Contagion: the systemic risks of globalisation

06 March 2020

Portrait of Professor Ian Goldin

by Professor Ian Goldin
Professor of Globalisation and Development

Professor Ian Goldin was the founding Director of the Oxford Martin School. He is currently Oxford University Professor of Globalisation and Development, Senior Fellow at the Oxford Martin School, Director of the Oxford Martin Programme on Technological and Economic Change and a Professorial Fellow at the University’s Balliol College.

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The spread of COVID-19 is alarming. But not surprising. Globalisation creates systemic risks. More flows between countries make risks more contagious.

As trade, finance, cyber, travel and other networks grow in scale and interact as they pass through major hubs, they become more complex and unstable. Edward Lorenz, the founder of chaos theory, showed that a butterfly flapping its wings over Brazil could cause a tornado in Texas. An intrinsic outcome of the growing integration and complexity of the world economy is that it too now suffers from this butterfly defect.

The super-spreaders of the goods of globalisation, such as major airport hubs, are also super-spreaders of the bads. The financial crisis in 2007 provided a dramatic example of how contagion could spread from the US to global markets overnight. So too has the rapid spreading of cyber viruses.

The parallel between the complacency which gave rise to the financial crisis and the lack of preparedness for a pandemic is striking. Rapid growth in profits and incomes in the decades leading up to the financial crisis, and the short-lived nature of the Asian and other crises, fostered dangerous confidence that the threat of another Great Depression had finally been vanquished. The result was that new systemic risks escalated until they precipitated the 2007 collapse, which rivalled that of 1929. The cataclysmic failure of the authorities and experts in charge has reshaped economics and politics globally.

The super-spreaders of the goods of globalisation, such as major airport hubs, are also super-spreaders of the bads.

In health, rising life expectancy and success in preventing a repeat of the devastating influenza pandemic of 1918, which infected an estimated one-third of the world’s population and killed over 50 million people, has created false security. We must stop looking in the rear-view mirror. History is a poor guide to the implications of COVID-19 or other emerging systemic risks because the world economy is now a complex system and societies operate in new ways. In 2003 when the SARS pandemic struck, China was 4 per cent of the global economy, now it represents over 16 per cent. It is integral to global supply chains, and its tourists spend over $260 bn annually.

Globalisation, surging trade and travel within countries and across national borders, has lifted billions of people out of poverty, but it also spreads infectious diseases. Wuhan, at the epicentre of COVID-19 is typical of many ‘mid-size’ Chinese cities. Over the last three decades it has grown from 2 to over 11 million people, and average incomes have quadrupled. As in many other rapidly growing cities, traditional markets where live animals are sold provide a potential source of animal to human disease transmission. Poor hygiene and lax enforcement of regulations coexist with dense living and proximity to airports, from which a virus can spread anywhere in 36 hours. In January 2020, a record 3 billion journeys were undertaken in China to celebrate Lunar New Year. The coincidence of this with the outbreak of Covid-19 outbreak accelerated its spread, making the government’s draconian quarantine more vital and yet more disruptive to individuals, firms and the Chinese economy.

The widening gap between the rising demands of managing systemic risk and national and global preparedness is the biggest concern. While global threats are escalating key governments are turning their back on the international system. The WHO has been starved of much-needed resources and authority, not least by the US and other rich countries. Like other agencies of the United Nations, it is governed by divided nations. Meanwhile, COVID-19 has hit at a time of when national public health systems are already under immense strain in many countries, with capacity undermined by austerity and privatisation. In response to the financial crisis, rich countries have fired their fiscal and monetary ammunition. Many emerging markets already face excessive public debt burdens. The collapse of export markets now will compound the economic challenges countries face and undermine their ability to address immediate, let alone future needs.

The widening gap between the rising demands of managing systemic risk and national and global preparedness is the biggest concern. While global threats are escalating key governments are turning their back on the international system.

The backwards-looking focus of financial authorities who have sought to prevent a repeat of the last crisis has come at the expense of building resilience against rapidly rising systemic risks, such as pandemics, though these are increasingly likely to be the source of future crises. For example, regulatory policy has largely ignored risks associated with the concentration of finance in a small number of locations. The headquarters of competitors are in neighbouring buildings, rather than providing diversification through being geographically dispersed. As a result, when a pandemic or other event (and Hurricane Sandy and 9/11 came close to this) leads to the closure of Wall Street or Canary Wharf the risks to the global economy will be amplified.

Pandemics are unlike other global risks in that they can originate anywhere in the world. In the case of the threats posed by financial systems, climate change, antibiotic resistance and in cyber space, a small set of actors, including companies, cities and communities, could greatly reduce the risk. Not so with pandemics, where the capacity to monitor and intervene to isolate outbreaks at source is vital, as is the need for national action to quarantine and treat affected individuals. For countries that do not have this capacity, constant monitoring and rapid response is required to contain the threats at source. The sharing of information and resources globally is vital for this, not least to support the poorest countries. The WHO has this mandate, but our governments have starved it of funds and frustrated much needed modernisation. Not surprisingly, it is not up to this existential challenge.

Our unprecedently integrated and complex systems are only as strong as their weakest link. Pandemics pose the gravest threat not only to the world economy but to our lives. We need to give them the attention and resources they deserve. High walls will not stop pandemics, or any global threat. What is being tested is our will to cooperate. The stakes could not be higher.

This opinion piece reflects the views of the author, and does not necessarily reflect the position of the Oxford Martin School or the University of Oxford. Any errors or omissions are those of the author.