Ian Goldin - The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do about It

THE BUTTERFLY DEFECT

Previous books by Ian Goldin

Is the Planet Full?

Divided Nations: Why Global Governance Is Failing, and What We Can Do about It

Globalization for Development: Meeting New Challenges

Exceptional People: How Migration Shaped Our World and Will Define Our Future

The Case for Aid

The Economics of Sustainable Development

Economic Reform, Trade and Agricultural Development

Modelling Economy-wide Reforms

Trade Liberalization: Global Economic Implications

Open Economies

The Future of Agriculture

Economic Crisis: Lessons from Brazil

Making Race

THE BUTTERFLY DEFECT

How Globalization Creates Systemic Risks, and What to Do about It

IAN GOLDIN

AND

MIKE MARIATHASAN

PRINCETON UNIVERSITY PRESS
PRINCETON AND OXFORD

Copyright 2014 by Princeton University Press
Published by Princeton University Press, 41 William Street,
Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press,
6 Oxford Street, Woodstock, Oxfordshire OX20 1TW

press.princeton.edu

All Rights Reserved

Library of Congress Cataloging-in-Publication Data

Goldin, Ian, 1955
The butterfly defect : how globalization creates systemic risks, and what to do about it / Ian Goldin, Mike Mariathasan.
Pages cm

Summary: Global hyperconnectivity and increased system integration have led to vast benefits, including worldwide growth in incomes, education, innovation, and technology. But rapid globalization has also created concerns because the repercussions of local events now cascade over national borders and the fallout of financial meltdowns and environmental disasters affects everyone. The Butterfly Defect addresses the widening gap between systemic risks and their effective management. It shows how the new dynamics of turbo-charged globalization has the potential and power to destabilize our societies. Drawing on the latest insights from a wide variety of disciplines, Ian Goldin and Mike Mariathasan provide practical guidance for how governments, businesses, and individuals can better manage risk in our contemporary world. Goldin and Mariathasan assert that the current complexities of globalization will not be sustainable as surprises become more frequent and have widespread impacts. The recent financial crisis exemplifies the new form of systemic risk that will characterize the coming decades, and the authors provide the first framework for understanding how such risk will function in the twenty-first century. Goldin and Mariathasan demonstrate that systemic risk issues are now endemic everywherein supply chains, pandemics, infrastructure, ecology and climate change, economics, and politics. Unless we are better able to address these concerns, they will lead to greater protectionism, xenophobia, nationalism, and, inevitably, deglobalization, rising conflict, and slower growth. The Butterfly Defect shows that mitigating uncertainty and systemic risk in an interconnected world is an essential task for our future.Provided by publisher.

Includes bibliographical references and index.

ISBN 978-0-691-15470-1 (hardback)

1. Risk management. 2. Crisis management. 3. Globalization. I. Mariathasan, Mike, 1982 II. Title.

HD61.G643 2014
658.155dc23

2013039405

British Library Cataloging-in-Publication Data is available

This book has been composed in Aldus with Gill Sans display by Princeton Editorial Associates Inc., Scottsdale, Arizona.

Printed on acid-free paper.

Printed in the United States of America

1 3 5 7 9 10 8 6 4 2

To Tessa, Olivia, and Alex

Ian Goldin

To Mechthild and Jos, to Vincent and Patrick, and to Sophie

Mike Mariathasan

Contents

Boxes, Illustrations, and Tables

BOXES

ILLUSTRATIONS

TABLES

Preface

I decided to write this book because I believe that globalization, by which I mean the process of increasing global integration and cross-border flows, has been the most powerful driver of human progress in the history of humanity. The tidal wave of globalization that has engulfed the planet over the past two decades has brought unprecedented opportunity. But it also has brought new risks that threaten to overwhelm us. This book focuses on the threat of systemic risk. Systemic risk cannot be removed because it is endemic to globalization. It is a process to be managed, not a problem to be solved. This book aims to provide a better understanding of technologically enhanced globalization with a view to making it more resilient. It seeks to overcome the benign neglect of systemic risk, which is not sustainable, and promote a more resilient and inclusive globalization. To this end, it considers different dimensions of the problem, offering a number of conceptual tools and lessons for managing the challenges of globalization and systemic risk.

The butterfly effect has become widely known to signify systems in which a small change in one place can lead to major differences in a remote and unconnected system. The name of the effect has origins in the work of Edward Lorenz, who illustrated how a hurricanes formation may be contingent on whether a distant butterfly had, days or weeks before, flapped its wings.effects and permeate all dimensions of society. Due to globalization, the butterfly of change has lost its innocence and globalization has produced structural defects that propagate new forms of risk.

Societies ignore systemic risk at our peril. Long before the shocks rip through our societies, the political pressures that seek to reverse globalization build. When citizens feel that openness and connectivity bring more bad things than good, they will seek to close off the flows that bind us. Xenophobia, nationalism, and protectionism are three well-known manifestations of the drive toward more inward-looking politics. A cosmo politan or international perspective is under threat. The financial crisis of 2007/2008, terrorism, cyberattacks, perceptions of excessive migration, and the ever-present fear of pandemics are among the threats that are seen to arise from cross-border movements of people, goods, and services. Even virtual flowsthrough the Internetare seen as sources of threat.

Politicians, business people, and civil society have done a bad job in explaining the wide-ranging benefits of international connections and why these connections imply more, not less, joined-up global action. But we face not only a political backlash. We face the real threats posed by systemic risks. Financial crises, pandemics, and cyber and other threats could overwhelm the ties that bind us. Deglobalization and slowing global growth would be the consequences. These would be disasters for the global economy, particularly for poor people, who are always the most vulnerable. Everyone stands to gain through better management of systemic risk. Poor people suffer most when there are shocks. They also have the most to gain through greater connection. This is particularly the case for those who are not yet connected due to their geographical or social isolation.

This book is the fourth in a series of books I am writing on globalization. Each seeks to make specific arguments, and together I hope they will provide insights into how better to manage globalization.