Managing and Mitigating Global Risks

Editor’s note: This report written by Ian Goldin is one of the nine thematic chapters of the book Global Redesign: Strengthening International Cooperation in a More Interdependent World. The book is the result of a collaborative process involving hundreds of experts since 2009. Ian Goldin is the first Director of the Oxford Martin School at the University of Oxford and a Professorial Fellow at Balliol College, Oxford.

Systemic Risk in the 21st Century[1]

Introduction

While the precise definition and various periods of globalization have been widely studied and debated,[2] the latest wave of globalization has been unique, with the particularly widespread and intense integration of markets, trade and finance. This has been facilitated over the past 20-30 years by seismic policy shifts, such as the economic and political reform process in China, and much of Asia, Latin America and Africa, the fall of the Berlin Wall in 1989, European integration following the signature of the 1992 Maastricht Treaty, and the ideological convergence around market primacy ushered in during the Reagan, Thatcher, and Kohl era of the 1980s. According to International Monetary Fund (IMF) and World Trade Organization (WTO) reports, between 1980 and 2005, global foreign investment inflow increased 18 times, real world GDP growth increased by approximately 32% and world merchandise imports and exports increased more than sevenfold.

Technological innovation has accelerated economic integration through both virtual and physical time–space compression.[3] While the development of fibre optics, the Internet and mobile telephony, as well as exponential growth in computing power all revolutionized the underlying architecture of systems by virtually increasing proximity, physical proximity has also increased through technological innovation in transport and infrastructure. Population growth and urbanization are driving physical proximity, integration and interdependence. The world population has nearly doubled since 1950, and the urban share has increased dramatically from 29% in 1950 to over 50% in 2009 with a strong concentration in coastal areas.

In addition to policy shifts, technological innovation and increased population density, changes in managerial practice and accounting standards have extended the “just-in-time” management strategies to emphasize that inventories reflect tied-up working capital, and must be made to “sweat.”[4] This has shortened the time between the production and consumption of goods and services, while outsourcing and global logistics chains have reflected the declining significance of geography in determining production and trade processes.

In short, by the turn of the 21st century, globalization was characterized by a more interconnected, interdependent and complex world than ever witnessed before. The benefits of global integration have been associated with unprecedented leaps in human development indicators.[5] However, that is not to say that globalization is not an entirely benign process: it can be viewed as a double-edged sword. One of the downsides to globalization, that of increased inequality between and within countries, has been widely studied, with Stiglitz,[6] Goldin and Reinert[7] and others stressing the need for national and global policies that enhance the potential benefits and mitigate the downsides of integration.

The existing literature fails to appreciate the extent to which the current tidal wave of globalization is different from its predecessors, especially in terms of the levels of interdependency and complexity and how this has resulted in an additional downside to global integration. This second “side-effect” of globalization has been the unintended and hitherto largely ignored production of systemic risks, which are “breakdowns in an entire system, as opposed to breakdowns in individual parts or components, and are evidenced by co-movements among most or all of the parts.”[8] Kaufman and Scott describe three main concepts of systemic risk: 1) “macroshock” triggered when relatively modest tipping points or regime shifts hit their threshold and produce large, cascading failures on most or all of the system; 2) shock diffusion through the network via contagion (transmission, feedback and amplification of risk); and 3) “common shock”, which is not the result of direct causation, but is evidenced by indirect impacts of systemic risk.

While historically the term systemic risk has referred only to collapses in finance, recent decades of globalization have created a “global risk society” characterized by new and much broader risks in the 21st century.[9] The fragility of the system as a result of these new vulnerabilities now challenges the very core of the benefits that globalization has produced and is a fundamental challenge to global institutions.

This essay draws on Goldin and Vogel[10] to conceptualize systemic risk in the 21st century, examining four major existing and emerging risks: financial stability, pandemics, cybersecurity and climate change. These examples highlight the complexity of risk in the 21st century and how globalization has structurally altered and heightened its impact. This essay further explores how global governance structures can adopt new approaches to mitigation and management with the development of a new set of tools to encourage improved behavioural reflexes and resilience mechanisms. A key challenge for this approach is to address the tension between national interests and global collective interests with a need for increased awareness from governments and institutions as well as citizens. An urgent and far-reaching reform agenda is required to ensure that the threat that systemic risks pose is mitigated. The Forum’s Global Agenda Councils have developed a set of recommendations that go some way to addressing this urgent challenge.

