Prospects for Global Governance

NAECRon Gass, former OECD Director, based on a paper prepared for today’s NAEC seminar on The Creative Society and Technology

A world society is emerging where nation states are dominant, but in a complex, multi-polar world in which the poles – including business, civil society, and multilateral agencies – are developing various forms of power through alliances and shared objectives (or even common enemies). In the global system that is emerging, economic growth and the technological advances that underpin it have to be geared to meet human ends. Global governance has to be built on three pillars which reflect this complexity: political vision; realistic goals; and operational strategies.

This is the sense of the UN Human Development approach, the OECD Better Life Initiative, and the UN 2030 Sustainable Development Agenda to which the G20 Hangzhou consensus lends support. Is the vision of global leadership as expressed by these bodies adequate to steer the world community out of the enduring crisis?

The 2030 Agenda implies a new relationship between the economy, nature, and society, and as such it has caught the mainstream political parties off balance. The Right is mainly on the economic leg; the Left on the social leg; the Greens on the ecological leg. The result is that the policy-making institutions, politically neutral, have a special responsibility. The OECD, in the nascent coalition of multi-lateral agencies, has the advantage of having pioneered its triangular policy paradigm almost since its foundation. This is now becoming a tripod, with governance at its apex.

The heart of the policy problem is that the economic, social and ecological systems have different logics. This means that policy coherence is both increasingly important and increasingly difficult. It has to be sought at all levels of decision-making, right down to cities and local communities where it is easier to achieve concertation between the stakeholders. At the level of the macro debate, policy coherence is complicated by the fact that the policy sciences are, by their very nature, silos. Economic, ecological, and social theory do not readily mix. Policy-makers can only get at the massive structural problems of today by systemic reforms which cross the boundaries of ministerial departments and the policy sciences. That is why systems thinking is needed for policy coherence.

This mutation in policy-making will not succeed if it remains the affair of a policy-making elite. Already, something like a popular movement appears to be building up. Way ahead of the policy-makers and the academics, people in cities, towns, and villages across the world are responding to the sustainability movement. For necessity is the mother of invention – as reflected in protest movements to avert climate disaster and to resist expropriation from historic “commons”.

Given the complexity of the goals of global governance, the leadership needs to explore the implications of alternative scenarios (futures) as a guide to today’s decisions. In that sense it has a pedagogical role, even rhetorical, since it engages in a “conversation” in and around possible decisions. Given the turbulence of the geo-political and geo-economic scene, its role is likely to become more important as predicting the future becomes more difficult while creating it becomes more necessary. And faced with the complex web of interactions between the SDGs, the context in which policies are formulated is vital. Success will depend on the extent to which, for example, “centres of government” are willing to collaborate.

There are two consequences. First, certain “chunks” of the SDG map are forced onto the policy agenda by the geo-political and geo-economic context. This is the case of the impressive commitments made at the G20 Hangzhou Summit, for example with regard to “a globally fair and modern international tax system”, green financing, energy collaboration, climate, inclusive and interconnected development, and illicit financial flows.

The second contextual reality is the need to pursue action in real-world decision-making contexts, national and sub-national. This is where the OECD can make a considerable contribution, because of its long-standing tradition of peer reviews, now extending down to the city, regional and local levels of public policy. The Multi-Dimensional Country Reviews of the OECD Development Centre are of particular interest in this regard.

Given the long and rocky road to the SDGs, regular monitoring of achievements and failures will be vital. This involves the publication of statistical indicators, an area in which the OECD has an important role to play. But more is at stake because sustainable development reflects a shift in opinion across the world. Policy-makers and citizens are in effect learning their way into the future, and emulation is an important stimulant for progress.

Progress is linked to security. After World War II, NATO and the OECD were the two arms of the Western strategy to provide security and prosperity. European economic and social progress was seen as the bulwark against Soviet communism, and the Marshall Plan was the instrument. Progress and security were thus linked. Today the progress-security nexus is quite different. The challenge of world progress – reconciling economy, nature and society – is much more complex. The security threats are more diffuse, ranging from nuclear conflict to climate change and terrorism.

