Getting Risks Right: Thoughts about Increasing the Resilience of the Global Social & Economic System

3. Understanding Risks
As we propose to put global risk management into a more prominent place, we need to understand the concept of risk and our relation to it more profoundly. There are three basic aspects about risk that are crucial:
1. Risk is a construct and there are no risks per se. Risks emerge as we perceive uncertainty in a specific way. Risks and opportunities go hand in hand, and risk management is trying to find a balance between the two.
2. Risk perception differs between cultures and needs. What is a risk to one person is an opportunity to another.
3. Risk management happens as a reaction to the risk perception: How do risks influence us? Can we influence risks? We can certainly adapt our position towards risks.
With Prof. Brian Woodrow and the Applied Services Centre (ASEC), we have pursued special work over the past years on risk, uncertainty, hazards, and vulnerability — all terms that we commonly encounter in various and numerous contexts each and every day.* In his Foundation Paper, Brian Woodrow explores the concepts: “As words or as behavior, we hear, talk or encounter both fundamental or more mundane uncertainties: what the weather will be  tomorrow and what the best route might be to get to work; whether, when, and where a major terrorist attack might take place; the uncertain science and impacts of global warming; how the stock market supposedly hates uncertainty but thrives on risk; or simply the uncertainty of what national team will win the World Cup of Football in 2010.”2
Uncertainties often generate risks and, as Woodrow explains, we face risks routinely in virtually all activities of our daily lives, sometimes expressly calculating those risks and taking action to mitigate them. These could be the following types of risks: the chance of severe storms happening, the attendant risk to be struck by lightning; the upside or downside risks of investing in the stock market; whether the technological risks associated with nuclear power or manned space flights justify their costs and benefits; or potentially massive risks of a category 5 hurricane or a magnitude 8 earthquake occurring in any particular place on earth. Indeed, we are continually confronted with the need to learn to live in a “risk society”— this despite the fact that risk is an inherent biological concept and intrinsic to life itself. Also, sometimes, whether voluntarily or involuntarily, knowingly or out of ignorance individuals choose explicitly to act in the face of risk economics thereby subjecting themselves to hazard. If they built their houses on a known flood plain and severe weather results in floods which destroy lives and property; or if they create a trade off between the thrills and risks, such as choosing to bungee-jump; or if they balance perceived pleasure against increased risk, as when smoking cigarettes or drinking alcohol so as to cause disease or injury to themselves and possibly others. Humans are permanently engaging in hazardous activities or behaviour.
While it seems relatively straightforward to deal with concrete risks, especially if they are of a personal kind, the larger and more complex a threat is and the slower it develops, the less we seem able to deal with it, especially as a society. Take as an example the crash of an airliner with 200 passengers on board. This is an almost universal news item that will travel around the world at the speed of our wired and wireless networks. It also results in outcry over possible lack of safety, sorrow for the victims and generally generates quite a commotion. At the same time, many more daily deaths on our roads do not elicit a similar response: the sudden and concentrated beat the slow and continuous. Managing risk also means dealing with different risk perceptions, overcoming different awareness thresholds and employing different risk management techniques according to specific circumstances. This is especially difficult to achieve at the global level, where risk management is confronted with a maximum of heterogeneity.

