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Citi GPS: Global Perspectives & Solutions
April 2021
How Has Globalization Changed the Nature of Risk? The COVID-19 pandemic has brought the strengths and weaknesses of the globalized economy into sharp relief. Invariably, the state of global travel, trade, and business contributed to the spread of the outbreak, and yet it is only through international collaboration, securitization, and mutual support that we will identify solutions to the disease itself, as well as the economic downfall linked to the crisis. Since the Great Financial Crisis (GFC) in 2007-09, sovereigns, supranationals, and businesses have grown increasingly aware of the active role they can play in limiting and shaping their risk exposure. The significant impact of a potential pandemic to global trade and business continuity had been acknowledged across many industries, if not fully understood or planned for in the early months of 2020. As businesses return to some semblance of normalcy after the pandemic’s first stages, the question remains as to how executives, analysts, and strategists can effectively manage their risk planning in the ongoing COVID-19 crisis, and in the face of concatenating or even direr shocks to the economic system. Throughout this report, we address a broad spread of global scale shocks that can affect businesses and the economy in general, and what can be done to mitigate them now and in the future. Although each business is exposed to its own catastrophes — a fire in its main manufacturing plant or a lawsuit from a business counterparty — the worst kind of shock, like a pandemic, is ‘systemic’, i.e. it may affect many organizations at the same time. One example of this phenomena is a credit crisis, where any one company reduces the amount of business it is prepared to do with another, so in turn each of its trading partners reduces their business with their counterparties and the downturn spreads contagiously throughout the entire economy. These systemic shocks are made worse by the very connections that have driven economic growth throughout the 20th century. The globalized nature of the economy can amplify shocks, e.g., the liquidity drought accompanying the Great Financial Crisis, and spread them quicker and wider than ever before to international markets. Shocks and extreme events, though rare, are recognizable by type and impact throughout history. Where they cause severe impacts to more than one continent, they can be termed ‘global shocks’ or ‘macro-catastrophes’. There are many potential causes of macro-catastrophe: epidemics, financial credit contractions, localized destruction of means of production, and geopolitical disruption to trading systems. It is equally important to identify systemic trends and attendant threats driven by human activity, compounded by the failure of global governance, and exemplified by the twin threats of climate change and biodiversity loss (see further discussion on the 10 systemic risks in the Global Risk Nexus to follow). Managing the risks of disruption from macro-catastrophes is a major concern of government national security, international business, financial services and insurers, and investment managers across the world.
A Recent History of Globalization To better understand how globalization has shaped the international economy, and enhanced the risks that economy faces, it is necessary to understand the forces underpinning globalization over the past fifty years and their related economic growth.
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