The people of the world are now faced with living together on a finite planet, in an ever-expanding universe that they are beginning to explore. The fundamental challenge facing global governance is whether security risks and threats will undermine and overwhelm the immense power for progress that the new technological revolution brings. The SDGs can be part of the response if sustainable development, the Brundtland vision, becomes a popular movement. So too can the Hangzhou consensus, if the commitment of the major G20 powers to the SDGs extends to peace and security aspects of the UN 2030 Agenda.

The hope that this will be the case depends on whether, despite a certain amount of sabre rattling, a complementary force to economic interdependence is on the move. The great historical civilisations now appear to be embarked on a global process of convergence/competition. Interaction and mutual fertilisation in philosophy, culture, sport, education and travel are all everyday realities for the connected peoples of the world. On this fertile soil, a new global humanism could, in the long run, be the best shield against xenophobia, populism, and terrorism.

Useful links

The creative society and the new technological revolution Issues paper by Ron Gass

50 Years of reconciling the economy, nature and society Ron Gass, OECD Yearbook 2011

NAEC and the Sustainable Development Goals: The Way Forward Mathilde Mesnard, OECD Insights

It’s not just the economy: society is a complex system too Gabriela Ramos, OECD Insights

Innovation and complexity

NAECAndrew Wyckoff, Director, OECD Directorate for Science, Technology and Innovation

Since its creation in 1961, the OECD has influenced how governments approach science, technology and innovation, and how economics as a discipline tries to understand these phenomena. The OECD Working Party of National Experts on Science and Technology Indicators (NESTI) was created in 1962, and in 1963, Science, economic growth and government policy convinced governments that science policy should be linked to economic policy. In 1971 Science, growth and society anticipated (also called the “Brook Report” after  the Chair, Harvey Brooks) many of today’s concerns by emphasising the need to involve citizens in assessing the consequences of developing and using new technologies.

For many experts though, the major contribution was the concept of national innovation systems, presented in 1992 in a landmark publication, Technology and the Economy: The Key Relationships. The origins of the concept go back to the 1970s crisis, which had provoked an in-depth re-examination of previous economic thinking on how growth came about and why growth in productivity was slowing. A 1980 OECD report, Technical Change and Economic Policy, is now widely recognised as the first major policy document to challenge the macroeconomic interpretations of the 1970s crisis, and to emphasise the role of technological factors in finding solutions, arguing for instance that innovation can be more powerful than wage competitiveness in stimulating an economy.

Economists working at the OECD were pioneers of a new approach that saw innovation not as something linear but as an ecosystem involving interactions among existing knowledge, research, and invention; potential markets; and the production process. In national innovation strategies, one of the key issues is the interactions among the different actors: companies, public research institutions, intermediary organisations, and so on. And contrary to the dominant thinking in policy circles in the 1980s and early 1990s, the OECD also saw it as something that governments should play a central role in – hence the term national innovation strategy.

Today, services are becoming the focus of innovation, with some companies even blurring the distinction between the value-added of products and services, smartphones being a good example. This is a logical outcome of the increasing digitalisation of the economy. Digital technologies are now so ubiquitous that it is easy to forget how recent they are. The World Wide Web we know today for example was created in the 1990s, and Microsoft thought it was possible to launch a rival to Internet (called MSN) as late as 1995.  Google was only founded in 1998 and it would be 6 years before it went public.

With the digital economy and society coming so far in such a short time, it is hard to predict what they will look like in the future. We can however identify some of the drivers of change. Big Data will be among the most important. In The phenomenon of data-driven innovation, the OECD quotes figures suggesting that more than 2.5 exabytes (EB, a billion gigabytes) of data are generated every single day, the equivalent of 167 000 times the information contained in all the books in the US Library of Congress. The world’s largest retail company, Walmart, already handles more than 1 million customer transactions every hour. Because so many new data are available, it will be possible to develop new models exploiting the power of a complexity approach to improve understanding in the social sciences, including economics. Also, the policy making process may benefit from new ways of collecting data on policies themselves and vastly improving our evaluation capabilities.

The analysis of data (often in real time), increasingly from smart devices embedded in the Internet of Things opens new opportunities for value creation through optimisation of production processes and the creation of new services. This “industrial Internet” is creating its own complex systems, empowering autonomous machines and networks that can learn and make decisions independently of human involvement. This can generate new products and markets, but it can also create chaos in existing markets, as various financial flash crashes have shown.

