COVID-19 teaches us how to better manage global systemic risks

United Nations Under-Secretary-General for Economic and Social Affairs Liu Zhenmin. Credit: UNDESA / Predrag Vasi?
  • Notice by Liu Zhenmin (The United Nations)
  • Inter Press Service

But in fact, the pandemic heralds a new normal – a world of systemic risk, where disasters and shocks do not remain local, but can have unpredictable and growing global consequences. Humanity must accept our fragility and heed the hard lessons COVID-19 has taught us.

Our economies and societies are increasingly interconnected. It is a source of prosperity and efficiency, but also makes us vulnerable to contagion and cascading crises. Global risks – pandemics, financial crises, climate change – are increasingly undermining the progress we have made in the fight against poverty.

Unless we adapt, the Sustainable Development Goals will almost certainly be out of reach.

What are the lessons of COVID-19 for us? What investments are needed to reduce systemic risks and better prepare for the next crisis? The United Nations’ 2021 Sustainable Development Financing Report makes recommendations for long-term investments in prevention and risk reduction. It also identifies measures to make development finance more resilient to shocks – and prevent disasters from derailing development progress. Risk management should be a routine part of any financial management. But COVID-19 has shown that this is often not the case. The pandemic has exposed vulnerabilities in public budgets and corporate balance sheets that have grown over the past decade, leaving countries ill-prepared for the current crisis. More than half of the poorest countries are currently or at risk of debt distress.

Countries will need a multi-instrument approach. For example, debt management needs to better take into account growing risks.

Official lenders can help. In the future, they should systematically include conditional clauses to the state in their loans to vulnerable countries, in order to automatically block debt service in the event of disasters and shocks.

Lenders can also support poorer countries with risk transfer and insurance mechanisms for high-impact low-frequency events such as climate-related disasters, as well as fiscal instruments such as contingency funds for more frequent but less costly shocks.

Much of the corporate world was also caught off guard when COVID-19 hit, due to high leverage and just-in-time supply chains without built-in redundancies to deal with shocks. Massive state aid programs averted a systemic financial crisis and helped many companies weather the storm. But such support may be less available next time.

Private investors need to consider all material risks in their investment decisions – including longer-term social and environmental risks – just as they increasingly consider climate risks. This will require, as an essential first step, the mandatory disclosure of the environmental, social and behavioral development impacts of companies.

But it is not enough to manage significant risks on the balance sheet more effectively. We need to break the cycle of heavy spending on post-disaster support while neglecting the new risks we create along the way.

We need to focus on investments in prevention, risk reduction and resilience. Since this is a public good, the public sector must take the lead in ensuring that it is provided and funded.

Policymakers need to ensure that incentives for private investors are fully aligned with sustainable development. This can include measures such as properly pricing carbon emissions and other externalities, banning single-use plastics, or requiring supplier due diligence on social risks.

Political cycles often make investments in prevention – with uncertain or long-term payoffs – seem unattractive to governments. Yet public finances can be a powerful tool for reducing risk, through investments in climate change mitigation and in structural and societal resilience.

Structural resilience includes investments in resilient infrastructure or early warning systems; society in strengthened social protection mechanisms that can provide rapid and intensified support in times of crisis.

Many developing countries will need additional financial and technical support. For example, aid programs have so far not given enough priority to strengthening health systems, which is essential to survive the next pandemic.

No country can do it alone. Systemic risks tend not to respect national borders. Climate change mitigation and the COVID-19 pandemic underscore the need to work together. It is not only that developing countries with limited resources need international support to deal with the fallout from crises that are not their source, but these crises cannot be resolved without a comprehensive approach. Just as it is in everyone’s best interests to have vaccinations for everyone; this is also true for carbon neutral development paths.

The world needs new forms of international cooperation that amplify the voice of the most vulnerable countries in global decision-making processes. It is only when their priorities are fully taken into account that the risks to their sustainable development will be adequately addressed.

* Secretary-General António Guterres visited Tuvalu as part of a trip to the South Pacific to highlight the issue of climate change ahead of the Climate Action Summit in September in New York. In addition to Tuvalu, the trip took him to New Zealand, Fiji and Vanuatu. In each country, the Secretary-General met with government leaders, representatives of civil society and youth groups, to hear from those already affected by climate change and who are also successfully engaging in meaningful climate action.

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© Inter Press Service (2021) – All rights reservedOriginal source: Inter Press Service

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