The year 2030, for most people on earth, will be a cocktail of these three cities [ed. Akita, Tallinn, and Santiago]: an urban society that is old, technologically advanced and economically unequal.
— Richard Davies, Extreme Economies (New York: Farrar, Straus and Giroux, 2019), p. 331.
article summary
Extreme Economies is full of so many interesting insights and lessons that it’s impossible to talk about all of them. I share three takeaways that were particularly valuable to me:
- Aceh: the devastation of the 2004 tsunami, and the power of human resilence and ingenuity in “building back better.”
- Yaviza: the role of geography in the fate of communities and the vicious cycle of economic decline in a society of distrust.
- Akita: how the ageing and shrinking of first world populations will leave us with unbearable fiscal burdens and force a radical change in the culture of the elderly.
- Conclusion: the unanswered questions.
The most interesting economic insights come from the study of human imperfection. This may be surprising to hear about a discipline famed for supply, demand, and the law of equilibrium, where deviation from this norm is a recipe for shortages, surpluses, and misery. It’s not so surprising if you remember that George Akerlof won his Nobel Memorial Prize in Economics for his work on how society overcomes situations where there exists asymmetric information — Carfax® exists because people don’t trust used car dealers. Daniel Kahneman won his for studying human biases. Elinor Ostrom earned hers for research on how societies overcome exploitation of shared resources. And, it was George Stigler who persuasively argued that property rights are relevant and important because societies are unlikely to arrive at ideal property right schemes without legal enforcement.
I will amend my opening statement.
The best economic insights stem from the study of human imperfection.
Richard Davies’ Extreme Economies is such an interesting book precisely because it explores how societies function in extreme situations, where natural disasters devastate entire cities, the rule of law is hardly respected, and extreme poverty breeds instability. He shows how societies use markets and cooperation to improve their situation, and where markets and cooperation breakdown and fail. It’s on the margin that economics can tell you the most about our world and it’s cities on the margin where Davies extracts powerful lessons. Nine cases are studied organized in three broad categories: the economics of survival, the economics of failure, and the economics of the future.
Without a dull moment, Extreme Economies is a remarkably intellectually stimulating book with many lessons. For the sake of brevity, I will explore three of these. For the rest, I highly recommend reading Richard Davies’ book. It’s rare for such a fun, quick book to hold so much insight on the nature of our economies.
Aceh: The Fundamental Humanity of Wealth
Aceh, sitting on the northern tip of the Indonesian island of Sumatra, has always stood out like a sore thumb in a country without a shortage of fractures and sprains. The three-decade-long insurgency under the Free Aceh Movement’s (GAM), brought on by ethnic tension, cultural differences, and income inequality, claimed an estimated 15,000 lives and displaced around 120,000 Acahnese more. If by the early 2000s the Indonesian military was winning the conflict, it only meant more death, terror, and uncertainty for the civilians, who of all sides suffered the most. Indeed, in 2001 alone, between 2,000 and 2,500 people were killed [note 1]. Yet, the conflict and its grief paled in comparison to the disaster that struck Aceh in 2004.
In late December 2004, the Indian Plate slipped beneath the Burma Plate, causing an earthquake of magnitude between 9.0–9.3 and a 30 cubic kilometer displacement of water along the entire length of the fault. The latter resulted in a series of 1,600 kilometer long tsunamis that struck 18 different countries, including and especially northern Sumatra which was hit first. The province of Aceh was particularly devastated, taking the brunt of the tsunami’s destruction. Over 167,000 Indonesian lives were lost, most of these concentrated within and around the city of Banda Aceh [note 2]. In a single day, the tsunami claimed more than 11 times the lives the 30-year guerrilla had taken.
Aceh, Indonesia, in the aftermath of the 2004 tsunami.
Yet, what makes Aceh’s experience so interesting is not the degree to which the tsunami absolutely devastated it, which it did, but rather the remarkable recovery which followed.
Excepting the oil and gas industry, Aceh’s economy has consistently grown since the 2004 tsunami.