A paradox of the current tidal wave of globalization is that although it has been associated with the creation of many new nation states, including those arising out of the fall of the Soviet Union, the latest wave of globalization also has been a period in which the power of the individual has grown rapidly. The widening of democracy, increasing wealth and education, Internet connectivity and other forms of empowerment have been liberating forces for many. Social and technological developments have the potential to immeasurably amplify the power of the individual. In particular, the widening availability of DNA synthesizers and the growing potential for single or small groups of individuals to create bio-pathogens or engage in other activities that could lead to massive destruction poses a new form of systemic risk. This is the first century in which single individuals can cause massive destruction and worldwide panic. With the multiplication of nation states that can pose serious systemic risk, either because they have the means or because they are failed and so have become havens to rogue elements, and individuals, particularly in democracies more able to pursue their personal ambitions, the potential for systemic risk has been compounded.

Exploring Global Risks – Examples

Financial Risk
The recent financial crisis is the first clearly evident systemic crisis of the 21st century.[11] It is vital therefore that we learn the lessons of the financial crisis in order to manage deeper and more damaging global challenges, such as climate change and global pandemics, and to avoid a destabilizing cycle of more acute future financial crises.

At the turn of the 21st century, the liberalization of capital markets and technological innovation resulted in the development of an increasingly complex “financial network”, where the speed, value and volume of financial transactions had increased sharply both domestically and internationally.[12] In particular, the pace of change and innovation in financial markets between 1998 and 2007, the “Golden Decade”, saw the explosive growth of sophisticated financial instruments, such as credit default swaps, collateralized debt obligations and an increase in resale markets for capital.[13] Whereas the trading of derivatives had been marginal in the three previous decades, by the turn of the century the global over-the-counter derivatives market had reached US$ 100,000 billion of outstanding deals. By the end of the “Golden Decade” in 2007, the market had expanded to US$ 600,000 billion, 16 times global equity market capitalization and 10 times global gross domestic product. Globally integrated markets and innovation had led to a transformation of the financial landscape. Integration and new networks greatly increased the robustness of the finance system, but interdependence, complexity and the growing gulf between oversight and market innovators simultaneously made global finance more brittle and fragile.

The financial crisis can be described as a systemic risk that began with the advent of an unregulated sub prime mortgage market in the United States, which ultimately destabilized the market for credit default swaps, collapsed markets for securitized instruments across global financial systems and triggered a global liquidity crisis. While many blame the burst of the real estate bubble for the financial crisis, few examine how economic integration and financial innovation in a deregulated environment created a financial network vulnerable to systemic risk. Governance gaps at all levels of the financial system, from global to individual actors, allowed regulatory arbitrage, bonus gouging and other corporate governance failures to spiral out of control. The response to the crisis has been a massive injection of liquidity into the system, but the deeper underlying systemic failures have not been addressed. It is therefore likely that further crises will occur. Governments have reached the limits of their indebtedness, and having fired all the bullets of defence, are now more vulnerable. The economic arsenal will be empty when the next systemic crisis strikes. The fact that finance is the best skilled and equipped of the global risk management systems, and that the relatively well endowed IMF, Bank for International Settlements (BIS), central banks, finance ministries and other institutions whose job it is to ensure financial stability failed to even see the crisis coming is a matter of acute concern. Small groups of banks, and even individual banks and individual rogue traders have the ability to bring down the entire financial system. Collectively and individually they will continue to be able to stay one step ahead of even the most effective supervision and regulation, even though the growing complexity and connectivity of the system means the risks they create are amplified and can lead to systemic failure. Existing reforms in financial governance remain unable to address the deep structural changes in globalization and the risks posed by increased integration and innovation in financial systems.

Pandemics
Pandemics are characterized as global systemic risks because of their ability to reach all corners of the world due to “increasing multidimensional interconnectedness and integration”.[14] The spread of pathogens across wide geographic scales has increased throughout history, facilitated by the increasing flow of information, goods, capital and people across political and geographical boundaries. The 1918 Spanish flu outbreak remains the most lethal pandemic in human history, killing an estimated 50 million people, 3% of the world’s population (which was around 1.6 billion people at the time) over a period of two years.

