IPCC and climate change risks: what would you do?

Click to read the report
Click to read the report

The latest Climate Change Report from the IPCC argues that human interference with the climate system is occurring, and climate change poses risks for human and natural systems. The report identifies eight major risks with high confidence, and says that each of these risks contributes to one of more of the five “reasons for concern” (RFC) the authors identify:

  1. Unique and threatened ecosystems and cultural systems.
  2. Extreme weather events.
  3. Uneven distribution of impacts, with disadvantaged people and communities facing greater risks.
  4. Global aggregate impacts, for example global biodiversity loss.
  5. Large-scale singular events, such as Arctic ecosystems or warm water coral reefs reaching an irreversible tipping point.

The report isn’t totally pessimistic, and it concludes that transformations in economic, social, technological, and political decisions and actions can enable climate-resilient pathways. It doesn’t say what the favoured options should be, and of course a mix of approaches should be taken, but we’d like your opinion on what the dominant options should be. For the sake of simplicity, we’ve labelled the options “government”, meaning intervention through regulation or taxation for example; “technology”, for example new ways to produce energy or reduce natural resource use; “behaviour”, for example consuming less or recycling more; or “markets”, for resources that become too expensive will be abandoned in favour of other solutions. You can select two options if, for example you think that technology plus markets or behaviour plus government is the best option.

Here are the eight risks.

Useful links

OECD work on climate change

OECD work on green growth and sustainable development

UN Framework Convention on Climate Change

Is your CEO really worth it?

Click to find out more about OECD Integrity Week
Click to find out more about OECD Integrity Week

Who’d be a CEO? Back in the days when the legendary Jack Welch was leading General Electric – and increasing its market value by more than a third of a trillion dollars – chief executive officers were the heroes of capitalism. These days, they seem as likely to show up on top-ten lists of failure.

Consider Thorsten Heins, appointed CEO of smartphone maker Blackberry in January 2012 at a time when it was haemorrhaging market share to Apple and Samsung. Mr Heins struggled to turn things around, but by the time he was eased out 22 months later the company’s share price was down almost 60%. That, in turn, hurt Mr Heins’ own earnings, which were linked to the share price. However, considering that he walked away with a farewell package estimated at between $14 million and $16 million, there’s another question you’d have to ask: Given the chance, who wouldn’t be a CEO?

Whether their companies are winning or losing, the popular perception is that CEOs are always winning – showered with bonuses when business is booming, gently let down on golden parachutes when things are going badly.

The reality, of course, is more complicated. For every CEO with a $6,000 shower-curtain, there are others working long days in forgotten corners of desolate business parks. Still, there seems little doubt that as a class, CEOs are doing fairly well for themselves. The Financial Times reported figures from the International Labour Organisation showing that the average pay of top CEOs in Germany rose from 155 times average earnings in 2007 to 190 times in 2011. In the United States, the multiple is 508 times.

But if CEOs are overpaid (and some would argue that – compared to footballers like Wayne Rooney or Hollywood stars like Robert Downey Jr. –  they’re not) how should societies respond? One of the biggest trends in recent decades is “say on pay”, which provides company shareholders with some role in determining executive compensation. Does it work? Views differ, as was clear during a discussion earlier today at OECD Integrity Week.

One of the key advantages of “say on pay” – at least in theory – is that it should allow executive pay to be better linked to the company’s performance. But reporting on the experience of the United Kingdom, Martin Petrin of University College London cast doubt on whether that was really happening. According to data he presented, executive pay in leading UK companies has risen by an annual rate of 13.6% since 1998, while the share price of these companies has risen only by an annual average of 1.7%.

He also questioned another of the much-vaunted benefits of say on pay – namely, that by making executive-pay setting more transparent, it leads bosses to moderate their demands. By contrast, he said, it can lead to “ratcheting up”. This is where companies declare that since their executives are all above average (otherwise they wouldn’t have been hired), they must be paid above the median for their industry peers.

But despite the potential criticisms, the panellists generally accepted that say on pay is now an unstoppable tide. In some countries, such as the UK and Switzerland, say on pay is – to some extent – legally mandated. Others, such as France, have steered more towards self-regulation.