A Story of Recovery
Up to 2005, the province had experienced three decades of low or negative GDP growth. After the Asian financial crisis of 1997–98, Aceh continued to wither on the vine while the rest of Indonesia experienced a recovery. Poverty and unemployment were on the rise, the latter reaching a pre-tsunami peak of 10–12% in 2003 [note 3]. Combined with the intensifying and brutal counterinsurgency campaign waged by the Indonesian armed forces, Aceh’s prospects were dim. Undoubtedly, the tragedy of the 2004 tsunami did very little to lift hopes and by 2005 it was clear that conditions in the province were even worse than they had been before.
Aceh’s story was not destined to be one of failure, however. By 2006, the economy was growing again and poverty rates were starting to fall in all but the most remote regions of the province. What is most spectacular is that Aceh’s post-tsunami growth hasn’t come on the back of oil and gas, one of the region’s export staples and a source of division, as the benefits of this trade are very unequally distributed among the province’s population. If you count oil and gas production, Aceh’s economy did not truly start to recover until after 2010. However, without counting oil and gas, the province’s economic growth has been on par with the rest of Indonesia’s after a decline in 2003 and the shock of 2004–05. Furthermore, the post-tsunami period marks the longest period of time with consistently positive GDP growth rates [note 4].
What explains Aceh’s recovery? How did it rebuild after losing literally almost everything? The years 2005 and 2006 there are two major factors which coincide: the response to the tsunami and the end of the guerrilla war. The end of the conflict certainly liberated many people from the terror the insurgency, and most especially the counterinsurgency campaign, produced. Nonetheless, it’s in Aceh’s response to the tsunami’s devastation where we find the greatest lessons of human resilience.
Source: World Bank
Source: World Bank
Source: World Bank
“Building Back Better”
“Regarding the economy, things are very much better now. Lifestyles are better too. The tsunami had huge costs, but it also had benefits.”
— Richard Davies quoting (p. 24) 61-year-old Akhyar Ibrahim, who lost one of his five sons in the tsunami.
Between 80,000 and 110,000 homes were destroyed in Aceh by the tsunami. Over 3,000 kilometers of roads, 120 major bridges, 1,500 other bridges, 14 seaports, and 11 airstrips had been swept away. More than 2,000 school buildings were eliminated and more than 2,500 teachers died. Some 5,000 fishing boats were ravaged, along with 20,000 hectares of fishing ponds [note 5]. How could the economy and life be better after all of this devastation? It starts to make sense once you consider that the quality of life is not a function of the past, but a product of the present.
By December 2006, 57,000 new homes were built in Aceh. According to Davies’ research, more than 140,000 new homes were constructed by the beginning of 2009. These are smaller and simpler, but they come with built-in sewage systems and plumbed-in bathrooms. By December 2006, over 1,200 kilometers of road were rebuilt, 121 bridges repaired, and more than 4,400 fishing vessels replaced. These were often bigger and better. Much of this was funded by immediate aid relief, and with aid workers came new technologies that were quickly adopted by the locals. One of these technologies was the mobile phone.
The Acehnese and aid workers refer to the post-tsunami reconstruction as “building back better,” writes Davies. The province’s physical capital had been utterly devastated, but physical capital can be restored. What matters is the preservation and importation of human capital. Everything else will come with activity.
Source: Sisira Jayasuriya and Peter McCawley, The Asian Tsunami.
The Humanity of GDP
If observers thought that Aceh’s economic growth would be short-lived and limited to the initial years of avid international aid, they were only partly correct. In 2008, GDP growth — outside of gas and oil extraction — fell, but by 2010 GDP growth was back, no matter how you measure it. The end of the guerrilla war played its role in releasing the population from a critical constraint, but so did the disaster itself. The disaster caused disproportionate casualties among those older than 40 and younger than 10. The youngest and oldest suffered the most. While this loss remains a tragedy, the deaths of so many elders caused an institutional shift away from tradition, liberalizing a region known for Shariah Law and its historic distrust of foreigners. For the young, this has changed too. So much physical destruction has put the sanctity of human education in proper perspective, leading to more and better schooling.
Source: Rofi, et. al., Tsunami Mortality and Displacement in Aceh Province, Indonesia.
