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Preparing for Future Shocks

As countries worldwide work to emerge from Covid and its consequences, they need to build resilience into their systems to counter future shocks, explains William Hynes.

In 2019, the OECD’s New Approaches to Economic Challenges (NAEC) Initiative anticipated that ‘a new crisis could emerge suddenly, from many different sources, and with potentially harmful effects’, and set out to explore ‘Averting Systemic Collapse’, in a conference of that title. Six months later that collapse came, COVID-19 confirming what NAEC had been tabling for years.

The pandemic has had serious consequences for people’s health, lives and livelihoods across the globe – notably now in India. This highlights that the crisis is not over. Vaccines, however, are now being deployed in many countries, and those responsible for policy have learned different ways to tackle the crisis. However, the virus has adapted, as viruses normally do, with several mutations.

COVID-19 will not be the last pandemic. The chance of a major influenza causing 6 million deaths globally is about 1% each year. Zoonotic risks as with coronavirus, are increased due to human intervention. Pneumonia and antimicrobial resistant pathogens are also a significant risk. And a health-related shock has about a 10 to 20% probability of occurring over the coming decade.

Pandemics are not the only danger crisis we face. Even if we manage to keep the average increase in global temperatures below 2°C, it is possible that 99% of coral reefs will be lost. Insects, vital for pollination of crops and plants, will likely lose half their habitat. Rising sea levels could threaten millions of people. The frequency and intensity of droughts, storms and extreme weather events ought by many scientists to be increasingly likely.

COVID-19 has also shown how a health emergency can provoke severe global economic consequences, with significant economic and financial imbalances in both developed and developing countries, with major longer-term consequences for the world economy. Like natural systems, countries’ social, economic and financial systems can also suffer emergent failures, with shocks amplified and rn-enforced in a non-linear fashion. The deep interdependence of these global systems means that local crises can rapidly prompt global emergencies. Global scale systemic challenges must therefore be tackled by rethinking our systems – how they interact and how they are designed, operated, managed and how they can fail.

For example, the ever-increasing monopoly concentration, especially the outsized power of largest tech firms presents a serious threat to the resilience of the economy and democratic societies an issue explored in a previous blog for Politeia profiling NAEC work with the Open Markets Institute – and that nationalism including vaccine nationalism undermined the potential for a systemic recovery

A Systemic Recovery should therefore involve the design and management of a more resilient socio-economic system. Systems, including infrastructure, supply chains, economic, financial, and public health systems, should be re-designed to be resilient, i.e., recoverable and adaptable. Such resilience by design might also involve stronger anti-trust rules to ensure monopolies and market concentration don’t lead to fragility and vulnerabilities. This would help control the complexity of systems. It would also help to minimise failures which result from unexpected disruption by stopping unnecessary chain reactions. At the same time markets should be encouraged to play their role in absorbing future shocks by facilitating the re-allocation of resources.

 

William Hynes

William Hynes is a Senior Advisor to the Secretary General and Head of New Approaches to Economic Challenges (NAEC) at the OECD in Paris. His recent publications include The Financial System and Systemic Thinking for Policymaking.

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