Is the world a more perilous place than ever before? Why are there so many crises? What can we do about it? Newspaper headlines routinely reflect the fact that terrorist attacks, industrial accidents, and economic and financial meltdowns are becoming more frequent and more far-reaching in their effects. There is no denying that the 21st century has become the century of living dangerously—with unpredictable consequences for the future.
Much of the disruption in today’s world has to do with the fact that the global economy and the global geopolitical landscape have become more systemic in nature. By systemic I mean that we have more moving parts interconnected with one another, and more of them are out of whack. Telling the shock-diffusing from the shock-absorbing dynamics is of fundamental importance when it comes to navigating global uncertainties.
Consider the example of terrorism. The reason why it has become such an intractable problem is not that the perpetrators, accomplices, and bystanders are fanatically committed to a destructive ideology. Rather, we have created a global system in which the free movement of people, youth unemployment, rising inequality in the cities, and the diminished resourcefulness of the state conspire to make us vulnerable. I am not arguing that international migration or international tourism should be curbed. I am simply pointing out that we have not fully grasped the implications of that combination of forces. In particular, we have debilitated the ability of the state to anticipate and to cope with problems of a systemic nature, and we are paying a price for that.
Let’s turn now to the global economy. The crisis of 2008 was a sobering event, one that in many ways accelerated the pace of change and exacerbated the consequences of long-standing trends such as the rise of the emerging economies, income and wealth inequality, and the obsolescence of the global financial architecture. What made this crisis spread like wildfire was the tightly-coupled nature of the global economy in terms of integrated manufacturing systems spanning multiple economies, portfolio investment, and cross-border banking assets.
The first line of defense against this dangerous world of ours is resolute and coordinated action by governments.
There are two main ways to reduce the shock-diffusing nature of the global system at the present time. The first has to do with reducing the degree of coupling among the various components of the global system, and with creating more buffers to absorb shocks. The second consists of giving governments the tools they need to cope with shocks. The two tools are actually interrelated. Spending by governments and their ability to intervene through structural, fiscal, and monetary policies is essential to creating a safe and well-functioning global system. There really is no substitute for governments when crises hit, be it a terrorist attack, a recession, or a financial meltdown. The first line of defense against this dangerous world of ours is resolute and coordinated action by governments.
And yet, the trends towards population ageing, social inequality, and public indebtedness are undermining the ability of governments to act. A new approach to retirement—one including work as well as leisure—is needed to ensure the viability of pay-as-you-go pension schemes. Social inequality not only creates social and political tensions, but it also weakens the incentives to work hard. Political pressures to further reduce taxes have to be balanced against the need to provide for a wide array of public goods, including education, healthcare, security, and economic governance to prevent the economy from falling prey to recessions or, even worse, deflation.
The future will be bleak if we do not manage globalization and the frequent tensions, crises, and disruptions that it creates and magnifies. We have much to gain from free trade and free capital flows, the free movement of people, and the free exchange of information. But we also need to acknowledge that the gains come with risks, and that those risks need to be managed.
Headline image credit: New York Skyline by Mark Ittleman. CC-BY-2.0 via Flickr.