How can you protect your economic system from shocks and crises?

Economic systems are complex and interdependent networks of institutions, markets, policies, and behaviors that determine how resources are allocated and how people interact. They are constantly exposed to various shocks and crises, such as natural disasters, pandemics, wars, financial crashes, social unrest, and political instability. These events can have severe and lasting impacts on the economic performance, welfare, and stability of a country or a region. Therefore, it is essential to understand how to protect your economic system from shocks and crises, and how to enhance its resilience and adaptability.

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1 Identify the sources of vulnerability

To protect your economic system, the first step is to identify the sources of vulnerability that make it prone to shocks and crises. These can be internal or external, structural or cyclical, and vary depending on the characteristics and context of your economic system. For instance, sources of vulnerability may include high dependence on external trade, finance, or aid; low diversification of production, exports, or income; high inequality, poverty, or social exclusion; weak institutions, governance, or rule of law; high debt, inflation, or fiscal deficit; low savings, investment, or innovation; and exposure to environmental, health, or security risks. By recognizing the sources of vulnerability in your economic system you can evaluate the potential magnitude and frequency of shocks and crises as well as their likely effects.

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Simon Dean, Chartered ALFBF
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I'd like to add here that, outside of the economic cycle, economic crises tend to come from issues that have not been considered before. It is hard to protect against a radical government that plays fast and loose with spending and taxation, for example. And what about the almost-crisis of pension liquidity, a result of the de-valuation of government bonds due to political, rather than economical, decisions? We will never be able to plan for every risk and put in place plans to dampen damage. It is therefore vital to supplement the identification of vulnerabilities with consistent sound economic management so that the state is able to safely flex its 'financial muscles' to tackle the problems that emerge, unforseen, out of the shadows.

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2 Implement preventive and mitigating measures

The second step to protect your economic system is to implement preventive and mitigating measures that can reduce the probability and severity of shocks and crises. These can range from short-term to long-term, and involve various actors and instruments, such as strengthening macroeconomic stability and fiscal sustainability, enhancing financial regulation and supervision, diversifying the economic structure, promoting social protection and inclusion, improving institutional quality and accountability, building physical and human capital, as well as developing risk management and contingency planning. Through these measures, you can improve the efficiency and equity of your economic system, while creating buffers that safeguard against potential shocks and crises.

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Simon Dean, Chartered ALFBF
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Regulation is a good thing; independent regulators help protect consumers from harm and those with the right mandate (and the right people driving the organisations) will be very successful in making markets work well. There is also such a thing as too much regulation; we want to ensure markets work efficiently and allow for competition and growth while protecting consumers. Anything beyond this overarching theme puts onerous and resource-draining limitations on enterprise.

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3 Monitor and evaluate the performance and outcomes

To protect your economic system, the third step is to monitor and evaluate its performance and outcomes, as well as the effectiveness and impact of your preventive and mitigating measures. This can be done by measuring economic growth, productivity, and competitiveness; assessing income distribution, poverty, and welfare; analyzing fiscal balance, debt, and sustainability; tracking financial stability, liquidity, and solvency; evaluating environmental, health, and social indicators; and conducting surveys, audits, and reviews. Through this process, you can identify the strengths and weaknesses of your economic system and the gaps and challenges of your preventive and mitigating measures.

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Simon Dean, Chartered ALFBF
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I disagree with some of the measures listed here. Most of these can be useful in assessing how an economy provides certain outcomes for citizens and businesses, but they tend to be backward-looking. Live data is required to monitor for impending shocks or issues, with the right KPIs attached to certain alarm bells. A cross-business short-fire sale of a certain type of derivative or stock can give a very quick indication of market confidence in a particular sector that could point to an emerging problem, for example.

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4 Learn from the experience and feedback

The fourth step to protect your economic system is to learn from the experience and feedback of your economic system, and the preventive and mitigating measures. You can do this by comparing best practices and lessons learned from other countries or regions, consulting stakeholders and experts from different sectors, reviewing reports from international organizations, incorporating evidence and data from research and studies, and soliciting opinions from the public and media. This process of learning will enable you to update and adjust your economic system and measures to reflect changing realities and needs.

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5 Foster the innovation and collaboration

The fifth step to protect your economic system is to foster the innovation and collaboration among actors and institutions, as well as with other countries or regions. This can be achieved through initiatives and platforms such as encouraging research and development, entrepreneurship, and creativity; supporting education and training, skills development, and lifelong learning; facilitating trade and investment, integration, and cooperation; participating in regional and global forums, networks, and partnerships; and respecting diversity and pluralism, dialogue, and consensus. By fostering innovation and collaboration, you can not only enhance the dynamism of your economic system but also its capacity to cope with shocks and crises.

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6 Adapt to the new challenges and opportunities

The sixth step to protect your economic system is to adapt to the new challenges and opportunities that arise from shocks and crises, as well as global trends and transformations. These can be positive or negative, expected or unexpected, and require different responses and strategies. For instance, digitalization, automation, and artificial intelligence, climate change, green transition, and circular economy, demographic change, migration, and urbanization, globalization, regionalization, and multipolarity, and social change, empowerment, and participation are all new challenges and opportunities. By adapting to these changes, you can boost the resilience and sustainability of your economic system in order to create value and well-being.

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Simon Dean, Chartered ALFBF
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There are some points here that will be familiar to many of us. It is also important to be proportionate with these types of transitions (digital revolution, green transition, etc...). A society can only be forced down one route for so long before the resistance outweighs the resources needed to carry out the change. We do not want to leave an entire generation behind in the digitialisation of the economy. It is too regular to hear of older generations feeling neglected by their service providers because everything is now done on an app, or online. Similarly with the green economy. We cannot deny that our entire civilisation was built on polluting industries. This is a difficult legacy to outgrow and will take time.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you protect your economic system from shocks and crises?

1

2

3

4

5

6

7

1 Identify the sources of vulnerability

2 Implement preventive and mitigating measures

3 Monitor and evaluate the performance and outcomes

4 Learn from the experience and feedback

5 Foster the innovation and collaboration

6 Adapt to the new challenges and opportunities

7 Here’s what else to consider

Economics

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How can you protect your economic system from shocks and crises?

1

2

3

4

5

6

7

1 Identify the sources of vulnerability

2 Implement preventive and mitigating measures

3 Monitor and evaluate the performance and outcomes

4 Learn from the experience and feedback

5 Foster the innovation and collaboration

6 Adapt to the new challenges and opportunities

7 Here’s what else to consider

Economics

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