4. Global Regulation and Its Rationale
Any system in which various active elements with differing interests are meant to coexist with some degree of harmony needs rules. It is somewhat surprising then to see how many rules we have created on the local and national level, but how limited the development has been at the global level. While in the past one could make the case that the lives of the persons on this planet were not connected enough and that the means to transmit information – which is at the heart of facilitating joint decision processes – were not available, this is simply no longer true today. People can and do interact more readily than ever before and the fully interconnected ecological nature of our planet combined with the now (largely) globalised economic system has created many shared interests and common touch-points.
This means we need rules, also in the form of specific regulation, to organise our global society. There are many excellent articles on the basic principles of regulation, and many institutions at the national level and a few at the international level that deal with economic issues that are habitually put out in papers in which they justify the interference in what would otherwise be free systems. Regulators of the economic generally want to ensure competitive, solvent, and fair markets in which all key stakeholders are adequately protected. To achieve this, a fine balancing act is necessary: the various objectives have to be pursued in such a way that transfers can take place in an efficient way and that access to markets is open to interested parties. Regulators try to ensure that reasonably-priced quality products and services are available from reliable producers. As mentioned above, the financial crisis has triggered more regulation, especially of a financial kind, than in previous decades.
It is obvious that every new wave of regulation produces winners and losers, hence competition among the parties concerned is fierce. This competition does not only take place among companies of a different type, sometimes pitting large against small, specialist against generalist, national against international, or privately held against publicly traded companies. Competition also occurs among regulators who want to be seen in control of things, especially following some of the more spectacular failures that occurred during the crisis. Regulators and policymakers vie for attention and have to be careful not to engage in a competition for who comes up with the most punishing rules. And for politicians this is a chance to shine, to build more political capital and maybe even to get an important reform project named after them, thus receiving the public recognition so important for winning the next election. In consequence, activism rather than cool objectivity is a constant danger and the objective of properly conceived regulation becomes entangled in special interests and cluttered with ulterior motives.**, 3
5. Addressing Global Risks through the Group of Twenty (G-20)?
From a political point of view, the most important source for international regulatory initiatives and indeed some wider political issues at the world level is currently the Group of Twenty or G-20. It has supplanted traditional organisations such as the UN, the IMF, the World Bank or the WTO as the key driving force behind the creation of a new framework, choosing largely to concentrate on the most pressing topic at hand − overhaul of the global financial architecture.
The G-20 is a self-organised group consisting of finance ministers and central bank governors from 19 countries plus a special seat for the European Union. It describes itself as “…the premier forum for our international economic development that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe.” Members of the G-20 represent about two- thirds of the world’s population and approximately 85% of the Global National Product.***
The G-20 was originally created as a response to the financial crises of the late 1990s. A key motivating factor was the growing recognition that key emerging-market countries with increasing global economic and financial relevance were not adequately included in the core of global economic discussion and governance. Following the full eruption of the financial crisis in 2008, it was the forum of choice for the leaders of the largest economies around the world (both developed and developing) to tackle the problems that the crisis created. The members wanted to strengthen international cooperation in the face of the largest financial emergency since the Great Depression. In the process, the G-20 has become the source of many important concerted actions comprising a wide array of measures like the introduction of unprecedented expansionary macroeconomic policies in member countries, the push for significant enhancements of international financial regulation (mostly concerning banking but also affecting the wider financial services sector), and the expansion of resources to strengthen the international financial institutions. At the same time, some other issues entered the debates of the leaders, de facto widening the scope of their debates from the strictly financial: questions on job creation, the use of fossil-fuels, the mitigation of climate change, how to bolster food security, or how to intensify the international fight against corruption etc.
Today, the G-20 acts as a key source and driver of a new governance model, pushing a wave of regulation in the international sphere that is relevant to many countries beyond the 20 members. And although up to date most major projects have yet to see full implementation in all member states, many highly relevant projects exist where broad international agreement has already been reached.††
The G-20 is without doubt very important but it has three potential weaknesses: Firstly, it has no specific democratic legitimisation beyond the decision of its members to co-operate and there is no objective and widely accepted mechanism to decide on who should be allowed to participate in the group. Already, seats around the table are contested and several countries feel excluded. Secondly, now that the financial crisis seems to evolve out of its most threatening phase, the interests of its members in the post-crisis setting are starting to diverge. As long as the common menace of a global collapse of the world’s financial system unites the members in their efforts and concentrates the minds of those that have to take the key decisions on a common goal, co-operation is easier. It will be interesting to see how the G-20 will develop in the future as these common themes will vanish. Will it be relevant enough to withstand serious questions about its representativity and legitimisation? Will a coalition of the self-appointed willing be acceptable to the whole planet and deemed appropriate from a global governance point of view? And thirdly, it has a core focus on the financial and those issues connected to it, with a sporadic excursion into topics that reflect to a certain degree the current populist trends. However, is this enough? Where do the real risks enter in this equation? And who will be the future guardians of the world’s global risk management processes? It seems that even the most recent addition to the global set of institutions has difficulties with such a comprehensive mission.
So far, the existing international institutions, including the new G-20 platform,  have not been able to address the question of how to create resilient world systems in a satisfactory manner. However, the international financial markets, the world economy and indeed our global society are in need of an institution (or maybe even more than one institution) that takes the lead in determining how we deal with the key risks facing us, under what rules nation-states and different markets can and should collaborate, how we interact socially, and how we will respond to the global risk management challenge, both in the financial as well as the real sphere.

* The Applied Services Economic Centre was created in 1985 and conceived essentially as an “observatory”, a lookout institution which would scan, focus and report on emerging trends and issues affecting the services universe and the emerging “services economy”. ASEC’s continuing purpose is to investigate those developments and trends which deserve greater attention in their own right, are of broad interest to the insurance industry worldwide, and then serve to stimulate interest and wide-ranging efforts by interested individuals and organisations. A set of Foundation Papers explore key features of the concept of Vulnerability and how it can be applied to specific issues and cases. The author is an ASEC Director.
** James Schiro, for example, writes,“The process of designing new regulation is not always perfect. Too often regulators react to political pressure or regulation emerges through litigation and not in response to sound economic criteria.”
† See the mandate of the G-20
*** James Schiro, for example, writes,“The process of designing new regulation is not always perfect. Too often regulators react to political pressure or regulation emerges through litigation and not in response to sound economic criteria.”
†† See the mandate of the G-20
2. Brian Woodrow, “Towards A Concept and Metrics of Vulnerability: An Initial Formulation,” ASEC December 2006 / Revised 2008 and 2010
3. James Schiro, “External Forces Impacting the Insurance Industry: Threats from Regulation,” The Geneva Papers on Risk and Insurance 31, no.1 (2006): 25-30.

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