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To preserve the benefits from

globalization, global connectivity
requires global coordination.

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Globalization has been a

powerful force that has
promoted sustained
periods of peace and
lifted many of the world’s
poorest out of poverty. In their new book, The Butterfly
Defect, Ian Goldin and Mike Mariathasan argue that it
has also contributed to the building up of systemic risks,
such as environmental hazards or a collapse of global IT
architecture. To preserve the benefits of globalization,
more global policy coordination to promote resilience,
encourage transparent communication and prepare for
contingencies, is necessary.

Global integration has brought unprecedented progress,

not least through the exchange of resources, skills, and
ideas that it enables. Globalization has fostered global
economic growth, lifted many of the world’s poorest out
of poverty, and has facilitated access to knowledge and
education around the globe. It has contributed to global
democratization, and played a vital role in confining and
eradicating some of the world’s most deadly diseases.
Global connectivity has promoted, and feeds off, global
migration, which throughout history has been a key
driver for innovation and progress, and an escape from
poverty, conflict and climatic and other disasters. It has
enriched our lives by providing us with access to a wider
range of opportunities, people, cultures, and traditions.

And yet, there is inherently also great danger in

(mismanaged) global connectivity. Along with more
efficiently produced goods, more diversely skilled
individuals and more innovative ideas, globalization also
contributes to the building up and spreading of a long list
of risks. As we illustrate in our recent book, these risks
arise within and across domains as diverse as the
physical and virtual global infrastructure, the ecosystem,
the global financial sector, the web of global supply
chains, social inequality, and the realm of pandemics
and public health.

In the aftermath of the recent financial crisis, the notion

that a complex global network cannot only spread
“goods”, but also vastly damaging “bads”, is not a novel
insight. What appears to be insufficiently emphasized,
however, is that many of the features of this crisis are

symptomatic of the hyper-connected world of the 21st

century. As a result, the lessons that need to be learned
from the crisis should not be limited to financial
regulation, but should be applied to the restructuring of
global governance more generally.

By the 2000s, finance had become the most

sophisticated of the global governance regimes. It was
overseen by a number of national and international
institutions that are well funded and well staffed (for
example, central banks, the International Monetary
Fund, or the Bank of International Settlements); there
was a vast amount of historic and real-time data
available, and a battery of analytical tools to study it.
And yet, the Global Financial Crisis could neither be
averted, nor could it be quickly contained. From the
American West coast, it spread to the world’s financial
centres in New York, London and Singapore, before
destabilising the real economies that relied on them,
across Europe and the rest of the world.

We have built globalization on a variety of complex and

interconnected networks, without which many of the vital
functions of our societies can no longer be provided.
The speed with which technological progress and
innovation have allowed these networks to grow since
the turn of the century has outpaced the institutional
structures that support them. The governance regimes
available for many of the aforementioned global
networks are less sophisticated than that of finance, and
the structures available to respond to risks cascading
across domains are even more limited.

Credit: Valentina Storti (Creative Commons BY)

The financial crisis was in many ways severely

damaging; yet one can easily imagine more devastating
damage being inflicted, for example by environmental
hazards, a collapse of the global IT architecture, or a
contagious virus spreading through global traffic and
transport networks. The damage may initially be,
confined to a specific sector or location, but – as with the
spreading of financial risk – it is an illusion to believe
that the impact will not be felt across borders.

In our book we have examined numerous examples of

such local risk events, and their globalized impact in the

interconnected world of the 21st century. We have

studied policy responses in the different domains and
distilled them into six guiding principles for global
governance. These six principles are:

1) Promote resilience and sustainability: Public and

private leaders should be aware of the increasing
unpredictability of risk and prepare to face unforeseen
challenges with resilient organizational forms. This
preparation should include fostering flexibility and
avoiding over-reliance on single channels and
geographical nodes. Sustainability requires taking into
consideration the broader context and longer time
horizons.