Global pandemics have not proliferated to such lethal proportions in recent years, however the rapid worldwide spread of the SARs virus in 2003 and of the influenza H1N1 virus in 2009 illustrates that the nature of risk is changing in the 21st century with pathogens utilizing our globalized society to their advantage. In the mid-13th century, the opening of trade routes in Europe assisted the violent spread of bubonic plague (the Black Death), killing 20 million people over three centuries. In comparison, pandemics of the 21st century no longer impact societies with the same mortality margins due to the introduction of inoculations against infectious disease as well as advances in public health. For example the smallpox virus, which decimated Native American populations in the 1500s, was successfully eradicated in 1979 following global vaccination programmes. Despite pharmaceutical advancements, however, not all viruses and pathogens can be eliminated. For some, such as HIV/AIDS, an effective treatment is yet to be found but even for those for which treatment exists, such as malaria, TB and cholera, inadequate health infrastructure and sanitation mean millions continue to die every year, mostly in sub-Saharan Africa.[15]

The greater movement of people, from rural to urban areas and across national borders, as well as higher population density and climate change, combine to facilitate the spread of known and new pathogens. The mobility of pathogens is further stimulated by advances in bio-technological innovation and the anthropogenic (human) fabrication of biological agents. It is now possible to harvest, reconstruct, and synthesize genomes such as smallpox or bubonic plague on a near-private basis. This presents a security challenge as it bypasses traditional regulatory frameworks for the control of biological agents. As a result, bio-terrorism risks are likely to become increasingly systemic in the 21st century with the “weaponization” of harmful pathogens or toxins. An early example was the 2001 delivery of letters laced with anthrax to US Congress and media offices, which killed five people. In addition to risks arising from the intentional misuse of these pathogens, there are safety considerations for research facilities with concerns over the accidental contamination of lab workers and the subsequent escape of viruses. Exposure to such pathogens can also trigger food insecurity, threatening agriculture, livestock and crops. For example, the outbreak of foot-and-mouth disease in the United Kingdom caused widespread economic damage and public concern in 2001 and 2007. Contamination of water supplies is similarly a looming threat, as the ability to create deadly pathogens and panic has moved in concert with a growing dependence of more people on a handful of reservoirs and pipes.

Pandemics of the 21st century have the potential to cause widespread economic, psychological and environmental impairment and our need to recognize and respond to such outbreaks should therefore be the same regardless of their natural, accidental or anthropogenic origins.

Cybersecurity
The continued exponential growth of computing power in the 21st century has revolutionized our modes of communication and developed a more integrated and amalgamated society. We are now more dependent than ever on communication networks such as the Internet to facilitate knowledge and information transfer. Despite our reliance on the Internet, it remains a fragile mechanism that is open to exploitation for malicious purposes and can now be used by both nations and, more ubiquitously, by individuals as a weapon to target financial markets, government computer systems and utilities. The low-cost and largely anonymous nature of cyberspace makes it an attractive domain for criminals, terrorists and states seeking means of espionage, influence or even warfare. Cybercrime is now a global issue; it has evolved significantly and poses a significant threat to citizens, as it does to corporate systems as well as to national and global security.[16] As is the case with pandemics, the power of individuals or small groups to destabilize society or systems through cyberattacks is a significant concern. At the same time, the power of states to engage in such activities has been greatly enhanced.

There are three main methods of cyberattack. Firstly, electronic attacks launched over a network, whereby criminals and others attempt to gain access to devices such as mobile phones, computers or web-servers, and thereby obtain information on those systems, spread propaganda, or use them as a launch pad for further attacks. For example, in 2009 a cyber spy network, dubbed GhostNet, using servers in China, hacked into classified documents from government and private organizations in 103 countries. Furthermore, in 2009, hackers penetrated the Gmail accounts of Chinese human rights advocates in the United States, Europe and China in a series of high-profile cyberattacks that led to Google redirecting requests to its Hong Kong based servers from mainland China. Cyberwarfare is a good example of an emerging 21st century systemic risk, fuelled by the interconnecting engine of globalization. Attribution in cyberattacks is particularly difficult as servers in one country may be used as a conduit for attacks initiated by agencies or individuals in another country. Secondly, “distributed denial-of-service” (DDOS) attacks that target sites or services hosted on high-profile web servers such as banks, credit cards payment gateways, and infrastructure networks (power grids, telecommunications, and transportation). For example, during the 2007 Estonian election campaigns and riots preceding the election, there were a series of DDOS cyberattacks against the Kyrgyz Central Election Commission’s Internet service providers.[17] The Estonian cyberwar in 2007, manifested by disputes with Russia surrounding the relocation of the Bronze Solider of Tallinn, disabled government ministries, broadcasters, newspapers and banks with the onslaught of spam e-mails disabling communications. Furthermore, the 2008 South Ossetia conflict heralded the arrival of “iWar”, in which a series of cyberattacks swamped and disabled websites of numerous Georgian, Russian, South Ossetian and Azerbaijani organizations. Thirdly, subversion of the supply chain where the technology supplied to an organization or individual is subtly altered (for example by implanting malicious programs) in order to make network attacks easier. This may be associated with an interference with services or, as is most commonly the case, systemic theft or simply anarchistic actions. All three of these are growing threats that challenge the integrity and trustworthiness of the entire Internet and risk destroying the system.[18]

