Today’s topic is risk. The World Economic Forum’s Global Risk Network released their now-annual Global Risks-report (see links below) already some time ago but I only now got around to reading it. Though the contents isn’t exactly breaking news as such, it’s a very interesting read that draws together some of the major risks that the world is facing.
To dive straight into the real thing, here’s the risk overview with severity of economic loss; in the report there’s a similar graph in terms of deaths:
Now, if it wasn’t for this little detail that “.. the increasing importance of the financial sector in the real economy has made the question of systemic financial risk more important than ever.”, the #1 risk – asset price collapse – which is now being realized would be poetic justice. Unfortunately the financial “innovations” driven by perverse incentives and moral hazard, lowered the risk premiums to unsustainable levels and things are now unraveling in a very concrete way.
But of that, since the risk has realized, we hear a lot from these days. So let’s focus on another highlighted thing: the hyper-optimization of supply chains and subsequent interdependency caused by globalization. Consider these statements:
Geographic concentrations of risk in economically efficient zones of production may have improved global welfare, but are businesses and governments prepared for the consequences of a risk event in these concentrated areas?
[..]
In global supply chains, dangerous accumulations of risk may not be recognized and, yet, may threaten a systemic crisis should one part of the supply chain fail.
There’s one word in particular that should pop up in your head – China. And don’t for a second think that Finland is somehow isolated from events elsewhere; all it takes is a quick glance at the “Made in”-statements of the stuff near you and you soon begin to realize that this country, no matter how seemingly isolated, could no longer function without an invisible global support and supply chain – vulnerabilities of which are generally poorly understood and managed.
Related to this is a process called “squeezing”: the transfer of negative externalities of a production process, such as human or environmental costs, from one area to another, typically one with less regulation – hence the massive environmental problems in China, for example. Of this the the following is noted:
While air and water quality have improved drastically in recent decades in developed countries, quality elsewhere has been declining – calling into question the long-term, risk-adjusted sustainability of economic growth.
Without going into further detail, the report also includes some good suggestions on how to structure the risk mitigation at state and international levels and much more insight into what can be done to mitigate risks in the financial markets.
Meanwhile in Finland..
In this report alone we have lots of important discussion on the risks like a systemic financial failure, problems with food security, supply chain vulnerabilities and energy risks. Surely these important things somehow show up on the agenda of politicians, economists, newspapers and so on over here in Finland, too.
Right?
Wrong. I am so fed up with the level, quality, breadth and depth of political and other debate in this country. So what is going on here then?
Here the energy discussion revolves around how ugly wind turbines are (Hello, excuse me? Are coal power plants belching out black smoke somehow substantially more beautiful?!) or on the location of hypothetical future nuclear power stations with everybody wanting those and nobody wanting the planned uranium mines.
Political debate, on the other hand, seems to be focused on bickering about ineffective Internet censorship initiatives. (Okay, granted, the government has also spent time on such essential issues as Man-island taxation. Wonder if they made a field trip there.)
Newspapers are mainly feasting on the aftermath of the prime minister’s personal relationships. Even the more economically oriented newspapers still mostly treat Finland’s economy as if it’s a cute, tiny bubble (pun intended), isolated from the rest of the world, thus leaving plenty of space to discuss about the supposed high salaries of the telemarketers, completely misinterpreting some EU commission studies or worrying about the best after ski-places.
It’s somehow surreal to live in a country that would be relatively well-positioned to combat most of these risks – if they only were acknowledged and planned for. Going back to the beginning of the above-mentioned report, there’s a lot of truth in this:
Inaction on long-term risks will only weaken the global capacity to manage future challenges.
Fix the incentives!
The Global Risks report highlighted yet again the importance of correct incentives. I’ve talked about this before, but it seems to pop up repeatedly on scales large and small. Here it was discussed in the context of energy security and how the uncertainty of future regulatory framework is impeding utilities’ much-needed investment in sustainable energy production:
Energy security has two sides, and both producers and consumers have much to gain from predictability. Similarly, to unlock investment and innovation in cleaner energy, longterm economic viability must be assured by forward-looking regulatory frameworks and, ultimately, an economic price for carbon. Whether or not such policy changes are forthcoming at the global and national level, individual companies and the energy industry need to improve their capacity to link their own risk management and strategic decisions.
[..]
For example, developed country measures to reduce carbon emissions will not be meaningful in the absence of global frameworks and action. Yet the lack of a global price for carbon means that economic incentives to enhance carbon efficiency or produce in more carbon-efficient geographies are not there.
A global price for carbon. Sounds so simple, doesn’t it? Setting a global price for carbon (preferably one that slightly increases over time) would allow the market to solve a huge number of issues without detailed regulation of things.
Changing the conversation?
But if we want to start small, how about creating the right incentives for wind power right here in Finland? If there were proper incentives in place, maybe over in Finland the conversation could also shift from whining about their looks to something more like this:
The wind turbines that recently went up on Louis Brooks’s ranch are twice as high as the Statue of Liberty, with blades that span as wide as the wingspan of a jumbo jet. More important from his point of view, he is paid $500 a month apiece to permit 78 of them on his land, with 76 more on the way.
“That’s just money you’re hearing,” he said as they hummed in a brisk breeze recently.
That model doesn’t even require any regulation. Just pay the landowner. But I’m sure someone here will find a way to make it too complicated to do even that.
Resources & references
But do we have to consume at the current levels to be happy? No, we don’t – and we can’t. It’s painfully clear that the world simply cannot support our “western-level” consumption levels on a global scale – we’re already consuming much more than is sustainably possible as it is. And so we enter the paradox of well-being. But if consuming makes people happy and we specifically want to consume to get physical “stuff”, is there any hope of a change in time?
