Achieving and sharing the benefits of globalisation

Catherine L. Mann, OECD Chief Economist, and Ken Ash, Director of the OECD Trade and Agriculture Directorate. Today’s post is also being published by OECD Ecoscope

Today’s OECD Interim Economic Outlook warns that trade growth is slowing, contributing to another slowing of global GDP growth in 2016 and with few signs of improvement for 2017. Does it really matter? If we believe the current anti-trade, anti-globalisation rhetoric, we might shrug our shoulders and say “no”. Trade has been so maligned and demonised, some might even be pleased.

But that would be the wrong answer. Open trade and cross-border investment are key vectors for diffusion of new technologies and competition, which are central to achieving productivity gains and improving well-being. New research published today by the OECD in conjunction with the Interim Economic Outlook suggests that a substantial part of the post-crisis slowdown in total factor productivity growth could be reversed if trade intensity were to recover. In short, weak trade is one of the factors that will keep the economy in a “low-growth” trap where sluggish trade and investment lead to diminished growth expectations and rising financial risks.

Over decades, trade has been responsible for drawing hundreds of millions of people out of poverty – and we mean one and two-dollar-a-day poverty – in emerging and developing countries. Trade could perform this same miracle for the many millions still living in abject poverty in poor countries in Asia and Africa, if other conditions are also right of course.  Salaries and working conditions are almost always better in companies that trade than in those that do not, and this is true in countries at all levels of development. Households gain hugely from trade because it increases choice and reduces prices.

The prospects of millions of workers in the global economy depend on their participation in global value chains, as highlighted by statistics developed by the OECD with the WTO on Trade in Value-Added (TiVA).  The main insight from these data is first, in order to export efficiently, a company has to also import efficiently. A second key insight is the importance of high quality services to support trade and trade-intensive activities.  It should be of great concern that there are signs that the development of global value chains appears to have gone into reverse in recent years.

The OECD paper published today looks at the reasons for the trade slowdown and back-tracking in the development of global value chains. Several factors are at play, some of them cyclical in nature, others structural like the changing role of China in the global economy. Increasingly murky protectionism is contributing to the slowdown, as is the failure to implement any really ground-breaking global new trade initiatives for more than a decade. Without entering into a rather futile debate about when the slowdown really started or the exact contribution of structural versus cyclical drivers, let us instead ask what governments can do to reverse it.

The OECD Interim Economic Outlook calls for implementation of a package of measures to boost demand, including through collective fiscal action focussed on raising investment and productive spending, and structural reforms. Removing barriers to trade and creating the conditions for people to reap the potential benefits of trade should be at the heart of the structural reform agenda.

First, governments should put their weight behind efforts to further lower trade barriers and unnecessary trade costs by implementing the Trade Facilitation Agreement, vigorously pursuing the reduction of restrictions on services trade, including by concluding the trade in Services Agreement (TISA), co-operating to reduce costly and unnecessary regulatory differences, concluding the Agreement on Environmental Goods, and by coming to the table to deliver a good result at the 11th WTO Ministerial Conference a little over a year from now.  They should reduce remaining barriers to foreign direct investment. There are unilateral, bilateral, plurilateral and multilateral channels available if governments want to provide those growth opportunities that are currently lacking.

Second, governments need to step in to ensure that the benefits of trade are fairly shared. Governments should help those affected by the churn and disruption caused by globalisation. Benefits from trade are diffuse and long-term in nature. Losses tend to be sharp and very concentrated on individuals and regions. The people most affected are sometimes those with the least capacity to adjust. An unemployed steel worker does not take much comfort from knowing that programmers in Silicon Valley are thriving, or that T-shirts and smartphones are cheaper. What he or she needs is a decent job, new training and skills, and a robust social safety net to help through the transition.

Making trade work better for more people is not just about persuading them, although clearer and more honest communication is important. It is about ensuring that the full panoply of structural policies is put to work to ensure that people are able to reap the benefits that more open trade, technology, and investment will bring. This means paying attention to infrastructure, well-functioning financial markets, education and skills, clear and transparent institutions and rule of law – all the things that make an economy nimble Trade policy cannot be made in a vacuum but rather must be part of the fabric of domestic policies.  If we are not able to do this, growing public scepticism, particularly in the most advanced economies, may mean that further market opening will be difficult, if not impossible. Such a result would impoverish many across the world.

