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Is Globalization The Next Mismanaged Risk?

May 27, 2008

Quality of risk management is currently one of the most highly rated attributes of the business world – at least, that is what many management gurus tell us. And certainly, the recent financial services debacle would suggest that improving the management of risk should be high on any corporate agenda.

So where was executive management when all those sub-prime decisions were being made? And where was executive management during the internet bubble? Or during the collapse of the telecoms supply industry? And where is it now on the issue of globalization?

According to a study on The Benefits and Challenges of Globalization, undertaken by the Economist Intelligence Unit on behalf of Equaterra, 89% of executives see globalization as ‘inevitable’.

These corporate leaders feel their focus must be on ‘streamlining processes, expanding markets, and hiring and retaining qualified local staff’. The executives certainly recognize risks – for example, the threat of new competitors from emerging markets, meeting the challenge of speed or facing the possibility of a global economic downturn. But not once does the report suggest that anyone is questioning the underlying platform for globalization – and hence they appear to be ignoring the greatest risk of all. It is rather like sub-prime – we had better jump on the bandwagon because everyone else is doing it.

I turned to one of my most respected sources for a counter-view. This executive shared some very different thoughts and possibilities and, while not suggesting that globalization will not succeed, I must say that this alternative scenario should at least feature in risk planning.

“Read ‘The War of the World’ by Niall Ferguson for the opposite view. He is an economic historian and Professor at Harvard and Oxford, as well as recently joining the board of Merrill Lynch. He charts the last great age of globalization and notes that economic prosperity is frequently the precursor to war. The reasons for this may be varied, but one possibility is that economic prosperity creates shifts in immigration and waves of people flooding from areas of limited opportunity to areas of more opportunity. Clashes of culture and massive disparities between rich and poor fuel the differences and the cheek by jowl visibility of difference fuels resentment and political upheaval, if not war.

Could this be true? Chart the theory against the Goldman Sachs ‘BRIC’ report that predicts GDP growth in India of 10% per annum for the next 20 years and inside India alone you are looking at 178 million people moving to urban poverty from rural deprivation over the period. That is a population the size of old Europe.

Look at the opportunity that the Olympics brings in an age of global communication for the people of Tibet to seek worldwide public support for their position, and the central Chinese response. This creates conflict, and the closing of borders (such as the challenge in Myanmar).

Look at the position in the Middle East and the rise in fundamentalism; is that fuelled by a rejection of capitalist values and a rejection of the western way of life in favour of a different set of values?

How many wars are there worldwide? And should we discount the lurch toward protectionism in the rhetoric of Obama, Clinton and McCain, or the French and German position on climate change as a mechanism to promote national champions and a vehicle for old fashioned industrial policy intervention?

Let’s cite some examples of areas where globalization is meeting reactionary forces:

3000 new crimes have been enacted in which western democracy since 1997? Answer at the foot of this page. And what about the fact that last year Sarkosy succeeded in his removal of Competition as a key preamble to the EU Reform Treaty, and his statement ‘ What has Competition ever done for Europe’.

In the EU and the US the lack of liberalization of any market that is of serious economic importance, from telecoms being partly open to energy, farming or the airline industry which are riddled with political intervention.

The US reaction to sovereign wealth funds as a mechanism for economic terrorism. Or the push-back on foreign ownership of the ports.

Gazprom’s position in world energy markets and Russia’s willingness to use energy as a political tool vis a vis Georgia: who is next? Big issue in Germany and Italy.

The US lurch towards despotism and lack of transparency and the rule of law (read Naomi Wolf ‘The End of America). Will this be fuelled by recession and fear of foreigners stealing your jobs? You betcha! I am surprised that no one has said that the US recession was all the fault of the Taliban.

No; it looks to me like tyranny exists everywhere; that nationalism and small mindedness prevail and the idea that the good of all that benefit from globalization is aspirational, heartfelt but taking a beating, and that the people in the survey have a limited appreciation of fact and risk and a high discount rate of the real risks involved.

The price of freedom is eternal vigilance.”

Extreme? Not really. If we think about a key impact of gloablization it is the fact that it creates new networks that threaten old power structures; it increases visibility of differences (especially ‘haves’ versus ‘have-nots’; and because it has no established governance system, it has led to a massive upsurge in corruption, illicit trade (drugs, prostituionn etc.) and lack of transparency and accountability (for example, the financial services debacle).

When Tom Friedman’s book, The World Is Flat, was first published back in 2005, IACCM acknowledged its great contribution, but challenged many of the underlying concepts. I wrote then about ‘the spiky world’ – the fact that the global networked economy was revealing and in some cases exaggerating the many differences that exist – and that not everyone wants to be the same, or ever can be.

So I want to know the names of the 11% of executives who do not share the view that globalization is inevitable. It is in their companies that I would first consider investing my money.

(Answer to question about new crimes: Great Britain)

3 Comments
  1. Very valid points! With global sourcing jumping various geographic boundaries, the need for a proactive risk monitoring system becomes very essential. Please visit http://www.GlobalSupplyRiskMonitor.com, for more insights on a comprehensive risk management system to proactively identify, monitor and report services supply chain risks across 50+ countries, 100+ cities and 500+ suppliers, in real-time!

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