The Great War and Global Governance * Mareeg.com somalia, World News and Opinion.
Mareeg Media
Somalia

The Great War and Global Governance

Mareeg.com-

ISTANBUL – This year marks the hundredth anniversary of the outbreak of World War I
– and, arguably, the worst year in human history. A century later, is the world any
safer?

Not only did WWI leave almost 40 million people dead; it can be viewed as a
precursor to World War II. After all, had Germany’s hyperinflation of the 1920’s – a
direct result of the war – been avoided, Hitler may well never have risen to power,
and WWII might not have occurred. Instead, the assassination of Austrian Archduke
Franz Ferdinand in Sarajevo on June 28, 1914, set in motion a chain of bloodletting
that killed nearly 100 million people by 1945 and caused human suffering on a
previously unimaginable scale.

Of course, generations of historians have meticulously researched the origins of the
world wars and written elegantly about their conclusions. That history should spur
today’s economists and policymakers to reflect on the difficult trade-off between
efficiency and robustness when it comes to global governance.

The painstaking effort since the end of WWII to build effective regional and global
governance institutions has reduced considerably the risk of catastrophes like the
world wars or the Great Depression. Indeed, while such institutions are far from
perfect, the progress that has been made in terms of preventing human suffering is
worth far more than the efficiency costs of ensuring that they are adequately
robust.

This efficiency-robustness tradeoff exists in many fields. When designing an
airplane, aeronautical engineers must ensure sufficient robustness so that their
creation can avoid crashing even under highly unusual or unforeseen circumstances.
This requires a degree of redundancy – for example, extra engines and extensive
backup systems – that comes at the cost of efficiency.

Economic systems also must be robust, as episodes like the Great Depression or the
2008 global financial crisis demonstrate. In the United States, in particular, the
financial sector’s structure prior to the recent crisis emphasized the efficient
generation of huge profits – and succeeded for more than a decade. But the
realization in 2007 that some of the system’s fundamental assumptions were no longer
valid triggered a crisis with huge economic and social costs. Had governments
worldwide not intervened with massive rescue and stimulus packages, the consequences
would have been catastrophic.

That near miss highlighted the unsustainability of pre-crisis policies. The new
Basel III banking guidelines, together with new national regulations, aim at
creating a more robust financial system by insisting on higher capital-adequacy
ratios, less leverage, greater separation between investment and retail banking, a
better macro-prudential framework, and measures to prevent financial institutions
from becoming “too big to fail.”

All of these efforts are shaped by the efficiency-robustness tradeoff. If capital
requirements are pushed too high, banks become less profitable, making it more
difficult for them to channel savings to investment and undermining economic growth.
The challenge, therefore, is to find the ideal balance between opportunity and
security – that is, between efficiency and robustness.

Policymakers face a similar challenge when designing, for example, efforts to combat
climate change. The scientific consensus is that greenhouse-gas emissions are
generating significant risks, but the scale and timing of these risks remain
uncertain.

To illustrate the tradeoff (in admittedly simplistic terms), a 14% capital-adequacy
ratio for banks may be compared to the objective of stabilizing carbon-dioxide
levels in the atmosphere at 450 parts per million, with both targets reflecting
caution and a desire for robustness, at an immediate economic cost. By contrast, a
capital-adequacy target of 7% and a CO2 target of 550 ppm would demonstrate
policymakers’ willingness to place a higher priority on short-term gains – even if
that means allowing another financial crisis or global warming’s long-term economic
and human consequences to manifest themselves.

An extreme course in either direction would be a bad idea. After all, it is
impossible to avoid all risk, and, at a certain point, the level of inefficiency
generated by excessive robustness would create new risks of collapse. Minimizing the
risk of a major war, depression, or financial breakdown thus requires that
policymakers find the optimal balance – and that requires more explicit discussion
of the efficiency-robustness trade-off.

As it stands, policies are often presented without any mention of costs in terms of
efficiency or robustness – and mere awareness of the tradeoff is insufficient for
effective decision-making. Instead, the tradeoff must be quantified in approximate
and reasonably accessible terms to facilitate productive debate and preempt
polarized ideological clashes that have little hope of resolution.

Perhaps the commemoration this year of the disaster unleashed in 1914 will inspire
people to think more deeply about how to avoid major risks without having to pay a
prohibitively high price in lost efficiency and dynamism to ensure robustness and
resilience. Now, as then, the fate of the world hangs in the balance.

    Kemal Derviş, former Minister of Economic Affairs of Turkey and former
Administrator for the United Nations Development Program (UNDP), is Vice
President of the Brookings Institution.

source : Project Syndicate, 2014.

Get real time updates directly on you device, subscribe now.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More

Do NOT follow this link or you will be banned from the site!