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. While the acceleration in global integration has brought many benefits, it has also created fragility through the underlying production of new kinds of systemic risks. The paper conceptualises systemic risk in the 21st Century and examines the challenges it poses to global governance regimes. The 2008-2009 financial crisis illustrates the failure of even sophisticated global institutions to manage the underlying forces of systemic risk, and this is symptomatic of institutional failure to keep pace with globalisation. The lessons from the financial crisis highlight the real threat of systemic risk to other 21st Century challenges, but more importantly, they expose the profound shortcomings of global institutions to manage global systemic risks in the future. The failure of the most developed and best-equipped global governance system, finance, to recognize or manage the new vulnerabilities associated with globalisation in the 21st Century highlights the scale and urgency of the challenge.
The rise of systemic risk requires a systemic response. Effective global governance and policy development has 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 with respect to regulatory reforms.
The institutional rigidity and profound shortcomings of global institutions applies not only to global finance, but to other looming systemic risks in the future. Neither the current global governance system, nor the planned reforms, meets 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.