Seven Shocks – Finland – Project Outline

Seven Shocks – Finland

Key questions being addressed:

How can a small open national economy succeed in the world of surprises?

Background

IIASA/Xevents team has developed a unique methodology for analyzing external shocks and their potential impact on national competiveness. Seven Shocks project studied the special requirements the global economic system will set for Finland as a small open national economy that is highly dependent on global systems.

Objectives

The project collected understanding on long-term national resilience requirements that emerge from the increasing uncertainties in the global physical and social environments.

Shocks

Participating organizations choose 7 shocks for the detailed investigation:

  1. EMU collapse. The European Monetary Union is celebrating the 20th anniversary of the Maastricht treaty, in 2012. The Maastricht criteria now have only a historical value and the undisciplined behavior of Italy and Spain, along with the recent bankruptcy of Greece have finally caused a strong rift between France and Germany over about corrective actions. Financial markets all over the world react to this discord, and ultimately there is no way to defend the euro as a common currency. Even as German banks put pressure on the government, Germany has no political option other than to leave EMU.
  2. Internet crashes become common and unpredictable. Internet service breaks down unpredictably in various parts of the world, remaining out for uncertain lengths of time before returning all of a sudden. No one really knows why these outages take place, as they cannot be pinpointed to hackers, saturation of the system or some new factor. The end result is that people attempt to return to earlier, more reliable modes of communication like fax and phone. But the lack of Internet services also effects these modes of communication as well, leading to complete chaos in the industrialized countries as production of goods and services plummet, firms go out of business, people lose their jobs, and the world sinks into a major depression.
  3. Nokia headquarters move from Finland. Even if some R&D still stays in the country, this has a major impact on the national R&D investments (Nokia’s share was 37% in 2010), professional service network (over 12 000 R&D professionals released within next two years), as well as tax revenues (in 2007 1,3 mrd Euros).
  4. “Once-in-a-100-years” droughts and flash floods devastate Europe. These events that change weather patterns and the impact on Scandinavia and some parts of Russia are experienced as increasingly severe storms accompanied by tornadoes. The snow becomes heavier and ice damages increases. All of this has a major impact on infrastructures that are not built to meet these extreme weather conditions. The cost to the economy is large, but unpredictable.
  5. China collapses due to internal disruption. The Chinese government fights a two-front war: A banking system that allowed local banks to finance the real estate bubble collapses when the first symptoms of lower growth rates hits the financial markets. China then meets its first financial domino effect since 1949. Ethnic minorities and opponents of the Chinese government use this opportunity and the government is not able to control the situation, unlike in 1966-79.
  6. The long-awaited consolidation of the European FPP (forest and pulp and paper industry) companies ends up a surprising upswing. The massive Asian private equity companies are the orchestrators of the consolidation of the European FPP market. Two out of three main forest industry companies leave Finland during the turmoil. Even the remaining company will close its pulp and paper production units in Finland if the new EU high sulfur dioxide emission requirements
    [1]raise the cost of transportation in the Baltic Sea.
  7. Price of energy drops 90%. Tight control of OPEC oil production leads to increasing interest in alternative energy production. The first results are promising, and the next bubble is supported by generous private equity. New investment speeds up the commercialization of several forms of alternative energy in different parts of the world. Italy establishes the first nickel and hydrogen technology-based power plant. As an result, enormous amounts of money is channeled to the new means of energy production and the widespread expectation is that the price of electricity will drop by 90%. This leads to fast emergence of technologies that can produce scarce materials by increasing the consumption of energy, including artificial food. But it also collapses the economy and leads to severe internal disruptions in oil export- based economies like Russia.

Project phases

The project consists of three different phases:

  1. Analysis of shocks – this part of the work is conducted by IIASA team that is supported by Finnish experts
  2. Generation of policy options that increase shock resilience – this part of the process involved a group (altogether 280) of Finnish decision makers from the corporate and public sector
  3. Analysis workshop November 24the -25th 2011 where the decision makers from participating organizations analyzed the results and commented the recommendations

Methodological background

The research is focused on the analysis of the shocks/extreme events, that have perceived to have a very low probability, but high impact. The analysis framework is the national economy, but when implications are studied we expand the scope to cover also some of the shock specific disruptions in the social system.

  • For the analysis of the current situation and detection of the potential extreme events: systems mapping, basic assumptions analysis, simulations with the current and the past data
  • For the analysis of the shocks and their impact we use scenario building (systems and structural scenarios) and simulations (Global Trade Network simulation).
  • Fort the identification of the relevant policy options we use a dedicated planning tool (Space of Uncertainty) and Robust Portfolio Modeling
2017-11-09T15:03:34+00:00

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