Globalization spreads contagion of all kinds

The writer is a professor at the University of Oxford and author of “The Butterfly Defect”

The spread of the coronavirus around the world is alarming, but not surprising. Globalization creates systemic risks. As commerce, finance, travel, cyberspace and other networks grow and interact, they become more complex and unstable.

Edward Lorenz, father of chaos theory, has shown that a butterfly flapping its wings over Brazil can cause a tornado in Texas. An intrinsic result of the increasing integration and complexity of the world economy is that it too suffers from a “butterfly defect”.

The super-diffusers of the goods of globalization, such as the large hubs of airports, are also super-diffusers of ills. The 2008 global financial crisis provided a dramatic example of how contagion could spread from the United States to global markets overnight. The same goes for the rapid spread of cyber viruses.

When the central banks started their monetary fire hoses in the aftermath of the financial crisis, they resolved the immediate problem, namely the lack of liquidity. Their attempts to stimulate the markets will now have less impact.

Indeed, the markets remain inundated with excess liquidity. With interest rates at record levels, there is little scope for further reductions. This is also explained by the fact that the decline in responsiveness to successive interest rate cuts is clearly visible in the lukewarm growth rates in Japan, Europe and the United States. Much more could and should have been done with fiscal policy, but that too will be less effective now – and could even be inflationary, because meeting existing demand will be more difficult due to quarantine workers, factory closings and supply chain disruptions during this epidemic.

The retrospective orientation of financial authorities seeking to prevent a recurrence of the last crisis has come at the expense of building resilience to new threats such as pandemics.

For example, regulatory policy has largely ignored the risks associated with the concentration of funding in a small number of sites. Competitors’ headquarters are located in neighboring buildings. As a result, when a pandemic or other event causes Wall Street (Hurricane Sandy and September 11 to close) or the city of London to close, the risk to the global economy is magnified.

The parallel between complacency, which provoked the financial crisis, and the lack of preparation for a pandemic is striking. The rapid growth in profits and incomes in the decades leading up to the financial crisis and the short-lived nature of other crises have heightened the dangerous confidence that the threat of another great depression had been overcome. This has resulted in an escalation of new systemic risks.

In health, the increase in life expectancy and the successful prevention of a repeat of the devastating influenza pandemic of 1918, which infected about a third of the world’s population and killed up to 50 million people, created a false sense of security. But the world is now more interdependent. China accounts for almost a fifth of global production, is an integral part of global supply chains, and its tourists spend more than $ 260 billion a year.

Globalization and the growth of trade and travel within countries and across national borders have lifted billions of people out of poverty, but they also spread infectious diseases. The epicenter of Covid-19, Wuhan, is typical of many medium-sized Chinese cities. In 30 years, it has grown from 2 to more than 11 million people, and average incomes have jumped. As in other growing cities, poor hygiene and lax enforcement of regulations coexist with people and animals living nearby, near airports from which a virus can spread anywhere in 36 hours.

As threats intensify, governments turn their backs on the international system. The World Health Organization is deprived of resources and authority, especially from the United States and other wealthy countries. Meanwhile, Covid-19 has struck at a time when national public health systems are under enormous pressure, with capacities undermined by austerity and privatization. The UK National Health Service has also been hit by chronic staff shortages compounded by misguided immigration policies.

Pandemics are different from other global risks in that they can come from anywhere. In the event of threats posed by financial systems, climate change, resistance to antibiotics or in cyberspace, a few players can reduce the risk. This is not the case with pandemics, where the ability to monitor and respond to isolate outbreaks everywhere is vital, especially in the poorest countries. A global effort to develop vaccines is needed. Sharing information and resources is essential.

High walls will not prevent pandemics or any global threat. Our unprecedented integrated and complex systems are only as strong as their weakest links. Pandemics are the most serious threat to the global economy and to our lives. We must give them the attention and resources they deserve. What is being tested is our willingness to cooperate and the stakes could not be higher.

