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Globalization TrendLab 2011

GLOBAL RISK
New Perspectives and Opportunities

Globalization TrendLab 2011

Global Risk
New Perspectives and Opportunities

Based on a conference organized by the Joseph H. Lauder Institute of Management & International Studies and the Penn Lauder Center for International Business Education and Research at the University of Pennsylvania, sponsored bySantander Universities, and distributed worldwide through the Knowledge@Wharton network. © 2011 The Trustees of the University of Pennsylvania. All rights reserved.

Executive Summary
he global financial and economic crisis has heightened everyone’s awareness of systemic risk. Confidence in the ability of decision-makers, policymakers and institutions to handle such risks has been shattered.Psychology, a culture of destructive self-interest, and social processes have also been invoked as part of a complex set of conditions that led to the debacle. In turn, the crisis has accelerated some prevailing demographic, economic, and social trends, including population aging, political tensions, geopolitical instability and environmental degradation, as the focus of attention has unavoidablyshifted towards short-term, immediate concerns. The crisis has placed the issue of systemic risk at the top of the global agenda, forcing analysts and policymakers to make a stark distinction between what is important and what is actually urgent. In this white paper we provide an overview of the causes, consequences, and potential solutions to the problem of risk, focusing on economic and financialaspects, while also paying attention to political, social and environmental risks associated with the crisis and its aftermath. The analysis represents the outcome of a collective, multi-disciplinary effort at understanding risk by a group of more than 30 scholars and policymakers from around the world who gathered in Philadelphia for a two-day conference. The analysis begins with the conventionalexplanations of the crisis, further adding political considerations, institutional constraints, psychology, and social processes. This prepares the stage for the assessment of the effectiveness of policy interventions during the crisis which, while averting a massive meltdown, generated a number of additional problems, both short-term and long-term. Failures in global governance and in understandingcomplex ripple effects are also explored. Risks building up in emerging economies—from financial to political and demographic—are presented as a stark reminder that global instability is punctuated by a growing number of troubled hot spots. The conference participants identified four action items. First, global governance needs to be enhanced, a task that is not easy as a changing of the guardtakes place due to the ascendancy of the emerging economies. Second, regulation must both set parameters for self-regulation and establish a set of cushions, bells and whistles to ameliorate the possibility of further systemic crises. Third, policymakers and scholars ought to adopt a more humble attitude in terms of the extent to which they are able to understand and overcome the complexities posedby crises. And fourth, as people adopt shorter time horizons due to incentives, demographics, politics, and cognitive biases, it is important to remain on the alert for the weaknesses and faults in the global economic, political, and social architecture.

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Global Risk: New Perspectives and Opportunities

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Globalization TrendLab 2011

Introduction

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risesrepresent opportunities for self-reflection. Systemic crises invite us to revisit our most ingrained assumptions, habits, and reflexive reactions to events. The recent economic and financial crisis is as systemic as a crisis can be. Perhaps its most devastating effect is that it has shaken our belief in the efficacy of both markets and government policy. It also represents a stark reminder of the...