By Isela-Elizabeth Tellez-Leon, IIASA-CONACYT postdoc in the Advanced Systems Analysis, Evolution and Ecology, and Risk and Resilience programs.
The rise of foreign investment in emerging economies after the global financial crisis of 2008-2009 has renewed interest in what drives such investment. My colleague at the Central Bank of Mexico and I examined the determinants of foreign investment, known as capital flows, into Mexico in 1995-2015, a period characterized by a free-floating exchange rate, that is, the authorities did not set an exchange rate.
Our research has useful findings for the design of economic policies because it provides measures that authorities can take to direct proper functioning of the economy. It also contributes to improved understanding of what influences capital flows into Mexico. We analyzed the determinants of each type of foreign investment separately, because different financial flows respond differently to the various external and internal factors. Mexico is an interesting case study because it experienced a large volume of capital investment after the commercial opening in the 1990s and more recently in the aftermath of the 2008-2009 financial crisis, as international investors were searching for high yields and security. In addition, the trading volume of Mexican government securities is one of the highest among emerging markets.
Capital flows are incorporated into financial accounts where foreign transactions are noted—including investments by foreign residents into Mexican public and private sector securities and by domestic residents in foreign securities. Mexico’s financial accounts (Figure 1) are composed of the following three components: portfolio investment (in terms of liquidity—i.e., the extent to which a market allows assets to be bought and sold at stable prices—this is a short-term investment, Figure 2), other investment (Figure 3), and foreign direct investment (in terms of liquidity this is a long-term investment, Figure 4).
The financial account is divided into three main areas: foreign direct investment (FDI), portfolio investment (PI) and other investment (OI). Figure 1 shows the net flows of foreign investment. Figure 2 displays portfolio investment (PI) and its components of domestic and foreign investors. Figure 3 and 4 show OI and FDI split into their different components. The figures show moving averages over 4 quarters adjusted for seasonality. Source: Elizabeth Tellez and the Central Bank of Mexico.
Portfolio and other investments tend to leave and enter a country quicker than foreign direct investment; thus, they are likely to respond faster to shocks. In particular, portfolio investment by foreign agents might have a different response compared to portfolio investment by domestic agents. For example, if foreign investors have timely information about the external economic conditions, they will likely respond faster to foreign shocks.
In general, foreign investment has an impact on developing economies in at least two ways. On the one hand, international borrowing allows a country to increase investment in the private sector, without sacrificing consumption. On the other hand, large foreign investment flows may be followed by increases in the prices of goods and services because of the strength of the exchange rate. In turn, this increases purchases of foreign products (imports), but exports decrease. In this way, a country’s foreign trade may become more vulnerable to external shocks and reversals of foreign investment.
To analyze what determines capital flows in the short and medium term for Mexico, we used an econometric model known as Vector Autoregression. This model allows us to examine the impacts of different shocks on capital flows. We studied two sets of factors that can encourage investors to shift resources to emerging markets. The first set considers external shocks (push factors), which are beyond the control of developing countries, such as foreign interest rates or economic activity in advanced countries.
The push factors we examined were global risk, US liquidity, US GDP, and US interest rates. The second set of factors are the prevailing economic conditions in the emerging economy (pull factors). For these we considered Mexican GDP, interest rates, inflation, and exchange rates.
One of our main findings is that investors are risk averse and prefer to invest abroad when foreign interest rates are higher. Portfolio investment (PI) and other investment (OI) seem more responsive to short-term shocks than foreign direct investment (FDI), possibly because they tend to be more liquid than FDI. We also found that domestic conditions play a role in explaining capital flows. For instance, we found that higher GDP growth leads to higher portfolio investment, while higher interest rates and lower inflation generate higher inflows of other investment. Our work underlines the benefits of separately analyzing the components of capital flows. For instance, a shock to the federal funds rate has important effects on portfolio investment in public-sector securities by foreign residents. This is because public securities are the closest substitutes to US government bonds found in the Mexican financial market.
