Globalization and Risk in the Twenty-First Century

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 smart phone with access to Google, then he has better access to information than the President did just fifteen years ago."

This interconnectedness manifests itself in every aspect of our lives, even when we do not consciously choose it. We are so accustomed to globalization that we take for granted the products and services we consume from around the world.

In the twenty-first century, trade is no longer primarily physical. Electricity, media, money, and ideas cross borders at speeds that make traditional trade, such as that in meat from Argentina or bananas from the Caribbean, appear almost anachronistic. We all depend on technologies, as well as on products and services from across our borders. For example, our information technology (IT) services may run on Israeli software provided from Mumbai as we consume entertainment from Los Angeles filmed in South Africa on computers manufactured in China or Taiwan assembled from parts from more than 20 countries. A German loan bails out the Cypriot government as the EU shapes the fiscal policy of the Greek exchequer. The fiber cables that enable the World Wide Web form a web across our oceans' floors, with the servers providing the necessary computing power located around the world and as likely to be in advanced economies as in what was once termed the "third world."

The traditional boundaries between the "developed" and "developing" worlds are fading. Although laws, borders, and restrictions separate countries, virtually all our activities and ideas have cross-border dimensions. Individual and local choices have global impacts and vice versa: what happens outside our borders has direct daily consequences for each of us, every day. These connections are complex, frequently opaque, and often beyond our control. Yet together they are shaping how the world develops. As we will see, there is a growing likelihood that events in one place will have cascading effects in other areas, jumping across national borders and sectors as well as the traditional divisions of different types of risk.

In this chapter we establish a framework for understanding this complex web. The defining characteristic of our age is increasing connectivity. We start by seeking to better understand the driving forces of growing connectivity. We then link this growth in connectivity to the concept of complexity and show how this link inherently implies instability. We also build on work in risk analysis to link this instability with uncertainty and systemic issues on the one hand and with the loss of individual and institutional responsibility on the other. Finally, we argue for reforms to promote a more transparent and a more resilient globalization.

GLOBALIZATION AND INTEGRATION

Globalization can generally be understood as the process driven by and resulting in increased cross-border flows of goods, services, money, people, information, technology, and culture. These flows are multi dimensional, and the number of connections between them is unprecedentedly large and growing exponentially. It is becoming deeper in that these connections penetrate a growing range of human activities. Increasingly not only people but also things are being connected—cars, phones, merchandise, and a rapidly widening range of inanimate objects and sensors.

The current period of integration is revolutionary in that a larger set of changes have occurred with a pervasively wider influence than over any comparably short time in previous phases of globalization. We consider, in turn, two additional examples of global connectivity that we feel are unique and have significantly lowered the transaction costs of economic integration. The first is innovation and technological progress, particularly with respect to computing power and information technologies. In the late 1960s Douglas Engelbart, a computer scientist at the Stanford Research Institute, gave a demonstration of the new technological opportunities emerging with the advent of personal computing. His ideas on the user experience constituted a milestone in personal computer usage and inspired many of the breakthroughs that have gone on to transform the world. Today personal computing and Internet usage have entered a new paradigm. When Intel cofounder Gordon Moore first suggested in 1965 that the number of transistors on a chip would continue to double every year, he could not have anticipated the implications of his prediction. Today "technology has ... permeated through our normal daily routines, changing the way we cook and eat, the way we travel from A to B and the way we work and interact with one another." Almost 50 years later, "Moore's Law" is still firmly in place, and it will underpin changes in the coming decades that will be at least as radical as those of the past two decades. Affordable IT and telecommunication devices have allowed us to create a virtual world that transcends national borders as well as traditional industry boundaries. They have enabled unprecedented degrees of global integration, and—by providing a platform for the exchange of information and skills—they continue to generate potential conduits for further globalization. Communication also allows the world to take advantage of its most valuable resource: the growing numbers of human beings who are increasingly educated and literate.

The second example of global connectivity relates to the political and ideological changes that have both defined and facilitated the latest wave of globalization. The political revolutions that tore down the Berlin Wall and ended the Cold War were fundamental. In the same decade that the Berlin Wall fell and the Soviet Union splintered, the West normalized relations with China's 1.3-billion-person economy. Authoritarian regimes collapsed in more than 65 countries in Latin America, Asia, Africa, and Eastern Europe and were replaced with democratic systems that were more open to global trade, finance, and ideas. In many but clearly not all countries, along with open borders came democratic institutions, intellectual property rights, and an economic paradigm shift toward...