Systemic Thinking for Policy Making

1. Introduction to the OECD-IIASA Strategic Partnership

Gabriela Ramos

Jan Marco Müller

Martin Lees

Abstract

The rationale and objectives of the OECD-IIASA Strategic Partnership are outlined. The Partnership underpins an effort to combine the OECD’s strengths in policy analysis and dialogue with the scientific expertise of IIASA, to strengthen the evidence base of policy and help provide better strategies and advice. The systems approach can promote cross-sectoral, multidisciplinary collaboration in the process of policy formulation by taking proper account of the crucial linkages between issues generally treated separately within different specialisations and scientific and institutional “silos”. The approach provides a methodology to achieve a better understanding of the nonlinear behaviour of complex systems and improve the assessment of the consequences of policy interventions. A joint Task Force is organised around systems-based strategies to address global issues; improved analytical methods; governance and institutional innovation; systems leadership; extending existing joint activities; initiating new topics for collaboration; and extension and outreach.

We are living in a period of profound systemic change, and as in similar periods in the past, there is bound to be considerable instability and uncertainty before the new society and economy take shape. We have to identify actions that will shape change for the better, and help to build resilience to the inevitable shocks inherent in, and generated by, the system of systems constituted by the economy, society, and the environment. We are facing issues whose complexity, scale, interconnectedness, and pace of change are unprecedented, affecting entire economic, social, and natural systems as well as the relations between them. Experience shows that we cannot manage such systemic issues through established approaches to analysis and policy based on a tradition that separates complex realities into specialised disciplines, fields of research, agencies, and ministries, each focused on a part of the overall truth. We need to pull these disparate contributions together to organise an effective policy response. We need to be aware that ad hoc, short-term, sectoral-based interventions and isolated solutions in one policy area may have unintended and unpredicted consequences in other areas. We must understand system behaviour and evolution as a whole if we are to know how, where, and when to act to change them positively.

Systems thinking offers a more-integrated perspective and a number of proven concepts, tools, and methods to improve our understanding of potentially threatening complex, systemic issues. Systems thinking can improve the prospects for successful policy outcomes by offering a methodology and a range of simple tools to disaggregate, understand, and act on connected systemic issues, while taking proper account of the critical linkages between them. This can enable us to understand better the behaviour of complex, dynamic systems so as to anticipate their evolution, assess and manage risks, and decide how and where to intervene through targeted policies. Systems thinking also helps us to identify and understand critical linkages, synergies and trade‑offs between issues generally treated separately, and thus to reduce unintended consequences of policies. Systemic thinking also helps decision makers to spend public money more wisely because integrated solutions tend to be cheaper than sectoral ones due to the synergies created.

Systems thinking not only improves multidisciplinary, cross-sectoral collaboration, it can also provide insights into systems behaviour and management by rigorous analysis of such aspects as system dynamics, feedback, sensitivity, and non-linear responses; the emergence of systems behaviour and properties; the optimisation of system performance over different time horizons or for different groups; the anticipation and assessment of systemic risks; and the strengthening of resilience to external change and shocks.

As demonstrated in this publication, the application of systems thinking extends beyond the fields of analysis, modelling and the formulation of policy. It includes the design and management of organisations and institutions, because if more-integrated, science-based analysis is to be effective, it must be implemented through reorganised and more-integrated policies and institutions. Systems thinking also has immediate application in developing human capital through education, training, and team building.

It could be argued that by isolating a problem, policymakers can focus their thinking and design responses tailored to the specific issue. Often, however, the outcome of such an approach will not be as hoped for due to unintended consequences, unforeseen spillovers, and unsatisfactory trade-offs, because the challenges are interconnected, multidimensional, and complex. At the same time, trying to adjust all the parameters of a problem simultaneously is likely to lead to confusion and paralysis. Systems thinking offers a solution to this dilemma. It allows us to identify the key drivers, interactions, and dynamics of the economic, social, and environmental nexus that policy seeks to shape, and select points of intervention in a selective, adaptive way.

