States Cannot Put Globalization Genie Back in Bottle

Nations cannot escape globalized risks, explains Jack Radisch, OECD policy analyst, for Public Service Europe. “For many risks, the frontline of protection is a well-functioning regulatory environment,” he writes. Governments must set priorities before investing in prevention strategies. Risk analysis is required, and he notes that costs of the 2008 credit crisis triggered by subprime mortgages were more than thirty times higher than those of Japan’s tsunami-nuclear disaster. Information gathering, cost-benefit analysis and awareness can build cooperation. Government efficiency leads to concentration of services, and Radisch writes, “Part of the challenge in preparing for and managing the risk of future global shocks is to diversify these hubs or to build-in greater system robustness and redundancy.” A tightly interconnected global economy assures that major events, good or troubling, are widely shared. Globalization’s risks can be managed with priorities, risk analysis, diversification, strong policies and regulations, and cooperation. Objectivity and fairness are key at every stage. – YaleGlobal

States Cannot Put Globalization Genie Back in Bottle

Governments and public services need to adapt to, not retreat from, globalization
Jack Radisch
Friday, July 8, 2011

Global shocks such as the 2008 financial crisis, which began locally and spread to global proportions, reflect underlying conditions that make such events more likely to happen in future. The Organisation for Economic Co-operation and Development report Future Global Shocks looks at the interconnections of the modern global economy and considers under what conditions they might become vectors for extremely disruptive events. 

Global networks - such as financial markets, the internet, aeroplanes carrying passengers or freight infected with a dangerous virus - are the means by which such events propagate and take on a much greater scale of importance. Why are extreme events important to public services?

A fundamental duty of the modern state is to protect the persons and property within its territory. In OECD countries - first responders such as police, fire and emergency medical personnel form the foundation of the capabilities to carry out this duty. For many risks, the frontline of protection is a well-functioning regulatory environment. In a period of fiscal consolidation, though, the efficiency and effectiveness of all public services - including first responders and regulators are under close examination.

Under these conditions, the adoption of preventive strategies and the need to build societal resilience take on additional importance. It is insufficient to rely solely on the state for protection from extreme events; the private sector and general public must also shoulder some of the burden. Furthermore, policy-makers need to look beyond their own borders for potential threats and consider prevention strategies that necessarily entail international cooperation.

Natural disasters provide some frame of reference for the destruction and disruption that extreme events can cause, but it is important to understand how global shocks are of a different scale. The damages caused by the Tohuku earthquake and tsunami, which were largely limited to Japan, are estimated to be in the order of $250-300bn. This is only a small fraction of direct economic damages caused by the sub-prime crisis, which the International Monetary Fund estimates to be about $11 trillion.

An increase in pathways through which risks can accumulate, propagate and culminate in a much greater scale of effects implies the need to take a systemic perspective to risk assessment - that looks at the causal relations of contagion and the total impacts of direct and indirect costs. This should help prioritise where public investments to mitigate risks can be put to their best use. Where are the key international connections that can cause propagation effects and what actions are needed at these junctures to prevent future global shocks?

Concentration, if not centralisation, has become an important facet of efficiency in economic activities - in transportation financial payments, for example. As a network structure, a hub allows greater flexibility within the transport system and transaction speed within the financial payment system. But if a major hub is disrupted, delays may ripple through interconnected supply chains. This not only upsets the functioning of the tightly knit transportation and financial payment sectors, it induces volatility that may lead to losses in productivity, foreign investment and access to exports - whether they be food, water, electricity, productive capital or some other scarce resource. Part of the challenge in preparing for and managing the risk of future global shocks is to diversify these hubs or to build-in greater system robustness and redundancy.

Improved international awareness is also important to enact the most effective policy reactions to extreme events. Consider the 2010 volcanic eruption in Iceland that produced an ash cloud over the air space of Europe's major air hubs. Many companies were unable to deliver products or key components to markets and production systems. The event was an opportunity to consider many questions relevant to policy makers and businesses alike, for example: What level of diversification would be required to maintain current supply capacity if the eruption had continued and air space had been closed for a month, a year or even longer? What technologies could be implemented to better inform risk analysis, and avoid blanket closures of air space in the future? In the short term, the major effects of closing air space were mostly limited to losses for airlines, stranded passengers, delayed orders for manufacturing and lost orders for sellers trying to export perishable goods to European markets. In a longer lasting scenario, global trade – and, especially, Europe - might suffer massive losses.

Policy-makers and industry strategists need to re-examine how to prepare for and respond to such systemic shocks in the future - whether they arise in financial, natural, technological, social or even political systems. While these networks enable local impacts to propagate across multiple territories, production systems, industries and asset classes - societies generally accept them as necessary for the improvements they bring to living standards.

The OECD has established a high-level risk forum as a platform for governments to consider these pressing issues and the need to adapt to, not retreat from, globalisation. The state's legitimacy requires it to ensure emergency response capabilities, but these public services need to adapt by empowering the people to do their part, by co-operating with the private sector to identify vulnerabilities and creating the policy conditions for more robust critical systems. And by co-ordinating with foreign partners so that threats emanating from abroad might be contained, avoided or lessened.

Jack Radisch is a policy analyst at the Organisation for Economic Co-operation and Development.

Copyright Public Service Europe

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