Global Governance and Systemic Risk in the 21st Century: Lessons from the Financial Crisis

Abstract

Abstract Recent decades of globalisation have created a more interconnected, interdependent and complex world than ever witnessed before. While global policy has focused on facilitating integration, the implications of growing interdependence have been largely ignored. The acceleration in global integration has brought many benefits, but it also has created fragility through the production of new kinds of systemic risks. This article provides a framework for understanding these new 21st‐century systemic risks and examines the challenges they pose to global governance. The 2008–2009 financial crisis will be used to illustrate the failure of even sophisticated global institutions to manage the underlying forces of systemic risk. We show this is symptomatic of institutional failure to keep pace with globalisation. The failure of the most developed and best‐equipped global governance system, finance, to recognise or manage the new vulnerabilities associated with globalisation in the 21st century highlights the scale and urgency of the global governance challenge. Policy Implications The rise of systemic risk requires a systemic response. Effective global governance and policy development have never been so necessary and urgent. The financial crisis illustrated that current global financial institutions are inadequate in their policy response to systemic risk and cannot keep pace with innovation and increasing system complexity in global finance. Deeper structural changes are required, including regulatory reforms. The institutional rigidity and profound shortcomings of global institutions apply not only to global finance, but to other looming systemic risks in the future. Neither the current global governance system, nor the planned reforms, meet the test of addressing new global systemic risks. Global governance requires radical structural changes in existing institutions and the development of new global institutions that reflect the realities of new global power balances and address the forces of systemic risk in the 21st century.