I guess its about time to rewrite the old saying; “When Wall Street Sneezes – The World Catches A Cold.” Scientist have been able to map the developed countries economic interconnection, and the result is a bit surprising. It shows that some of the smallest countries, with the lowest gross national product, has in fact the greatest potential to create a worldwide financial havoc.
“These smaller countries do not support only their local economy but are also a haven for foreign investments, as they attract funds from large countries for taxation purposes, safekeeping, etc, and a problem in such investments can easily lead to a chain reaction in other countries.”
Antonios Garas/Panos Argyrakis/Céline Rozenblat/Marco Tomassini/Shlomo Havlin
According to the new research paper, the phrase “When Belgium Sneezes, The World Catches A Cold,” would be more accurate. Belgium, who has been without a government for six months and has one of the lowest GDP outputs in the world, is in fact among of the nations that easily can cause a major global financial crisis. The report by IOP Science list the 12 most economic contagious countries in the world – hereby named the C12.
The new analysis of countries’ economic interconnectedness finds that some of the countries with the greatest potential to cause a global crash have surprisingly small gross domestic production.
Using data from Bureau Van Dijk — the company information and business intelligence provider — to assess the reach and size of different countries’ economies, and applying the Susceptible-Infected-Recovered (SIR) model, physicists from universities in Greece, Switzerland and Israel have identified the twelve countries with greatest power to spread a crisis globally.
Here’s the “C12” nations:
- United Kingdom
- The Netherlands
Except for USA and France, they’re all – almost – equally dangerous if a crisis occurs on a national level.
Note: Six of the eight wealthiest nations in the world – G8 – is on the list.
“This is explained by the fact that these smaller countries do not support only their local economy but are also a haven for foreign investments, as they attract funds from large countries for taxation purposes, safekeeping, etc, and a problem in such investments can easily lead to a chain reaction in other countries. Countries such as Luxembourg and CH, which are the headquarters for some of the world’s largest companies and subsidiaries, interact very strongly with a large number of countries. For example, about 95% of all pharmaceutical products of the Swiss industry is not intended for local consumption but for exporting,” the scientists write.
Using a statistical physics approach, the researchers from the Universities of Thessaloniki, Lausanne and Bar-Ilan used two different databases to model the effect of hypothetical economic crashes in different countries.
The data used allowed the physicists to identify links between the different countries, by mapping the global economy to a complex network, and gauge the likelihood of one failed economy having an effect on another.
One network was created using data on the 4000 world corporations with highest turnover and a second using data on import and export relations between 82 countries.
In addition, the SIR model, successfully used previously to model the spreading of disease epidemics, is applied to these two networks taking into consideration the strength of links between countries, the size of the crash, and the economic strength of the country in potential danger.
When put to the test with the corporate data, the USA, the UK, France, Germany, Netherlands, Japan, Sweden, Italy, Switzerland, Spain, Belgium and Luxembourg were part of an inner core of countries that would individually cause the most economic damage globally if their economies were to fail.
Using the import/export data, China, Russia, Japan, Spain, UK, Netherlands, Italy, Germany, Belgium, Luxembourg, USA, and France formed the inner core, with the researchers explaining that the difference – particularly the addition of China to this second list – is due to a large fraction of Chinese trade volume coming from subsidiaries of western corporations based in China, according to the report.
The researchers write:
“Surprisingly, not all 12 countries have the largest total weights or the largest GDP. Nevertheless, our results suggest that they do play an important role in the global economic network. This is explained by the fact that these smaller countries do not support only their local economy, but they are a haven for foreign investments.”
The Big Bang of Belgium
Belgium – who now have been without a government for six months – is held up as an example.
“We find that countries in the nucleus can spread a crisis to larger parts of the world compared to countries in the outer shells, even if the crisis originates in a small country, such as Belgium.”
“Zoom of the area showing the spreading for smaller crisis magnitudes (m). The dashed line shows the spreading of a crisis originating in Belgium, which is one of the smaller countries that belong to the nucleus of the network. Note that a crisis originating in Belgium, as m gets larger, becomes more severe in comparison with the average case for all countries in shell 11, (e). Fraction of nodes infected by a crisis originating from different shells of the network versus its magnitude m for ITN, (f) Zoom of the area showing the spreading for smaller crisis magnitudes (m). The dashed line again shows the spreading of a crisis originating in Belgium.”
It’s hard to imagine, but the scientist writes that a crisis originated in Belgium has the potential to infect 95 percent of the global economy:
“Considering the example of Belgium – ranked 29th according to its total GDP – we find that a crisis originating in this country (with magnitude m = 4.5), is able to affect for CON almost 60% of the world’s countries (average result of 50 realizations), while the worst-case scenario that is given by the maximum value of the fraction of infected countries (out of the same 50 realizations) is 95% of global infection,” they write.
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- When Belgium sneezes, the world catches a cold (eurekalert.org)
- Fears debt crisis is spreading in Europe (seattletimes.nwsource.com)
- Euro Debt Crisis Bankruptcy Bailout Queue, Protect Savings & Deposits From Banks Going Bankrupt!… (projectworldawareness.com)
- After Ireland: Who Will Be Next to Need a Bailout? (time.com)
- Belgium-Netherlands outsider for 2018 World Cup (AP) (bogartkick.com)
- “Euro Fatally Wounded by Serial Sovereign Debt Bailouts” and related posts (marketoracle.co.uk)
- The 10 Richest Countries in the World (dailyfinance.com)