On the home page of this blog (http://fiftyyearperspective.com/) there is a description of what is known as the butterfly effect. It portrays how a harmless event in one location can lead to disastrous effects a great distance away. Ian Goldin and Mike Mariathasan published a book in 2014 titled The Butterfly Defect, which describes how globalization creates systemic risks “such that small perturbations now have much greater effects and permeate all dimensions of society.”
Far from opposing globalization, the authors characterize globalization as “the source of the greatest progress the world has known.” Connectivity has been a blessing for most of the world’s population, and regardless of opposition from whatever sources, it cannot be reversed: “…the physical flow of goods and services may still be interrupted by borders and regulations, but virtual exchange overcomes such obstacles easily.”
The 2007-2008 financial crisis served as an example of an unforeseen breakdown resulting from opaque complexity. The authors attribute systemic risks to globalization’s deep connectivity and profound complexity.
Often the pursuit of efficiency, speed, and profit serves the needs of individual businesses, but causes “unwanted externalities” in the aggregate supply chain. Dependence upon multiple suppliers for individual components is a common pattern. A low-cost producer of a particular component may be favored by numerous end-product manufacturers. Over-reliance on a single source can cause a shortage of end products, as happened when fire struck a New Mexico semiconductor plant in 2000. Combining single source suppliers with efficiency steps, like just-in-time delivery, leaves manufacturers without backup supplies to continue production.
A critical component of supply chain robustness is physical infrastructure. Here again, concentration of traffic on key transportation nodes, such as O’Hare Airport or the Suez Canal, make movement of goods and people vulnerable to natural disasters, human error, or attack. Likewise, interconnectivity of electric power grids and networked computers are vulnerable to attacks with the potential of causing loss of control, blackouts, and significant financial damage.
Ecological risks center on greenhouse gas emissions, but include land use and agricultural practices supporting a growing world population. “Accelerated emissions of greenhouse gases are part and parcel of the process of globalization and are bound up in the economic growth of emerging markets and the associated rapid rise in incomes and energy consumption.” Negative impacts of development on the natural ecosystem will result in “an increase in disasters, a growing vulnerability to hazards, and the depletion of resources and biodiversity placing systems and people at risk.”
As in past centuries, movement of people is associated with widespread threats to health. The 2003 SARS epidemic that began in China quickly spread to all continents after a doctor who had treated SARS patients came into contact with travelers at an elite Hong Kong hotel. “The hallmarks of globalization – connectivity and integration – create the potential for negative externalities in the field of health, just as they do in other sectors.” Pandemics are unpredictable and unavoidable, but world health initiatives have done more to contain epidemics than have efforts to address other risks discussed in The Butterfly Defect.
Inequality represents the final risk addressed in the book. “A cohesive society is as crucial to sustainable globalization as functioning physical and virtual infrastructure.” For many, the rise of inequality and the inability to control what may be seen as an opaque and complex governance leads to nationalism and a reversion away from globalization. To maintain popular support for globalization going forward, the authors state “…sustainable globalization requires careful management, ensuring transparency, inclusivity, and resilience as guiding principles. Global institutions need to be more accountable and transparent, but they also need to be given mandates and resources that are relatively immune to constant buffering in political tides.”
Isolationism is not an option. Globalization is on an unsustainable course. Sound advice is sorely needed. The Butterfly Defect is Ian Goldin’s 4th book written to “provide insights into how better to manage globalization.”