Useful links

Economic complexity, institutions and income inequality

NAECCésar Hidalgo and Dominik Hartmann, Macro Connections, The MIT Media Lab

Is a country’s ability to generate and distribute income determined by its productive structure? Decades ago Simon Kuznets proposed an inverted-u-shaped relationship describing the connection between a country’s average level of income and its level of income inequality. Kuznets’ curve suggested that income inequality would first rise and then fall as countries’ income moved from low to high. Yet, the curve has proven difficult to verify empirically. The inverted-u-shaped relationship fails to hold when several Latin American countries are removed from the sample, and in recent decades, the upward side of the Kuznets curve has vanished as inequality in many low-income countries has increased. Moreover, several East-Asian economies have grown from low to middle incomes while reducing income inequality.

Together, these findings undermine the empirical robustness of Kuznets’ curve, and indicate that GDP per capita is a measure of economic development that is insufficient to explain variations in income inequality. This agrees with recent work arguing that inequality depends not only on a country’s rate or stage of growth, but also on its type of growth and institutions. Hence, we should expect that more nuanced measures of economic development, such as those focused on the types of products a country exports, should provide information on the connection between economic development and inequality that transcends the limitations of aggregate output measures such as GDP.

Scholars have argued that income inequality depends on a variety of factors, from an economy’s factor endowments, geography, and institutions, to its historical trajectories, changes in technology, and returns to capital. The combination of these factors should be expressed in the mix of products that a country makes. For example, colonial economies that specialised in a narrow set of agricultural or mineral products tend to have more unequal distributions of political power, human capital, and wealth. Conversely, sophisticated products, like medical imaging devices or electronic components, are typically produced in diversified economies that require more inclusive institutions. Complex industries and complex economies thrive when workers are able to contribute their creative input to the activities of firms.

This suggests a model of heterogeneous industries in which firms survive only when they are able to adopt or discover the institutions and human capital that work best in that industry. According to this model, the composition of products that a country exports should tell us about a country’s institutions and about the quality of its human capital. This model would also suggest that a country’s mix of products should provide information that explains inequality and that might escape aggregate measures of development such as GDP, average years of schooling, or survey-based measures of formal and informal institutions.

With our colleagues from the MIT Media Lab, we used the Economic Complexity Index (ECI) to capture information about an economy’s level of development which is different from that captured in measures of income. Economic complexity is a measure of the knowledge in a society that gets translated into the products it makes. The most complex products are sophisticated chemicals and machinery, whereas the least complex products are raw materials or simple agricultural products. The economic complexity of a country depends on the complexity of the products it exports. A country is considered complex if it exports not only highly complex products  but also a large number of different products. To calculate the economic complexity of a country, we measure the average ubiquity of the products it exports, then the average diversity of the countries that make those products, and so forth.

For example, in 2012, Chile’s average income per capita and years of schooling ($21,044 at PPP in current 2012 US$ and 9.8 mean years of schooling) were comparable to Malaysia’s income per capita and schooling ($22,314 and 9.5), even though Malaysia ranked 24th in the ECI ranking while Chile ranked 72nd. The rankings reflect differences in these countries’ export structure: Chile largely exports natural resources, while Malaysia exports a diverse range of electronics and machinery (see illustration here). Moreover, these differences in the ECI ranking also point more accurately to differences in these countries’ level of income inequality. Chile’s inequality as measured through the Gini coefficient (0.49) is significantly higher than that of Malaysia (0.39)

We separated the correlation between economic complexity and income inequality from the correlation between income inequality and average income, population, human capital (measured by average years of schooling), export concentration, and formal institutions. Our results document a strong and robust correlation between the economic complexity index and income inequality. This relationship is robust even after controlling for measures of income, education, and institutions, and the relationship has remained strong over the last fifty years. Results also show that increases in economic complexity tend to be accompanied by decreases in income inequality.

Our findings do not mean that productive structures solely determine a country’s level of income inequality. On the contrary, a more likely explanation is that productive structures represent a high-resolution expression of a number of factors, from institutions to education, that co-evolve with the mix of products that a country exports and with the inclusiveness of its economy. Still, because of this co-evolution, our findings emphasize that productive structures are not only associated with income and economic growth, but also with how income is distributed.

