Triple A shocks?

A is for aaaaaaaaaaaaaargh

Thanks to mass media and social media, awareness of risks (and imagined risks) is growing, while at the same time local difficulties can quickly become global shocks due to the increased physical and virtual mobility of people, concepts and things. But resilience has increased too. For instance, power failures rarely last long in OECD countries because providers have backups and can call on diversified sources. France had to shut or power down 17 nuclear reactors during the 2003 heat wave, but that didn’t deprive any customer of electricity.

But is diversity necessarily a good thing? Cybersecurity for instance is made much more difficult because of the multiplicity of software platforms, infrastructures, telecom networks, norms, and so on that a system depends on. But having only one operating system to attack may not be such a great idea either.

The lonely hacker creating global chaos has yet to materialise, but the fact that what seem like minor problems can now provoke major disruptions reveals an aspect of the risk landscape that will grow in importance: asymmetry. Greece’s GDP is only around $305 billion compared with over $16 trillion for the EU as a whole, but the prospect of a default is causing panic worldwide due to the numerous connections among financial markets that amplify the scale of problems, as we saw with the subprimes crisis. And to stick with finance, the number of traders actually speculating on Greek debt is tiny compared to the power they have.

In addition to asymmetry and amplification, a third “A” is likely to become more important: asynchronicity. This is to be expected as the complexity and number of interactions grow. It could take a number of forms, varying from lags between economic activity and commodity prices to decoupling of countries or regions from swings in the global economy. Asynchronicity complicates the risk landscape because it undermines the case for global solutions to a number of problems.

Why care? And if we do care, what can we do about it, given the scale and intricacy of the problems?

In reply to the first question, the number of people affected by catastrophes is increasing and with it the human and economic costs. Population growth and settlement patterns are putting a growing number of people at risk from natural phenomena such as floods, storms and droughts.

The number of recorded technological disasters such as explosions, fires, and transport accidents has also risen rapidly since the beginning of the 1970s, and economic expansion and competition, combined with greater concentrations of population, will increase the associated risks.

The last major new health catastrophe to appear was HIV/AIDS, but new diseases such as SARS and H1N1 continue to emerge and others are evolving, leading to fears that at some stage a dangerous, new global pandemic is inevitable.

Terrorist attacks remain a constant threat and the world financial system has learned nothing from major crises.

The question as to what we can do is more difficult. The pace seems to be accelerating, but if crises come more quickly, they go more quickly too. The last recession was due to the unravelling of a number of tensions in the system. These tensions were not reduced thanks to any government policy, but built up until they exploded into a systemic shock that plunged the world into a recession and would have destroyed the financial systems if states hadn’t pumped trillions of dollars into the economy. Is pay up and wait for things to improve really the best we can do?

Useful links

The OECD Project on Future Global Shocks

OECD work on risk management in agriculture, arguing that government policies should focus on planning for catastrophic risks like floods and droughts, instead of getting involved in normal farm business risks like price variations.

Patrick Love

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