2) Foster the transparent communication of choices,

risks, and uncertainties about policy alternatives to
address political and attribution challenges: The
ability to link cause to action is being reduced by the
increasing complexity and speed of transactions.
Leaders need to understand this and respond by
increasing transparency. If attribution of responsibilities
is impossible, it undermines accountability. Shareholders
require information on which to make their decisions,
including those with respect to potential sources of
instability and risk. Electorates similarly require
transparency in order to make informed choices and
ensure democratic stability.

3) Improve risk measurement: Due to rising

complexity and interdependency, we are reaching our
limits in terms of correctly assessing cross-sector and
cross-border risks. This does not imply, however, that
we should abandon our efforts; rather, we should
redouble them. In particular, we should invest in
understanding complexity and “big data”.

4) Rectify economic incentives: Research in

economics has an important role to play in political
responses to the complexities of our times. Salaries,
taxes, insurance payments, markets and prices have an
important influence on the choices of millions. These
choices can harm the environment, create financial risk,
or make us vulnerable to infrastructure failures or other
risks, including those arising from the virtual domain.

5) Prepare for contingencies: In combination with

conducting research on risk management, public actors
in particular need to work toward designing contingency
plans and the capability to respond to unforeseen risks
swiftly. This includes setting aside resources, educating
risk and disaster management experts, and defining
contingencies for times when global political
coordination is suddenly required.

6) Define and enforce unified legal responsibilities:

Unifying and enforcing legal responsibilities do not
necessarily lead to the assimilation of national legal
frameworks. They require, however, that every firm –
whether it operates from Taiwan, the Cayman Islands, or
the United States – be held to the same standards in
terms of its impact on the global stage.

Our main goal with this exercise is to draw attention to

the essence of what we have identified from studying
the nature of systemic risk in today’s globalized world.
We are convinced of the beneficial force of globalization
and worry that current institutional structures put its
continued success at risk.

Our main conclusion is that, although globalization is the

cause of systemic risk, it is also its solution; provided
that it is carefully managed. More connectivity and
openness, rapid change, growing populations, and
higher incomes bring greater complexity and higher
potential for systemic risk. The cultivation of a resilient
globalization, however, is also the best means available
to us to manage it. Building firms and societies that
focus on sustainability is vital. Core to this, as is
emphasised in the Oxford Martin Commission for Future
Generations report Now for the Long Term, is the need
to overcome short-termism in business and politics. For
businesses and societies to thrive, we need to tame The
Butterfly Defect which is the underbelly of globalization.

This article is based on: Ian Goldin and Mike

Mariathasan ‘The Butterfly Defect: How Globalization
Creates Systemic Risks, and What to Do about It’,
Princeton University Press, 2014.

Please read our comments policy before commenting.

Note: This article gives the views of the author, and not
the position of USApp– American Politics and Policy, nor
of the London School of Economics.

Shortened URL for this post: http://bit.ly/1poDgcA

_________________________________

About the authors

Ian Goldin – Oxford Martin School

Ian Goldin is director of the Oxford Martin
School and professor of globalization
and development at the University of
Oxford. He has served as vice president
of the World Bank and an advisor to President Nelson
Mandela.

Mike Mariathasan – University of

Vienna
Mike Mariathasan is assistant professor
of finance at the University of Vienna. His
research interests include financial
regulation, banking, and corporate finance.

Related

Book Review: The Globalisation has

Butterfly Defect: How
Globalization Creates
Systemic Risks, and
What to Do about It
July 19, 2015
In “Alex Verkhivker”
created substantial
benefits, but global
governance must
evolve to meet the
challenges posed by
new systemic risks
September 4, 2014
In “Democracy and
culture”

Book Review: Is the

Planet Full? edited by
Ian Goldin
August 17, 2014
In “Book Reviews”

June 27th, 2014 | Democracy and culture,

Economy, Ian Goldin, Mike Mariathasan | 2

Comments

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2 Comments
Para preservar los beneficios de la globalización | La
Celosía June 30, 2014 at 12:47 pm - Reply

[…] Artículo completo […]

PUP News of the World — July 7, 2014 July 27, 2015 at 9:46
pm - Reply

[…] Visit the LSE blog to view the entire piece, including
the authors’ six guiding principles for global governance,
and check out the book trailer below. […]

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