Globalization And Systemic Risk

By Ian Goldin and Mike Mariathasan

For most of the world’s growing number of inhabitants, greater connectivity has been a blessing. The world is connected; individuals are connected, firms are connected, and governments depend on each other more than ever. Below, Ian Goldin and Mike Mariathasan conclude that insufficiently managed globalization might drive us toward a world of overly complex interdependencies, with the resulting cascading shocks encouraging more local rather than more globally connected politics.

Globalization – A Double-Edged Sword
The world we live in is markedly different from that of just a couple of decades ago. Goods, services, people, and ideas travel across borders more rapidly than ever before. This connectivity has brought about unprecedented improvements in average living and health standards. It has enriched our lives with more information, more choices, and more opportunities. It has also contributed to the mitigation of political tensions. The ending of the Cold War, the opening of China, and the sustained period of peace in Europe, as well as the fall of authoritarian regimes in over 60 countries in Africa, Latin America, and Asia, are part of this extraordinary process. Connectivity has also accelerated the spread of innovations that have changed the lives of millions for the better. For most of the world’s growing number of inhabitants, greater connectivity has been a blessing.

Many, however, see globalization as a curse. They worry about growing inequalities and about those who are excluded from the benefits of closer integration. They also point to systemic risks, including financial crises, environmental destruction, pandemics, cyber attacks, and other cascading threats. We share these concerns, and provide evidence on the reality of a wide array of global systemic risks in our recent book: ‘The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do about It’. We show that the complexity of the world that we have built may well have escaped our models and cognitive abilities. We are overloading the global networks; we are stretching their capacity beyond what prudence recommends, and too often we neglect the accumulation of a large variety of risks and the geographical concentration of activities in a small number of pivotal nodes.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.