April 2021
Citi GPS: Global Perspectives & Solutions
Identifying Systemic Risks Known and Emerging Global Risks
It is commonly claimed that future crises are generally unforeseeable, and the world’s complexity means that catastrophic failures and disruption arise randomly with too many potential future permutations to consider. Some have even argued that any kind of expectation and preparedness for future crises is doomed to be defeated by ‘black swans’: strategic surprises from extreme events outside the realm of regular expectations that are only able to be perceived in retrospect. This has led to a degree of fatalism towards threat assessment. Due to the difficulty of anticipating rare crises and the need for thorough theoretical understanding of low probability events (often to augment a statistical dataset or historical record), the task of rigorous evaluation of potential future threats has appeared daunting. This is, perhaps, especially so for a shock severe enough to have systemic consequences which can be written off under force majeure as an ‘act of God.’ On the contrary, the unexpected nature of catastrophes has more to do with human and organizational perception, specifically the failure to recollect or consider long past events, than to the occurrence of unique or new processes. It is a worthwhile exercise to consider the fundamental causes of what we call macro-catastrophes, namely, events causing losses on a global scale, or globally systemic shocks. Nearly all macro-catastrophes are caused by a process that has occurred generically before, usually in a different form, or a different location. It is rare for a catastrophe to be completely unprecedented. The 9/11 al-Qaeda attack is often cited as a ‘black swan’ although using a plane as a missile was the modus operandi of Japanese Kamikaze pilots in World War II, and the threat of crashing a plane into a building was nearly three decades old in 2001.18 While the scale and sophistication of the 9/11 attack, and the political and economic consequences that followed, were unexpected by almost everyone, terrorism and acts of political violence have been recorded for centuries. Likewise, the spread of COVID-19 cannot be reasonably viewed as an unprecedented, or even unexpected catastrophe. Disease has accompanied civilization from its beginning as a consequence of the domestication of animals. The increasing economic power of parts of East Asia throughout the 20th and 21st centuries has contributed to changes in traditional diets, leading to a sharp increase in the number of urban farms in densely populated cities, increasing the risk of zoonotic diseases manifesting in humans. The 2002-04 SARS and 2012-15 MERS epidemics, along with the 2010 H1N1 influenza outbreaks and intermittent threats of avian influenza, can all be linked to this economic phenomenon. The 2019-nCoV acute respiratory disease, or COVID-19, is part of the same trend. What makes these known risks, with substantive historical records, ‘emerging’ in the current context is the nature of risk translation across globalized industries, supply chains, and economies, which is highly complex and still poorly understood. Put simply, an emerging risk is a new risk, changing risk, or novel combination of risks for which the broad impacts and costs are not yet well understood.
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© 2021 Citigroup
Mansfield (2001).
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