The writer is a professor at Oxford university and author of ‘The Butterfly Defect’
The spread of coronavirus around the world is alarming, but not surprising. Globalisation creates systemic risks. As trade, finance, travel, cyber and other networks grow in scale and interact, they become more complex and unstable.
Edward Lorenz, father 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 global economy is that it too suffers from “a butterfly defect”.
The super-spreaders of the goods of globalisation, such as major airport hubs, are also super-spreaders of the bads. The 2008 global financial crisis provided a dramatic example of how contagion could spread from the US to global markets overnight. So too has the rapid spread of cyber viruses.
When the central banks turned on their monetary fire hoses in the aftermath of the financial crisis they resolved the immediate problem, which was the lack of cash. Their attempts to boost markets now, such as Tuesday’s 50 basis point rate cut by the US Federal Reserve, will have less impact.
This is because markets remain swamped with excess liquidity. With interest rates at record lows there is little scope for further reductions. It is also because diminishing responsiveness to successive interest rate cuts is starkly evident in tepid growth rates in Japan, Europe and the US. Much more could, and should, have been done with fiscal policy, but that too will be less effective now — and could even be inflationary, as meeting existing demand will be harder due to worker quarantines, closure of factories and disruption to supply chains during this outbreak.
The backward-looking focus of financial authorities seeking to prevent a repeat of the last crisis has come at the expense of building resilience against new threats such as pandemics.
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. As a result, when a pandemic or other event leads to the closure of Wall Street (Hurricane Sandy and 9/11 came close to this) or the City of London, the risk to the global economy is amplified.
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 shortlived nature of other crises, fostered a dangerous confidence that the threat of another Great Depression had been vanquished. The result was that new systemic risks escalated.
In health, rising life expectancy and success in preventing a repeat of the devastating influenza pandemic of 1918, which infected about one-third of the world’s population and killed as many as 50m people, has created a false sense of security. But the world is now more interdependent. China represents almost one-fifth of global output, is integral to global supply chains, and its tourists spend over $260bn annually.
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Globalisation and surging trade and travel within countries and across national borders has lifted billions out of poverty, but it also spreads infectious diseases. The epicentre of Covid-19, Wuhan, is typical of many midsize Chinese cities. In 30 years, it has grown from 2 to over 11m people, and average incomes shot up. As in other mushrooming cities, poor hygiene and lax enforcement of regulations coexist with people and animals living in proximity, near airports from which a virus can spread anywhere in 36 hours.
As threats escalate, governments are turning their backs on the international system. The World Health Organization is starved of resources and authority, not least by the US and other rich countries. Meanwhile, Covid-19 has hit at a time when national public health systems are under immense strain, with capacity undermined by austerity and privatisation. The UK’s National Health Service has also been hit by chronic staff shortages made worse by misguided immigration policies.
Pandemics are unlike other global risks in that they can originate anywhere. In the case of threats posed by financial systems, climate change, antibiotic resistance or in cyber space, a few actors can reduce the risk. Not so with pandemics, where capacity to monitor and intervene 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 stop pandemics, or any global threat. Our integrated and complex systems are only as strong as their weakest links. Pandemics pose the gravest threat to the world economy and our lives. We need to give them the attention and resources they deserve. What is being tested is our will to co-operate and the stakes could not be higher.
