Thinking Systematically about the G20 Statement

Follow-up to the classroom exercise in systems thinking to sharpen your analytical skills that was introduced yesterday. Including lots of discussion, this exercise would make an appropriate undergraduate lesson for two one-hour classes.

The G20 that just met to resolve the global financial crisis made a significant decision that fell short of the recommendations made by the Stiglitz report to the U.N. that was submitted in March. Although the U.N. commission headed by Stiglitz recommended restructuring the highly restricting rules used by international lending institutions so as to grant poor recipient countries the flexibility to implement desperately needed social welfare measures, the G20 instead focused simply on adding funding to the international lending institutions, thereby increasing the political power of the lending institutions rather than the recipient state governments.

How should we begin to think about the implications of this decision? Is it good news or bad news for everyone who is concerned about the state of the world’s economy? Following the method outlined in yesterday’s post, the apparent “reference mode” (mental model; initial point of view) of the G20 underlying their decision is presented.

(Note: for the purposes of this post, I assume goodwill and sincerity on the part of the G20; i.e., I assume here that the G20 truly desired to resolve the economic crisis to the benefit of all mankind. Of course, if you make a different assumption, e.g., that the G20 was out to exploit the world for the benefit of the rich countries, then the reference mode I have drawn would not represent the G20’s point of view. Normally, in using this methodology, you draw the reference mode honestly to represent what you personally believe before you start analyzing the problem of interest to you. Here, instead, I am guessing—based on the logic of the G20’s statement—what the real intent of that body was.)

The G20 Reference Mode says that:

1. The key variable impacting the well-being of the world’s poor is the amount of aid;
2. The amount of aid and the well-being of the poor covary.

QUESTION: is the G20’s presumed perspective correct?

Consider the following initial causal loop diagram as an approach to analyzing the accuracy of the G20 perspective. I am suggesting that this causal loop diagram captures the key issue: does a rise in World Bank & IMF funding under current rules help or harm the well-being of the world’s poor? The argument can be made that increased aid under current rules results in the impoverishment of local populations even as, e.g., extractive industries designed to export resources cheaply to the West flourish. The purpose of this post is not to answer that question but simply to structure an analytical approach that could profitably be used, say, in a classroom, systematically to illuminate this problem.

Feel free to create a completely different explanation of the core behavior of socio-economics in poor states receiving World Bank/IMF aid if you wish. Alternatively, if you wish to accept this causal loop diagram, first, think about its implications and then consider how it might be improved.

Implications of the causal loop diagram as it stands:

• The black arrows represent the initial effect – the G20 evidently believes the effect is positive; do you agree? Will the rate of positive impact on social welfare be as rapid as positive impact on resource extraction? Will it remain positive? Will it be linear?
• The green arrows represent a second stage effect. The G20 evidently believes this will, in both cases, also be positive. Do you agree? Specifically, does a successful extraction industry (consider oil from Iraq or Nigeria or Colombia; gas from Central Asia) equate to a general rise in social welfare?
• The blue arrows represent feedbacks to international aid institution policies. What might the nature of such feedback be, assuming it exists?
• The red arrow indicates a direct impact of the state of resource extraction industry on social welfare. The literature is vast; you may wish to start with Abdelrahman Munif’s novel about the arrival of Western oilmen to Saudi Arabia. What sign would you put on the red arrow (or do you think there is no impact at all)?

How it might be improved:

• Add new variables?
• Add intervening steps (e.g., along the red arrow)?
• Add a feedback arrow from “popular living standards in poor countries” to “World Bank/IMF aid levels?

Please do not tell anyone, but here’s a secret: this post was not that difficult to write. It is about thinking systematically, which turns out to be easy once you get in the habit because, by definition, you do it one step at a time. This thinking process was so easy that, for example, a serious New York Times reporter reviewing the G20 statement would have had time to do it. In fact, this thinking process was so easy that even a G20 decisionmaker would have had time to do it. I wonder if any of them did.