Tag Archives: institutions

The tragedy of a common currency

The current crisis of the Euro emphasizes some basic lessons from the study of resilience of dynamic systems. Attributes of complex systems that enhance resilience are diversity, redundancy and modularity. There is a cost of maintaining resilience. The decision to have one currency among different countries in Europe was based on a focus of efficiency. This could be reached as long as economies would grow steadily and the countries kept their budgets in check.

Unfortunately, some countries did not so. Also Germany and France have broken maximum governmental budget shortages, and no actions were taken. It sounds as if the basic principles of institutional design were not met. Meaning that there was no proper monitoring and were no proper enforcement mechanisms. Surprisingly there are not even regulations how countries may leave the EU or Euro.

By creating a tightly connected system without proper enforcement it is no surprise that the resilience of the European, and global, economy has been decreased. The budget crisis leads now to a spiral of distrust among participants in the action arena of the global financial system. It does not help either that the USA is not able to reach to any solution to their own budget problems.

If there was more modularity we could afford countries to fail. But in the tightly globalized financial system, a failure leads to a cascade of dominos falling. A short-sighted focus on efficiency has led to a costly endeavor and likely collapse of the euro. We can learn from long-lasting biological systems and the importance to develop system features that enhance resilience. Hopefully during the recovery after the pending transformation more emphasis will be given to design system properties to enhance resilience.

Global change and missing institutions

In  Science Policy Forum, Brian Walker and others have a policy forum in Looming Global-Scale Failures and Missing Institutions, in which they argue that the the global order of nation-state’s has improved the well-being of many people at the cost of global resilience, and that building global resilience requires more interaction among existing global institutions, as well as new institutions, to help construct and maintain a global-scale social contract.  They write:

Energy, food, and water crises; climate disruption; declining fisheries; increasing ocean acidification; emerging diseases; and increasing antibiotic resistance are examples of serious, intertwined global-scale challenges spawned by the accelerating scale of human activity. They are outpacing the development of institutions to deal with them and their many interactive effects. The core of the problem is inducing cooperation in situations where individuals and nations will collectively gain if all cooperate, but each faces the temptation to take a free ride on the cooperation of others. The nation-state achieves cooperation by the exercise of sovereign power within its boundaries. The difficulty to date is that transnational institutions provide, at best, only partial solutions, and implementation of even these solutions can be undermined by international competition and recalcitrance.

…Of special importance are rules that apply universally, such as the peremptory, or jus cogens, norms proscribing activities like genocide or torture. Failure to stop genocide in Rwanda spurred efforts to establish a new “responsibility to protect” humanitarian norm (12). As threats to sustainability increase, norms for behavior toward the global environment are also likely to become part of the jus cogens set.

The responsibility to protect rests in the first instance with the state having sovereignty over its population. Only in the event that the state is unable or unwilling to protect its people are other states obligated to intervene. The challenge is not just to declare the principle but to ensure its acceptance and enforcement. Acceptance is needed for legitimacy, and enforcement will depend on whether states are willing to make the necessary sacrifices. If the responsibility to protect is to apply to the environment as well, these same challenges will need to be overcome. We use three examples to illustrate how institutional development might proceed.

Climate change. International climate agreements must be designed to align national and global interests and curb free-riding. Borrowing from the WTO architecture, the linkage between trade and the environment could be incorporated within a new climate treaty to enforce emission limits for trade-sensitive sectors. New global standards could establish a climate-friendly framework with supporting payments, e.g., for technology transfer, to encourage developing country participation. In this context, trade restrictions applied to non-participants would be legitimate and credible, because participating parties would not want nonparties to have trade advantages.

Coevolution of institutions offers a pathway to further progress. Recently, the Montreal Protocol strengthened its controls on hydrochlorofluorocarbons (HCFCs), manufacture of which produces hydrofluorocarbons (HFCs) as a by-product. HFCs do not affect ozone and are not controlled under the Montreal Protocol. However, they are greenhouse gases (GHGs), controlled under the Kyoto Protocol. The Montreal Protocol should now either be amended to control HFCs directly or else a new agreement, styled after the Montreal Protocol, should be developed under the Framework Convention to control HFCs.

High-seas fisheries. The Code of Conduct for Responsible Fisheries, which was adopted by the U.N. Food and Agriculture Organization in 1995 was a positive step, but because adherence is voluntary, it has had little effect. Another approach would be to develop a norm, akin to the responsibility to protect (12), requiring all states responsible for managing a fishery to intercede when a state fails to fulfill its obligations. Credible enforcement is a challenge, but efforts by major powers to enforce a U.N. General Assembly ban on large-scale drift-net fishing offers hope that an emerging norm can be enforced (13).