We advance methods that enable a more fine-grained perspective on the relationship between productive structures and income inequality. The method is based on introducing the Product Gini Index or PGI, which estimates the expected level of inequality for the countries exporting a given product. Overlaying PGI values on the network of related products allows us to create maps that can be used to anticipate how changes in a country’s productive structure will affect its level of income inequality. These maps provide means for researchers and policy-makers to explore and compare the complex co-evolution of productive structures, institutions and income inequality for hundreds of economies.

Useful links

This article is based on Linking Economic Complexity, Institutions and Income Inequality, by D. Hartmann, M.R. Guevara, C. Jara-Figueroa, M. Aristarán, C.A. Hidalgo.

The Atlas of Economic Complexity

The OECD is organising a Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning29/09 afternoon30/09 morning

OECD countries need to address the migration backlash

imoThis post, by Stefano Scarpetta, Director of the OECD Directorate for Employment, Labour and Social Affairs, is also the editorial of  the “International Migration Outlook 2016”, published today.

The public is losing faith in the capacity of governments to manage migration. Opinion polls in a wide range of countries suggest that the share of the public holding extreme anti-immigration views has grown in recent years and that these extreme views are more frequently heard in public debates. In part, this is due to the perception that no end is in sight for large migration inflows and that countries have lost control over them. People are concerned about the short-term impact of large inflows of migrants, and refugees in particular, and many feel that migration is threatening their economic, social as well as personal security. Common concerns are that migration is unmanaged and borders are not secured; immigrants stretch local services, such as social housing, health and education, to the detriment of local populations; immigration benefits the rich, with the poor finding themselves competing with immigrants for jobs, and wages for low-skilled work depressed; and many migrants do not want to integrate and may even oppose the values of host societies.

In most countries though, refugee flows are still a relatively small part of overall migration. The OECD has collected a wealth of evidence showing that the medium and longer term effects of migration on public finance, economic growth and the labour market are generally positive. But this message is not getting through. However much the demographic and macro-economic arguments for migration are true, they seem abstract and long-term to many people. As a result, they have only a limited impact on public opinion, and mainly preach to the converted. Governments need to develop better, more practical arguments if they are to counter anti-immigration voices.

The truth of the matter is that migration is a fact of life and is here to stay. About 120 million people living in OECD countries were born elsewhere and one person out of five is either a migrant or was born to a migrant parent. More than 4 million new permanent migrants settled in OECD countries each year on average over the past decade.

If we want to reap the full benefits of migration and to heal the social schisms that seem to be appearing in too many countries, action is needed from policy makers on three main fronts.

Countries must acknowledge and address the fact that the impact of migration is not the same for everyone.

Immigrants are nearly always concentrated in specific regions and urban areas – often the most disadvantaged ones. The local impact of large-scale immigration may be far stronger than what is observed at the national level, and may be working in a different direction. In particular, this edition of the OECD International Migration Outlook shows that large sudden inflows of migrants can aggravate longstanding structural problems and bottlenecks in local infrastructure, such as housing, transportation and education. Similarly, although this is not usually the case, in some circumstances, large numbers of low-skilled migrants arriving in a particular area may have a negative impact on the local labour market prospects of low-skilled residents already present. Scaling up those local public services stretched by increased numbers of migrants is a necessary part of an effective policy response, as is ensuring that minimum wages and other labour market regulations are applied rigorously.

Global challenges need global solutions. Leaving individual countries to deal with massive inflows, as recently witnessed with the refugee crisis, cannot address the problems adequately. International co-operation needs to be stepped up, with different countries making different contributions.

Needs must be identified and addressed more rapidly at both the global and local level. Adapting to higher migration flows can take time, during which political resistance builds up. If authorities fail to respond quickly to emerging migration challenges, as witnessed during the recent refugee surge in Europe, the impression that migration and (lack of) integration are out of control becomes entrenched.