The material discussed in the following chapters accurately reflects the types and diversity of the complex challenges we are grappling with. Perspectives are drawn from a range of disciplines and methodologies - from economics, social science, and policymaking of course, but also from the physical and biological sciences and engineering. The publication shows how cross-sectoral, multidisciplinary collaboration can take account of the crucial linkages between issues generally treated within different specialisations and scientific and institutional “silos”. It demonstrates the value of combining “hard” sciences and physical evidence with the social sciences and the humanities to strengthen the basis of public policy. Naturally, the authors do not always agree with each other on the best approach to the issues discussed, other than that it should be systemic, but a number of common views have emerged and a coherent work programme based on shared priorities is evolving.

There is growing recognition of the relevance and potential of systems thinking to complement established approaches to policy analysis and implementation by providing greater insight into the complex, dynamic systems of the modern world.

In December 2017, OECD Secretary General Angel Gurría and Pavel Kabat, then Director General of the International Institute for Applied Systems Analysis (IIASA), signed a Memorandum of Understanding establishing a Strategic Partnership which should “tighten links between science and analysis on the one hand with policy and action on the other to better address global challenges through the development of systems approaches.”

This joint publication, first proposed in June 2018 by Professor Kabat and the Chief of Staff and Sherpa of the OECD who oversees the NAEC initiative, has been prepared through intensive collaboration between authors from the two organisations. Its purpose is to demonstrate the relevance and power of the systems approach to understand and act on a number of the critical systemic issues that confront policy-makers.

This is a first step to establish strong practical collaboration between the two organisations. It is principally focused on the strategic level, that is, the relevance of systems thinking to the formulation, implementation, and evaluation of national policies. The authors show how the methodology and tools of systems thinking can respond to the concerns and priorities of governments by providing valuable insights into policy choices, trade-offs and synergies; improving the effectiveness of policy interventions; and facilitating the assessment and management of risk.

The Strategic Partnership is laying the foundations for a concerted effort that will combine the OECD’s strengths in policy analysis and dialogue with the scientific expertise of IIASA to strengthen the evidence base of policy and help provide better strategies and advice. A joint OECD-IIASA Task Force on Systems Thinking, Anticipation and Resilience has been formed, bringing together 25 senior experts from across the different areas of activity of the two organisations. The programme of the Task Force is organised through a systems approach, such that the connections between the different activities will be analysed within an overall framework. Activities are organised around the following themes: systems‑based strategies to address global issues; improved analytical methods; governance and institutional innovation; systems leadership; extending existing joint activities; initiating new topics for collaboration; and extension and outreach.

The practical applications outlined in the following chapters show that the systems approach can be applied to a number of domains, as illustrated below.

Modernising economic analysis

The socio-economic system is changing and self‑organising itself in a way that is difficult, if not impossible, to reconcile with existing theory. In an increasingly complex and interdependent system, the aggregate phenomena that emerge do so as a reflection of the interaction between all the participants. The system is constantly evolving and is neither in, nor converging towards, a steady state. Thus, forecasting cannot be based on extrapolations from the past or analysis of the behaviour of an isolated individual.

Next-generation systems-analysis models have to better integrate real-world dynamics such as social and behavioural heterogeneity. This will help to represent social dynamics and complex collective decision‑making and facilitate the evaluation of the effectiveness of policies and their systemic impacts. A promising approach is to integrate existing modelling tools from different fields, for example linking environmental models with economic growth and trade models. This extends the boundaries of what is modelled and allows for broader ranges of interactions to assess policy interventions. Going beyond the integration of existing tools may involve pioneering applications and innovative methodologies and tools in several areas, including explicit accounting for uncertainty; multiple agents with strategic interactions; bounded rationality, including consumption preferences and consumer choices; and network effects linked to complex interconnectedness and systemic risks.

