OECD, Future Global Shocks: Improving Risk Governance

The IFP project on Future Global Shocks originated in 2009, as a follow-up to decade-long research into risk management.  “Awareness of risk management in government and the private sector has risen dramatically in recent years” (p.3), along with growth of large-scale disasters, usually at national or regional level.  The concept of “global shocks” takes account of cascading risks that become active threats as they spread across global systems, whether they arise in health, climate, social, or financial systems.  “There is a palpable sense of urgency to identify and assess risks arising from vulnerabilities in these crucial systems, and to develop policies that will bolster efforts for prevention, early warning, and response to ensure sustained economic prosperity.  This urgency explains the demand for OECD to deliver strategic advice on preparing for and responding to potential global shocks mired in uncertainties.  While the list of potential global risks is quite long, this report focuses on a pressing shortlist: the relatively few that begin suddenly and result in severe, wide-scale disruptions or impacts.” (p.3)   The report draws largely from analysis of five case studies and a background paper, all available at www.oecd.org/futures

 

Future global shocks are defined here as “a rapid onset event with severely disruptive consequences covering at least two continents.” (p.12) Many events may result in national-level disasters requiring international assistance, but most do not produce secondary or knock-on effects across multiple continents.  Some events can be positive shocks, e.g. development of new technologies such as a cheap, clean, and renewable energy supply.  But many if not most are negative, and how they “propagate through the intense bundling of interdependencies in today’s world, and what to do about them, is the focus of this report.”

 

Drivers of future global shocks include: 1) Heightened Mobility, due to growth of information and capital flows, migration, tourism, and business travel; 2) Interdependency of Production and Delivery Systems and their Infrastructure; 3) Concentration and Centralization of Systems (part of the challenge in managing future global shocks is to diversify these hubs or build greater system robustness and redundancy); 4) Urbanization and Concentration of Populations and Assets (notes a growing number of megacities in relatively small areas, increasing the risk of a catastrophic event); 5) Herd Behavior and Groupthink in Organizations (often leading to a lack of critical thinking about operating assumptions).

 

In sum, “The 21^st century is likely to see more global shocks, some familiar, others new, due to a rapidly changing environment where the one reliable constant is its increasing conduciveness to shocks.”  (p.21)  The high degree of uncertainty and the pervasive feeling of insecurity complicates the tasks of building adequate capacities for prediction, prevention/mitigation, and response/continuity planning, which can lead to untimely reactions, misguided preparations, and disproportionate reactions.  Uncertainty can also undermine the sense of urgency needed to invest in these capacities.

 

Four cases studies are discussed:

PANDEMICS.  An epidemic of a disease in a given human population that “substantially exceeds what is expected based on recent experience.”  It is impossible to predict the exact timing or nature of any future pandemic, but experts agree that “the most likely virus to reach pandemic proportions will be a novel form of influenza A, for which there is little or no immunity in the human population, and that spreads easily from person-to-person.” (p.29)  The most severe influenza pandemic of the 20C occurred in 1918-19, resulting in 40-50 million deaths worldwide.  Most professionals in public health consider the next flu pandemic to be inevitable.  Over the past three centuries, a flu pandemic has been identified every 25-30 years on average.  Poor access to safe water and sanitation (especially in mega-cities with weak public health systems), prolonged rainy or dry seasons, and population displacements contribute to the frequency and severity of epidemics.

FINANCIAL CRISES.  Such crises encompass a broad variety of situations where a financial institution or an asset class suddenly loses a large part of its value, e.g.: bank-runs, asset bubble bursts, currency crises, balance of payment crises, and sovereign default.  “Well before the global financial crisis of 2008, regional and national financial crises had increased in number, frequency, and severity over the past two decades, e.g.  in Japan, Mexico, SE Asia, Russia, Turkey, Argentina).” (p.31)  Multiple theories explain how these crises develop and could be prevented, “but there is little consensus since each one is different in important respects.  It appears likely that they will continue to occur, which is precisely why tools are needed to anticipate them and reduce the severity of their impacts.” (p.31)

CYBER RISKS.  Many experts hold that “it is highly unlikely that a single cyber attack currently has

the capacity to become a full-scale global shock.”  An attack that targets about 5% of highly connected sites, however, has the capacity to make the Internet collapse, very rapidly breaking down the entire network to small, unconnected islands.  “A more likely scenario for a global shock due to a cyber attack entails a combination of events.  Perfect storm conditions could exist should two different cyber-events occur simultaneously, or if a cyber-event were to disrupt critical infrastructure at the same time as some other form of disaster or attack.”  (p34)  The inability to measure the full disruptive effects of cyber attacks prevents gathering of compelling evidence that they could amount to a global shock.  While the frequency of cyber attacks seems to increase nearly every year, only a few instances of malware, worm viruses, and distributed denial of service attacks have ever had international impacts.  “There seems little prospect that cybersecurity issues will diminish with increasing uptake of ICT worldwide.”  (p.47) There will be even more computers connected to the Internet, many of which will fail to take basic precautions.  Hardware and software will become even more complex, making it difficult to debug flaws.  Customers of cloud computing storage will face various off-site risks.

