10 Jan 2013 11:48am

Systems at risk

Lee Howell, member of the management board of the World Economic Forum, considers the economic impact of environmental uncertainty

Failure to adapt to climate change, persistent extreme weather, and major systemic financial failure are just three of 50 major risks monitored every year in the World Economic Forum’s Global Risks Report. It seems natural to draw connections among them, especially after a “superstorm” shut down Wall Street this past October. Indeed, the report reminds us of the many ways in which systems inevitably affect one another in our interdependent world.

More important, the report warns of the dangers of multiple systems failing. Two of the world’s most fundamental systems, for example, are the economy and the environment; their interplay underpins the first of three case studies of risk in this year’s report.

What happens if an apparently minor system - such as social media - sparks a "major" geopolitical crisis

The 1,000 experts who responded to the WEF’s annual Global Risks Perception Survey, on which the report is based, ranked climate-change adaptation as their top environmental concern in the coming decade.

This reflects a wider shift in thinking about the climate, with growing acceptance that we are now locked in to some degree of global temperature change and need to adapt locally – for example, by strengthening our critical infrastructure systems in order to boost their resilience to extreme weather events.

But we face these environmental challenges at a time of persistent economic weakness. Global growth remains slow; and, with monetary and fiscal policies having a limited impact on economic recovery, governments have neither the resources nor the courage to push for major projects.

Not surprisingly, our survey group ranked chronic fiscal imbalances second among 50 global risks that are most likely to manifest themselves over the next ten years.

Strong economies provide the leeway to invest in climate adaptation, while environmental stability ensures the breathing space needed to attend to economic problems. Facing stresses on both systems simultaneously is like losing both engines on an airplane in mid-flight.

The second case study takes another perspective on systems thinking. What happens if an apparently “minor” system – such as social media – sparks a “major” geopolitical crisis? With the growing reach of social networks, information can spread worldwide almost instantaneously.

The benefits of this are well documented, but the risks of misinformation are not. Consider the real-world case of someone shouting “Fire!” in a crowded theater. Could something similar happen digitally, with a spark of misinformation igniting a conflagration and wreaking havoc before the truth is revealed?

The report’s third case study looks at what happens when we become complacent about a vital system. For example, constant innovation in medical science over the last 100 years has left us with the impression that our health-care systems can never regress. But experts are increasingly concerned about the potential for pandemics caused by bacteria resistant to all current antibiotics, while our intellectual-property system is failing to create adequate incentives for the development of new varieties. The director-general of the World Health Organization has warned that if the world falls back into a pre-antibiotic age, a scratch or throat infection could become lethal once again.

Each case highlights the need to consider how to make systems more resilient, which means that systems cannot be considered in isolation. They are both plugged into larger systems and comprised of smaller subsystems. While, ideally, global risks would be met with global responses, the reality is that these risks manifest themselves mainly at the national level, and countries must address them largely on their own. So we need to assess national resilience by regularly evaluating critical subsystems within countries.

The WEF currently is developing metrics that could evaluate national subsystems across five factors of resilience – redundancy, robustness, resourcefulness, response, and recovery – by combining perception-based data with publicly available statistical data. Initial perception-based data gathered by the Forum is pointing toward the importance of leadership ability, transparency, efficiency, and good relationships between public and private-sector stakeholders.

While the development of these metrics is in its early stages, the ultimate aim is to develop a practical diagnostic tool that would function as an “MRI” for national decision-makers to assess their countries’ resilience to global risks. By revealing underlying weaknesses that more traditional risk-assessment methods may miss, we could pinpoint the structural reforms, behavioral changes, and strategic investments that increased resilience requires.

The result would not only directly benefit each country willing to engage in this process. It would also imply accelerated innovation in global governance, which we need more than ever for the sake of preserving the integrity of our most crucial systems.

Lee Howell is a member of the Management Board of the World Economic Forum

Copyright: Project Syndicate, 2013.