Drug resistance. Addressing drug resistance demands global standards. The International Health Regulations (IHRs) are an international legal instrument that is binding on 194 countries, including all the member states of the World Health Organization. It currently establishes minimum standards for infectious disease surveillance, but could be amended to promote standards for drug use. For example, monotherapy treatments for malaria are cheaper but more prone to encourage resistance in mosquitoes than combination therapy drugs. Their use should be limited in favor of the more expensive combination therapy drugs. One approach to global action would be an amendment to the IHRs that obligated all member countries to collective action to promote combination therapies, supported by global subsidies, and to discourage, or even prohibit, monotherapies (14).

Refocusing medical research

Philosopher Peter Singer writes a newspaper editorial Tuberculosis or Hair Loss? Refocusing Medical Research:

… the diseases that cause nine-tenths of what the World Health Organization refers to as “the global burden of disease” are getting only one-tenth of the world’s medical research effort. As a result, millions of people die every year from diseases for which no new drugs are in the pipeline, while drug companies pour billions into developing cures for erectile dysfunction and baldness.

…If drug companies target diseases that affect only people who are unable to pay high prices for drugs, they cannot expect to cover their research costs, let alone make a profit. No matter how much their directors may want to focus on the diseases that kill the most people, the current system of financial incentives means that if they did so, their shareholders would remove them, or their companies would soon be out of business. That would help no one. The problem is with the system, not with the individuals who make their choices within it.

At a meeting in Oslo in August, Incentives for Global Health, a nonprofit organization directed by Aidan Hollis, professor of economics at the University of Calgary, and Thomas Pogge, professor of philosophy and international affairs at Yale, launched a radical new proposal to change the incentives under which corporations are rewarded for developing new medicines. They suggest that governments contribute to a Health Impact Fund that would pay pharmaceutical companies in proportion to the extent to which their products reduce the global burden of disease.

…Hollis and Pogge estimate that about $6 billion a year would be required to enable the Fund to provide a sufficient incentive for drug companies to register products that target the diseases of the poor. That figure would be reached if countries accounting for one-third of the global economy – say, most European nations, or the United States and one or two small affluent nations – contributed 0.03 % of their gross national income, or three cents for every $100 they earn. That’s not a trivial sum, but it isn’t out of reach, especially considering that affluent nations would also benefit from cheaper drugs and from medical research that was focused on reducing disease rather than on maximizing profits.

Social Implications of Arctic Melting

An article Arctic Meltdown in Foreign Affairs by Scott G. Borgerson discusses the political and economics consequences on a ice-free summer Arctic:

The shipping shortcuts of the Northern Sea Route (over Eurasia) and the Northwest Passage (over North America) would cut existing oceanic transit times by days, saving shipping companies — not to mention navies and smugglers — thousands of miles in travel. … Taking into account canal fees, fuel costs, and other variables that determine freight rates, these shortcuts could cut the cost of a single voyage by a large container ship by as much as 20 percent — from approximately $17.5 million to $14 million — saving the shipping industry billions of dollars a year. The savings would be even greater for the megaships that are unable to fit through the Panama and Suez Canals and so currently sail around the Cape of Good Hope and Cape Horn. Moreover, these Arctic routes would also allow commercial and military vessels to avoid sailing through politically unstable Middle Eastern waters and the pirate-infested South China Sea. An Iranian provocation in the Strait of Hormuz, such as the one that occurred in January, would be considered far less of a threat in an age of trans-Arctic shipping.

Arctic shipping could also dramatically affect global trade patterns. … As soon as marine insurers recalculate the risks involved in these voyages, trans-Arctic shipping will become commercially viable and begin on a large scale. In an age of just-in-time delivery, and with increasing fuel costs eating into the profits of shipping companies, reducing long-haul sailing distances by as much as 40 percent could usher in a new phase of globalization. Arctic routes would force further competition between the Panama and Suez Canals, thereby reducing current canal tolls; shipping chokepoints such as the Strait of Malacca would no longer dictate global shipping patterns; and Arctic seaways would allow for greater international economic integration. When the ice recedes enough, likely within this decade, a marine highway directly over the North Pole will materialize. Such a route, which would most likely run between Iceland and Alaska’s Dutch Harbor, would connect shipping megaports in the North Atlantic with those in the North Pacific and radiate outward to other ports in a hub-and-spoke system. A fast lane is now under development between the Arctic port of Murmansk, in Russia, and the Hudson Bay port of Churchill, in Canada, which is connected to the North American rail network.

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