Climate Change and Natural Catastrophe Risk
Climate change presents a significant environmental, social and economic risk to humanity. According to the latest evaluations, the average temperature at the surface of the planet has increased by 0.6°C during the 20th century. The Intergovernmental Panel on Climate Change (IPCC) concludes that observed temperature increase can be attributed to increasing concentrations of greenhouse gases resulting from unsustainable anthropogenic activity such as fossil fuel burning and deforestation. Furthermore, climate model projections summarized in the latest IPCC report indicate that global surface temperature is likely to rise by at least a further 1.1°C during the 21st century.

Increasing global temperature has the potential to trigger three significant consequences. Firstly, sea levels will rise as a result of ice caps melting and glacial retreat, which will inundate low-lying island states and coastal regions. Already, rising sea levels in the South Pacific have forced residents of the Carteret Islands to relocate to nearby Bougainville, becoming the world’s first environmental refugees. Secondly, desertification will be exacerbated in arid and semi-arid regions, which will amplify a broader set of resource scarcity issues such as food, energy, land and water. In the Sahel region of Africa, expansion of the deserts already has led to mass migration and to violent conflict over scarce natural resources. Thirdly, there will be changes in the frequency and intensity of extreme weather events such as floods, heat waves, droughts and precipitation.

The nature of climate change risk has evolved in the 21st century and has increased in severity as the tidal wave of globalization stimulates population growth and urbanization. The expansion of trade networks and docks has fuelled movement towards low-lying coastal regions. Higher incomes and mobility has been associated with mass migration and settlement in coastal regions, such as the southern coast of Spain, Florida, California and China coasts and in arid regions such as Arizona. This transition is leaving millions of people vulnerable to more severe natural catastrophes, such as hurricanes, floods and earthquakes. Hurricane Katrina, for example, decimated the New Orleans coastline in 2005, resulting in US$ 100 billion of recovery costs. Furthermore, the rapid swelling of urban centres has led to inferior construction and engineering practices to keep pace with demand. The 2010 earthquake in Haiti killed 230,000 and in the 2008 Sichuan earthquake in China, over 68,000 people lost their lives, mainly those trapped under the rubble of buildings that were inadequately designed and built for areas of seismic activity. In addition to the death toll, those earthquakes also left an estimated 1 million Haitians and 4.8 million Chinese homeless. Many urban centres remain susceptible to destruction, such as Iran’s sprawling capital, Tehran, of 8 million people, 1 million of whom are estimated at risk if an earthquake of the same magnitude of Haiti should hit the geologically unstable region.

The impact of climate change is not evenly distributed, with the world’s poorest at greatest risk. Inadequate public and private finance, poor infrastructure and weak or non-existent state services all diminish the resilience and coping mechanisms of the poor. There is some scope for adaptation but policy must focus on the mitigation of climate change impacts. Greater unity and commitment at the global level is required to address the risks exposed by climate change as it threatens the potential for globalization to flourish in the 21st century. The development of new tools to manage and mitigate its impact, not least in poorer countries and communities, is a necessary precondition for an effective, efficient and sustainable response.

Global Risk and Governance in the 21st Century

The 2008 financial crisis was a stark illustration of how difficult it is to contain or indeed understand the exact nature of contagion in a highly interconnected world and thus how any one entity cannot respond alone. The January 2010 earthquake in Haiti also demonstrated how an emergency can trigger a rapid response on a global level. The underside of globalization is systemic risk. However, the upside is the potential for global coordination and for the raising of global consciousness in ways that were not possible even 20 years ago. So, for example, the growing global awareness of the threat of climate change and the rapid global mobilization of donations in response to the Haiti earthquake from citizens are evidence of the awakening of a global consciousness and solidarity which has been facilitated by the tidal wave of globalization.

The challenge lies in sustaining the focus of collaborative action and the effectiveness of the response over time. Once the initial wave of concern subsides, and the first signs of “back to normal” reappear, the momentum for collaboration around reform and innovation, as with solidarity and support for development, can dissipate. To borrow the title of Jonathan Safran Foer’s novel, the “extremely loud and incredibly close” nature of national, political and business interests can all too easily submerge the larger, and longer-term, collective interest. A common objective emerged from the Global Agenda Councils’ Risk Cluster proposals: to proactively mobilize, and sustain, collective action around threats from global risks, be they systemic or incident-driven. There are several fundamental elements for effective global risk governance.