The product of all the factors that coincided in 2005 and after was an increase in human activity. New infrastructure and technology, along with a leveling of the playing field as far as access to objects as simple as motorbikes and cell phones, has made getting to work easier and the scope of productivity activity broader. The same is true of the new sense of peace and the increase in tourism since 2005. While oil and gas extraction continue to be a large part of the local economy, growth outside of this sector has helped to diversify Aceh’s output.
If there’s one metric that captures Aceh’s success it is GDP. GDP is strictly a measure of the one year’s output. Ignoring what came in the past, it places an emphasis on the activities of the present. The tsunami’s shock to GDP was relatively constrained given the enormity of the disaster’s physical toll. But, while more than 150,000 people died, those who remained — disproportionately, people of prime working age — quickly rebuilt their society to a status better than it was ever before.
Section Notes
1. The estimates for the number of dead and displaced come from the UN’s Provincial Human Development Report Aceh 2010, pp. 9–10, and Christopher Paul’s, et. al., Paths to Victory, p. 409–411. [Back to top]
2. Estimates of deaths vary widely. The Tsunami Evaluation Coalition published a synthesis in 2006 with revised and detailed casualty figures. For a detailed study of the tsunami’s mortality in Aceh, see Rofi, et. al., Tsunami Mortality and Displacement in Aceh Province, Indonesia. [Back to top]
3. GDP growth, unemployment, and poverty statistics for the years between 1990 and 2006 are taken from the World Bank’s Aceh Poverty Assessment 2008. [Back to top]
4. Economic data between 2004 and 2010 is taken from The Asia Foundation’s The Contested Corners of Asia. [Back to top]
5. Estimates of the tsunami’s destruction, and subsequent two-year recovery, in Aceh come from Sisira Jayasuriya and Peter McCawley, The Asian Tsunami: Aid and Reconstruction After a Disaster (Cheltenham, UK: Edward Elgar, 2010), pp. 81–82. [Back to top]
Yaviza: The Vicious Fickleness of Geography & The Limits to Markets
Geography is so often the master of our fates.
For more than 2,300 years, the history of Mesopotamia has been dominated by three cities: Seleucia, Ctesiphon, and Baghdad. Founded around 300 B.C., Seleucia was made capital of a great Greek empire that extended from central Anatolia to the banks of the Indian Indus. Situated at the confluence of the mighty Tigris River and a canal which connected it to the Euphrates, Seleucia represented prime commercial real estate and it thrived because of it. In the 2nd century B.C., this land changed hands when it was conquered by the Parthian Empire, who built their capital at Ctesiphon only 5 kilometers to the north of Seleucia. Seleucia was absorbed as a suburb of the new capital, but it nevertheless ultimately disappeared beneath the shifting sands as the Tigris’ course moved away from it.
Seleucia was destined to suffer from a similar fate. One hundred years after the Muslim conquest of Mesopotamia, the ruling Abbasid Caliphate founded the city of Baghdad as their capital. Baghdad, just 35 kilometers to the north, condemned Ctesiphon to an obscurity no less dramatic than Seleucia’s. Again, the nature of the Tigris had changed and so had the value of the real estate around it — the Arabs were simply moving to where the money was. Such were the economics of geography.
The ruins of Taq Kasra of Ctesiphon.
Yaviza, an impoverished and guerrilla-infested city in southern Panama, is the victim of a similar story. Sitting on the Chucunaque River, the city once served as the hub of a thriving river trade. Yaviza’s fall from grace is not the product of a shifting, changing river-course, like that of Seleucia and Ctesiphon, but rather of a shift from rivers of water to rivers of concrete.
The Geographical Economics of Modernization
Yaviza is situated within a geographical area known as the Darién Gap, connecting Central and South America. In the southern third of the gap sits the Panamanian-Colombian border. Historically underdeveloped, Yaviza and the surrounding localities lacked basic road infrastructure. As a result, the movement of goods was mostly restricted to the Chucunaque River and Yaviza’s important role, a result of its strategic location where the various tributaries of the Chucunaque connect, in this trade is fossilized by the elaborate port facilities. Old homes on the mainstreets, with first-story verandas and intricately patterned walls, are a testament to the wealth this activity once bestowed upon Yaviza.
Source: Panamanian census data.
