Age of risk

It did take the genius of Donald Rumsfeld to wake us up to the fact that we are living in an age of "known unknowns and unknown unknowns"! Uncertainty and risk are today the primary concern for everyone - individuals, businesses, governments, and society itself. The sources of uncertainty have multiplied and encompass every dimension of life. The importance of risk management is underlined by the emergence and growing salience of an exclusive Chief Risk Officer (CRO) in major private companies.

Globalisation has thrown up in its wake numerous risks arising from outsourcing, free movement of labor and capital, reduction of tariffs and opening up of economies etc. Globalisation and the resultant integration of markets, has rendered individual national policies on many issues ineffective and considereably reduced national autonomy in economic policy making. As the benefits of globalisation becomes cornered by a handful few, the overwhelming majority of those left-out are beginning to make their voices heard, often violently so. Economic globalisation is leaving behind an ever widening inequality gap, both within and between nations. And democratically elected governments can fail to hear the voices of the losers only at their peril.

Thanks to globalization, capitalism, as we understand it, is facing a crisis of confidence. While the consumers and investors are prospering, the employees are facing uncertain times. The unprecedented choice available across all categories of consumer goods, and that too at unbelievably low prices, have led to consumers shopping away to glory. Similarly among investors, the diverse portfolio of investment opportunities and an equity market that seems to be moving in only one direction, barring a few blips, has generated a feel-good wealth effect. But citizens as employees are facing uncertain times, with massive lay-offs, proliferation of low paying temporary jobs, de-skilling and need for re-skilling, falling real wages, reduced and even no benefits, and diminishing job security.

The recent collapse of the sub-prime mortgage market, made us realize that the global financial system, far from diversifying and mitigating risk, had become ever more opaque and complex. The real impact of globalisation and its attendant risks are being felt in the global financial markets. The success of securitized lending over the past decade has seen impressive feats of financial engineering, seeking to diversify risk and increase liquidity. This has resulted in the emergence of a veritable cornucopia of financial instruments and market players. But the proliferation of such instruments, instead of reducing systemic risk, appears to have increased it in the global financial system.

As Paul Krugman wrote, "The innovations of recent years — the alphabet soup of CDO’s and SIV’s, RMBS and ABCP — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized." Though risk is today omnipresent in our financial system, we are in no position to identify it and and worse still do not have any clue about mitigating it! As Goldman Sachs have showed, the only way to make money appears to be to locate a risk and then transfer it to unsuspecting investors, and there are plenty of them around, and make money when the bet succeeds.

Beyond the financial system lurk even more dangerous risks arising from the challenges posed to our environment. This affects not only us, but has repercussions on the future of our children and grandchildren, and beyond. As the developing world, led by China and India, march towards catching up with the developed West, the opening act of an environmental nightmare appears to be unfolding. Negative externalities, be it by way of pollution or over exploitation, is taking its toll on our environment.

The biggest challenge is posed by the ever increasing threat of global warming arising from carbon emissions with its consequent impact on climate change. If the entire planet emitted CO2 at the rate the US does today, global emissions would be almost five times greater. As As Martin Wolf recently pointed out in the Financial Times, if there are to be limits to emissions, then there may also be limits to growth. But any limits to growth will have serious political consequences with resource distributional dimensions, both within, and more dangerously, between nations.

The issue of climate change is intertwined with the challenge of development itself, and about how the world will look like if the currently impoverished five-sixth of humanity catches up with the remaining sixth. At a time when development itself is increasingly energy dependent, the biggest scare scenario is painted by the "peak oil" theories, pointing to a world of high oil and energy prices, even as energy resources become ever more scarce. The story is no different with other commodities, all of whom are experiencing their highest prices. In the last five years, prices of gold has gone up 150%, zinc 250%, uranium 750%, copper four times, and nickel three times.

The recent fashion with bio-fuels is taking its toll on global food security. The massive demand for corn and other biofuel producing crops has resulted in diversion of the fixed land resources away from foodgrains and also exploitation of virgin forest lands. Generous subsidies have produced internal distortions that have only exacerbated the trend. This in turn has led to steep rises in food grain prices, manifested by "pasta strikes" in Italy, "tortilla riots" in Mexico, "tomato boycott" in Argentina, to "onion crisis" in India. The Economist's food price index is now at its highest since its introduction in 1845. Food inflation is affecting the rich and more critically the poor across the globe, and is an important political issue everywhere.

The changing consumption patterns, with a shift towards meat, eggs, and dairy products have also contributed towards straining the food supply chain. Despite all the technological breakthroughs, agriculture continues to remain vulnerable to the vagaries of weather and other natural forces. The surging global demand for foodgrains has depleted global food reserves, and send food prices soaring to historic highs. The high costs of inputs like seeds, fertilizers and pesticides means that the high prices for agriculture commodities are not translating into higher profits for farmers.

Geo-political risks are intensifying in an alarming manner. After having prematurely proclaimed the "end of history", Francis Fukuyama must be surely looking for cover, as the events of the past decade has shown that change, and very violent and unpredicatable one at that, is running as strong as ever. To the volatile cocktail of strife in West Asia, sub-Saharan Africa, Iran-Iraq, Afghanistan, North Korea, and sub-national threats to nation-states across the world, has been added the more dangerous, uncertain, and faceless threat posed by terrorism. In fact, terrorism has fast replaced threats from neighbours and other countries as the primary security risk for many countries.

The spectacular emergence of China, and to a lesser extent India, has surely rocked the geo-political balance of power. Kremlin watching has been replaced with deciphering the signals from Beijing as the popular pastime for political commentators.

The triumph of democracy has proved elusive as the story has not followed the script written in Washington. The experiments with democracy in various parts of Asia, Eastern Europe and Africa, have not gone much beyond the holding of elections, and have even slipped back to retrograde authoritarianism. In its own backyard, America is facing a strong ideological rebellion from Hugo Chavez. The Chavez inspired Bolivarian Revolution has swept through Latin and South America, overthrowing US-backed, right-wing leaders and replacing them with indigenous and left leaning governments.

Unfortunately, even as all these risks mount, we seem to be not fully aware of the gravitas of the problems staring at us. We are still squabbling with each other, busy running each other down, thereby even failing to acknowledge the problem. Many of these are issues which need to be tackled now and immediately, failing which its costs are too high to be imagined. Nobel Laureate Prof Kenneth Arrow, has an insightful cost-benefit analysis of the climate change problem in the latest Project Syndicate column, The Case for Mitigating Greenhouse Gas Emissions.

Risks have been ubiquitous throughout life, but what makes the present day risks more dangerous are their global dimensions. Nation states have become powerless in combating these changes. These risks do not respect national boundaries. Be it, climate change, terrorism, increasing inequality, food security, economic globalisation - all these risks can be addressed only by collective action, by summoning the will of all the nations of the world, big and small. Successfully addressing them demands that the big and richer nations should take the lead. This is partly because a major share of the solution to these problems lies there and more importantly only these nations have the resources and the capability to take the important leadership role on any meaningful efforts to tackle these challenges. Unfortunately, as seen by the tame conclusion of the recent UN Climate Change Conference in Bali, this leadership seems to be as scarce as ever.

All these challenges are both inclusive and global, as Ulrich Beck calls it "cosmopolitics", and it is time all nations come to the table and start tackling them before it is too late.