The 2007-08 financial crisis highlighted the potential for negative economic developments to spread quickly across the world’s interconnected economies. Ian Goldin writes that this constituted the first example of a truly systemic crisis, where risks that pooled in a relatively small market in the American Midwest (the sub-prime mortgage market) cascaded to all corners of the global economy. He argues that new insights are required to restructure globalisation in a manner which allows us to harvest the benefits of closer integration, while also reducing harmful and dangerous spill-overs

Goldin, Ian

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Credit: Folger Shakespeare Library (CC-BY-SA-4.0)01/09/2014Globalisation has created substantial benefits, but globalgovernance must evolve to meet the challenges posed bynew systemic risksblogs.lse.ac.uk /europpblog/2014/09/01/globalisation-has-created-substantial-benefits-but-global-governance-must-evolve-to-meet-the-challenges-posed-by-new-systemic-risks/The 2007-08 financial crisis highlighted the potential for negative economic developments to spreadquickly across the world’s interconnected economies. Ian Goldin writes that this constituted the firstexample of a truly systemic crisis, where risks that pooled in a relatively small market in theAmerican Midwest (the sub-prime mortgage market) cascaded to all corners of the global economy.He argues that new insights are required to restructure globalisation in a manner which allows us toharvest the benefits of closer integration, while also reducing harmful and dangerous spill-overs.The fall of the Berlin and other political walls over the past 25 years, together with the developmentof the internet over the same period, have led to many of humanity’s greatest achievements. Theseinclude the spreading of democracy to over 60 countries, significant reductions in poverty and increases in lifeexpectancy, and improved access to food, energy, information and education. The pace of this worldwide changehas been unprecedented. But is it sustainable?Interconnectedness also breeds interdependency andleads to cascading systemic risks. The successes ofglobalisation in increasing incomes and individualchoice leads to increasing ‘externalities’ or spillovers, inwhich the choices of individuals have greaterconsequences for others. Furthermore, the growingcomplexity of the interdependencies makes thechallenge for politicians, the media and citizens ofidentifying the relationships between cause and effectincreasingly difficult. As economic, social and politicalcausality become harder to discern, accountability isweakened, and the institutional capacity to deal withcrises. The integration of our societies and systems alsomeans that while the events that shape our lives and anincreasing share of the products, services andinformation we consume comes from beyond ournational borders, our politics remained rooted inWestphalian national institutions. This creates not onlya gap in our knowledge of causality, but also a yawningcredibility gap as, despite their promises to serve our needs, our politicians increasingly have little if any influenceover the forces that will shape our lives.An emergent feature of globalisation is that global integration, while successful in spreading ‘goods’, also spreads‘bads’ faster and wider than ever before. An overhaul of supranational governance structures in domains such asfinance, supply chain management, the internet, pandemics and the environment is urgently required – not only toglobalise the solutions to these new global risks, but also to effectively grasp the nature of the problems that arise inthe interaction between these previously separate realms. The Butterfly Defect: Why globalization creates systemicrisks, and what to do about it, which I co-authored with Mike Mariathasan and which was recently published byPrinceton University Press, identifies the new emergent systemic risks which are endemic to globalisation and1/3points to ways in which they can be managed.The first hurdle to understanding the risks that globalisation poses to society is that of the new nature of these risks:they are systemic. A systemic risk does not arise from any one constituent of a system, but rather in the verystructure of the system itself. Growing complexities in the web of global interactions hide these risks until theymanifest and undermine our ability to mitigate them when they do, threatening the system itself rather thanindividual parts of it. These systemic shocks spread through and across sectors due to higher numbers ofconnections within and between them and due to the increasing significance of individual nodes in these systems(such as Wall Street and the City of London in finance, or Heathrow airport in the world’s transport infrastructure).These vulnerabilities in the very structure of modern society require reforms of competition and planning policies, aswell as fundamental reforms of regulatory structures for finance and other sectors of the national economy. As thesystemic risks associated with globalisation are necessarily cross-border, co-ordination with other countries is also aprerequisite of the management of systemic risks. In some cases, such as pandemics or cybersecurity globalgovernance is required, but in other cases, a smaller set of countries could be more effective at managing the risks.The establishment of a global governance structure where a variable geometry of actors reflects the requirements ofmanaging systemic risks, rather than political or historical legacies is required to build a resilient globalisation thatdoes not become the source of amplifying and cascading systemic crises.Globalisation