Two sets of challenges, or tensions, need to be addressed by policy makers to maximise the benefits of digitally-driven innovation, and mitigate the associated economic and societal risks. The first is to promote “openness” in the global data ecosystem and thus the free flow of data across nations, sectors, and organisations while at the same time addressing individuals’ and organisations’ opposing interests (in particular protecting their privacy and their intellectual property). The second set of tensions requires finding policies to activate the enablers of digital-driven innovation, and at the same time addressing the effects of the “creative destruction” induced by this innovation. Moreover, there is a question concerning the efficacy of  national policies  as digital-driven innovation is global by definition. As a policy maker you can promote something in your country, but the spillovers in terms of employment or markets can be somewhere else.

With so many new technologies being introduced, more firms and countries being integrated into global value chains, and workers becoming more highly educated everywhere, you would expect productivity growth to be surging. In fact it is slowing. But that average trend hides the true picture according to an OECD study on The Future of Productivity . Labour productivity in the globally most productive firms (“global frontier” firms) grew at an average annual rate of 3.5 per cent in the manufacturing sector over the 2000s, compared to 0.5% for non-frontier firms.

Diffusion of the know-how from the pioneering frontier firms to the bulk of the economy hasn’t occurred – either because channels are blocked or because we are in a transformative period and the expertise for how best to exploit the technologies is still in the heads of a few.  Most likely, it is a combination of the two.  We therefore have to help the global frontier firms to continue innovating and facilitate the diffusion of new technologies and innovations from the global frontier firms to firms at the national frontier. We can try to create a market environment where the most productive firms are allowed to thrive, thereby facilitating the more widespread penetration of available technologies and innovations. And we have to improve the matching of skills to jobs to better use the pool of available talent in the economy, and allow skilled people to change jobs, spreading the know-how as they move.

In a complex system, you can’t forecast outcomes with any great degree of certainty, but many of the unintended outcomes of interactions in the innovation system are beneficial. The policies mentioned above would each be useful in themselves and would hopefully reinforce each other beneficially.

Useful links

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

OECD work on innovation

The Innovation Policy Platform (IPP), developed by the Organisation for Economic Co-operation and Development (OECD) and the World Bank is a web-based interactive space that provides easy access to knowledge, learning resources, indicators and communities of practice on the design, implementation, and evaluation of innovation policies.

Sing for our time too, or what Homer can teach us about complexity

NAECLast week’s Workshop on Complexity and Policy organised by the OECD New Approaches to Economic Challenges (NAEC) team along with the European Commission and the Institute for new Economic Thinking (INET) included a discussion about how you build a narrative around complexity. As one participant pointed out, “complexity economics” isn’t the most thrilling of titles, except (maybe) to complexity economists. But “narrative” was one of the keywords of the discussions, along with “navigating” complexity. If you add to this Lex Hoogduin’s plea for modesty in his article on Insights and during the debate, I think we could learn something from an expert on narrative, navigation, and modesty: Homer.

The Iliad and Odyssey start with similar requests to the Muse to tell the tale of the hero, but with one striking exception. In the Iliad, she is asked to tell of the anger of Achilles, and the epic that follows is a more or less chronological account of ten days at the end of the Trojan War. In The Odyssey on the other hand, the poet suggests that the goddess start the tale wherever she thinks is best. One reason could be that, in our terms, The Iliad is a linear account, where one event causes and leads to the next, while The Odyssey is complex, jumping all over the place in space and time, with events far apart influencing each other, often in unintended ways.

Where you start a complex narrative determines what you describe and to some extent how you describe it. If, for example, you start your explanation of the financial crisis with the collapse of Lehmann Brothers, you will tell the story one way. If you start a few years earlier with market deregulation, the story will be different. Go back to the end of unlimited liability of stakeholders and yet another plot and set of characters become possible.  Wherever you started, you would tell the true story, but not the only story. So in telling a complex story, you have to first decide what you want the audience to remember, and then decide what combination of the limitless elements available would best allow them to understand the issues and agree with a course of action.