By Valeria Javalera Rincón, IIASA CONACYT Postdoctoral Fellow in the Ecosystems Services and Management and Advanced Systems Analysis programs.
What is more important: water, energy, or food?
If you work in the water, energy or agriculture sector we can guess what your answer might be! But if you are a policy or decision maker trying to balance all three, then you know that it is getting more and more difficult to meet the growing demand for water, energy, and food with the natural resources available. The need for this balance was confirmed by the 17 Sustainable Development Goals, agreed by 193 countries, and the Paris climate agreement. But how to achieve it? Intelligent cooperation is the key.
The thing is that water, energy, and food are all related in such a way that are reliant on each other for production or distribution. This is the so-called Water-Energy-Food nexus. In many cases, you need water to produce energy, you need energy to pump water, and you need water and energy to produce, distribute, and conserve food.
Many scientists have tried to relate or to link models for water, agriculture, land, and energy to study these synergic relationships. In general, so far, there are two ways that this has been solved: One is integrating models with “hard linkages” like this:
In the picture there are six models (let’s say water, land use, hydro energy, gas, coal, food production models) that are then integrated into just one. The resulting integrated model then preserves the relationships but is complex, and in order to make it work with our current computer power you often have to sacrifice details.
Another way is to link them is using so-called “soft linkages” where the output of one model is the input of the next one, like this:
In the picture, each person is a model and the input is the amount of water left. These models all refer to a common resource (the water) and are connected using “soft linkages.” These linkages are based on sequential interaction, so there is no feedback, and no real synergy.
The intelligent linker agent
But what if we could have the relations and synergies between the models? It would mean much more accurate findings and helpful policy advice. Well, now we can. The secret is to link through an intelligent linker agent.
I developed a methodology in which an intelligent linker agent is used as a “negotiator” between models that can communicate with each other. This negotiator applies a machine-learning algorithm that gives it the capability to learn from the interactions with the models. Through these interactions, the intelligent linker can advise on globally optimal actions.
When I came to IIASA, I was asked to apply this approach to optimize trading between cities in the Shanxi region of China. I used a set of previously development models which aimed to distribute water and land available for each city in order to produce food (eight types of crops) and coal for energy. The intelligent linker agent optimizes trading between cities in order to satisfy demand at the lowest cost for each city.
The purpose of this exercise was to compare the solutions with those from “hard linkages” – like those in the first picture. We found that the intelligent linker is flexible enough to find the optimal solution to questions such as: How much of each of these products should each city export/import to satisfy global demand at a global lower economic and ecological cost? What actions are optimal when the total production is insufficient to meet the total demand? Under what conditions is it preferable to stop imports/exports when production is insufficient to supply the demand of each city?
The answers to these questions can be calculated by the interaction with the models of each city just by the interfacing with the intelligent linker agent, this means that no major changes in the models of each city were needed. We also found that, under the same conditions, the solutions using the intelligent linker agent were in agreement with those found when hard linking was used.
My next challenge is to build a prototype of a “distributed computer platform,” which will allow us to link models on different computers in different parts of the world—so that we in Austria could link to a model built by colleagues in Brazil, for example. I also want to link models of different sectors and regions of the globe, in order to prove that intelligent cooperation is the key to improving global welfare.
Javalera V, Morcego B, & Puig V, Negotiation and Learning in distributed MPC of Large Scale Systems, Proceedings of the 2010 American Control Conference, Baltimore, MD, 2010, pp. 3168-3173. doi: 10.1109/ACC.2010.5530986
Valeria J, Morcego B, & Puig V, Distributed MPC for Large Scale Systems using Agent-based Reinforcement Learning, In IFAC Proceedings Volumes, Volume 43, Issue 8, 2010, Pages 597-602, ISSN 1474-6670, ISBN 9783902661913, https://doi.org/10.3182/20100712-3-FR-2020.00097.
