NAEC-OMI Shock Proof: Building Resilient Systems in the 21st Century

On 23 April 2020 the OECD hosted a roundtable entitled “Shock-Proof: Building Resilient Systems in the 21^st Century” jointly with the Open Markets Institute. Gabriela Ramos opened the session with Barry Lynn, Executive Director of the OMI. The Roundtable featured the following speakers: Paul Romer, Professor of Economics, NYU; Rohit Chopra, US Federal Trade Commissioner; Congressman David Cicilline, Head of the Anti-Trust Sub-Committee in the US House of Representatives; Michael Osterholm, Director of the Center for Infectious Disease Research and Policy; Yossi Sheffi, Professor, Engineering Systems, Massachusetts Institute of Technology; Sharan Burrow, General Secretary of the International Trade Union Confederation; Christopher Gopal, Global Supply Chain & Operations Consultant and Educator; Cristina Caffarra, Vice President, Charles Rivers Associates; Paul Tucker, Chair of the Systemic Risk Council and Fellow at the Harvard Kennedy School; Ganesh Sitaraman, Professor of Law, Director, Program in Law and Government, Vanderbilt University, former Senior Advisor to Senator Elizabeth Warren; J. Doyne Farmer, Director of Complexity Economics, Institute for New Economic Thinking, and Santa Fe Institute, and Rebuilding Macroeconomics; Michael Masters, National Director and Chief Executive Officer of the Secure Community Network, Laurence Boone, Chief Economist, OECD; Pascal Lamy, President Emeritus of the Institut Jacques Delors, Former Director-General, World Trade Organization; Paul Tucker, Chair of the Systemic Risk Council and Fellow at the Harvard Kennedy School.

** Remarks as delivered on 23 April 2020 **

Good morning everybody and welcome to this virtual NAEC session. Thank you Barry for your opening remarks.

It is our pleasure to host this event with the Open Markets Institute (OMI), who are examining the influence of monopolies, and how monopolies have made our systems more fragile.

The Covid-19 pandemic shows this in a shocking way, with hospitals lacking the basic equipment that markets dominated by a few suppliers failed to provide.

The pandemic also illustrates more basic features of complex systems. For example, interconnectedness brings benefits, but it also means that a shock to one system can cause cascading failures in others. A health crisis in a Chinese province quickly became a global economic and social crisis.

And contrary to the ideas of traditional economics, complex systems are inherently unstable. They generate shocks themselves, and they don’t return to a previous equilibrium.

These systems are not only complex, they are adaptive. They are constantly reorganizing themselves in reaction to what their own components and other systems are doing. Natural ecosystems for example react to changes in land use, bringing wild animals and their viruses into closer contact with the humans who destroyed their habitats.

NAEC, our New Approaches to Economic Challenges (NAEC) Initiative, champions more accurate ways of analyzing complex, adaptive systems.

We are now in the midst of a systemic upheaval foreshadowed at the NAEC Group meeting in September 2019 on Averting Systemic Collapse which pointed out that “a new crisis could emerge suddenly, from many different sources, and with potentially harmful effects”.

But simply warning about impending catastrophes is not enough: we have to propose approaches to dealing with them. That means first admitting that important systems may fail and preparing to deal with failure. 

Here, another system characteristic is central: resilience, the ability of a system to plan and prepare for, absorb and withstand, recover from, and adapt to adverse events and disruptions.

Nobody would argue against resilience, but one lesson we have learned in NAEC is less welcome. There is a tradeoff between resilience and efficiency. Cutting the number of hospital beds and staff may make the health system more efficient, but at the price of less resilience.

Linked to efficiency is optimization. In NAEC, we call on a range of disciplines, not just economics. Engineers and physicists tell us that when you try to optimize a complex system, you may end up destabilizing it.

For the economic system, Barry has illustrated how the concentration of power in a small number of global corporations may have improved efficiency in specific domains and circumstances, but over-reliance on a few actors has undermined the resilience of the economic system as a whole.

Concentration of wealth and power is a fact of today’s economy with 80% of corporate value housed in 10% of corporations.

This has wide, systemic impacts. Paul Krugman and Larry Summers link growing monopoly power to weak growth, while Jason Furman and Peter Orszag argue that monopoly has contributed to inequality. It also damages entrepreneurship.

Today, we are discussing what happened to production networks, why it happened and what could be done in the future to create shock-proof systems. The answer is not localisation or anti-globalisation, but at least part of the answer must be anti-monopolisation.