The writer is a professor at the University of Oxford and author of “The Butterfly Defect”

The spread of the coronavirus around the world is alarming, but not surprising. Globalization creates systemic risks. As commerce, finance, travel, cyberspace and other networks grow and interact, they become more complex and unstable.

Edward Lorenz, father of chaos theory, has shown that a butterfly flapping its wings over Brazil can cause a tornado in Texas. An intrinsic result of the increasing integration and complexity of the world economy is that it too suffers from a “butterfly defect”.

The super-diffusers of the goods of globalization, such as the large hubs of airports, are also super-diffusers of ills. The 2008 global financial crisis provided a dramatic example of how contagion could spread from the United States to global markets overnight. The same goes for the rapid spread of cyber viruses.

When the central banks started their monetary fire hoses in the aftermath of the financial crisis, they resolved the immediate problem, namely the lack of liquidity. Their attempts to stimulate the markets will now have less impact.

Indeed, the markets remain inundated with excess liquidity. With interest rates at record levels, there is little scope for further reductions. This is also explained by the fact that the decline in responsiveness to successive interest rate cuts is clearly visible in the lukewarm growth rates in Japan, Europe and the United States. Much more could and should have been done with fiscal policy, but that too will be less effective now – and could even be inflationary, because meeting existing demand will be more difficult due to quarantine workers, factory closings and supply chain disruptions during this epidemic.

The retrospective orientation of financial authorities seeking to prevent a recurrence of the last crisis has come at the expense of building resilience to new threats such as pandemics.

For example, regulatory policy has largely ignored the risks associated with the concentration of funding in a small number of sites. Competitors’ headquarters are located in neighboring buildings. As a result, when a pandemic or other event causes Wall Street (Hurricane Sandy and September 11 to close) or the city of London to close, the risk to the global economy is magnified.

The parallel between complacency, which provoked the financial crisis, and the lack of preparation for a pandemic is striking. The rapid growth in profits and incomes in the decades leading up to the financial crisis and the short-lived nature of other crises have heightened the dangerous confidence that the threat of another great depression had been overcome. This has resulted in an escalation of new systemic risks.

In health, the increase in life expectancy and the successful prevention of a repeat of the devastating influenza pandemic of 1918, which infected about a third of the world’s population and killed up to 50 million people, created a false sense of security. But the world is now more interdependent. China accounts for almost a fifth of global production, is an integral part of global supply chains, and its tourists spend more than $ 260 billion a year.

Globalization and the growth of trade and travel within countries and across national borders have lifted billions of people out of poverty, but they also spread infectious diseases. The epicenter of Covid-19, Wuhan, is typical of many medium-sized Chinese cities. In 30 years, it has grown from 2 to more than 11 million people, and average incomes have jumped. As in other growing cities, poor hygiene and lax enforcement of regulations coexist with people and animals living nearby, near airports from which a virus can spread anywhere in 36 hours.

As threats intensify, governments turn their backs on the international system. The World Health Organization is deprived of resources and authority, especially from the United States and other wealthy countries. Meanwhile, Covid-19 has struck at a time when national public health systems are under enormous pressure, with capacities undermined by austerity and privatization. The UK National Health Service has also been hit by chronic staff shortages compounded by misguided immigration policies.

Pandemics are different from other global risks in that they can come from anywhere. In the event of threats posed by financial systems, climate change, resistance to antibiotics or in cyberspace, a few players can reduce the risk. This is not the case with pandemics, where the ability to monitor and respond to isolate outbreaks everywhere is vital, especially in the poorest countries. A global effort to develop vaccines is needed. Sharing information and resources is essential.

High walls will not prevent pandemics or any global threat. Our unprecedented integrated and complex systems are only as strong as their weakest links. Pandemics are the most serious threat to the global economy and to our lives. We must give them the attention and resources they deserve. What is being tested is our willingness to cooperate and the stakes could not be higher.