Morcego B, Javalera V, Puig V, & Vito R (2014). Distributed MPC Using Reinforcement Learning Based Negotiation: Application to Large Scale Systems. In: Maestre J., Negenborn R. (eds) Distributed Model Predictive Control Made Easy. Intelligent Systems, Control and automation: Science and Engineering, vol 69. Springer, Dordrecht
Javalera Rincón V, Distributed large scale systems: a multi-agent RL-MPC architecture, Universitat Politècnica de Catalunya. Institut d’Organització i Control de Sistemes Industrials,Doctoral thesis. 2016. http://upcommons.upc.edu/handle/2117/96332
Note: This article gives the views of the author and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.
Extractivism, a mode of economic growth currently practiced by many developing countries, is the phenomenon of extracting natural resources from the Earth to sell as raw materials on the world market. It is a central cause of many environmental problems, such as deforestation, loss of habitat and biodiversity, water, soil, and air pollution. Any study of these topics is therefore incomplete if it does not take this model of development into account.
Climate change is no exception, and it is my goal at IIASA to investigate the links between extractivism and climate change mitigation policies for Mexico. To start this search, it is relevant to ask whether the drivers of CO2 emissions might be different in countries that practice extractivism to those that do not. During my PhD, which examined the basic drivers of CO2 emissions in Mexico as a fossil fuel producer and exporter, I suggested that the answer is yes.
Even when there are as many causes of CO2 emissions as there are economic activities, CO2 emissions can be linked to four main drivers: population, GDP per person, the energy use per unit of GDP, and the CO2 emitted by each unit of energy consumed. The greater the value of these variables, and the faster their growth, the more CO2 emissions (all other things being equal). These four factors can then be incorporated into a model known as the Kaya identity, which aims to explain CO2 emissions at a global level.
For fossil fuel producers and exporters, these four elements of the Kaya identity may vary in idiosyncratic patterns across various periods, for example during booms and busts. There is a possible positive relationship between oil abundance and increased population growth, namely because of increased migration to oil production sites. For GDP per capita, a phenomenon known as the natural resource curse describes how production and export of fossil fuels can harm economic growth in the long term, although this debate is still not settled. Alongside this, various analyses have linked fossil fuel production with higher energy consumption, especially during boom times.
Lastly, a proposed carbon curse relates higher abundance of fossil fuels to higher “carbon intensity”—the amount of CO2 emissions per unit of GDP. The carbon curse may be a result of four mechanisms. First, the predominance of a fossil fuel production sector which emits a lot of CO2 itself. Second, crowding out effects in the energy generation sector, forming a barrier to newer renewable energy sources. Third, crowding out effects in other sectors of the economy—a phenomenon known as the “Dutch Disease” because when the Netherlands discovered its Groningen gas field in 1959 the economic boom that followed the gas exports resulted in a decline in manufacturing and agriculture. Finally, less investment in energy efficiency technologies and more subsidies for national fossil fuel consumption can also bring on the carbon curse.
It is therefore crucial to account for the links between extractivism and climate change related topics: for mitigation, but just as importantly for vulnerability and adaptation. If the past can be used to shape the future, a measure of the carbon curse could help national and international policymakers to determine how close an oil-extractive economy can get to being a low carbon economy.
This article gives the views of the author, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.
By Adam French – Peter E. de Jánosi Postdoctoral Scholar Risk and Resilience and Advanced Systems Analysis Programs
In mid-January, I found myself calling upon rusty rock climbing skills to scramble up a steep side canyon of Peru’s Rimac River valley. I was with a group of engineers and local municipal officials on the way to assess disaster reduction infrastructure that had been installed in early 2016 against the threat of a strong El Niño-enhanced rainy season. The Swiss-made barriers we were going to see, which resembled giant steel spider webs stretched across the streambeds, had been constructed in multiple locations in the Rimac watershed to reduce the destructive impacts of the region’s recurrent but unpredictable huaicos—powerful debris flows that form when precipitation runoff mixes with loose rock and other material on unstable slopes. The 2015-16 El Niño did not live up to its forecasted intensity in Peru, and the barriers went untested until heavy rains in early 2017 unleashed a series of huaicos on the Rimac valley, damaging homes and flooding roadways. Where the barriers were installed, however, no major impacts had been reported, and we were eager to see if the infrastructure had made a difference.