For many institutions, including the OECD, which has traditionally emphasized the need for efficiency, it is not easy to accept that we should build slack, buffers, and spare capacities into our systems, especially when countries face fiscal constraints after the current crisis. But as we now see, this is a literally a question of life or death.

So welcome to this seminar, that is contributing to re-thinking our systems to ensure that they are sustainable and deliver for people.

OECD Friends of Climate: COVID-19, Climate, and Biodiversity

On 22 April 2020, Earth Day, the OECD’s Friends of Climate met to discuss Biodiversity in COVID-19. The meeting was attended by OECD Member country ambassadors, the Secretary-General, Deputy Secretaries General, the Chief of Staff and Sherpa, the Chief Economist, the Director of the Environment and the Director of Development Co-operation to share their analyses on this theme. Gabriela Ramos delivered the following remarks:

I welcome the initiative to call for this meeting at this moment in time. when talking about resilient systems, and looking at the level of interconnectedness of our world economy and cascading effects of this pandemic, we could not agree more that environmental agenda is central to healthy, sustainable, equitable societies.

Even if our countries are focused on fighting the pandemic and containing the economic damage, the decisions and policies that we take now will determine how we come out of this crisis, and whether or not we will learn from it. This pandemic and the widespread effects it is having across all the systems we rely on in our daily lives, is revealing truly how important resilience and sustainability is. We must come out of this crisis with having learned from it, with a renewed commitment to contribute to the higher goal of delivering on our environmental and climate commitment, creating a win-win-win for people, the planet, and our societies.

This is not about tomorrow. The stimulus packages, the government support on many areas, to SME’s to people, to different activities that we are rolling out today can and must be consistent with climate objectives.

In the recovery phase, where we will almost certainly need further stimulus packages and efforts, we must prioritize those that are consistent with our climate objectives, on infrastructure, on transport, on many other sectors. This is why IPAAC, International Programme for Accelerating Action on Climate is particularly important at this stage.

But, considering the high level of inequalities that have been brought further to light in this crisis, we must also take care to align response and recovery efforts it with the goal of achieving more inclusive societies.

Unfortunately, COVID-19 has already had disproportionately negative impacts on certain groups of people: lower-income groups, children, youth, women, the elderly, workers in the informal sector. Across the OECD, 30 percent of people are considered financially vulnerable, meaning they will fall into poverty if they forego 3 months of income, soon to be a reality as confinement measures continue across countries.

They have lower health status, and their children are more affected by the closing of schools. Access to internet is much lower on those groups and half of the world population are not connected to internet.

Already, 2.7 billion workers (or 81% of the world’s workforce) are currently impacted. New unemployment benefit claims in some countries are 10 times ‘normal’ rates.

With job loss, many of them are losing their health insurance in the face of this health crisis.

And women are hit harder by the impact of the crisis as many women are overrepresented in informal employment without adequate social protection and healthcare coverage. The impact is amplified in developing countries.

Although logical that those with less means to respond to the crisis suffer most, this does not mean we should accept these disproportionate impacts. We have yet to account for inequalities in our response efforts, and we must work to do so.

Unfortunately, these disproportionate impacts foreshadow the future as the same groups are likely to be hardest hit by climate events and crises. We know that low-income households are more vulnerable to air pollution, lack access to clean drinking water and quality infrastructure.  They are also more affected by climate events.  Evidence from past crisis tell a clear story:

Post-Hurricane Katrina disaster, black workers were 3.8 times more likely to have lost their jobs (increasing to 7 times for low-income black workers). Climate change affects workers who are the most reliant on ecosystem services such as farmers and fishermen.

So we need a fair transition, and this is something your countries have underscored. This crisis has made it more clear than ever before that our current economic system and growth models are not setting us up for successful response to impending climate impacts but rather poses great risks for future well-being.

A comprehensive and integrated approach to human health is needed, and a green transition can provide a significant opportunity to alleviate existing inequalities in outcomes.

Thank you.

Breakingviews – Guest view: Can we achieve gender equality? Op-ed by Gabriela Ramos and Phumzile Mlambo-Ngcuka

The impact of this Covid-19 crisis is widespread and unavoidable across countries, unfortunately while both men and women suffer, women are hardest hit. Phumzile Mlambo-Ngcuka and I are joining forces to call leaders to action and support policy- and decision-makers ensure we re-balance the equation by incorporating a gender lens into our responses. We cannot let this crisis exacerbate already existing inequalities.

Read our op-ed and Call to Action here.