Another lesson we can learn from Homer is that in a non-complex telling, there can be a “God’s-eye view” of the narrative, as when Achilles contemplates the shield made for him by the god Hephaestus. In The Odyssey, the narrator doesn’t have this knowledge, and is in fact part of the story himself, influencing its outcome. Eric Beinhocker of INET, who co-organised the NAEC Complexity workshop, relates this to Gödel’s incompleteness theorems, arguing that it may be impossible for an agent embodied within the system to access information an agent outside the system with a God’s-eye view would have.

Once you have decided what you want to say and selected what you are going to use to say it, there remains the question of how to say it. Policy experts, like experts in other fields, often defend their poor communication by explaining that the subject is complicated and shouldn’t be dumbed down. Here’s an extract from Einstein’s critique of Newtonian cosmology in Relativity: The Special and General Theory: “If we ponder over the question as to how the universe, considered as a whole, is to be regarded, the first answer that suggests itself to us is surely this: As regards space (and time) the universe is infinite. There are stars everywhere, so that the density of matter, although very variable in detail, is nevertheless on the average everywhere the same. In other words: However far we might travel through space, we should find everywhere an attenuated swarm of fixed stars of approximately the same kind and density.”

Practically any adult or young person who can read can understand Einstein’s point, however complicated the subject. Here by way of contrast is the OECD explaining a fundamental concept in economics: “…the relative cost differences that define comparative advantage, and are the source of trade, disappear once one reaches equilibrium with free trade. That is, the two countries in the trading equilibrium in Figure 1.2 are both operating at points on their PPFs where the slope is equal to the common world relative price. Thus comparative advantage cannot be observed, in a free trade equilibrium, from relative marginal costs.” Can you tell from this if we’re for or against free trade?

It’s striking that in so many domains, the greatest experts are the greatest advocates for simplicity. David Hilbert set the agenda for 20th century mathematics at the 1900 International Congress of Mathematicians in Paris in a paper on 23 unsolved problems. Hilbert supported the view that: “A mathematical theory is not to be considered complete until you have made it so clear that you can explain it to the first man whom you meet on the street”. Maths genius Alan Turing was even more provocative, claiming that “No mathematical method can be useful for any problem if it involves much calculation.”  (Turing wrote a paper on computability without using any equations, basing his explanation on puzzles sold in toyshops.)

We can learn a final lesson from Homer in the character of his heroes. Achilles is arrogant, immature, impulsive, self-centred (“the best of the Achaeans”, making you wonder what the rest of them were like). He’s strong and is good at killing people but ends up dead. Ulysses is clever and is good at persuading people. He is modest and he listens to advice. He worries about others. And he navigates his way back to Ithaca and Penelope. In a complex world, today or as described by Homer, you will achieve more through strategy and resourcefulness than by brute force. The poet doesn’t just ask the goddess to “start from where you will”, he asks her to “sing for our time too”.

Useful links

You can see the webcast of the Workshop at these links: 29/09 morning; 29/09 afternoon; 30/09 morning

Navigating wicked problems

NAECJulia Stockdale-Otárola, OECD Public Affairs and Communications Directorate

Knowing there is a single clear solution to any problem is certainly a comforting idea. As children we would raise our hands in class to answer increasingly difficult questions – always hoping that we would “get it right”. But sometimes the question itself is ambiguous and the list of potential solutions endless.

Such is the case with wicked problems.

The term isn’t a moral judgement. Wicked problems are dynamic, poorly structured, persistent and social in nature. Difficult to define, highly intertwined with other social issues, and involving many actors, wicked problems reflect the complexity of the world we live in. For example, think of policy challenges such as climate change, immigration, poverty, nutrition, education, or homelessness. Each issue involves multiple drivers, impacting various policy domains and levels of government. To further complicate matters, any intervention could set off a chain of new unintended consequences. That’s a lot of moving parts.

All these factors make it difficult for anyone to agree on what the actual problem is, where it is rooted, who is responsible, and how to best address it. The scope of the problem is also vague. Entire systems can be involved in a seemingly local or regional problem like mass transit.

Clearly coming to grips with the issue is challenge enough, so how do we go about making decisions? So far, traditional approaches have proven unsatisfactory. In fact, many of these wicked problems seem to only get worse as we try to solve them.