The environment and sustainable development

The environmental challenges facing policymakers are not only systemic, complex and nonlinear, they are regressive, in that they will affect the poorest regions and poorest people most. Adequate response to the environmental issues associated with sustainable development requires acting on several scales, from global to city. For macro-level interdependencies and trade-offs, the stringency of global mitigation will determine climate impacts on human and natural systems. The rate of climate change has implications for how quickly systems can adapt, as does dependence on bio-energy and biomass. Concerning country, regional, and local transformations and vulnerabilities, mitigation actions at a global level will determine the intensity of potential trade-offs between mitigation measures and their potential (in)direct impacts on ecosystems and human well-being at smaller scales, notably concerning the water, energy, land nexus. Adaptation policies will be better informed as long as we include the broader set of phenomena that will derive from the interaction of the social, environmental, and economic system. The growth maximisation paradigm may need to be revisited to ensure growth is sustainable, while at the same time contributes to improving the well-being of people.

Responding to transport’s impacts on the environment, notably climate change, shows how a number of policies and interests have to be considered simultaneously. For example, electrified transport causes non‑exhaust emissions and may cause distant emissions with different health impacts if the electricity comes from fossil sources, so policies must go beyond inducing manufacturers to produce cleaner and electric vehicles. Policies could aim to reduce individual drivers’ use of existing vehicles at the local level, including by providing public transit and active transport alternatives; and to supply cleaner electricity at the local, regional, or national level, or alternative fuels based on internationally-sourced feedstock.

Social and economic change

In order to promote positive social and economic change, a range of policies have to be integrated, including education, demographic, employment, well-being, and technology and innovation policies. Lifelong education, for example, will keep populations healthier, more physically and cognitively active, and more connected to society and the labour market. However, the content and quality matter, as well as how aligned education systems are with societal and environmental goals. System mapping is one tool to facilitate consideration of the behaviour of a complex system by decomposing it into sub-processes that can be verbally described in a straightforward and relatively simple way. From this, policymakers can obtain a broad view of the drivers of policy outcomes. Agent-based modelling can complement a systems mapping approach.

Systemic risk and resilience

A fundamental challenge to governing systemic risk is understanding the system as a complex network of individual and institutional actors with different and often conflicting interests, values, and worldviews. Superimposed on this governance network are the potential risk events with ill-defined chains or networks of interrelated consequences and impacts.

The 2008 crisis illustrated why a systems approach offers the best possibility of understanding the nature of global challenges. The crisis started in the US financial sector but quickly became global and evolved into an economic recession that gave rise to social and political crises too. It proved the level of interconnectedness of our economies, and the channels of contagion of a highly integrated financial sector. The financial system also illustrates potential benefits of OECD-IIASA collaboration. IIASA has quantitative methods to measure, model, and manage systemic risk of financial systems using network theory and agent-based modelling. OECD looks into how to operationalise the concept of resilience to systemic risk to give policymakers an effective and efficient resilience management framework. IIASA’s methods can inform and enhance OECD’s framework by making available simple and transparent systemic risk indicators that can be monitored in real-time, as well as tools to test alternative policy interventions to reduce systemic risk.

Insights of this first deliverable of the OECD-IIASA Strategic Partnership and next steps

In advancing systems thinking, some features of conventional policy analysis could be reassessed. There is no single and agreed definition of a problem; distinguish facts from values; set up a single metric for comparing and assessing options; optimise around the most promising option.

A systems approach should be applied to both the system to be governed and the governance system itself. The OECD’s ‘whole of society’ approach for managing risk could incorporate IIASA’s suggestions for establishing learning loops to reframe or enable transformative changes and focus attention on the critical nodes that are key to ensuring resilience of economies and societies.

Systemic issues IIASA and OECD could collaborate on include sustainable and inclusive growth and well‑being; linkages between finance, investment, and climate change; concerted policies for the climate, ecosystems, energy, and water nexus; longer-term strategies for employment; managing the interactions between technological innovation and economic progress; a concerted approach to water, food, and trade; systems-based approaches for development co-operation to meet diverse needs and aspirations; strategies and governance to assess and manage systemic risk; improved methodology and tools for modelling; and adapting institutions to systems thinking to meet new challenges.