Preparing for future developments requires:

  • Better anticipation of future flows and the corresponding needs for infrastructure and capacity, at all levels.
  • Pre-commitment to take appropriate actions. When a migration crisis hits, it often takes too long to agree on even ad hoc actions at the international level. Countries should consider stronger pre-commitment before a crisis becomes unmanageable. Here, lessons from other global challenges are illuminating; for example, systems are in place to identify global health challenges and to ensure that they are addressed in a co-ordinated and systematic way.
  • Adapting policies to reflect crisis situations. This issue is considered at length in the OECD International Migration Outlook. For example, a range of policy responses to address large movements of refugees and migrants are available, but one which has not yet been exploited in any substantial way is the use of legal alternative pathways to reduce irregular flows.
  • We need a new generation of effective migration policies adequate to the challenges of the 21st century. These policies must be global, because no country can deal with large, unexpected migration flows alone and in isolation. And local, because policies must promote quick and effective integration of those who are going to stay in the local community; and address the specific concerns of those who feel they do not experience direct benefits from migration and fear that it will challenge the basic values of the host society.

Unless systematic and co-ordinated action is taken in a timely way to acknowledge and vigorously address these concerns, migration policy will continue to seem abstract and elitist, at best trailing behind the problems it is supposed to be addressing. And, as is already apparent, the result is likely to be a more strident political populism.

Useful links

OECD Migration Insights

Stepping up to the plate on antimicrobial resistance

IFPMAEduardo Pisani, Director General of IFPMA – the International Federation of Pharmaceutical Manufacturers and Associations.

Antibiotics have made modern medicine possible. Before the discovery of penicillin in 1928 and the recognition of its therapeutic potential, there were few tools doctors could use when patients came to them with common or minor infections from simple paper cuts. Today, complex medical interventions are made possible by the use of antibiotics.

However, seventy years on, the rise of antimicrobial resistance (AMR) is threatening the effectiveness of these tools. A hallmark of antibiotics is that they lose their effectiveness over time as bacteria naturally evolve and mutate and so become resistant to the medicine’s power.  Estimates from the UK Review Team on AMR predict that the death toll from drug-resistant infections could rise from 700,000 today to 10 million by 2050, and that the burden put on healthcare systems would amount to trillions of dollars.

These statistics and scale of the challenge of tackling antimicrobial resistance may seem daunting, but they have certainly galvanised action. In many ways, the global pharmaceutical industry is already at the forefront of leading action to address antimicrobial resistance.

In January this year, a major milestone in the global response to AMR was achieved, when over 100 companies and 13 associations signed the Declaration by the Pharmaceutical, Biotechnology and Diagnostics Industries on Combating Antimicrobial Resistance. The Industry Declaration set out three key commitments. First, to reduce the development of drug resistance; second, to increase investment in R&D to meet global public health needs; and third, to improve access to high-quality antibiotics and vaccines for all. The industry also called on governments to commit to allocating the funds needed to create a sustainable and predictable market for these technologies while also implementing the measures needed to safeguard the effectiveness of antibiotics. There is a clear need for global coordination of stewardship, conservation, hygiene, and the creation and use of new commercial and incentive models for antibiotics, vaccines and diagnostics, to be delivered through local action.

The Declaration is a living document, and to keep up the pace with the evolving landscape of scientific breakthroughs and policy action, it will be updated every two years. Alexander Fleming himself is said to have called the discovery of penicillin “a triumph of accident”. Since, we’ve moved from analyzing basic samples of mold to developing new molecules through innovative private-public partnerships. As bacteria are getting “smarter”, researchers spend hundreds of hours in the lab to develop new medicines to address drug resistance. With 34 antibiotics and infection preventing vaccines within the global pipeline, the opportunity to bring resistance under control is within reach.

In one of the most comprehensive analyses to date on the scope of drug resistance, the World Health Organization points out that there are major gaps in actions needed across all 6 regions in order to prevent the misuse of antibiotics and reduce the spread of antimicrobial resistance. Perhaps one of the most eye-opening findings is that few countries (34 out of 133 surveyed) have comprehensive national plans to tackle AMR. While antibiotic resistance is a serious global threat, it does not provoke the same sense of urgency for all countries.

