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.
