Globalisation is a double-edged sword. Ian Goldin, professor of globalisation and development at the University of Oxford and author of The Butterfly Defect, discusses the systemic risks that have built up as an array of interconnections have spread their wings of influence across the globe.
4 minute read
Why did COVID-19 take the majority by surprise?
When I wrote The Butterfly Defect in 2014, I came to see that the super spreaders of ‘good’ globalisation are also super spreaders of the ‘bad’.
The financial crisis demonstrated how systemic risk works in the 21st century. It was inevitable that a pandemic would arise and spread extremely quickly, because the factors that create pandemics – meat (wild meat in particular) being produced so near to human settlements, poor sanitary conditions near airports and so on – were all in place. That we narrowly escaped SARS, Ebola and other potential pandemics in recent years was just luck.
Poor global governance made a pandemic more likely. Governments around the world have not empowered multilateral organisations like the World Health Organisation (WHO) to do what was necessary to stop one.
How are we going to manage pandemic risk better, with WHO in crisis?
WHO, like other global institutions, has been starved of the necessary skills, technology and resources to deal with a global pandemic. It also has its own governance issues and needs to be reformed.
A workable global agreement would need to be in place allowing for fast, accurate and transparent information to be reported
I would like to see a NATO-like equivalent of a rapid-response taskforce able to go to any jurisdiction in the world at short notice and identify the virus, then isolate and seal it off. Effective monitoring capabilities would be required. For this to happen, a workable global agreement would need to be in place allowing for fast, accurate and transparent information to be reported.
None of this has happened, which is one of the reasons why the risks have increased.
Who is responsible for these failings?
Responsibility should be placed firmly at the door of the biggest governments: China, the US, Europe and the UK. We are the main shareholders of these global institutions and have allowed them to wither and become ineffective. We have also prevented them interfering in our national affairs. Governments have not given supranational organisations the power to see what is happening in their kitchens. This is not only true for pandemics, but also for money laundering, tax evasion, cyber risks, climate change and other areas.
Could a breakdown in the US-China relationship exacerbate the economic fallout from the coronavirus pandemic?
Yes, there is a real danger here. It has escalated the potential risks and could create a new Cold War. However, the one thing this pandemic should have taught us is that there is no wall high enough to keep out the great risks we face; pandemics or climate change or others. The tensions are further undermining our global institutions.
Is it too drastic to say that globalisation could go into reverse?
Yes. While there has been a dramatic slowdown which reflects the slowdown in economic activity globally, COVID-19 is accelerating transformation; it is exacerbating trends that were happening anyway. So, some aspects of globalisation have leapt ahead, like tech and digital. Momentum in other aspects will increase again soon – in finance, for instance, because over 100 countries are embarking on bailouts. Supply chain fragmentation had already reached its peak a few years ago due to other trends, notably technology and automation.
One thing that will change as a result of COVID-19 will be the constraint of business travel in the longer term.
How significant will the outcome of the US elections be for the China-US relationship?
I am not very optimistic. There are very few things that create agreement across the US political spectrum but bashing China is one of them. A Democratic win is unlikely to lead to fundamental change.
What positives do you see from the situation we find ourselves in?
There are several. The pandemic is leading to a massive rethinking of priorities; some sacred cows have been thrown out. Ideas of basic income, of massively increased government expenditures, and a greater recognition of the importance of government have all bubbled to the surface.
We need to recognise the importance of strong global cohesion
At the national level, there is a much healthier recognition of the importance of social cohesion and social welfare. The challenge is international too, as we need to recognise the importance of strong global cohesion to start to resolve some of these issues.
To what extent are you worried about ecological risks?
I am extremely worried. There is a real risk that we take the eye off the ball on climate – particularly given the amount of money being spent could allow a dramatic increase in expenditure toward policies that fail to promote green growth. Of course, one of the big realisations is that pandemic risk is inextricably linked to climate change given the zoonotic nature of many viruses.
In terms of industries and sectors, where do you see the most fragility?
There has been a huge amount of time and effort spent trying to stop another crisis emanating from the finance and banking system, with regulatory intervention including Solvency II and Basel III. But my view is that the financial system is no more robust than it was in 2008. Certainly, we are not going to have the same crisis as we did in 2008 – it never is like that. The potential for the financial system to fall apart as a result of another cause, like an even larger Hurricane Sandy or a pandemic, is greater than ever.
In terms of the internet, there has been some growth in resilience – more networks and alternative routes, for example. But given the limited number of cables between the UK and the US, that situation could soon change. Likewise, there are few cables running from the Mediterranean through to Asia, so there are clearly vulnerabilities in the system. We are also overly dependent on Russia for oil and gas, particularly gas.
We cannot change the incentives facing managers, both in the private sector and the corporatized public sector
The MBA mentality of ‘just-in-time’ efficiency is being challenged as well. But the inference we will move from this model to a ‘just-in-case’ one is a bit of stretch, because unless you change mark-to-market accounting and quarterly reporting and the way managers are incentivised, you cannot change the basic ethos based on stocks held or spare capacity in working capital tied up that is ‘wasted’. Until spare capacity is seen as an asset not a liability, we cannot change the incentives facing managers, both in the private sector and the corporatized public sector, like hospital trusts.
So, this is going to require system-wide change, not simply saying we need more spare parts to guard against system fragility. I do not see this changing as a result of the pandemic; the change will come as a result of the other factors instead – like automation, technology and politics, as well as changes in accounting practices, regulations and shareholder behaviour.