Most of the time, the Rimac valley looks more like a lunar landscape than a flood-risk hotspot. Yet with only a few millimeters of rain in the surrounding highlands, this arid region becomes extremely vulnerable to huaicos. Located between the sprawling cityscape of Lima—the planet’s second largest desert city—and the lush foothills of the central Andes, the middle reaches of the Rimac watershed have been settled rapidly over recent decades, often without effective zoning regulations to restrict occupation in even the most hazard-prone areas.
I had not planned to work in the Rimac basin when I moved to Austria to take up a postdoctoral position in late 2015. While my research includes the study of climate change-related risk in Peru’s Cordillera Blanca (the world’s most extensively glaciated tropical mountain range), I came to IIASA to focus on watershed-level governance and the implementation of the Integrated Water Resource Management (IWRM) paradigm. Yet as a Spanish speaker with extensive experience in Peru, I was well suited to get involved in IIASA’s activities in the Rimac valley as part of the Zurich Flood Resilience Alliance Project. This project, which includes close collaboration with the NGO Practical Action in Peru and Nepal, supports measures to understand and address the underlying drivers of flood risk and to move beyond short-term disaster preparedness and response towards transformative actions that build long-term capacity and resilience.
As part of IIASA’s Flood Resilience team, my work in the Rimac valley has included activities ranging from evaluating El Niño preparations to conducting interviews with public authorities and local residents living in the Rimac basin. This fieldwork is just part of our project’s efforts to identify the systemic components of flood risk and vulnerability in the region and to promote productive exchanges between residents, policymakers, and the scientific community through participatory research and innovative approaches such as serious gaming.
In addition to building expertise in a new setting, my involvement in this work has helped me better incorporate risk-focused systems thinking into my broader research agenda—a perspective that is too often overlooked in integrated resource planning. An example of how my research interests are converging within this project is through the promotion of a risk-management working group to advise the multi-sectorial watershed council in charge of IWRM planning in the Rimac valley. The establishment of this working group and the participation of project partners at Practical Action in its activities should mark an important step in bringing lessons from the Flood Resilience project regarding links between disaster risk reduction, economic development, and community resilience to bear on watershed planning in the Rimac basin. More broadly, we hope these insights will influence policy making in other settings in Peru and beyond that face similar challenges in handling risk management and economic development as intricately linked and co-dependent governance processes.
Returning to our January field inspection, we found that one of the new barriers had been put to the test. The structure had captured several tons of debris, protecting a neighborhood that had been devastated by a huaico in 2015, and local authorities were already discussing the potential to build additional barriers to guard their community. While I celebrated this outcome with them, as I look to the future and the goals of the Flood Resilience Alliance, I am hopeful that such infrastructural interventions will be just one aspect of comprehensive plans for hazard reduction, with long-term risk management actions increasingly seen as a vital component of watershed-level planning and governance.
By Edward Byers, Postdoctoral Research Scholar, IIASA Water, Energy, and Transitions to New Technologies programs
Scenario analysis, a process for comparing alternative futures, has been a fundamental tool in sustainability and systems research, but less prominent in the water field. Recently, researchers at IIASA have been applying scenario analysis to their modelling capabilities to tackle global water issues.