Denis Ranque, a leading French businessman and president of the High Committee on Business Governance, argued that hard law was not always the most effective approach. Speaking in French, he pointed out that “Enron had a system of governance where all the ethics boxes were ticked.” Rather than relying on hard law, he said, we should emphasise the role of transparency in executive-pay setting and in wider issues of corporate governance. “Just remember, whatever you do will be in the papers tomorrow. Think about your mother or your daughter’s reaction when they see it.”

But if say on pay is inevitable, it raises another question – who gets to have a say? Typically, it’s limited to shareholders, but the French academic Charley Hannoun said it may be an issue that’s of less concern to shareholders and more to stakeholders, most notably the company’s employees. After all, he argued, they were the ones most likely to be affected by the growing disparity in pay between the people at the bottom and the people at the top.

Useful links

OECD Integrity Week 2014 – a week of public events focused on integrity in business and government and the fight against corruption.

Corporate governance – OECD research and analysis

Board Practices: Incentives and Governing Risks (OECD, 2011)

Corporate governance: Lessons from the financial crisis (OECD Observer)

Economics’ massive magnet

Where boundless optimism meets bounded rationality
Where boundless optimism meets bounded rationality

Today’s post is by Professor K. Vela Velupillai of Trento University and The New School, New York

Behavioural economics challenges orthodox economics theory and its foundational assumptions regarding human behaviour, its institutional underpinnings, its poor prediction power, and its intrinsic non-falsifiability. In orthodox theory, economic agents are assumed to be fully rational and completely informed. It’s not that they do know everything, but that they can know everything and there are means to learn – epistemology – and they know how to make the best choices for themselves (even if only probabilistically, and even if the choice (sic!) of the precise foundations of the theory of probability that underpins expected utility maximisation is colourfully ad hoc).

Individuals are assumed to have underlying orders of preference for all the alternatives which are knowable[1], although the means of getting to know them is never specified. These rational preferences are often represented by a utility function, which is assumed to be well-behaved. The “non-satiation” assumption promises that the satiation point will never be reached, at least in the economic domain. Thus, the individuals are always in a state where “more is better”.

Behavioural economics originated, almost fully developed, during the 1950s, and can be classified into at least two streams – Classical and Modern. We would argue that Classical behavioural economics (CBE), pioneered by Herbert Simon (1953), presents a more radical break with the tradition than Modern behavioural economics (MBE) originating in work by Ward Edwards (1954), respectively. The two streams have different methodological, epistemological and philosophical aspects.

First, MBE assumes economic agents maximising utility with respect to an underlying preference order – to which “an increasingly realistic psychological underpinning” is attributed. The “realistic psychological underpinning”, however, is not itself based on any computational foundation, in contrast to Classical behavioural economics, in which the cognitive psychology of choice was intrinsically constrained by a machine model of computation. CBE assumes no underlying preference order. An economic agent’s decision-making behaviour, at any level and against the backdrop of every kind of institutional setting, is subject to bounded rationality and exhibits “satisficing” behaviour – a word Herbert Simon coined from “satisfy” and “suffice” to describe a strategy for reaching a decision the decider finds adequate, even if it’s not optimal in theory. Put another way, MBE remains within the orthodox neoclassical framework of optimisation under constraints; CBE is best understood in terms of decision.

Second, MBE concerns the behaviour of agents and institutions in or near equilibrium; CBE investigates disequilibrium or non-equilibrium phenomena.

Third, MBE accepts mathematical analysis of (uncountably) infinite events or iterations, infinite horizon optimisation problems and probabilities defined over s-algebras and arbitrary measure spaces; CBE only exemplifies cases which contain finitely large search spaces and constrained by finite-time horizons.

There is no doubting the success of MBE. You could characterise it as a massive magnet which attracts different resources, new tools and ways of explanations. In fact you could almost claim that MBE has already become a new mainstream economics, as a consequence of it playing the role of a revised approach of orthodox economics rather than an alternative approach. CBE on the other hand, is developed on completely different grounds from MBE.