Developing a Better Understanding of Risk Interconnections and Priorities
The globalization in communication has brought a daily tsunami of data and media coverage that influences policy-makers, business leaders and, not least, the general public in their role of electorate and consumers. Decision-makers from all spheres are exposed to information that is often conflicting or highly technical from innumerable sources. Fear, rather than facts, can rapidly shift public opinion and use of the word “risk” has become overused to a point where it has lost its significance. In this environment, decision-makers need to be equipped with reliable information and frameworks with which to better understand and communicate true risk priorities and, thus, priorities for action and resource allocation.

While not prescriptive in its proposal, the Global Agenda Council on Catastrophic Risks highlights the need for better information for better decision-making around a range of risks. The Council believes that the highest-return areas for improving global risk management lie in the area of better applying knowledge that already exists about hazards and how they can be prevented or the capabilities necessary to respond to them developed. This knowledge-action gap can easily be bridged by engaging in a dialogue process among experts and policy-makers rather than ascribing the need for a specific, new institution to risk managers. They propose to convene a dialogue involving key actors in the risk-management field so as to determine how best to create a comprehensive risk management institution (CRMI). This organization could have several forms but its focus would be to create a source of neutral and shared information not just on risks but also on what can be done to prevent, respond to or mitigate their impact using best practices and drawing on international expertise and support.

Providing a Net Assessment of Emerging Risks
Science and technology have provided solutions to many risks and been an accelerator of growth, from the development of vaccines to the Internet. Its powers will continue to deliver solutions but with the convergence of genetics, computing power and nanoscience, a certain level of caution is necessary to understand the impact new discoveries could have on individuals, society and the environment. As the Global Agenda Council on Emerging Technologies states, “science and technology have been at the heart of economic growth, social prosperity and improvement in quality of life for close to ten thousand years,” and “now, perhaps more than at any time in history, we need the tools that science and technology provide to face an uncertain future.” At the same time, the Council suggests that, “attempts to introduce genetically modified foods (GMOs) into commerce in Europe provide a sobering lesson in how easy it is to mishandle emerging technologies.” More particularly, the European GMO debate exemplifies how difficult it is to provide neutral and clear information to the lay decision-makers, be they policy-makers or consumers.

The complexity of the subjects, the interests, commercial or otherwise, of those involved, and the pace at which science evolves, make it particularly difficult for decision-makers to be confident that they have sufficient information. In the absence of a respected and neutral source, fear and miscommunication, rather than facts, appear to lead public opinion and overwhelm policy. An institution tasked with providing a neutral and transparent assessment of the potential risks, benefits and wider implications of emerging technologies as well as communicating this to the public would be a key asset to decision-makers. Dissatisfied with the observation that too often “emerging technologies result in a polarized debate between those who have a vested interest in developing the technology (academics seeking funding, early investors, consultants seeking to develop new markets) and those wishing to maintain the status quo (conservative religious organizations or consumers who are distrustful of technology), the Council on Emerging Technologies wishes to encourage “rational debate” through the creation of a Global Centre for Emerging Technology Intelligence. This organization could be a source of neutral analysis, to be shared with all stakeholders, around the identification, evaluation and assessment of new opportunities and challenges.

Engaging Stakeholders around Systemic Responses
Just as risks cannot be fully understood unless considered in the context of their interconnections, so do most risks require a multistakeholder approach to their management or mitigation. Several of the Councils proposed models that leverage the power and scope of stakeholders from different spheres (public and private, but also global and regional or national) to complement existing bodies or mechanisms by sharing information, improving their capacity to act and, ultimately, by reducing the costs of the risk or its management to all.

One area of systemic risk was the focus of a proposal of the Global Agenda Council on Illicit Trade. Illicit trade includes narcotics, weapons and other potential threats to society. Breaking down the way this risk embeds itself into global trade, the Council’s proposal is to build a coalition from all actors in global trade, from nations, suppliers and retailers to the end consumers. The “T3 Coalition”, standing for “Trust and Transparency in Trade”, would build engagement around product labelling, providing guarantees between producers and consumers, integrating the movement in global and regional free trade agreements, and working on cooperation among member states and signatories. The Council proposes to bring anti-illicit trade agreements under the mandate of the WTO, thus linking it to new trade agreements.