Last week, a high level group of water experts met at IIASA for the Water Futures and Solutions (WFaS) Stakeholder Focus Group. WFaS is a flagship initiative from IIASA challenged with understanding future water resource issues, and identifying solutions to problems like water scarcity and water access. However, when a recent fast track assessment found that even its most sustainable scenario, would still result in water scarcity in some river basins due to growing demands, researchers realized that fresh thinking was required. So in last week’s meeting, IIASA water researchers were on the search for more sustainable and transformational solutions. The efficacy of these new sustainability scenarios will be tested in IIASA’s new ensemble of global hydrological models and presented in time for the next World Water Forum 2018.
Victoria Falls on the Zambezi River. In the Zambezi basin, water is abundant but there are challenges in getting that water to the people who need it, particularly as the population grows in the future. (cc) Pius Mahimbi | Flickr
The two-day workshop at IIASA hosted 20 international water experts from around the world and across research, government, and development organisations. Modellers from the IIASA water program, myself included, took part in the focus groups with the experts, discussing how to represent in our models complex interactions that occur in transboundary river basins as well as for key interactions with other sectors such as energy and agriculture.
Our discussions on the Zambezi, the Indus, and the Yellow river basins will contribute to broader understanding of the development challenges in three different parts of the world –not just along the rivers, but throughout the entirety of the river basins and the populations and ecosystems that they support. For example, the Indus basin is extremely water scarce and is expected to be further depleted due to melting of the upstream glaciers. In the Zambezi basin, in contrast, water is abundant, but there are significant political and economic challenges to sustainably providing access to a population of 38 million people that is expected to double within one generation.
Similarly, our sectoral discussions on energy, food, economics, and ecosystems will improve our model representations of sectors that may be substantially different by 2050, such as the energy sector. This is particularly important for demonstrating how the benefits of water security unlock other benefits for development challenges, such as health, food security, gender equality, and education.
Identifying, quantifying and communicating these well-recognized, inter-dependent benefits can be key to unlocking the investment in solutions. Our work with the experts focused primarily on Sustainable Development Goal 6, the Clean Water and Sanitation Access goal, with a view to identifying co-benefits for other goals. Having received much useful information and positive feedback from our stakeholders, the challenge now is to integrate this into our models and scenario narratives, so that we can demonstrate on a global scale the benefits of water security not as a development target to be attained, but as one of the fundamental drivers of sustainable development. With growing populations and intensifying impacts of climate change, challenges for water security will continue long beyond the Sustainable Development Goals for 2030. Meeting these targets is just the first step of the pathway to long-term water security.
The Water Futures and Solutions Initiative (WFaS) was launched by IIASA, UNESCO/UN-Water, the World Water Council (WWC), the International Water Association (IWA), and the Ministry of Land, Infrastructure and Transport (MOLIT) of the Republic of Korea, and has been supported by the government of Norway, the Asian Development Bank, and the Austrian Development agency. More than 35 organizations contribute to the scientific project team, and an additional 25 organizations are represented in stakeholder groups.
Note: This article gives the views of the author, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.
By Mia Landauer, a Finnish postdoc at IIASA Risk, Policy and Vulnerability Program and Arctic Futures Initiative
When I was a child I did not like cross-country skiing. One reason was that like many other schoolmates in Finland, I had no other option than to ski to school throughout the winter, even when temperatures were below -20 C, and even though my skis were too big because I got them from my sister and so old that they could have broken anytime.
When I decided to write my dissertation in Austria about climate adaptation of winter tourism, I found I still couldn’t get away from skiing. My professor at the University of Natural Resources and Life Sciences (BOKU) asked me to join a research team investigating this topic. “What a great tradition you have in Finland! My friend and colleague from METLA (now Natural Resources Institute) in Finland would love to do research with us but with somebody who knows about cross-country skiing! You are the perfect match!” I guess I was too shy to admit that I was not excited about having cross-country skiing as a case study—but I decided to give it a try.