MBE is fostered by orthodox economic theory, game theory, mathematical finance theory and recursive methods (Not, however, recursive in the rigorous sense of recursion theory, which forms a key foundation in the development of classical behavioural economics), experimental economics and neuroeconomics, computational economics and subjective probability theory[2]. It preserves the doctrine of utility maximisation and does not go beyond it or discard it (the consumer tries to get the most value possible from the smallest amount of money). Though the behavioural models do consider more realistic psychological or social effects, economic agents are still assumed to be optimising agents, whatever the objective functions may be. In other words, MBE is still within the ambit of the neoclassical theories, or is in some sense only an extension of traditional theory, replacing and repairing the aspects which proved to be contradictory.

CBE is based fundamentally on a model of computation – hence, computable economics – computational complexity theory, nonlinear dynamics and algorithmic probability theory. Unlike MBE, CBE does not try to endow the economic agent with a preference order which can be represented by utility functions; nor do equilibria or optimisation play any role in the activation of behavioural decision-making by CBE agents.

Classical behavioural economics exploits the powerful notion of “bounded rationality” proposed by Simon in 1953. Simon’s definition of bounded rationality encapsulates different notions, such as limited attention, limited cognitive capacity of computation sequential decision-making, and satisficing. For Simon, it is not evident and admissible to assume that human beings are able to exhaust all the information and make the “best” choice out of it.  To put it simply: Simon took the limits of human cognition into account and devised mathematical means of describing the roles of memory, experience and intuition in solving problems. His agents do not think in terms of infinite horizon optimisations (nobody in their right mind would!) rather they try to make good decisions for only the near future, but with long-term targets in mind.

Useful links

Behavioural economics: Classical and modern”, Ying-Fang Kao & K. Vela Velupillai, (2013): Behavioural economics: Classical and modern, The European Journal of the History of Economic Thought, DOI: 10.1080/09672567.2013.792366

OECD work on behavioural economics

[1] Whether there are ‘unknowable alternatives’ is never clearly specified – especially when the set of alternatives has the cardinality of the continuum, implying the invoking of some form of the axiom of choice, even in the routine implementation of an optimisation exercise. As a result, ‘the means of getting to know them’ cannot be specified in any constructive way.

[2] See, however, the caveat about probability in the first paragraph.

Signs of spring?

Before you shift over to springtime mode, take a moment to recall the wild weather that swept across North America earlier this winter. Powered by a “polar vortex,” freezing air and storms repeatedly swept across the continent,  dumping deep piles of snow and stranding motorists in blizzards.

Something else may have been obscured by all those swirling snowflakes – the state of the economy. To explain, not only did the harsh weather make everyone’s life miserable, it also dragged down the economy in North America – shops were forced to close, flights were cancelled, people couldn’t get out of their homes. That, in turn, is reflected in the economic data for last quarter of 2013 and (probably) the first quarter of this year, which showed an unexpected dip.

But this winter blip looks to be masking what is otherwise a fairly rosy picture for major G7 developed economies, according to the OECD’s latest economic assessment. The assessment, released today, argues that economic growth in the G7, including, of course, Canada and the United States, is probably strengthening, despite fluctuations caused by the one-off winter weather (and the U.S. government slowdown in October) and an imminent tax revision in Japan.

There’s less encouraging news for the emerging economies. According to the OECD economists, a number of these economies are now experiencing a “marked loss of momentum”. As these economies now account for more than half of the world economy, that’s likely to curb global growth.

 Interim outlook

Source: Interim Economic Assessment, 11 March 2014.

Overall, then, first-half growth for the G7 economies looks set to be well up on the equivalent periods in 2012 and ’13. But, largely as a result of those one-offs, it’s likely to fall below second-half 2013 growth (although the OECD economists don’t rule out the possibility that this apparent dip in momentum may be due to more than just snow).

The performance of the Eurozone countries, however, continues to be spotty. Germany is doing well and is forecast to see annualised growth of 3.7% in the first quarter, but France will hover around 1% while Italy will be slightly under 1%. And while  unemployment is showing encouraging signs of easing elsewhere, it’s showing little signs of improvement in the Eurozone.

