Using Systems Thinking to Enhance Country Risk Assessment

Victoire de Groote and Seth Aslin

One may wonder whether reliance on mathematical approaches to risk assessment remains prudent. The significant limitations of model-based risk management techniques were exposed under a harsh light in the global financial crisis, while observers such as the Financial Times’ Martin Wolf have repeatedly underlined that the “mathematisation” of economics has not helped predict the emergence of crises, nor the potential consequences or derived issues. This poor track record has led to many advocating the need for a more eclectic approach to economic phenomenon analysis, while some economists increasingly support the use of qualitative assessments.

We are sympathetic to such views. The mathematical techniques we suggest in this chapter are in fact deployed in such a way so as to be supportive of a more holistic approach to risk assessment. Combining structural models, early warning approaches and systems thinking does not produce a single rating representative of all risks, but instead fuels the thinking of economists and enables a better understand of the interaction between various aspects of crises. We advocate the use of mathematical tools to support analysis as opposed to model