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World money meltdown can start in surprising places, physicists say

Aug. 25, 2010
Special to World Science  

A small group of coun­tries—in­clud­ing not just the mighty Un­ited States but al­so ti­ny Lux­em­bourg—have the du­bi­ous hon­or of be­ing able to spread an eco­nom­ic cri­sis glob­ally once it sprouts on their soil, five phys­i­cists say.

The re­search­ers say they ar­rived at the find­ing us­ing con­cepts from “s­tatis­ti­cal phys­ics” and availa­ble da­ta that quanti­fies trade and busi­ness own­er­ship ties among al­most all na­tions. The sci­en­tists, from Greek, Swiss and Is­rae­li uni­vers­i­ties, al­so used spe­cial for­mu­las meant to es­ti­mate the prob­a­bil­ity of an ef­fect, such as a dis­ease, spread­ing be­tween links in a net­work.

Their meth­od in­di­cat­ed that 10 na­tions are so tightly linked in­to the glob­al busi­ness net­work that they can trig­ger a world­wide cri­sis, re­gard­less of wheth­er the cal­cula­t­ion con­sid­ers trade ties alone or ow­ner­ship ties alone. The coun­tries are: Ja­pan, Spain, the U.K., the Neth­er­lands, It­a­ly, Ger­ma­ny, Bel­gium, Lux­em­bourg, the Un­ited States, and France.

More­o­ver, if only own­er­ship ties but not trade ties are con­sid­ered, Swe­den and Switz­er­land join the list. If only trade but not own­er­ship ties are con­sid­ered, then Chi­na and Rus­sia march on­to the ros­ter.

“For both net­works we are able to lo­cate a nu­cle­us of coun­tries that are the most likely to start a glob­al cri­sis, and to sort the re­main­ing coun­tries’ cri­sis spread­ing po­ten­tial ac­cord­ing to their ‘cen­tral­ity,’ the re­search­ers wrote in re­port­ing their find­ings. 

“Ini­tially, a cri­sis is trig­gered in a coun­try and prop­a­gates from this coun­try to oth­ers. The propaga­t­ion prob­a­bil­ity de­pends on the strength of the eco­nom­ic ties be­tween the coun­tries in­volved and on the strength of the econ­o­my of the tar­get coun­try.”

The re­search­ers, in­clud­ing An­to­nios Garas of the Uni­vers­ity of Thes­sa­loniki, Greece posted a re­port on their find­ings on the web­site Arx­iv.org, a da­tabase of phys­ics re­search pa­pers.

The work may be par­tic­u­larly rel­e­vant as the world lurches from a re­cent re­ces­sion to what some an­a­lysts pre­dict could be an all-out de­pres­sion in the months and years ahead.

The sci­en­tists ran com­put­er sim­ula­t­ions of fic­ti­tious eco­nom­ic cri­ses based on their equa­tions. In these sim­ula­t­ions, a cri­sis would un­fold in a series of in­di­vid­ual steps. In each step, each na­tion was char­ac­ter­ized as ei­ther “sus­cep­ti­ble” to cri­sis, “in­fect­ed” by cri­sis, or “reco­vered.”

A si­m­i­lar sys­tem “has been used suc­cess­fully to mod­el spread­ing of epi­demics in var­i­ous net­works,” the team wrote.

The group re­ported that in their sim­ula­t­ions of a cri­sis orig­i­nat­ing in the Un­ited States, the overall re­sults were si­m­i­lar to what ac­tu­ally oc­curred in the 2008-2009 re­ces­sion, in terms of the num­bers and ident­i­ties of the coun­tries in­fected.

A coun­try’s “spread­ing pow­er” de­pends not so much on its size as on the strength and the tar­gets of its busi­ness links, the group wrote. That ex­plains, they added, why “even smaller coun­tries have the po­ten­tial to start a sig­ni­fi­cant cri­sis out­break.”

Some smaller coun­tries “are 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,” Garas and col­leagues wrote.

Coun­tries such as Lux­em­bourg (popula­t­ion about 489,000) and Switz­er­land “are head­quar­ters for some of the world’s larg­est com­pa­nies and sub­sid­i­aries [and] in­ter­act very strongly with a very large num­ber of coun­tries,” they added. “For ex­am­ple, about 95 per­cent of all phar­ma­ceu­ti­cal prod­ucts of the Swiss in­dus­try are not in­tend­ed for lo­cal con­sump­tion, but for ex­port­ing.”

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A small group of countries—including not just the mighty United States but also tiny Luxembourg—have the dubious honor of being able to spread an economic crisis globally once it sprouts on their soil, five physicists say. The researchers say they arrived at the finding using concepts from “statistical physics” and available data that quantifies trade and business ownership ties among almost all nations. The scientists, from Greek, Swiss and Israeli universities, also used special formulas meant to estimate the probability of an effect, such as a disease, spreading between links in a network. Their method indicated that 10 nations so strongly linked into the global business network that they can trigger a worldwide crisis, regardless of whether the calculation considers trade ties alone or business ties alone. The countries are: Japan, Spain, the U.K., the Netherlands, Italy, Germany, Belgium, Luxembourg, the United States, and France. Moreover, if only ownership ties but not trade ties are considered, Sweden and Switzerland join the list. And if only trade but not ownership ties are considered, then China and Russia march onto the roster. “For both networks we are able to locate a nucleus of countries that are the most likely to start a global crisis, and to sort the remaining countries’ crisis spreading potential according to their ‘centrality,’ the researchers wrote in reporting their findings. “Initially, a crisis is triggered in a country and propagates from this country to others. The propagation probability depends on the strength of the economic ties between the countries involved and on the strength of the economy of the target country.” The researchers, including Antonios Garas of the University of Thessaloniki, Greece posted a report on their findings on the website Arxiv.org, a database of physics research papers. The work may be particularly relevant as the world lurches from a recent recession to what some analysts predict could be an all-out depression in the months and years ahead. The scientists ran computer simulations of fictitious economic crises based on their calculations. In these game-like simulations, a crisis developed over the span of many individual steps. In each step, each nation was characterized as either “susceptible” to crisis, “infected” by crisis, or “recovered.” A similar system “has been used successfully to model spreading of epidemics in various networks,” the team wrote. The group reported that in their simulations of a crisis originating in the United States, the overall results were similar to what actually occurred in the 2008-2009 recession, in terms of the numbers and identities of the countries infected. A country’s “spreading power” depends not so much on its size as on the strength and the targets of its business links, the group wrote. That explains, they added, why “even smaller countries have the potential to start a signicant crisis outbreak.” Some smaller countries “are 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,” Garas and colleagues wrote. Countries such as Luxembourg (population about 489,000) and Switzerland “are headquarters for some of the world’s largest companies and subsidiaries [and] interact very strongly with a very large number of countries,” they added. “For example, about 95% of all pharmaceutical products of the Swiss industry are not intended for local consumption, but for exporting.”