Cross-country skiing is socially and culturally a very important activity in Finland, with considerable health benefits. Forty-two percent of the population practice skiing annually and 98% have the skills. But cross-country skiing, like other snow-based activities, is affected by climate change: even Nordic countries are now seeing lack of snow, shift of seasons, and extreme weather events. The winter 2015/2016 has been no exception. Many Finns are concerned that losing this activity would lead to reduced well-being and loss of cultural tradition. Furthermore, economic impacts on tourism regions brought about by a decrease in skiing would cause problems to local economies heavily dependent on snow-based tourism.
Although vulnerability indicators of some other tourism sectors such as beach tourism exist, nobody had thought about cross-country skiing. So we decided to develop an index, based on climatic observations together with extensive survey data on skiers living in climatically different regions in Finland.
We found that exposure to changes in snow conditions have a considerable effect on regional vulnerability. The most vulnerable skiers are in southernmost parts of Finland, which makes sense. But it is not only the amount of snow and length of winter that matter. We also found that skiers in North and East Finland have the highest capacity to adapt, as indicated by their ability to ski: having the necessary skills and equipment, as well as capacity and willingness to travel to be able to ski.
However, the results also show that if it we could enhance these components of adaptive capacity, also the skiers in the south would have a chance. If there are no adaptation options (no artificial snow tracks, no indoor skiing facilities, or simply no interest to use these, or no money or time to travel to be able to ski), in the short term the Finnish cross-country skiing population will face impacts on health, well-being, and quality of life. In the long term, the skiing culture could be lost. Furthermore, decline in demand would lead to regional economic losses in tourism-dependent local economies.
Attempts are being made to maintain the skiing tradition. Nowadays there are a lot of organized activities where kids are introduced to outdoor activities in a playful and educational environment, and ski school and clubs are being established. They play an important role to create a close and pleasant relationship to nature and increase motivation for skiing. But of course the most important element for skiing is snow.
I have always had a very close relationship to nature. Believe me or not, sometimes I do go skiing although it also brings back the unpleasant memories. Despite them, wintery landscapes and nature experience have motivated me to continue skiing as an adult. The gray and rainy winters make me worried and I simply cannot see myself skiing in a ski tunnel… Albeit “you will never know the true value of a moment until it becomes a memory“, I want snow!
Landauer, M., Sievänen, T., & Neuvonen, M. (2015). Indicators of climate change vulnerability for winter recreation activities: a case of cross-country skiing in Finland, Leisure/Loisir, 39:3-4, 403-440. http://dx.doi.org/10.1080/14927713.2015.1122283
Landauer, M., Haider, W., & Pröbstl, U. (2014). The influence of culture on climate change adaptation strategies: Preferences of cross-country skiers in Austria and Finland. Journal of Travel Research 53(1), pp. 95-109. doi: 10.1177/0047287513481276
Landauer, M., & Sievänen, T. (2011). Suomalaisten maastohiihtäjien sopeutuminen ilmastonmuutokseen. In T. Sievänen & M. Neuvonen (Eds.), Luonnon virkistyskäyttö 2010 (pp. 91–101). Vantaa: Working Papers of the Finnish Forest Research Institute, 212.
Neuvonen, M., Sievänen, T., Fronzek, S., Lahtinen, I., Veijalainen, N., & Carter, T. R. (2015). Vulnerability of cross-country skiing to climate change in Finland – An interactive mapping tool. Journal of Outdoor Recreation and Tourism, 11, 64–79. doi:10.1016/j.jort.2015.06.010
Neuvonen, M. & Sievänen,T. (2011). Ulkoilutilastot 2010 (Outdoor Recreation Statistics 2010). In: Sievänen, T. & Neuvonen, M. (toim.). Luonnon virkistyskäyttö 2010. Metlan työraportteja / Working Papers of the Finnish Forest Research Institute 212: 133–190
Perch-Nielsen, S. L. (2010). The vulnerability of beach tourism to climate change – An index approach. Climatic Change, 100(3–4), 579–606. doi:10.1007/s10584-009-9692-1
Note: This article gives the views of the author, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.