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

6. Key Aspects to Watch
Economic activities and real risk management are strictly dependent on which setting they are carried out and under what conditions the discussions are organised that lead to future rules and norms which define how we deal with the economic and social challenges. We would posit that the following key trends that have arisen out of the financial crisis are of special relevance in this context. They ought to be watched carefully as each point will have a major impact on how the financial, economic and social systems will develop at the global level:
1. The crisis has made everybody more aware of true globalisation and its consequences:
While for several decades following the Second World War the global interaction of businesses has readily increased and the openness of national economies has grown, the term globalisation came to describe a new phenomenon of tight integration of markets at the world level and the appearance of global companies with production facilities and service centres in many different countries.**** What has not followed in an equally dynamic manner are development of the governance structures needed at the world level to direct globalising economies and the political and civil institutions
required to accompany them. Both are needed in order to provide the same stable framework that has characterised the national (and some regional) approaches for market-oriented systems. Following the financial crisis, there is a new and stronger awareness that an overhaul of global governance – at least as far as economic and financial markets are concerned – is urgently needed. What is still lacking though is the corresponding development for addressing the risk issues of the non-financial environment.
2. Neoclassical capitalism and the Anglo-Saxon financial hegemony are questioned: For several decades, mainstream economic thinking has been strongly influenced by the neoclassical economic theories and their derivatives. The most dynamic economic and financial developments resulted from a set of paradigms that are now being scrutinized in ever more detail in order to discover more possible shortcomings than the ones that led to the most recent crisis. The impacts of behavioural economics and other more progressive theories have begun to exert a direct influence on how the current generation of policymakers regard market performance, efficiency, resilience and limitations. Together with the increased relevance of emerging markets for the world economy, this is expected to lead to a reduced importance of the traditional centres in the Anglo-Saxon world.
3. New focus of national and international policies, binding of resources: The near collapse of the world’s financial system resulting in the financial crisis (especially in October 2008) led to an immediate shift in attention of all major governments. Following the rescue actions, the question of how to deal with financial stability and systemic risk became the central concern for all G-20 countries. This has led to a crowding out of other issues, such as climate change, trade negotiations, natural catastrophes etc. While one would expect that the less threatening the situation in the world financial markets appears the more energy will be available again for other projects, it is obvious that the challenges to safeguard the global financial system against future threats will require many years of unrelenting efforts to produce acceptable solutions. Until this is achieved, the challenges for financial stability and systemic risk will require constant attention and hence reduce the capacity of all involved governments to take on other projects at the same time. It is to be expected that less progress can be made on the real risk front when most energies are absorbed by the financial.
In addition, there will have to be a continued and sustained struggle against any potentially appearing tendencies for protectionism as some countries may try to isolate their economies from financial havoc happening elsewhere through inappropriate measures, which would not only have detrimental effects on world trade and future growth but also possibly slow down the progress towards more integrated global thinking and advancements in global governance and risk management.
4. Creation of new institutions or revamping current ones to deal with global stability: Although a lot has already happened in this respect on the financial side of things, see e.g. the establishment of the G-20 and the reorganisation of the Financial Stability Forum (FSF) into the Financial Stability Board (FSB) with added powers, more activity is needed, especially beyond the purely financial. In many countries and regions around the world, governments are getting ready to establish systemic risk councils and boards that are going to be tasked with regional or local financial stability monitoring. Other organisations such as the IMF or the World Bank are adapting their operations to be more useful in the future to avoid financial instability and to combat it whenever it might appear. This will ultimately lead to an institutional landscape that will be very different from what was in place before the financial crisis. It will also have an influence on how and where key decisions for the world markets will be taken and what kind of framework will exist for nation-states to interact in the future.
5. International reform projects pushing national agendas: As has been evident over the past three years, it is increasingly an international agenda that drives national agendas rather than the other way around. The G-20 as a key source for regulatory projects and driver of institutional change has clearly established an international platform that directs the focus of national governments. Reform projects such as Basel III, Solvency II (which is increasingly not only a European project but growing into an international benchmark) or International Financial Reporting Standards reforms have not only a global quality to them but establish a mechanism of the international influencing and determining the national. They currently do so mostly for the financial, but the trend is expected to have increasing consequences for the economic, political and social environments in all countries.
6. Higher relevance of politicians and public servants for economic issues: With laissez-faire capitalism (that postulated minimal governmental intervention and a soft touch for regulation and supervision as key principles) coming to an end, so a new group of persons will require more relevance − government officials. As central banks have greatly increased their balance sheets, as governments and their agencies have massively augmented their debt burden, as regulators and supervisors are vying for more control over the financial and economic systems, the officials in control of these institutions all exert more direct control over markets. Many decisions that will be taken by policymakers and public servants now have a more immediate impact on the economy and following the new wave of regulation this is set to increase. Market participants will have to pay closer attention to these decisions, understand who takes them and why, and how they will possibly affect the markets in which they are active. Consequences in the social dimension will follow this trend.

7. Conclusion
As we write at the outset of this paper, we hope to develop some thoughts that are aimed at increasing the resilience of the global social and economic system while safeguarding basic democratic principles at the global level. There is a long way ahead of us in this respect and hopefully the financial crisis can be used as a catalyst for producing further change that will bring the social dimension of globalisation, which has yet to appear in a more evident way, closer in line with the financial one, which has already seen significant (for some even excessive) advancement. Ultimately, our global systems can be resilient if they are based not only on efficient markets that can cope with future crises, but on principles that also allow for the projection of civic will and preference onto the global level. Stability and resilience are laudable goals but they need to be achieved in all three dimensions, the financial, the economic and the social, in a participatory fashion.

**** The openness of an economy is defined as imports plus exports divided by (twice) the GDP of the economy. According to OECD
figures, this measure has increased markedly for almost all nations over the past fifty years.


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