It is evident that there is no “one-size-fits-all” approach, and that governments need to acknowledge the global principles for action and implement them at local level. There are some countries that are already leading the way, but not all may start from the same level playing field. In Europe, there are countries such as Sweden, the Netherlands or the UK, who have invested in taking concrete actions to meet ambitious targets on AMR. In Africa, for instance, there is a real need for more and better data to understand the magnitude of AMR, while China is looking to increase training for consumers and medical professionals on proper use of antibiotics. Furthermore, the IFPMA Health Partnerships Directory lists over 20 case-studies of collaborative initiatives to combat AMR.

These issues are at the top of agenda of the forthcoming UN High-Level Meeting on AMR, where UN member states will be summoned to maintain a strong political commitment to tackle this global health threat.

IFPMA has an event in the margins of this meeting, where we will discuss how the biopharmaceutical industry will deliver on the commitments laid down in the Declaration. Building on the Declaration, over a dozen leading biopharmaceutical companies have developed a roadmap which lays out a number of practical steps in four key areas: reducing manufacturing pollution; addressing inappropriate use; improving global access; and developing a broad R&D ecosystem. Without collective action and local implementation of plans, we cannot expect real change. But when the global community rolls up their sleeves, we are that much stronger in tackling AMR.

Useful links

Antimicrobial resistance: millions of lives and trillions of dollars? Jim O’Neill, Commercial Secretary to the UK Treasury, author of the Review on Antimicrobial Resistance

Tackling antimicrobial resistance Michele Cecchini, OECD Health Division

Complexity, modesty and economic policy

NAECLex Hoogduin, University of Groningen and GloComNet

Societies and economies are complex systems, but the theories used to inform economic policies predominantly neglect complexity. They assume for example representative agents such as a typical consumers, and they also assume that the future is risky rather than uncertain. This assumption allows for the application of the probability calculus and a whole series of other techniques based on it.

In risk situations, all potential outcomes of a policy can be known. This is not the case in situations of uncertainty, but human beings, policy makers included, cannot escape having to take their decisions and having to act facing an uncertain future. The argument is one of logic. Human beings cannot know now what will be discovered in the future. Future discoveries may however impact and shape the consequences of their current decisions and actions. Therefore, they are unable to come up with an exhaustive list of potential outcomes of a policy decision or action.

Properly taking into account the complexity of the economy and the uncertainty of the future implies a paradigm shift in economics. That paradigm does not need to be developed from scratch. It builds on modern complexity science, neo-Austrian economics (in particular Hayek and von Mises), as well as the work of Keynes and Knight and certain strands of cognitive psychology (for example, Kahneman 2011). There is no room here to elaborate on the theory and the claim that it entails a paradigm shift. Rather, I will discuss the implications for economic policy that follow from this paradigm.

This starts with the recognition that the future cannot be predicted in detail. We should be modest about what can be achieved with economic policy. This is the “modesty principle”. Economic policy cannot deliver specific targets for economic growth, income distribution, inflation, the increase of the average temperature in four decades from now, etc. Economic policy makers would be wise to stop pretending that they can deliver what they cannot. This insight implies that many current policies should be discontinued. To mention just one example: inflation targeting by central banks does not pass the modesty test.

This principle also implies refraining from detailed economic forecasts as a basis for policy making and execution. Policies should not be made on the assumption that we know the value of certain variables which we cannot know. An example here is the income multiplier in relation to changes in fiscal policy. The modesty principle also flashes red for risk-based regulation and supervision.

What economic policy can do is contribute to the formation and evolution of a fit economic order, and avoid doing harm to such an order, what I would call the “do no harm principle”, and be as little as possible a source of uncertainty for private economic agents.

Order is a central concept in the alternative paradigm, replacing the (dis)equilibrium concept in mainstream economics. An order is the set of possible general outcomes (patterns, like growth, inflation, cyclicality, etc.) emerging from purposefully acting and interacting individuals on the basis of a set of rules in a wide sense (laws, ethics, conventions…), together called a regime. Economics can analyse the connection between changes in regime and changes in economic order. Economic policy can influence the economic order through changing the regime.

However, this knowledge is not certain. There is always the potential for surprises (positive and negative; opportunities and threats) and unintended consequences. Policy can therefore not be designed first and then just be executed as designed. Policy making and execution have to evolve in a process of constant monitoring and adaptation. This would also allow for evolutionary change. An economic order that is not allowed to evolve may lose its fitness and may suddenly collapse or enter a crisis (as described by Scheffer for critical transitions in society). This mechanism may have played a role in the Great Moderation leading up to the financial crisis of 2007/2008 and in the crisis of fully funded pension systems. It is also a warning against basing sustainability policies on precise temperature targets decades in the unknowable future.