The complexities involved force us to rethink our problem-solving strategy. Instead of trying to find a final solution we need to recognise that these challenges can, generally speaking, at best be managed but not solved. At least, not solved in a static sense. That doesn’t mean the situation can’t be improved. To some, it might even be “solved” depending on how the problem is defined. The bottom line is that we need to become more flexible to better manage the challenges posed by wicked problems. Policies should be adaptive, so that they can change as the issue evolves over time. We also need to avoid becoming too attached to our own solutions. They need to be dynamic, to change along with the problem at hand.

From the outset we need to look at problems more holistically. An increasing number of new approaches are developing in different fields to offer solutions. For example, complexity science is naturally adaptive as it looks at the way in which systems interact. To date this strategy has been helpful for example in improving traffic management. To improve traffic safety analytics techniques are applied to anticipate risks and traffic jams, and improve flow. Implementing pilot projects can also be useful in addressing wicked problems, when affordable, as they involve continuous monitoring and opportunity for adjustments. Though no magic formula exists, these approaches can help capture some of the intricacies of wicked problems.

Governments have already started using some of these adaptive strategies. Singapore’s government has introduced a mix of policy approaches to tackle wicked problems. For example, a matrix approach was implemented to help departments better share information and work horizontally; new departments reflecting the thorniest issues were established; and a computerised tool to help mitigate systemic risks. Though the island has the advantage of size, facilitating the implementation of new approaches, their experiences may provide some useful insights into best practices.

The OECD has also been looking at policy challenges as wicked problems. In a 2009 workshop on policy responses to societal concerns, Sandra Batie and David Schweikhardt of Michigan State University analysed trade liberalisation as a wicked problem. In this case, the role of stakeholders is typical of a wicked problem: different groups are likely to have differing ideas about what the real problem is and what its causes are. Some would say the issue is making the economy as open as possible while for others national sovereignty or protecting local producers may be more important.

Unlike a tame problem where scientifically based protocols guide the choice of solution, answers to the question of whether more trade liberalisation is needed depend on the judgements and values of whoever is answering. Many stakeholders will simply reject outright arguments to justify trade liberalisation based on neoclassical economics. Batie and Schweikhardt argued that the role of science, including economic science, is not to narrow the range of options to one (in this case trade liberalisation), but rather to expand the options for addressing the issue(s), and to highlight the consequences, including distributional consequences, of alternative options.

Wicked problems remind us that it isn’t always easy, or even possible, to “get it right”. There isn’t always a solution that can be implemented once and last forever. But that’s okay. We just need to stop thinking about achieving optimal solutions and learn how to sustain adaptive solutions.

Useful links

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

Please consult the draft Agenda for more information, and a preliminary background paper “Insights into Complexity and Policy” regrouping articles from the insights blog and other sources.

It’s not just the economy: society is a complex system too

NAECGabriela Ramos, OECD Chief of Staff and G20 Sherpa

Income and wealth inequality is not a new phenomenon. On the contrary, it seems that it is a permanent feature in human history, and over the years, its causes and consequences have become more numerous and more interconnected. The same is true for many social phenomena, and even though the world looks more complicated today, it is not. What is different is the increased number of domains where public policy is expected to play a role. Regarding inequalities of income and wealth, governments have to make decisions on several interlinked areas such as taxes, education or health.

Unfortunately, the tools at the disposal of policymakers have not always been updated fast enough to cope with these challenges and with their inter-linkages. Moreover, policies are often designed within the narrow confines of one issue, without taking into account their consequences elsewhere.

Economists have tried to simplify and abstract from reality with limiting assumptions like the representative agent and general equilibrium. They have also given primacy to the goal of effectiveness, in detriment to other important considerations such as fairness. Yet, the use of aggregate data obscures the distributional consequences of policies: an economy as a whole may be doing well, but – as we have seen in recent years – there are severe consequences for social cohesion, and ultimately growth itself, if large groups are excluded from the benefits of economic prosperity. In defining growth policies that aimed only at increasing GDP per capita, inadequate attention was paid to institutions, human behaviour, and culture. These approaches failed to adequately account for the realities of markets, consumer decisions, and the interconnectedness of economic, communications and societal networks.