The city’s fortunes changed with the overall modernization of Panama in the 1960s and after. A major highway construction project, an extension of the Pan-American Highway, connected Yaviza to the city of Chepo by 1980. From Chepo, one can reach Panama City. These roads eventually ran parallel to the length of the Chucunaque, increasing the amount of activity and trade flowing between Panama City and the country’s southern localities. While this was good for Panama, it was bad for Yaviza.
Today, new homes are smaller and cheaper, little more than concrete slabs with tin roofs. Bars that once bustled with customers remain open, but mostly empty. While the district of Pinogana grew from 12,000 to 18,300 people between 1990 and 2010, Yaviza — Pinogana’s largest municipality — shrunk from 8,500 inhabitants to less than 4,500 [note 6]. Entering years beyond its prime, Yaviza doesn’t offer us a story of recovery and rehabilitation, like Aceh did. Rather, it warns us of the potentiality for a vicious cycle of decline.
From Rivers to Jungles
Despite the radical population reduction Yaviza saw in the years following the extension of the Pan-American Highway, there is still a scarcity of work and an abundance of poverty. People make money where they can and the river is still the heart of an ever-more-desperate economy. Transporting their output in flimsy canoes, locals chip and blast away at the riverbanks to collect sand and grit for construction, and gold. Locals have also resorted to chopping down protected rosewood trees and selling them to Chinese exporters. Between 1990 and 2010, Panama lost almost 5,500 square kilometers of rainforest, or over one million football fields.
To help control deforestation, the Panamanian government issues a certain number of logging licenses to the local villages. Furthermore, some 5,750 square kilometers of local rainforest, named Darien National Park, has been closed to all logging. Institutionally, the situation seems set up for success, offering the rainforest protection but also giving the people of the Darién Gap, including Yaviza, a means of leveraging the rich natural resources in the area to improve a declining standard of living. But, as deforestation accelerates, the data shows that the rules have failed to promote a sustainable ecological economy, while Yaviza remains a shell of its former self.
Yaviza’s decline came when the river economy was replaced by a highway economy.
Of course, logging requires heavy, specialized equipment which the locals don’t have and can’t afford. Thus, they sell their logging rights to big companies which drive into the rainforest in their big trucks. With the licenses in hand, they can legally enter the logging areas. Once inside, quotas no longer always need to be respected. Even when they are, industrial loggers simply fell everything and take away the best, leaving the discards dead on the floor behind. It’s not just that the rules haven’t helped jumpstart the local economy and simultaneously limited ecological damage; they’ve done the exact opposite and exacerbated the problem.
The Failure of Markets
Davies invokes Elinor Ostrom’s research to illustrate how communities often cooperate to protect scarce resources that would otherwise suffer from exploitation. In parts of Japan, for example, logging is “regulated” through community rules that determine which types of trees can be felled at what times of the years and how many loggers can be working at any one time. The system has worked to protect the forests of Mount Fuji. Similarly, in the Swiss Alpine region of Törbel, villages organize logged trees into communal piles which are then allocated by means of a lottery. Everyone gets a pile, and it could be any of them, and so the communities work hard to make sure all piles are adequately stocked.
Ostrom, as retold by Davies, highlights three criteria to a successful cooperative resolution to the exploitation of public resources:
- Clear boundaries around the environmental assets in question.
- Regular meetings at an assembly hall or similar institution.
- A relatively stable population.
Yaviza, and the rest of the Darién Gap, do not meet the criteria. Directly to the south, Colombia is one of the largest drug manufacturers in the world and the trade passes through Panama. If drugs weren’t enough, human trafficking and mass immigration make the Darién Gap a very diverse, dangerous, and lawless place. Even the indigenous tribes, the Embera, Wounan, and Kuna, no longer trust each other. Theft and exploitation are common themes, and a transitory, migrant population comes and goes. In a world like Darién’s, it’s hard to see the opportunity for cooperation. Its fate is, once again, the product of its geography.