Fitness of an order has five dimensions. The first is an order in which agents are acting as described in the previous paragraph – policymaking involves a process of constant monitoring and adaptation. In addition to that, fitness is determined by alertness of agents (the ability to detect mistakes and opportunities); their resilience (the ability to survive and recover from mistakes and negative surprises); adaptive capacity (the ability to adjust); and creative capacity (the ability to imagine and shape the future). Policies may be directed at facilitating economic agents to improve these capacities, although constrained by the “modesty” and “do no harm” principles. Note that the concept of stability does not appear in the definition of fitness. This marks a difference with current policies which put much emphasis on stability.

In its own actions the government should be transparent and predictable. The best way to do that seems to be to follow simple rules. For example in fiscal policy, balance the budget, perhaps with clearly-defined, limited room for automatic stabilisers to work.

This alternative paradigm places highlights some methods and analytical techniques, including narrative techniques), network analysis), evolutionary logic), qualitative scenario thinking, non-linear dynamics (Scheffer), historical analysis (development of complex systems is path dependent) and (reverse) stress testing.

Economic policies developed along these lines help people to live their lives as they wish. They are good policies for good lives.

Useful links

The OECD is organising a Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning29/09 afternoon30/09 morning

Urbanisation and Complex Systems

NAECColin Harrison, IBM Distinguished Engineer Emeritus (retired), formerly lead the development of technical strategy for IBM’s Smarter Cities initiative.

The city is humanity’s greatest invention.  An artificial ecosystem that enables millions of people to live in close proximity and to collaborate in the creation of new forms of value.  While cities were invented many millennia ago, their economic importance has increased dramatically since the Industrial Revolution until they now account for the major fraction of the global economy.  All human life is there and so the study of cities crosses boundaries among economics, finance, engineering, ecology, sociology, anthropology, and, well, almost all forms of knowledge.  Yet, while we have great knowledge in each of these domains individually, we have little scientific knowledge of how they come together in the overall system of systems that is a city.  In brief:  How does a city work?

Such knowledge would be helpful in the coming decades.  In the last sixty to seventy years, globalisation has spread the Industrial Revolution ever more widely, creating in cities new opportunities that attract hundreds of millions of internal and international migrants.  This process is lifting many of these migrants out of deep poverty, while causing cities from London to Nairobi to struggle in differing ways with the unending influx.

Further, cities are responsible for large fractions of greenhouse gas emissions, for the consumption of natural resources such as water and air, and the resulting discharges of pollution into the environment.  If the battle against climate change is to be won, it will be won in cities.  Cities are also the principal centres for innovation and economic development, both of which are needed to continue lifting migrants out of poverty.

While the roots of urban planning can be traced back more than three thousand years in terms of the master plans of cities, it was the tremendous growth of cities in the late 19th century that transformed that field into considering the many services and affordances that are required for urban dwellers.  But urban planning emerged mainly from the humanities and works primarily through extensive case studies, although it has adopted many digital tools.  The notion of the city as an object of scientific study is more recent and still in its infancy, triggered in part by developments in complexity theory such as network theory, scaling laws, and systems science, and the growing availability of urban data.

Urban scaling laws have been explored at least since the early 20th century, when cities were found seen to be an example of Zipf’s law. In this case Zipf’s Law states that “for most countries, the number of cities with population greater than S is proportional to 1/S”.  The understanding of scaling was greatly expanded in recent years by the works of West and Bettencourt and Batty.  Their work showed that many properties of cities such as the number or lengths of roadways, the numbers of amenities such as restaurants, and so forth follow scaling laws over population ranges from ten thousand to tens of millions.  Moreover these scaling laws have exponents in the ranges 0.85 to 1.15 that show large cities to be more productive, innovative, efficient in energy consumption, expensive, but also better paying than small cities.  Likewise negative attributes such as crime, disease, and pollution also scale superlinearly, that is they don’t rise in strict proportion to the increase in city size. For example, GDP is proportional to the Size (S) of a city raised to a power that is slightly greater than 1, thus S1.15, while other attributes like energy consumption per capita scale sublinearly, at S0.85. Network laws also describe well the evolution over long time scales of roadways and railways in cities.