Focusing on the need for greater and more sustainable investment in energy infrastructure, to reduce the risk of supply shocks and periods of high volatility, the Global Agenda Council on Energy Security’s proposal brings together stakeholders who normally sit on either the supplier or the consumer side. There is “no shortage of the geological resources”, the Council Members write, while nevertheless worrying that “whether [adequate investment] happens hinges on producers being confident about the level of the future demand.” In short, the sector’s investor need for stability justifies why “the energy system … requires novel methods for providing both private and public actors with increased visibility regarding their future.” It is with these concerns in mind that the Council proposes to create both a World Energy Forum and an associated Energy Stability Board to ensure transparency and stability in the politically-sensitive market. While the former would bring producers and importers together to meet biannually to propose novel norms and solutions to the market’s constraints, the latter would act in a manner akin to that of the Financial Stability Board to support the newly-created World Energy Forum’s efforts.

The proposal put forward by the Global Agenda Council on the Future of the Internet is an innovative example of how collective action on a decentralized basis might also serve as a model to manage some systemic risks. The Council points out that the Internet has “a history of self-governance on technical matters” and one may argue that in some cases “systemic risk is best tackled by openness and collaboration, not centralizing and control” for “attempts to gather major public and private stakeholders in one room – literally or metaphorically – are necessarily limited.” Instead, the Council suggests basing the Internet’s resilience at all levels – World Wide Web, software, hardware, wiring – on a scheme based on the principle of mutual aid and solidarity. “Consider longstanding practices on the high seas, where private parties will respond to an SOS without any obligation to do so – indeed, even if they are business competitors to the firm owning the ship in distress. They do so not only because they may consider it the right thing to do, but because they adhere to a larger scheme of reciprocity: if they should be the ones in trouble next time, others will help.” The strength of this proposal, the Council argues, is that it does not require oversight and enforcement by an organization to be implemented. “At the election of a site operator [...] a site can implement a practice the Council calls “Mirror as You Link”. In simple terms, this system would safeguard and protect content on a reciprocal basis.

Strengthening Existing Institutions to Better Manage “Known” Risks
Several of the Councils considered how the role of existing institutions could be reshaped or how to leverage their existing capacity. While greater investment or resources featured as part of the proposals, equal emphasis was placed on the leadership role they could play. The importance of understanding the impact of population growth on a number of risks has already been raised in this essay. The Global Agenda Council on Population Growth focuses its attention on existing governance institutions and structures active in this area: the United Nations Population Division, which tracks demographic shifts and conducts policy relevant research; the United Nations Population Fund (UNFPA), which was originally tasked with knowledge and capacity-building in population and family planning; and the World Bank and regional development banks, which provide loans for a number of population-related development issues, such as health and education. As the Council points out, each of these entities has a complementary role to play and already has a mandate to act. However, a lack of investment in, and leadership from, the UN Population Division and the UNFPA means that they are not in a position to fulfil their roles, which are now more critical than ever. If properly organized and funded, these institutions could provide crucial analysis of the causes and implications of demographic change, could disseminate these data widely and build capacity worldwide. The Council proposes a systematic evaluation of their missions, structures, staffing and programmatic strategies. The objective of this evaluation “would provide the foundation for a set of recommendations aimed at enhancing (their) future role and capacity to addressing population growth”.

Funding Transparent Research on Threats and Potential Responses
To better understand some of the biggest threats facing the world over the next decades, more resources need to be spent on research that can be shared in a transparent manner. Research funding is often geared towards single issues or those that have been traditional areas of investigation. There is currently about four times as much scholarly research on the dung beetle than there is on global catastrophic risks. Funding for emerging issues or non-traditional topics is extremely limited. Solutions to manage highly interconnected risks will only be possible if there is a shift in how those issues are understood. Just as new governance mechanisms should be designed to leverage multistakeholder input and response, so should research funding encourage a multidisciplinary approach to understanding the drivers and systemic implications of highly interconnected global risks. This understanding should also enable some element of prioritization: to prevent what can be prevented and to prepare for what cannot. A neutral source of information and prioritization would also provide a better base for collaboration across regions, reducing the concern about vested interests dominating the discussion.

