Sony Kapoor — The rising complexity of the global economy

A complex system can be roughly understood as network of nodes, where the nodes themselves are interconnected to various degrees through single or multiple channels. This means that whatever happens in one node is transmitted through the network and is likely to impact other nodes to various degrees. The behaviour of the system as a whole thus depends on the nodes, as well as the nature of the inter-linkages between them. The complexity of the system, in this instance the global economy, is influenced by a number of factors. These include first, the number of nodes; second, the number of inter-linkages; third, the nature of inter-linkages; and fourth, the speed at which a stimulus or shock propagates to other nodes. Let us now apply each of these factors to the global economy…

Everything involves tradeoffs. Increasing efficiency may reduce resiliency.  Increasing complexity may increase fragility. Emergence creates not only new opportunities but also fresh challenges along with them.

Such systems are more efficient, and the quest for efficiency has given rise to just-in-time supply chains and the rising speed of financial trading and other developments. But this efficiency comes at the cost of rising fragility. Evidence that financial, economic, pathogenic, security and other shocks are spreading more rapidly through the world is mounting.

To sum up, the Dynamic Stochastic General Equilibrium (DSGE) models and other traditional approaches to modelling the global economy are increasingly inadequate and inaccurate in capturing the rising complexity of the global economy. This complexity is being driven both by the rising number of nodes (countries) now integrated into the global economy, as well as the number and nature of the interconnections between these, which are intensifying at an even faster pace.

This calls for a new approach to policymaking that incorporates lessons from complexity theory by using a system-wide approach to modelling, changes institutional design to reduce the fragility of the system and deepens international and cross-sector policy making and policy coordination.

OCED Insights

The rising complexity of the global economy
Sony Kapoor, Managing Director, Re-Define International Think Tank and CEO of Court Jesters Consulting
ht Mark Thoma at Economist's View