Section Notes
6. Population numbers for Pinogana and Yaviza are taken from Panamanian census data. [Back to top]
Akita: Our Digital, Geriatric Future
Until recently, life’s basic plan for most people was the same: you work and save enough so that when you retire at 65, you can afford another 15–25 years of life at some level of comfort and decency. For a growing proportion of the world, the basic plan is no longer working. In 1963 Japan, there were 153 living persons over the age of 100. In 2016, there were 65,000. By 2040, there will be 300,000. Few of these people expected to live as long as they have and they did not plan accordingly. The situation is ripe for a challenge, and the city of Akita is living proof.
Two problems become evidence once you consider three assumptions:
- The average retirement plan, or social security program, is designed to fund 20 years of life after retirement.
- The population of people beyond the age of 80 is growing.
- Populations are aging as people are having less kids.
Aging populations are certainly becoming the trend in most of the developed world. Countries like Japan, Portugal, Spain, and Italy are already aging and their populations are shrinking. Other countries, like South Korea (by the early 2030s) and Germany (by 2022) are on the cusp of the transition toward a shrinking population [note 7].
The villages at the foot of Mount Fuji are at the vanguard of Japan’s ageing economy and the economic consequences.
Source: Wikipedia.
There are three challenges that the developed world of the future will have to overcome. First, it will have to resolve the fiscal shock of retirement programs that will drain early in the retiree’s life. Second, it will have to contend with a world where there are proportionately more retirees and less youth. Caretakers will be harder to find and more expensive to hire, meaning that the elderly will have to accept alternative sources of help, comfort, and entertainment. Third, the elderly will have to find their place in a new world where 80 is the new 50.
Great Misexpectations
If the rule of thumb of retirement is to prepare for 20 comfortable years, what happens in year 21? What happens in year 30?
Countries with aging populations will face an acute problem as welfare programs evolve to provide more financial support to a generation that did not plan to reach this stage of life. Governments will have to fund these programs even as their working, and therefore taxable, populations shrink. This is a difficult dilemma, because the revenue shrinkage from an aging population can be devastating. In Japan, some municipalities are finding it hard to keep schools and hospitals open because there aren’t enough people of working-age to pay for them. In highly democratic governments where power and spending has been significantly devolved to local municipalities, this creates a world of winners and losers, as some villages and towns slowly decline into extinction because they can no longer finance basic public services.
Beyond the municipal level, funding will be a challenge on the national level, as well. According to Davies, social security and healthcare spending required 22% of all Japanese national spending. By 2017, when including elderly care and pensions, the liability had risen to 55% of the government’s annual budget. By the early 2020s, it will be 60%. Governments like that of Japan will have to choose which programs to cut, as the elderly population grows and the size of the taxable population falls.
The problem of an aging population has started to eat the very foundations of democracy, representative at the local, everyday level. Some villages and towns in steep decline have tested a variety of programs to inspirate immigration, but these rarely work. The result is that fewer and fewer people are willing to run for local political positions, making democratic government non-viable out of a lack of participants.
Strong democracies operate at the grassroots level and up, bolstering their political institutions with a culture of cooperation and negotiation. If the system no longer works at the bottom level, how will it eventually influence the top?
The Coming Robotic Age
In Spain, Portugal, and Italy, the population of people over the age of 65 will grow by 3.2 million between 2020 and 2030, requiring about 640,000 new care workers for full- or part-time assistance [note 8]. These new care workers will be harder to find among a shrinking working-age population, especially one that is equally pulled in other directions by market and cultural forces. Other types of jobs carry with them more prestige and better pay. Japan expects a shortage of 380,000 care workers by 2025.
Japan, which sits at the head of the aging curve, also takes pole position in the automation of elderly care. In 2009, Intelligent System Research Institute developed the first robot to be classified as a therapeutic aid. It uses machine learning to adapt its behavior to the unique qualities of its owner and it has been shown to help patients with dementia. Robots are becoming so ubiquitous that even dogs are starting to be replaced by robots.
As the working age population shrinks, robots will become a larger part of our lives.
Source: Pew Research Center.
Even much of the work done by human caretakers, such as lifting patients into bed or into the bathtub, is starting to be done by machines. Much of the time, the displacement of the human caretaker is not complete. More often than not, machines and automations merely help the same amount of caretakers do more work with less effort, something that will be more and more necessary as the ratio of elderly people to caretakers increase.