When threats have been identified and their potential impact assessed, possible solutions should also be assessed in light of the real threat and current capacity to manage it. In the case of the ongoing threat of the emergence of a new influenza pandemic, the Forum’s Global Agenda Council on Pandemics notes that “[t]o reduce the potential occurrence of this future scenario, the global community must immediately address today’s antiquated influenza vaccine technology (i.e. 1950s technology requiring the growth of the virus strain in inoculated chicken eggs over six or more months). [...] The international public and private sectors must fully support the development and regulatory approval of “intermediate-technology influenza vaccines” including cell culture and “recombinant vaccines” if the 21st century’s pandemics are to be addressed. The recent UK parliamentary enquiry into what some committee members saw as an exaggerated response to the recent H1N1 (swine flu) pandemic points to the difficulties facing governments who react robustly to a threat which is then not realized. Increasing the awareness of decision-makers and the public of the need for these robust and at times costly responses is vital if catastrophic systemic risks are to be avoided.

Stabilizing Confidence through a Better Understanding of Risks
Economic history is punctuated by periods of boom and bust. Overconfidence can translate into over-reliance on “business as usual” or a belief that the odds can be beaten. Overconfidence, underestimation of low probability risks and myopia about not-so-near future risks are all human traits that institutions display collectively.[19] Thus, they cannot be ignored as key factors for success in any redesign of governance systems to manage risks. Underconfidence is not a healthy alternative either. Its effects can prolong a crisis; until confidence returns to investors and consumers, the financial crisis will continue to cast a shadow. As research and history proves time and time again, humans are bad judges of risk, confused by probability and blinded by a natural tendency to worry more about today than tomorrow. By focusing attention on what are real risks, as opposed to perceived risks, decision-makers can help stabilize confidence by avoiding the worst excesses of the peaks and troughs. Delivering clear messages about the nature and extent of risks and what can be done about them could also help generate support for difficult decisions. There is a huge flow of information available to all today but decipherable by only a few. Leaders in political and public life must have oversight and they need greater insight, into both the risks and the potential to act to prevent or mitigate them.

Conclusion

The discussion in this essay has highlighted how the flipside of globalization – the ties that bind regions and economies together, and aid growth, trade, mobility, information technology and communication – also acts as carriers for risks. Over the past 20 years seismic policy and other changes have been associated with supercharged globalization. This tidal wave is unlike any other past wave of globalization. It has brought immense benefits but has also led to new systemic risks. If the benefits of globalization are to continue to outweigh the risks that rapid integration exacerbates, understanding systemic interconnections and building multistakeholder responses are vital. Redesigning global risk governance mechanisms to take these interconnections into account and to enable cooperation is a major but necessary undertaking. The bad news is that the tidal wave of globalization has brought unprecedented and new systemic risks. The good news is that this phase of globalization has brought the means to meet these risks, through raising levels of wealth and opportunity, and vitally increasing our collective knowledge and connectivity. The opportunities for cooperative solutions have never been greater.

Addressing some of the behavioural aspects that determine so much of our individual and collective choices when faced with risks is a major challenge. Many key global risks are closely related to changing demographics, intensifying demand and competition for resources, and climate change. The immediate growth and development concerns of many countries, which are justifiable, can be at odds with the near-term costs they may have to incur to engage fully around global risks. The potential for long-term gains, through greater growth due to better resource management or reduced risk from the effects of natural catastrophes or improved resilience in financial systems, is weighed against the short-term political and economic costs of reform or change, which governments and, ultimately, taxpayers are usually reluctant to bear.

There is a growing disconnect between the long-term aspect of these risks and political and business time frames for tenure and decision-making. The full impact of many of the global risks addressed by the Global Agenda Councils may only be felt in several decades’ time. Though other risks may occur in the near term, their shadow may stretch over several years, through the costs they inflict or their direct impact on future growth and development. Only effective governance can help stakeholders manage these “generational imbalances”, the costs current generations will have to bear for actions that will provide benefits to future generations. In the wake of recent crises, we should seize this opportunity to rethink how governance mechanisms can reward long-term efforts that avoid reliance on a short-term “fix”. The long tail of risk events that have a very low probability and high impact need to be better understood. Greater connectivity and complexity, as well as the rising density of people and assets, make it more difficult to predict the source and impact of these events, even though their impact is becoming more severe. As a result of globalization, the long tail of risk distribution is wagging more aggressively. Small surprises somewhere can lead to big shocks everywhere in ways that were unimaginable only 20 years ago.

The current tidal wave of globalization has brought unprecedented benefits; there is immense potential for it to create a widening set of opportunities that bring development to the many, perhaps 1 billion people, who have not benefited so far. Globalization and development are reversible and the twin threats of growing inequality and systemic risk could well severely undermine the achievements so far and derail the potential for further progress. For the poor, this is especially worrying, as not only have they yet to reap the full benefits of globalization, but because systemic shocks exacerbate poverty and inequality. The poor are most vulnerable to systemic risks, be they financial, pandemic, climate or other.

