Rethinking global resilience by Ian Goldin published by Finance & Development (2020).
“The pandemic is straining economic and social fault lines: the only remedy is international cooperation
An infected passenger flies from Wuhan to Milan, a computer virus invades an internet connection, subprime defaults in the US Midwest trigger a global economic crisis. The super-spreaders of the goods of globalization—airport hubs, fiber-optic cables, global financial centers—are also the super-spreaders of the bads. This is the “butterfly defect” of globalization, the systemic risk endemic to our hyperconnected world, in which small actions in one place can spread rapidly to have global effects.
My book The Butterfly Defect shows why globalization creates systemic risks. It also shows why stopping globalization will not stop global threats but rather will amplify them. There is no wall high enough to keep out climate change, pandemics, and other catastrophic risks. But high walls undermine the potential for cooperation required to manage our shared risks. Protectionism reduces investment, trade, tourism, and technological advances, which create jobs and higher incomes, reducing the capacity of countries to build resilience. The solution is in working together to make globalization safe and sustainable, not in working against each other.
Leadership is required to manage the negative dimensions of globalization and harvest the positive, to ensure progress is not overwhelmed by common threats. Resilient systems are only as strong as their weakest links. Stopping the next pandemic, which could be even worse than COVID-19, must be a priority. This requires reinforcing and reforming the World Health Organization (WHO) to give it the governance, staff, and capacity it needs to be the world’s rapid-response fighting force on global health.
In recent decades, globalization has led to revolutionary changes that have outstripped the slower evolution of institutions, causing a widening gap between our increasingly complex systems and our methods for managing their risks. As we saw with the financial crisis and now with COVID-19, systemic risks can quickly overwhelm processes that previously appeared robust. While there is no doubting the pandemic threat, the slower-moving but accumulating dangers posed by climate change require equally concerted action.
The pandemic has highlighted our lack of immunity to natural threats, but also created an opportunity to reset our economies. There is no shortage of ideas regarding green stimulus policies, which offer the potential to build back better and accelerate the transition from fossil fuels. Global protests, from climate to race, have demonstrated the appetite for fresh thinking. And COVID-19 has also demonstrated that citizens are prepared to change their behavior when required to do so. All that remains is for governments to act.
Networked solutions needed
COVID-19 has highlighted the pressing need for better global risk management. So too has escalating climate change. As did the financial crisis. Urgent reform is required to tame the butterfly defect of globalization.
These networked threats require changes in all parts of the system. Action must begin with us as individuals changing our behavior—for example by wearing masks and weaning ourselves off fossil fuels. Resilience cannot be delegated to others. It is everyone’s responsibility. Firms should value a prudent level of spare working capital as a valuable investment in resilience, not just as excess fat to be trimmed to maximize leverage. Minimizing the amount of capital or spare capacity tied up through just-in-time or lean management systems can undermine resilience. Regulators should note the lessons from the Eyjafjallajökull volcano, the Tohoku tsunami, Hurricanes Katrina to Maria, and now COVID-19—that widespread leanness can multiply into systemic fragility.
Our financial, digital, trade, and other systems are intertwined through complex networks. The intersecting nodes and hubs are concentrated in specific locations, such as global financial centers and major ports and airports. The concentration of logistic or other nodes in one location makes them vulnerable, as does the concentration of key personnel and information in headquarters buildings. Resilience can be enhanced by greater geographic diversification, but its benefits have not yet found their way into competition policy or risk management strategies.
A growing number of shareholders and managers of forward-looking firms have expressed their desire to improve their companies’ resilience to systemic shocks. And politicians are similarly keen to improve the resilience of the public sector. Although welcome, this requires deeper analysis, including to determine how much resilience, and to what; firms and governments do not have the financial or other resources to insulate themselves totally from all possible shocks.
Resilience can be improved by decentralization, so that individuals, businesses, and countries are empowered to make their own decisions. The principle of subsidiarity is, however, a complement not a substitute for higher levels of authority. Overarching principles are necessary for risk management, and for global systemic risks. This requires that countries yield some autonomy to supranational institutions. Countries that have assiduously followed the guidelines of the WHO have done best, whether they are relatively poor, such as Vietnam, or richer, such as Canada. Stark differences in the management of COVID-19 have demonstrated the importance of operating at multiple levels to contain risk and that robust international, national, subnational, and local actions are required.
Multilateral institutions should be at the apex of this layered approach. Yet there remains a set of orphan issues with no institutional home. A number of international agencies provide analysis and information on climate change, such as the International Panel on Climate Change. But there is no global institution with decision-making and enforcement power to coordinate responses. There also is no major global organization working on cybercrime, even though a single computer virus, such as WannaCry or NotPetya—whether produced by organized state agencies or lone-wolf individuals—can spread globally and cause billions of dollars of damage within days. This threat, like that of extremist ideologies and the subversion of democracy or vaccination campaigns through fake news, is spread opportunistically through the digital networks of globalization. While these threats transcend national borders, as do the threats posed by climate change, pandemics, and terrorism, current responses are predominantly national (or regional, in the case of the European Union).
Significant progress can still be made using the Pareto principle (which states that 80 percent of consequences come from 20 percent of causes), since a small set of actors can usually resolve a large part of any problem. And those that contribute the greatest share of the problem have the greatest responsibility to resolve it. A small number of countries and companies account for well over two-thirds of carbon emissions. New York state accounts for more carbon emissions than 45 African countries. It also consumes more antibiotics than all these nations combined. As the Oxford Martin Commission for Future Generations report “Now for the Long Term” argues, a C20-C30-C40 partnership of the largest countries, companies, and cities would include enough key players to make a significant difference in addressing climate change. The success of coalitions that emerged to tackle ozone depletion or reverse the tide of HIV/AIDS provides inspiring insight into the ability of coalitions of committed citizens, companies, and countries to make a difference, bolstering the efforts of the United Nations and multilateral institutions…”
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