In stark contrast to the assumptions of neo-classical economics, socio-economic systems are not stable, but in constant flux. Complexity science generates new insights and furnishes us with the analytical tools and instruments to help us, as individuals and societies, to navigate this new understanding of the economy. It addresses some of the limitations which constrain conventional economics and ultimately it is helping us to do a better job in advising governments and public institutions.

For example, taking a complexity-based approach we can begin to recognise that the causes and consequences of inequalities and major economic and societal problems are intertwined. Besides contributing substantially to the increase of wealth inequality, the financialisation of the economy also led to increased systemic risks where a problem in the subprime markets led to a major economic crisis that has set additional hurdles in the way of the most vulnerable groups all over the world.

Just like the financial system and its major risks, our social systems are complex and vulnerable. Considering the increased fragmentation and divisions in our societies (and adding the challenge of integration of migrants and marginalized groups) more attention should be paid to social stability. In this vein, policies to address societal problems, should not only rely on traditional economic tools and measures, but broaden them to bring insights of useful disciplines.

This more realistic approach to how people and the economy actually work is needed – an integrated inclusive growth agenda which also considers unintended consequences, trade-offs and complementarities between policy objectives.

Indeed, I believe that economists – and the policy makers they advise – can do better by listening to and learning from others. It’s not easy for an organisation that has “Economic” in it is name, but we need to break the monopoly of economics over policy – looking to other disciplines such as physics, biology, psychology, sociology, philosophy and history. Societies and economies are not static features that can be predicted, but evolutionary systems with breakpoints and changes that need to be better characterized.

At the OECD, we recognise the potential of new economic thinking, drawing on complexity theory, and evolutionary and behavioural economics. Technological and analytical innovations are driving a revolution in the physical sciences, biological sciences, and social sciences, breaking down the barriers between disciplines and stimulating new, integrated approaches to pressing and complex challenges. Advances in computing power are opening up new possibilities for integrating systems models, agent-based modelling and network analysis. It is only by properly utilising these new approaches that we can strive to create social and economic models that provide a more accurate representation of the world around us. These tools also allow us to get away from average representations, or to look at stocks and not only at flows in the economy (income vs wealth inequality).

And indeed, economics is starting to incorporate insights from other disciplines. For example, expectations may be admirably rational in traditional models, but by combining psychology and economics we are designing policies based on how real people actually behave, not on limited assumptions about how some fictional average person should behave. Taking a problem-based approach, we can design policies to influence people and nudge them in the right direction in areas such as consumer policy, regulation, and environmental protection.

The OECD is part of this revolution and we are already transforming our policy thinking and acting. With the New Approaches to Economic Challenges (NAEC) initiative, we are taking a hard look at our analytical methods, our data and policy advice.

Many articles in this series have argued that the economy is a complex adaptive system. Society is a complex system too. It is formed by the interaction and mutual dependence of individuals, and is pursuant to their spontaneous, natural behaviour. Since the emergence of hunter-gather societies inequalities have threatened to undermine and weaken the fabric of the social system. If we are to overcome the pernicious effects of these inequalities, we need to think about the interactions between our social and economic systems – which follow their own logics – and design policies which help our economies to grow. But growth isn’t an end in itself. It has to be inclusive to ensure that all segments of our societies prosper.

Systems thinking can lend us a hand to fight inequalities and develop an agenda for inclusive growth. As we draw out the inter-linkages between different policy areas, we begin to understand how the economic system interacts with other systems, as well as with the history, politics, and ambitions of countries. Our task now is to put this growing comprehension to good use, in order to make the economy work better for all people.

Useful links

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

Please consult the draft Agenda for more information, and a preliminary background paper “Insights into Complexity and Policy” regrouping articles from the insights blog and other sources.

Stop pretending that an economy can be controlled

NAECAngel Gurría, OECD Secretary-General

The crisis exposed some serious flaws in our economic thinking. It has highlighted the need to look at economic policy with more critical, fresh approaches. It has also revealed the limitations of existing tools for structural analysis in factoring in key linkages, feedbacks and trade-offs – for example between growth, inequality and the environment.