can and has led to increasing inequality within countries, as individuals who are not able to get on therapidly moving globalisation train are left further and further behind. The crises endemic in globalisation also impactparticularly negatively on the poor and vulnerable, further exacerbating the inequalities. The result is growingdissent, with hundreds of millions of people around the world feeling that globalisation is more a threat thanopportunity. The consequence has been the political pendulum swinging towards nationalist, protectionist andxenophobic views. This further reduces the capability to manage globalisation and the associated systemic risks.The financial crisis of 2007/08 was the first example of a truly systemic crisis. Risks that pooled in a relatively smallmarket in the American Midwest (the sub-prime mortgage market) cascaded to all corners of the global economy.The effects were far reaching and toppled the governments of Italy, Spain and Greece. While the effects of thefinancial crisis continue to ripple and mutate, the complexities of the financial system and vested interests, as well asthe tensions between different jurisdictions and unwillingness to cede sovereignty to global institutions, means thatthe underlying causes have still not been addressed.Globalisation is the underlying cause of the financial crisis and other new systemic risks. It also can provide thebasis for managing these new risks. To counter the rising threat from systemic instabilities, resilience, transparencyand sustainability must be the guiding principles by which to manage globalisation. Resilience is a system’s ability toabsorb shocks. Our global systems are currently unable to handle acute and unknown risk events. Among thereasons outlined in The Butterfly Defectare the short-term nature of mark-to-market accounting and thestandardisation of ‘just-in-time’, ‘lean’ and other management processes, which drive down spare capacity andflexibility in systems. The primacy given to efficiency and deregulation of concentrated and at times monopolisticsuppliers has also led to an overreliance on particular geographic nodes and firms, who have become ‘too big to fail’.Greater diversity in systems, a focus on sustainability and long term returns, and an appreciation of the newsystemic risks in globalisation require a reform of corporate and national governance, as well as internationalcoordination. The pricing and regulation of the spill-over effects arising from the successes of globalisation isurgently required. The management of the externalities associated with global consumption is required if the oceansare to be preserved, greenhouse gases curtailed, and excessive antibiotic use stopped before it leads to widespreaddrug resistance. Furthermore, effective top-down governance is needed in order to fully grasp these top-down risks.Globalisation requires that our self-interest be reconciled with collective-interest. Awareness of our sharedresponsibilities needs to be translated into actions. This may be done by enacting legislation to internaliseexternalities and by establishing independent (yet accountable) supranational institutions designed specifically todeal with those risks that cannot be handled at the national level.2/3The Butterfly Defect is divided into eight chapters as it investigates globalisation and its relationship with systemicrisk. The first introduces the concept of complexity and systemic risk. The subsequent six chapters examine finance,supply chains, infrastructure (both physical and virtual), the environment, public health and pandemics, andinequality and social cohesion. The final chapter then draws lessons and focuses on the interactions arising from thedifferent domains, providing recommendations for the management of systemic risks.The change society is undergoing is progressing at a rate never before seen. The revolutionary changes bringenormous benefits, but the fact that the governing institutions are evolving at a much slower evolutionary pacecreates a growing governance deficit. The result is that we are navigating in a dense fog of complexinterconnections and risk repeatedly crashing with high impact, uncertain shocks. New insights are required thatprovide navigational tools which are fit for purpose and which allows us to restructure globalisation in a mannerwhich allows it to harvest the benefits of closer integration, but reduce the harmful and dangerous spill-overs.Resilient and inclusive globalisation is required, which provides a better life for not just the fortunate, but for all andfor the future. Globalisation presents daunting challenges to us, but it also presents us with the tools to overcomethem. All that is needed now is the imagination and the initiative.Please read our comments policy before commenting .Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, norof the London School of Economics.Shortened URL for this post: http://bit.ly/1qhpMxP _________________________________About the authorIan Goldin – University of OxfordIan Goldin is Director of the Oxford Martin School and Professor of Globalization and Developmentat the University of Oxford. He was previously Vice President of the World Bank (2003-2006) andprior to that the Bank’s Director of Development Policy (2001-2003). His two most recent books areThe Butterfly Defect: How globalization creates systemic risks, and what to do about it  (PrincetonUniversity Press, 2014) and an edited volume Is the planet full? (Oxford University Press, 2014).3/3

Globalisation has created substantial benefits, but global governance must evolve to meet the challenges posed by new systemic risks

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