This article illustrates the changing nature of systemic risk using four examples: financial stability, pandemics, climate change and Internet security. Unfortunately, many more potential sources of systemic risk exist and the triggers for these risks will continue to evolve in unpredictable ways. To be sure, there will be many more nasty surprises.

Global institutions have proved themselves singularly unable to understand the structural changes in systemic risk. As made evident by the financial crisis, even the IMF, BIS, central banks and other well endowed institutions were surprised and incapable of achieving their ambition of global financial stability. New thinking and risk management systems are urgently required. Together the United Nations and Bretton Woods institutions have the global mandate to secure a safer, inclusive and sustainable global society. To date, they have failed to grasp the scale or extent of change in the nature of risk and the threat this poses to the achievement of their mandates. Global mobilization, on the scale of that which in 2000 at the Millennium Summit launched a fight against poverty, is required to meet this challenge.

If implemented, the objectives of the Global Agenda Councils’ proposals, including better information and insight, the wider engagement of various stakeholders, greater resilience to shocks, longer decision-making time frames, and collective agreement around priorities for cooperation in a proactive manner, should go some way to addressing these issues. Much will rely on the political will and far-sightedness of key stakeholders whose task it will be to take up these proposals and design a global governance system that will meet the challenges of the 21st century.

The author would like to thank Sheana Tambourgi, Director of the World Economic Forum’s Global Risk Network, who provided invaluable guidance and wide-ranging contributions to the drafting of this chapter, and Andrew Bishop and Matthew Richard who provided very helpful research assistance.

Notes

[1]. This chapter draws extensively on Goldin, I. and Vogel, T. 2010. Global Governance and Systemic Risk in the 21st Century, Global Policy, 1 (1), January.

[2]. See Goldin, I. and Reinert, K. 2007. Globalization for Development: Trade, Finance, Aid, Migration and Policy. Washington, DC: The World Bank and Palgrave Macmillan.

[3]. Harvey, D. 1989. The Condition of Postmodernity: An Enquiry into the Origins of Cultural Change. Oxford: Basil Blackwell.

[4]. Hutchins, D. 1999. Just in Time. Hampshire: Gower Publishing Ltd.

[5]. Goldin and Reinert, 2007.

[6]. Stiglitz, J. 2006 Making Globalization Work. New York: W. W. Norton & Company.

[7]. Goldin and Reinert, 2007.

[8]. Kaufman, G. and Scott, K. E. 2003 “What Is Systemic Risk, and Do Bank Regulators Retard or Contribute to It?” The Independent Review, 7 (3), pp. 371.

[9]. Beck, U. 1999. World Risk Society. Cambridge: Polity Press.

[10]. Goldin and Vogel, 2010.

[11]. See Goldin and Vogel, 2010, on which this section draws.

[12]. White, W. 2004. “Are Changes in Financial Structure Extending Safety Nets?”, BIS, Working Paper No. 145.

[13]. Gai, P., Jenkinson, N. and Kapadia, S. (2007) “Systemic Risk in Modern Financial Systems: Analytics and Policy Design”, The Journal of Risk Finance, 8 (2), pp. 156-165.

[14]. Ingram, A. 2005. “The New Geopolitics of Disease: Between Global Health and Global Security”, Geopolitics, 10, pp. 522-545.

[15]. WHO, 2000. “Report on Global Surveillance of Epidemic-prone Infectious Diseases”, Department of Communicable Disease Surveillance and Response. [online] Available from who.int/csr/resources/publications/surveillance/en/cholera.pdf

[16]. Zittrain, J. 2008. The Future of the Internet and How to Stop it. New Haven: Yale University Press.

[17]. Evans, M. and Whitell, G. 2010. Cyberwar declared as China hunts for the West’s intelligence secrets. The Times Online. March 8 2010. [online] Available from: technology.timesonline.co.uk/tol/news/tech_and_web/article7053254.ece

[18]. Zittrain, 2008.

[19]. Shiller, R. 2005 “Behavioral Economics and Institutional Innovation”, Southern Journal of Economics, 72(2), pp. 269-283.

MORE INFORMATION:

Ian Goldin: On Systemic Risk
Ian Goldin: Only a New Global System Can Handle a World of Explosive Risk

THE MEANING OF THE 21ST CENTURY
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Posted by N4CM on 16 Apr 2011. Filed under Futurism and tagged with Global future | Systemic risk. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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