We should seize the opportunity to develop a new understanding of the economy as a highly complex system that, like any complex system, is constantly reconfiguring itself in response to multiple inputs and influences, often with unforeseen or undesirable consequences. This has many implications. It suggests policymakers should be constantly vigilant and more humble about their policy prescriptions, act more like navigators than mechanics, and be open to systemic risks, spillovers, strengths, weaknesses, and human sensitivities. This demands a change in our mind-sets, and in our textbooks. As John Kenneth Galbraith once said, “the conventional view serves to protect us from the painful job of thinking.”

This is why at the OECD we launched an initiative called New Approaches to Economic Challenges (NAEC). With this initiative we want to understand better how the economy works, in all its complexity, and design policies that reflect this understanding. Our aim is to consider and address the unintended consequences of policies, while developing new approaches that foster more sustainable and inclusive growth.

Complexity is a common feature of a growing number of policy issues in an increasingly globalised world employing sophisticated technologies and running against resource constraints.

The report of the OECD Global Science Forum (2009) on Applications of Complexity Science for Public Policy reminds us of the distinction between complicated and complex systems. Traditional science (and technology) excels at the complicated, but is still at an early stage in its understanding of complex phenomena like the climate.

For example, the complicated car can be well understood using normal engineering analyses. An ensemble of cars travelling down a highway, by contrast, is a complex system. Drivers interact and mutually adjust their behaviours based on diverse factors such as perceptions, expectations, habits, even emotions. To understand traffic, and to build better highways, set speed limits, install automatic radar systems, etc., it is helpful to have tools that can accommodate non-linear and collective patterns of behaviour, and varieties of driver types or rules that might be imposed. The tools of complexity science are needed in this case. And we need better rules of the road in a number of areas.

This is not an academic debate. The importance of complexity is not limited to the realm of academia. It has some powerful advocates in the world of policy. Andy Haldane at the Bank of England has thought of the global financial system as a complex system and focused on applying the lessons from other network disciplines – such as ecology, epidemiology, and engineering – to the financial sphere. More generally, it is clear that the language of complexity theory – tipping points, feedback, discontinuities, fat tails – has entered the financial and regulatory lexicon. Haldane has shown the value of adopting a complexity lens, providing insights on structural vulnerabilities that built up in the financial system. This has led to policy suggestions for improving the robustness of the financial system.

Closer to home, Bill White, Chairman of our Economic and Development Review Committee (EDRC) has been an ardent advocate of thinking about the economy as a complex system. He has spoken in numerous OECD meetings – in part as an explanation and in part as a warning – that systems build up as a result of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non-linearity. As a result Bill has urged policymakers to accept more uncertainty and be more prudent. He also urged economists to learn some exceedingly simple but important lessons from those that have studied or work with complex systems such as biologists, botanists, anthropologists, traffic controllers, and military strategists.

Perhaps the most important insight of complexity is that policymakers should stop pretending that an economy can be controlled. Systems are prone to surprising, large-scale, seemingly uncontrollable, behaviours. Rather, a greater emphasis should be placed on building resilience, strengthening policy buffers and promoting adaptability by fostering a culture of policy experimentation.

At the OECD, we are starting to embrace complexity. For several years we have been mapping the trade “genome” with our Trade in Value Added (TiVA) database to explain the commercial interconnections between countries.

We have examined the possibilities for coupling economic and other systems models, for example environmental (climate) and societal (inequalities). Our work on the Costs of Inaction and Resource Constraints: Implications for Long-term Growth (CIRCLE) is a key example of linking bio-physical models and economic models to gauge the impact of environmental degradation and climate change on the economy.

We are also looking at governing complex systems in areas as diverse as education and international trade policy. And we are looking at the potential for tapping big data – an indispensable element of complexity modelling approaches. But there remains much to do to fully enrich our work with the perspectives of complexity.

The OECD is delighted to work with strong partners – the Institute for New Economic Thinking (INET) Oxford, and the European Commission to help policy-makers advance the use of complex systems thinking to address some of the most difficult challenges.

An important question remains. How can the insights and methods of complexity science be applied to assist policymakers as they tackle difficult problems in areas such as environmental protection, financial regulation, sustainability or urban development?

