How thick is your armour? Measuring economic resilience to shocks in global production networks

Abstract

When economic shocks occur, whether at home or abroad, economic agents are expected to react to reduce the negative impact or amplify the positive effects. The ability of a country to contain economic losses can be defined as the resilience to economic shocks. Using the OECD’s annual Inter-Country Input–Output (ICIO) tables from 1995 to 2011, this paper investigates the relationship between changes in final demand and production structures for 61 economies. We found that, during economic downturns, countries that are able to prop up the economy through the domestic service sectors instead of domestic goods and foreign sectors are more resilient to negative shocks. Therefore, understanding the substitutability between goods and service sectors and between domestic and foreign sectors is crucial for gauging the potential risk to a country’s domestic economy from shocks abroad – whether economic, environmental, health-related or political.