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The Butterfly Defect

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

Copyright Date: 2014
Pages: 352
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  • Book Info
    The Butterfly Defect
    Book Description:

    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 Defectaddresses 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 everywhere-in 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 Defectshows that mitigating uncertainty and systemic risk in an interconnected world is an essential task for our future.

    eISBN: 978-1-4008-5020-4
    Subjects: Political Science, Business

Table of Contents

  1. List of Boxes, Illustrations, and Tables
    (pp. ix-xii)
  2. Acknowledgments
    (pp. xvii-xxii)
    Ian Goldin and Mike Mariathasan
  3. Introduction
    (pp. 1-8)

    This book examines the consequences of living in a more connected, complex, and uncertain world.¹ The central theme is that globalization must be managed more effectively, which, as we show in the concluding chapter, includes investing in institutions and policies to build resilience at all levels. Globalization permeates every element of our daily lives. Byglobalizationwe mean the movement of people, goods, services, and ideas across a widening set of countries. The process of globalization is not confined to multinational corporations and their global supply chains or to banking conglomerates and their international investment portfolios. It affects even the...

  4. 1 Globalization and Risk in the Twenty-First Century
    (pp. 9-35)

    In recent decades we have entered a new era of connectivity and integration. Globalization not only affects multinational corporations and their global supply chains or banking conglomerates and their international investment portfolios. It also shapes the life of virtually every individual alive, every day. Transnational interactions have become the norm, and social networks are global. The connections between people around the world have grown at an astounding pace. “Right now a Masai warrior with a cell phone has access to better mobile phone capabilities than the President of the United States did twenty-five years ago. And if he’s on a...

  5. 2 The Financial Sector
    (pp. 36-69)
    Co-Pierre Georg and Tiffany Vogel

    In the previous chapter we argued that an immense change in the pace of innovation fundamentally altered the nature of globalization around the turn of the twenty-first century. This “hyperglobalization” is transforming the world into a complex system and creating instabilities linked to systemic risks. In this chapter we examine the financial sector and dissect how systemic risks materialized in 2008. We point to this as the archetypical example of how globalization has created a new form of risk. Further, we show how advances in information technologies led to revolution in the financial sector and how this complexity created underlying...

  6. 3 Supply Chain Risks
    (pp. 70-99)

    We have argued that globalization has contributed to economic integration, efficiency gains, and growth but also to the hidden systemic risks that materialized in the 2007/2008 financial crisis. In this chapter we show that global integration has transformed the nature of the real economy in terms of the actual production of goods and services. Globalization has facilitated the widespread creation of extensive supply chains, defined as systems of organizations, people, technology, activities, information, and resources involved in moving a product or service from supplier to customer.¹

    With global supply networks, even small, localized events can have ramifications on an international...

  7. 4 Infrastructure Risks
    (pp. 100-122)

    So far we have examined the risks associated with globalization emanating from cross-border flows of finance and physical goods. We have shown that connectivity in both the financial sector and the real economy has increased dramatically in the twenty-first century and that global governance has failed to match the speed of global integration. The resulting governance gap has led to systemic risk in the financial sector and to instability in the global supply chain network.

    Global supply chains and financial systems operate on the foundation of increasingly sophisticated infrastructure networks. Infrastructure includes the freight and travel networks touched on in...

  8. 5 Ecological Risks
    (pp. 123-143)

    Our consideration of systemic risk has dealt with the instability of finance, trade, and infrastructure, which are all the products of economic development. We have touched on possible risks to these structures from natural disasters, and we have seen how events such as floods and storms can cause disruptions and overwhelm infrastructure and fragile supply chains. Typically, environmental hazards are described as “metarisks.” Environmental disasters are classified as natural and unavoidable events, exogenous to the fragile systems we have analyzed. In this chapter we take a different view, analyzing environmental risk as an endogenous or integral consequence of globalization. This...

  9. 6 Pandemics and Health Risks
    (pp. 144-167)

    This chapter is concerned with the systemic risk of pandemics. Although globalization has brought immense health benefits, it has also led to a number of escalating threats to health. Pandemics, as a result of increasing globalization, can have profound and potentially catastrophic systemic consequences.

    When the first case of SARS (severe acute respiratory syndrome) occurred in November 2002 in the Guangdong province of China, the virulence of the disease quickly resulted in an epidemic; incidences were reported throughout Guangdong but mostly remained localized around one epicenter.¹ For most of human history, this would have been the end of the story....

  10. 7 Inequality and Social Risks
    (pp. 168-197)

    Globalization has led to growth in inequality both within countries and between countries. It has been the most powerful force in history in raising incomes for poor people. But not everyone has benefited equally. Within countries, the educated and the most physically and virtually connected have benefited most. Across countries, the majority of emerging markets are growing at three to five times the rate of the richer countries, leading to what has been dubbed “convergence, big time.”¹ However, up to 20 of the poorest countries—the failed states, states in conflict, and those such as North Korea—are isolated as...

  11. 8 Managing Systemic Risk
    (pp. 198-220)

    The world we live in is markedly different from that of just a couple of decades ago. Goods, services, people, and ideas travel across borders more rapidly than ever before. This connectivity has brought about unprecedented improvements in average living and health standards. It has enriched our lives with more information, more choices, and more opportunities. It has also contributed to the mitigation of political tensions. The ending of the Cold War, the opening of China, and the sustained period of peace in Europe, as well as the fall of authoritarian regimes in over 60 countries in Africa, Latin America,...