Protects from the wind, but in a downpour it can kill - Newspaper Kommersant No. 179 (7380) of 09/28/2022

Protects from the wind, but in a downpour it can kill - Newspaper Kommersant No. 179 (7380) of 09/28/2022



The effects of disruptions in complex industrial supply chains may not match the magnitude of the shock to “simple” industries and trade. In particular, argues Northwestern University (NWU) economist Ian Dew-Baker, complex networked supply chains seem to smooth out weak shocks but can multiply strong ones. Works investigating such effects are now relevant for the Russian Federation - sanctions shocks in different industries differ from each other, and the development of events in them is clearly far from over.

Dew-Baker's work from NWU focuses on "Residual Risks in Production Chains". The question of how “residual” (tail) risks are generally arranged in areas remote from the peak of the probability of an event is usually of interest to the financial and stock markets - “black swans”, significant events that are rare in probability, are predicted much worse than ordinary ones. However, the economist in this case was interested in the impact of such risks from the “tail” of distribution on differently arranged production chains in industry — the events of the 2020–2021 pandemic showed that economists are quite bad at predicting the effect of economic shocks for them, while the main works on this The topic is studied not in the production sector, but in trade, where intermediary chains are relatively homogeneous and simple, while in combination with complex supply chains, the effect of logistical disruptions is unpredictable and poorly comparable to the scale of the shock itself.

The “residual risk” and the issues that Dew-Baker discusses in the preprint of the publication in the NBER series, apparently, are well known in the Bank of Russia - the Central Bank’s “Enterprise Monitoring” survey for September 2022 rather dryly states the de facto frontal improvement in sentiment and assessments in most industrial sectors adjusting to the new terms of trade and restructuring trade and supply chains disrupted by a very large-scale shock - the primary and secondary effects of trade sanctions, including sectoral ones, imposed against the Russian Federation after the start of the military operation in Ukraine and since then repeatedly intensifying. However, the models used by Dew-Baker are only limitedly applicable to this situation: economists usually view economic shocks as one-time, while sanctions pressure develops over time (and is not uniform across industries). Apparently, it is still difficult to adequately model "dynamic shocks", although the paper considers options for combinations of shocks.

The main conclusion of Dew-Baker's work is that "non-linear", including those arranged as a network, supply chains respond to shocks differently from linear ones. Thus, “network” chains extinguish weak standard shocks significantly better than “linear” ones (the latter are typical for large old industries of the Russian Federation), while strong and non-standard shocks in some cases can multiply their effect in them. In the macroeconomic aspect, systemic risks rather create shocks that affect the supply of raw materials to industry in sectors with a high share in GDP, while sectors for the production of final products, as a rule, do not create systemic risks. In any case, Dew-Baker states, the "residual risks" of large, extraordinary shocks should not be calculated by extrapolating data on the reaction of the economy to ordinary ones - and the impact on GDP of a rare, but seemingly not very important random event in the industry (sanctions in RF quite fit the description) can be unexpectedly large-scale. The author's recommendations, however, are common - specific studies are needed for such predictions, and standard models cannot be trusted. It should be noted that the Russian economy is a very bizarre combination of complex and simply arranged supply chains, even in individual industries - in many respects, claims that economists “cannot accurately calculate” the development of events in it are due to a lack of understanding of the real complexity and cost of such works, as well as analyst capabilities.

Dmitry Butrin



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