Steps to manage and mitigate international risks Monday, 31 May 2010 02:28

Excerpts from the Report of the Global Redesign Initiative Managing and Mitigating Global Risks by Ian Goldin

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 percent and world merchandise imports and exports increased more than sevenfold. Technological innovation has accelerated economic integration through both virtual and physical time–space compression.  While the development of fibre optics, the Internet and mobile telephony, as well as exponential growth in computing power all revolutionised the underlying architecture of systems by virtually increasing proximity, physical proximity has also increased through technological innovation in transport and infrastructure.

Population growth and urbanisation are driving physical proximity, integration and interdependence. The world population has nearly doubled since 1950, and the urban share has increased dramatically from 29 percent in 1950 to over 50 percent 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.” 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,Goldin and Reinert 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.”Kaufman and Scott describe three main concepts of systemic risk: “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; shock diffusion through the network via contagion (transmission, feedback and amplification of risk) “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” characterised by new and much broader risks in the 21st century.  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 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.

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