negative local market conditions

Dollar stores have a bad reputation for negatively impacting local communities (see here and here, for example). Some communities have pushed back, resisting the opening of new stores. One thing that dollar stores are accused of is hurting other local businesses, but is that the case?

That is the question addressed in this new article by Amelia Biehl, Amir Ferreira Neto (both Florida Gulf Coast University), and Juan Gomez (University of Iowa), published in the journal Economic Modelling (ungated earlier version here). They focus on the opening of new Dollar General stores in Florida, using data from Dun and Bradstreet's National Establishment Time Series dataset between 1990 and 2019. Over that period, there were a lot of store openings, with the state going from 202 stores to 1014 between 2000 and 2019. That's about one store per 23,000 people in Florida by the end of the period.

Biehl et al. look at the impact on revenue, employment, and probability of firm closure, by comparing firms operating within a half-mile of a new Dollar General store opening (the 'treated firms'), with firms operating between one and 1.5 miles away (the 'control firms'), in what is termed a difference-in-differences analysis. Biehl et al. limit their focus to firms with fewer than 50 employees, as they are more likely to be impacted by the opening of Dollar General. This still results in a sample of over 7.5 million observations of over 1.1 million firms. The hypothesis is that these small firms operating in close proximity to the new Dollar General store will be affected by its opening, whereas small firms located further away will not be.

Their results are summarised in Figure 4 from the paper, which shows an event study version of the analysis:

That figure shows the impact on each variable (revenue, employment, and probability of firm closure), year-by-year, from eight years before the store opening to eight years after. Focusing on the time after the store opening (from time zero onwards, because time -1 is the year of store opening), the positive and significant effects show that employment increases, revenue increases, and the probability of firm closure increases for treated firms compared with control firms after the store opening. These results are consistent with the overall difference-in-difference results.

However, there is a slight problem here. One of the assumptions of difference-in-differences is that there are parallel trends - that treated and control firms would have followed similar paths in terms of revenue, employment, and probability of closure, if no Dollar General store had opened. Obviously, this is impossible to establish for sure, because we don't know the counterfactual (we don't know what would have happened if Dollar General had not opened). But there is one indicator that is often used to argue in favour of parallel trends, which is to look at the estimated coefficients from the time period before the treatment started. If those coefficients are statistically insignificant, it establishes that there is little evidence that the treatment and control firms were diverging before the Dollar General even opened. But for this analysis, that isn't the case. Take a look back at Figure 4 shown above. There is a clear trend in the coefficients even before Dollar General opened, and that trend appears to continue through to the period after the Dollar General opens. If anything, the coefficients at time -1 (which is the year of opening) are unusually inconsistent with the coefficients on either side of them.

The failure of this analysis to consider a violation of the parallel trends assumption should make us very cautious about taking these results at face value. At least, I don't think they should be interpreted as showing that Dollar General leads to the closure of some local businesses, with the surviving firms having higher revenues and employment (which is how Biehl et al. interpret their results). Instead, I think it possibly shows that Dollar General stores locate in areas where stores are already closing (notice in Figure 4 that probability of closure is already positive and statistically significant for treated firms compared with control firms before the Dollar General opens).

Biehl et al. go on to look at the impacts on firms by industry and by retail category. However, given that their headline results don't really show what they are purported to show, I would place even less weight on the industry-specific results. Besides which, at that stage of the analysis they are doing multiple comparisons, meaning that some of their results might show up as statistically significant simply by chance, which they haven't adjusted for.

Overall, the results from the main analysis in this article are consistent with Dollar General finding new locations where there are open storefronts (because other firms have already closed), and setting up shop in those locations. So, it may be that it isn't the Dollar General that causes firm closures, and higher revenue and employment for surviving firms, but something else like local market conditions more generally. Considering that possibility, a Dollar General opening would be a symptom of those negative local market conditions, not a cause of them.

Who is morally responsible for grade inflation?

This article in The Conversation last year by Ciprian N. Radavoi, Carol Quadrelli, and Pauline Collins (all University of Southern Queensland) pointed me to their interesting article published in the Journal of Academic Ethics (open access) on who is morally responsible for grade inflation. The article attracted my attention because it engages moral philosophy in the task of identifying responsibility for grade inflation, a problem that I have blogged about before.