What about the risks to all these forecasts? As we noted recently, the Great Recession highlighted failings in forecasting at the OECD and other international institutions. In response, forecasts now place a much greater emphasis on why they could be wrong, either because they’re too optimistic or too pessimistic.

On the positive side, the OECD economists are encouraged by signs that political tensions in Washington over government financing and the debt ceiling have eased, and by indications that Europe’s troubled banks are stabilising.

On the downside, and despite the progress so far of “Abenomics,” they’re concerned by the continuing challenges that Japan is facing from its huge public debt. The Eurozone, too, is not out of the woods, while China may be facing a risk of a “sharp slowdown”.

And, of course, there’s the continuing question of how emerging economies will respond to the slow return to normal monetary policy, especially in the U.S.  The impact of the “taper” was clear in these economies both last year and in January, with currency weakness and falling prices for bonds and equities in a number of emerging economies. If these problems continue or worsen, that could be bad news for the global economy.

Useful links

OECD Interim Assessment

OECD economic analysis and forecasting

What’s the difference? Try our International Women’s Day quiz and find out!

Admit it, you're surprised
Admit it, you’re surprised!

“How abominable before God is the Empire or Rule of Wicked Woman, yea, of a traitress and bastard.” That’s the opening of John Knox’s 1558 diatribe The First Blast of the Trumpet against the Monstrous Regiment of Women in which he explains that “To promote a Woman to bear rule, superiority, dominion or empire above any realm, nation or city is:
A. Repugnant to nature.
B. Contumely to God.
C. The subversion of good order, of all equity and justice.”

In fact, it’s not a multiple choice, all these are the correct answer.

He helpfully points out that “Woman in her greatest perfection was made to serve and obey man, not to rule and command him.”

How much has changed since, and how much do you know about it? Try the quiz to find out. If you’d like some help finding the answers, try the following:

OECD work on Gender

Wikigender “a project initiated by the OECD Development Centre to facilitate the exchange and improve the knowledge on gender equality-related issues around the world.”

DAC network on gender equality “the only international forum where experts from development co-operation agencies meet to define common approaches in support of gender equality and women’s empowerment.”

Social Institutions and Network Index (SIGI) “first launched by the OECD Development Centre in 2009 as an innovative measure of the underlying drivers of gender inequality for over 100 countries. Instead of measuring gender gaps in outcomes such as employment and education, the SIGI instead captures discriminatory social institutions”

You’ll learn why the correct answer is correct if that’s the one you pick, but you may also learn something from an incorrect choice (other than it’s wrong).

The security peril of Guinea’s transition: from military rule to weak policing

Rally in support of Alpha Conde
Rally in support of Alpha Conde

Today’s post is by Erwin van Veen (Twitter @ErwinVeen) a senior research fellow with the Clingendael Conflict Research Unit of the Netherlands Institute of International Relations, based on interviews conducted by the author during a recent visit to Guinea.

Over the last two-and-a-half years, a UN-supported stabilization package has helped put the ongoing transition from military to civilian rule in Guinea on a more sustainable footing. It largely took the form of a set of security sector reform interventions. While progress since 2010 has been substantive, Guinea today remains fragile. This highlights security as a critical precondition for development. It also demonstrates that initial security improvements must be followed up to become sustainable. Finally, it suggests what kind of results external money may ‘buy’ in a transition context. All three issues raise challenges for donors in terms of their policy focus (e.g. in the context of the post-2015 debate), their ability to commit long-term and their need to demonstrate clear-cut, ‘value-for-money’ results.

Between 1984 and 2009 the people of Guinea lived under a series of military and strong-arm governments that combined oppression with repression, plunging the country into a severe economic downturn. In 2010, the election of president Condé heralded a first step towards the return of civilian rule. However, the role and behavior of the armed forces continued to pose a critical challenge to political stability. The military retained a strong grip on political life and a visible position in society: theft, intimidation and violence were common. Citizens experienced the military as a daily, random threat on the streets.