While scaling laws and network laws have great descriptive power, opinions vary on whether they apply across different countries or have predictive power.  That is, the scaling of attributes is a snapshot of frequency versus size at a given time.  If a city grows and “moves up the scale”, it may not achieve, in the short term, all of the positive benefits and negative impacts described.  Nor do the laws provide explanations for the observed behaviours.  Nonetheless, this is an important area for planners and developers seeing their cities growing or shrinking.

As urban data has become more pervasive, it is now possible to study cities as complex systems of interactions.  We may view the city as a myriad of interactions among its inhabitants, its infrastructures and affordances, its natural environment, and its public, private, and civic organisations.  Some of these interactions involve the exchange of goods or services for money, but many of them involve the exchange or transmission of information, enabling inhabitants and organisations to make choices.  Public transportation is often studied in this way, revealing for example that small and medium sized cities evolve networks enabling commuting between small numbers of residential and business districts, while very large cities, such as London, have much richer networks that permit greater flexibility in where people live and work.

The operation of cities is also modelled using synthetic populations of software agents that represent the distribution of behaviours or preferences of much larger, real populations.  Such agent-based models, with agents representing patterns of origin, destination, travel times, and modality preferences, are used to examine the overall impact of new services such as London’s Crossrail.

As the Internet of Things provides greater visibility into how inhabitants choose to exploit the opportunities offered by a given city, we may hope to discover abstract principles about how cities work.  We may envision being able to construct agent-based models representing the complete spectrum of choices a city’s inhabitants make at timescales from minutes to years and spatial scales from meters to kilometers.  Equally, given the increasing availability of real-time information, we might hope one day to understand the effective use of a city’s services in terms of a Nash Equilibrium, a game theory concept (often used to describe poker games), where no player can gain anything by changing their chosen strategy if other players don’t change theirs – all the players’ strategies are optimal.  These are far in the future, but the EC’s Global Systems Science programme is the beginning of that journey.

Useful links

OECD work on urban development

The OECD is organising a Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning29/09 afternoon30/09 morning

The new terrorism

paris-attacks-nov-2015
Paris, November 2015

Fifteen years after 9/11, the world is now facing the threat of systemic terrorism. Apparently mindless, random attacks are in fact part of a strategy developed over a number of years, whose origins can be traced back to three major turning points, one ideological, one political, one military, that occurred at the end of the 1970s.

Traditionally, terrorism was the work of relatively small groups with clearly identifiable political or ideological goals, ranging from national liberation to animal rights. It was used as a bargaining counter to attain a clearly defined objective such as the freeing of prisoners or the withdrawal of the army from an occupied zone, or for vengeance. Of course, there were campaigns designed simply to destabilise the political climate, but these were the minority. The terrorism of Al-Qaeda represented a radical break from this, in that its aim was sustained opposition to the entire “Western” economic, cultural, and belief system, with no negotiable end to their campaigns, and whole populations seen as legitimate targets. Attacks, and the possibility of attacks, are supposed to change enemy policy by means other than the traditional method of battlefield superiority. One of their aims is to convince public opinion that the price for supporting a particular policy is too high, as well attracting support from potential sympathisers following retaliation for the initial attack.

Conflicts are fought worldwide in a complex arena across the whole spectrum of political, social, economic, and military networks, and involve a mix of national, international, transnational, and subnational actors, motivated not only by politics or ideology, but also profit. This grey area, combining aspects of traditional warfare with organised crime, is a major aspect of 21st century terrorism. But the major way in which terrorism has evolved beyond the Al-Qaida model is the strategy of Daesh to create a state by conquering and holding territory, using traditional military confrontation in some cases, and isolated attacks far from its main bases in others. The roots of this strategy can be found in the combination of the three events mentioned in the introduction.