GEOMAGNETIC STORMS.  Large, violent eruptions of plasma and magnetic fields from the Sun’s corona, known as coronal mass ejections, are the origin of such storms.  The most severe space weather event recorded in history is the Carrington Event of 1859, which disrupted telegraph networks worldwide.  “An event of the same magnitude today could be catastrophic, with some damage estimates as high as several trillion dollars.  The electricity production and distribution infrastructure of modern societies makes them more susceptible to such events.” (p.36)  The total length of high-voltage power lines in North America has increased nearly tenfold since the 1950s, turning power grids into giant antennas for geomagnetically induced currents.  But the probability of such an event is very low.

 

Explains mapping of complex systems to understand the way in which components are interrelated (this requires a sustained effort since they evolve over time, and can involve physical maps, conceptual maps, or process maps), and modeling complex systems once a robust map is developed.  “Maps and models of complex systems are rarely available, and there is no valid ‘one-size-fits-all’ approach to modeling.”  (p.71)  A variety of modeling approaches should be pursued to help inform risk management policy decisions.  Mapping and modeling of future global shocks needs proper government support to ensure continuity, validation, and refinement over time.  “Due to the high number of complex systems from which future global shocks could arise, there is a need to develop diverse modeling capabilities with global coverage.”  (p.71)  Basic assumptions in models should undergo periodic “wild-card” stress tests.

 

“Effective emergency management of global shocks requires 1) availability of adequate countermeasures (medical, technical, and financial); 2) mobilization of significant reserve and surge capacity (energy, food, water, first responders); 3) rapidly delivery of countermeasures and reserves for maximum effect; and 4) broad deplo0yment across multiple jurisdictions.” (p.97).  Policy makers need to address capacity gaps in surveillance/monitoring capabilities, readily available counter-measures, automatic back-up systems, and appropriately trained human capital to manage external and internal risks that could destabilize systems and create widespread negative spillovers.  A “major lesson” from the financial crisis is to strengthen risk management and insure internal oversight.  Also notes that “incentive structures in a number of critical industries have resulted in creation of significant externalities with destabilizing effects in many systems vital to the functioning of modern society.” (p.91)

 

Discusses global early warning systems such as the International Energy Agency’s 40 years of monitoring oil production and consumption to anticipate a supply-side shock, the World Meteorological Organization’s World Weather Watch system, FAO’s food security alerts,

WHO’s Global Influenza Surveillance Network, and the Global Public Health Intelligence Network sponsored by the Public Health Agency of Canada.  PANDEMICS: Infectious disease surveillance capabilities in many developing countries are not capable of early warning, and “these weak links are of global concern.”  Also, “new antibiotics are desperately needed to keep pace with bacteria that have developed resistance to approved treatments.”  The medical sector would be critically impaired in the event of a severe pandemic.  CYBER RISKS: security of ICT suffers from a sub-optimal incentive structure, especially in guiding investments for increasing safety and resilience.  Consumers worldwide are subject to millions of spyware, malware, and virus intrusions every day, and “these attacks are expected to grow.”

 

“Many if not most countries have been reaping the economic benefits of global economic integration, but there is a tendency to turn a blind eye to new vulnerabilities that result.  Complex systems in the modern risk landscape contain various vulnerabilities to shocks that can result in rapid and widespread negative spillovers.  Such broad exposure draws attention to the need for strategic preparation and international cooperation to support prevention and surveillance.”  (p.103)

 

Key elements of a strategic blueprint to better manage known and unknown vulnerabilities include scaling up governance capacities and building societal resilience: 1) institutional pillars for governance include not only multilateral organizations, but regional organizations, professional networks, and public-private partnerships; currently, “efforts to govern rapid onset, high-impact events face significant deficits” (p.105); 2) normative arrangements are needed, such as treaties, legislation, standards, memoranda of understanding, and codes of conduct; “reliance on ineffective norms is one of the main deficiencies in risk governance and is a key contributor to the global spread of risks” (p.109); 3) a trend in the environment of risk governance is the increasing treatment of potential global shocks within the framework of national security doctrines” (p.113); 4) societal resilience includes identifying vulnerable populations, contingency plans for businesses, and improving risk communication; 5) “insurance is a key ingredient of financial resilience to global shocks” (p.119); in 2008, natural catastrophes caused total losses of US$270 billion worldwide, but less than 20% of this amount was insured according to Swiss Re.

 

In sum, “international coordination to address global shocks should be strengthened at all phases of the risk management cycle” (p.121), and self-organization needs to be promoted across society as a cornerstone of building resilience.

   

Welcome to our ever-growing world of global risks!  This notably multi-disciplinary report is distinctive and important, and probably could only have been issued by OECD.  It is not easy reading in parts, and often gets technical, amply demonstrated by charts and tables on critical infrastructure interdependencies (p.18), global hubs for air freight transport (p19), the six WHO phases of pandemic declaration (p.28), diffusion of a pandemic through a global transport network (p.30),  network analysis of systemic interbank exposures (p.33), probability of a severe geo-electric event in North America over a 22-year solar cycle (p.37), direct and secondary critical infrastructure disruptions of an extreme geomagnetic storm (p.42), cloud computing as a new variable in the information economy (p48), propagation effects of disruption to electricity supply (p.57), a critical infrastructure interdependencies map (p.62), and the rising number of natural catastrophes and man-made disasters 1970-2009 (p.119).

 

About the Author(s)

Michael Marien Senior Principal, The Security & Sustainability Guide; Fellow, World Academy of Art & Science Website: www.globalforesightbooks.org

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