In a rare show of unity, ECOWAS, the AU, UN and Government of Guinea recognized the instability of this situation in 2010 and jointly conducted a review of the country’s security situation. It led to a comprehensive, UN-supported, initiative to stabilize the security sector. Two-and-a-half years later both the results and the challenges look substantial. While Guinea’s poor governance and economic situation – exacerbated by its ‘bad neighborhood’ – still make for a combustible combination, the specter of another coup is fading. The military has moved from the streets into the barracks, weapons have disappeared from sight and civilian oversight improved.

A census of the armed forces that led to the retirement of 4000 out of roughly 24,000 soldiers – with dignity and a package – proved a critical part of the intervention. It helped reduce corruption in the military by weeding out ‘ghost soldiers’, reduced the potential for violence and increased the affordability of the military. Most importantly perhaps, it was a first step in restoring an ‘esprit de corps’ amongst the armed forces. Another key part of the intervention included the creation of a small, UN-led team to provide strategic advice on the security sector reform process to the office of the president. Leveraging the UN’s prestige, this team played an important role in maintaining momentum, building confidence and stimulating the re-instatement of critical institutional practices. Finally, additional interventions enabled difficult conversations to start on sensitive topics like democratic oversight and better protection of women against violence. The entire package came at the bargain price of $11 million out of a total Peace Building Fund (PBF) envelope for Guinea of $18 million.

What is remarkable is that in such a short time span a legal framework governing the security forces has been put in place, the previously prevalent culture of military secrecy has been reduced, the budget for the security forces is now publicly available (the government itself financed the retirement of the most recent contingent of soldiers in December 2013) and public consultations are going on about the role of the security forces (including the police) in society. No less important for the citizens of Conakry, soldiers now obey traffic laws like anyone else. The military is poised to contribute a battalion to MINUSMA (United Nations Multidimensional Integrated Stabilization Mission in Mali) later this year, which will further increase its accountability, cohesion and esprit de corps.

These results may not seem transformative in Western parliaments – they are in Guinea.

Three factors played an important role. First, the UN leveraged the credibility it gained from staying in the country throughout Guinea’s crises – bilateral donors largely left – to advantage. Second, PBF funds were mobilized in a timely and flexible manner. It is worthwhile recalling that Guinea is neither post-conflict nor hosts a peacekeeping mission – the usual criteria for PBF support – and so this is a testimony to the catalytic role the fund can play. Third, and most importantly, the Guinean government recognized the urgency of the process and drove it hard, putting political capital on the line. Three decades of coups and military rule undoubtedly provided a useful reminder of the consequences of failure.

However, the devil is in the detail and this progress has, in a way, merely thrown up the next set of challenges. For example, now that the army has vacated the social space it used to occupy to the benefit of the police, the latter needs to step up to ensure public security. So does the country’s notoriously ineffective justice system. Yet, they are poorly governed, led, paid, trained and equipped. Reforming these organizations is also likely to command less political interest. For example, the 2009 ‘stadium massacre’ remains unresolved despite there being clear clues as to suspects and appropriate next steps. Finally, funds are becoming scarcer now that Guinea’s ‘success’ puts it at risk of seeing its PBF funding discontinued and donors in-country are few and not necessarily well-coordinated. Without further political and financial support the reform process may flounder, setting the scene for a slow erosion of what capacity has been created and increasing the potential for future violence.

Hence, paradoxically, if next steps cannot be taken, the success of the stabilization intervention may increase instability. A lack of prospects, basic services and poor governance continue to ensure that small incidents can spontaneously escalate and quickly lead to widespread violence. For example, a two-month long span of blackouts in some of the poorer suburbs of Conakry resulted in massive demonstrations leading to at least one death and several injured on 18 February. Police performance was poor. Such incidents are frequent.

In other words, given its help in achieving initial successes, can the international community now demonstrate it has staying power in accompanying the next step of the security sector reform process? Time will tell and yet the challenge is real.

Useful links

OECD work on Guinea

OECD work on peacebuilding, statebuilding and security