In November 1977, Egypt’s President Sadat travelled to Jerusalem to prove his willingness to sign a peace deal with Israel. This marked the end of pan-Arabism as a viable ideology. Sadat also broke with the USSR and encouraged the rise of the Muslim brotherhood to counter the influence of the left, especially in the universities. Shortly afterwards, the Shah of Iran was overthrown by a popular uprising that the Islamists came to dominate, eventually creating an Islamic State. Then the Soviets invaded Afghanistan, but were defeated by a Western-backed coalition that the Taliban came to dominate.

Pan-Arabism was promoted by Nasser, and the intellectual origins of today’s Islamist terrorism can be traced back to the writings of one of his opponents, Sayyid Qutb, an Egyptian intellectual jailed by the regime, although his books were not banned. For Qutb, the world is living in a state of ignorance and idolatry, Jahiliyyah, a term normally reserved for pre-Islam Arabia. This includes even those who claim to be Muslims, but who are in fact apostates and thus legitimate targets: “this is not Islam and they are not Muslims”. The evil is due to the fact that men have denied God one of his attributes, Hakemeyya, divine sovereignty. Muslim scholars are scandalised by the claim that man can deprive God of anything, but Qutb’s position is echoed by Daesh’s sinister black flag, where the “Mohammed-Messenger-Allah” you would expect is replaced by “Allah-Messenger-Mohammed”, if read in the usual top-to-bottom order.

Daesh are also influenced by Qutb’s idea that divine sovereignty will be restored by a self-proclaimed elite, and that the declaration of faith is not enough to define someone as Muslim, and must be completed by jihad. The practical manual for bringing about this new, truly Islamic state, was written by Daesh in the mid-2000s. The Management of Savagery: The Most Critical Stage through Which the Umma Will Pass sets out the thinking behind the terrorist campaigns we’re seeing just now. The idea is to create such chaos, by whatever means necessary, that the jihadi are seen as the only group capable of restoring and maintaining order, similar to the initial support for the Taliban regime from Afghanis exhausted by the corruption and incompetence of the warlords.

Terrorism is one part of this strategy and Daesh have learned at least one lesson from the totalitarian regimes in Europe before and after the Second World War, namely that terror succeeds best when it is accepted on its own terms by its enemies. It’s not possible to physically terrorise everybody, but if everybody thinks they could be the next random victim, that is just as efficient.

Another major strand of Daesh’s approach is finance. The recommendations of The Management of Savagery for winning people over emphasize: “Uniting the hearts of the world’s people by means of money”. The financial power of Daesh is another significant difference with previous terrorist organisations, with some estimates putting its annual turnover at around USD 2 billion. It obtains its income through extortion, theft, and the black market – the same means described in a 2010 Rand Corporation report into Al-Qaida’s finances for the US Office of the Secretary of Defense.

Black market sales of oil probably remain Daesh’s main source of income, but as this dries up due to the success of the military forces opposing them, they will turn to other means. (Al Shabab in Somalia for instance controlled the sugar trade). Whatever it is, corruption will still be the “enabling technology” that enables the terrorists to operate. Two of the 9/11 hijackers allegedly obtained fraudulent driver’s licences from a branch of Virginia’s Division of Motor Vehicles which they used as identity cards to board the aircraft. The same branch had also sold licenses to illegal immigrants in exchange for bribes. “Nigerian troops were denied weapons to fight Boko Haram and thousands of lives were lost because of rampant fraud in the procurement process”, Nigerian President Muhammadu Buhari declared when a corrupt multi-billion dollar deal for weapons and equipment was revealed in the press in November 2015. The deal has not materialised, leaving troops without proper equipment to fight terrorist groups.

The OECD published work on the economic consequences of terrorism as long ago as 2002,  and since then has examined regional, sectoral and broader aspects of the issues, for example terrorism and conflict over resources in West Africa, the implications for the transport industry, and how to help fragile states. In an analysis published earlier this year, Terrorism, corruption and the criminal exploitation of natural resources, the OECD argues that since terrorism is a multidimensional challenge, tackling it efficiently requires integrating social, economic, and political factors into the security analysis and response. Speaking personally, I would add that since the aims of Daesh include destroying democracy and dividing society along religious grounds, we should not do this for them in the name of the “war against terror”.

Useful links

Financial Action Task Force (FATF) Action on Terrorist Finance

A Development Co-operation Lens on Terrorism Prevention

International E-Platform on Terrorism Risk Insurance