The United States is no stranger to the problem of a growing elderly population and a shortage of care workers. It too has started to look toward the development of eldery care automation through the use of machine learning and robots. But, the United States is not at the same stage as Japan and demographic changes, along with the fiscal and technological changes that come with it, will have to be accepted by a still skeptical society.
A Changing Search For Meaning
Poverty and loneliness make for a dangerous recipe, and in Japan the product is suicide. While the suicide rate is highest among Japanese in their 50s, the rate for those above the age of 70 is the second-highest, and the rate for those between the ages of 60 and 69 the third-highest. In 1990, persons over the age of 65 made up 12% of Japan’s population, but 29% of its suicides. In 2020, over a quarter of Japan’s population is 65 or older. Among the old, suicide is associated with depression and lack of social support. It is also highly correlated with unemployment and poverty [note 9].
There is a growing divide between the young and the old, driven in part by the economic burden the elderly represent. Writes Davies (p. 221), “The young people of Akita are aware of the costs the elderly impose, and that they are the ones expected to foot the bill.” Generational and cultural rules of respect are breaking down, and this isolation is only compounded by the effects of poverty and the inadequacy of public support systems.
A new and growing segment of the population will have to develop a culture from scratch, because there are no examples from history to pull from. The elderly of Akita have learned that “life starts at 75” and that their place in society is defined by them, and not by others. In Akita, the elderly have formed soccer teams, reading clubs, and enjoy group exercise. They’ve also learned to appreciate their robot companions, as will have to do most people in the developed world within the next decade. Finally, most of us may have to come to terms with the fact that retirement no longer comes at 65, even if the nature of our work has to change.
Akita’s experience proves that this transition will be gradual and painful. But, if governments will only have greater troubles funding pensions, social security, and social programs over time, solutions will have to be found within the community instead.
Section Notes
7. Population statistics are provided by Richard Davies. [Back to top]
8. The statistics for Spain, Portugal, and Italy are taken from p. 243 of Richard Davies (2019). [Back to top]
9. See Roxanne Russel M.D., et. al., on the correlation with unemployment, depression, and lack of social support. Regarding poverty, on p. 226, Richard Davies writes, “The most common reason for these lonely deaths, where sucide notes are found or a person’s papers assessed…seems to be poverty.” [Back to top]
The Questions Left Unanswered
Aceh, Yaviza, and Akita are only three of nine places that Richard Davies takes us to. He explores the refugee camp of Zaatari in Syria, the economics of the Louisiana State Penitentiary, the quagmire of Kinshasa, the depression of Glasgow, the technological edge of Tallinn, and the inequality of Santiago. All of these offer us their unique set of insights and truths, some of which give us hope, others which illuminate the paths to failure, and many that imply a mixed, bittersweet future for the cities on the vanguard of progress.
All nine places are organized in groups of three: where markets work to promote growth, where markets and communities fail to promote growth, and where the world’s leading markets are headed. This implies three different futures, not just one. By 2030, much of the developed world will be “an urban society that is old, technologically advanced and economically unequal.” But, not Banda Aceh, Zaatari, or Kinshasa. These are communities on different parts of the path. Their populations are burgeoning; some of these communities may one day thrive and others will continue to stagnate.
Glasgow, UK.
What are the implications of a world that is evolving at different places? As countries like Japan, Germany, and the United States age and shrink, how will their role change vis-a-vis countries like the Democratic Republic of Congo, India, and Indonesia? How will these developments change the balance of trade and economic power between countries? Finally, how will ageing and shrinking societies respond to the shifting balances? These questions lie outside the scope of Richard Davies’ excellent book.
Extreme Economies is a fantastic read that manages to teach you deep lessons in a very accessible and applied way. He brings in theory and research like Ostrom’s and Robert Putnam’s to explain why economies and communities like Yaviza’s and Glasgow’s have suffered and failed to recover, while Aceh’s and Zaatari’s thrives. The book is also very tempered and fair, often favorable of markets, but never shy to be clear about when they fail. The same goes for government, which in his book is often shown to blunder and amplify the problem. This combination of accessibility and entertainment, as well as depth and sophistication, fairly places Extreme Economies within my list of top five economics books recommendations.