Radavoi et al. start by noting that grade inflation is unethical, relying on three main normative ethics theories: (1) deontology; (2) virtue ethics; and (3) consequentialism. As they explain:

In a deontological perspective, the problem with grade inflation is that it is a dishonest action...

A virtue ethics approach further substantiates grade inflation as unethical... As for what counts as virtues (that is, excellent traits of character), there have been numerous lists proposed in the history of philosophy, and courage, integrity and justice feature in most... regardless of the reason one inflates grades, that person does not act as a just person... It is easy to see how the act of equally rewarding with top marks hardworking and lazy students is unequal treatment that shows social irresponsibility, and fails to show leadership...

As for consequentialism, Radavoi et al. note all of the parties that are potentially harmed by grade inflation, including students whose grades are inflated (because they are "disincentivised from studying, shielded from the educative experience of failure, and instilled with a false sense of success"), employers (because grades become less valuable as a signal of the quality of job applicants), universities (whose reputations are damaged when they become known to be merely 'diploma mills'), and society generally. On the latter, Radavoi et al. note that:

If academic teachers do not fulfill their gatekeeping role, society will end up with incompetent doctors who may damage someone’s health, incompetent lawyers may ruin someone’s wealth or liberty, and so on. Also, if grades lose their quality of correctly indicating achievement, society will lose its trust in higher education and in universities as places of learning and excellence.

Having established grade inflation as unethical, Radavoi et al. then present the qualitative results from a survey of Australian academics, in the form of quotes from open-ended questions from the survey. This highlights the role of management coercion, and student evaluations of teaching , with the latter often being the mechanism through which management pressure is applied to academics. Radavoi et al. then unpack whether academics are manipulated into grade inflation, or coerced, concluding that:

...at least for casual academics, it seems safe to say they inflate grades under coercion, and this mitigates their moral blameworthiness: indeed, the coercive pressure on them, exercised via SETs, is insurmountable given the insecurity of their position and the overwhelming desire to secure another contract.

In contrast, in Radavoi et al.'s view, academics with continuing employment are generally not coerced into grade inflation, as those academics have greater agency to take a stand against grade inflation. Of course, context matters, and I suspect that there are not a lot of academics who feel genuinely secure enough in their employment to take a stand against university management on principle. I know from personal experience that even when a senior academic is willing to take a stand on behalf of a larger constituency of academics, those other academics will not necessarily voice their support in a public forum (and yet, simultaneously, be very willing to thank the senior academic in private). Taking a stand against grade inflation is only one example. Top-down one-size-fits-all rules imposed on teachers and their subjects, and enforcing onerous levels of flexibility that suit students but impose high costs on staff in terms of workload and administration, are other examples where pressure from university management has been applied, and yet academics have not effectively resisted. However, I am getting off topic.

Radavoi et al. do highlight that moral responsibility for grade inflation cannot be attributed solely to the academics responsible for grading. The institutional context, and management pressure (whether manipulation or coercion) are important too. However, Radavoi et al. do not consider the extent to which students are also implicated in this situation, albeit in a different way from academics or university management. As higher education has increasingly treated students as consumers of education services, successive cohorts of students have increasingly been encouraged to adopt the ideal of the ‘sovereign customer’, able to demand that education providers deliver particular outcomes for them. It is hardly surprising, then, that some students come to see higher grades not only as something to be earned, but as part of the education services that they have paid for. This does not make students primarily responsible for grade inflation, but it does mean that student expectations can reinforce the pressures placed on academics and university management.

So, perhaps moral responsibility cannot be attributed solely or largely to university management either. All three parties (academics, university management, and students) each bear some responsibility for grade inflation. However, that responsibility is not necessarily shared equally. The greatest responsibility should fall on those with the greatest power to change the incentives that make grade inflation attractive to students, convenient for managers, and sometimes the least risky option for academics. Which party bears the greatest responsibility will depend crucially on context.

Read more:

• Teaching evaluations and grade inflation
• Grade inflation is harming students' learning
• A few papers on grade inflation at universities
• Grade inflation and college completion in the U.S.
• More on teaching evaluations and grade inflation
• Grade inflation at New Zealand universities, and what can be done about it