At the Workshop on Complexity and Policy on 29-30 September at the OECD, we will help find the answer – stimulate new thinking, new policy approaches and ultimately better policies for better 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

Please consult the draft Agenda for more information, and a preliminary background paper “Insights into Complexity and Policy”.

If you are an OECD staff member, please click here to register: Registration

NAEC and the Sustainable Development Goals: The Way Forward

naecMathilde Mesnard, Senior Advisor to the Secretary-General and OECD New Approaches to Economic Challenges (NAEC) Coordinator, and William Hynes, Senior Economist, NAEC Unit. This article is part of the newly-released Insights book “Debate the Issues: New Approaches to Economic Challenges“.

While global integration has been an engine of growth since the emergence of capitalism, the financial and economic crisis highlighted that the current level of interconnectedness between countries and its impact, positive or negative was poorly understood. This increased complexity has exposed the limitations of prevailing analytical tools, policy frameworks, and governance arrangements. It has also underlined the fact that global challenges can only be addressed through collective co-ordination and action.

The 2030 Agenda for Sustainable Development with the Sustainable Development Goals (SDGs) at its core are based on this new understanding. The goals are universal – applicable to all countries with targets adapted to national circumstances and context. The agenda acknowledges that new approaches are needed to tackle an integrated set of challenges. The SDGs are also transformative – they contribute to systemic change and help anticipate future global threats.

The OECD is actively responding to the agenda with better policies for better lives – drawing on the cumulative experience of member and partner countries and capitalising on its value-added. The New Approaches to Economic Challenges (NAEC) Initiative is helping OECD to prepare for the SDGs – through developing integrated analysis and policy advice for tackling an ambitious set of interlinked goals, as well as the forward-looking transformational agenda. As Doug Frantz has argued, the SDGs and NAEC are like Romeo and Juliet – they are meant for each other.

An Integrated Policy Agenda

The Millennium Development Goals focused mainly on social objectives. Less systematic emphasis was placed on economic growth and jobs as well as environmental sustainability and climate change. A key lesson of the MDGs is that sustained change cannot be achieved through one-dimensional or single sector goals. The SDGs with their much broader coverage require multidimensional policy responses which involves identifying trade-offs, complementarities and unintended consequences of policy choices. This is the only way to improve policy advice for dealing in a more realistic and effective manner with global challenges. It privileges collaboration and coherence in addressing interlinked problems by removing the compartmentalised approach that has too often limited the effectiveness of policies. It also requires a more sophisticated policy design in which systemic spill-overs can be beneficial as well as damaging.

Consideration of these trade-offs should at the first instance be undertaken at the national level. This is where policy-makers can optimise among trade-offs between economic, social and environmental goals. Making policy choices on the basis of their inter-relationships requires systemic and long-term thinking, strategic foresight and strategic governance. Realising this vision has proved elusive but gradually the relevant policy signposts have been put in place. Through the NAEC, analytical frameworks have been broadened to assess better the nexus between economic growth and inequality on the one hand (inclusive growth), and between environment and growth on the other (green growth). Less progress has been made on the social-ecology nexus. Further work is needed to better examine the distributional, employment and skills implications of the transition to environmentally sustainable growth. Eloi Laurent has argued at a NAEC seminar that environmental challenges are in fact social problems that arise largely because of income and power inequalities (Laurent, 2016).

Transformational approaches

With NAEC the OECD is also considering how to cope with the complexity of the world economy replete with numerous interconnections between states, and networks of firms through global and regional value chains. We are increasingly considering the global economy as a complex system. We are measuring the trade and investment linkages between economies – rich and poor – through the Trade in Value Added (TIVA) database. And we are examining how international regulatory co-operation also in tax matters can help ensure a level playing field between jurisdictions.

The policy agenda to meet the SDGs must be transformational to shape a future of intensifying environmental pressures, (e.g. climate change and resource depletion); technological progress and digitalisation as well as rising inequalities.

With NAEC, we are preparing for the future, or possible futures. This requires our Committees and Directorates to keep asking hard questions and challenging assumptions about our understanding of the economy while constantly reviewing our analytical approaches. To ensure that the global goals are reached, we must collectively do the same. We must change our mindsets, approaches and ultimately our economies.

Useful links

The OECD NAEC Unit 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