Balancing Efficiency and Resilience in
the post-Covid-19 Era
As the global community muddles through the fog of uncertainty of the Covid-19 pandemic, much of the post-Covid-19 debate will focus on getting the balance right between resilience (a system’s or entity’s capacity to absorb stress, recover critical functionality, and thrive in altered circumstances) and economic efficiency (the optimal allocation scarce resources in the production process while minimizing redundancies and waste).
Evidently, during the past decades public and private sector actors have very much focused on increasing economic efficiency as the key instrument for maintaining and building out national or corporate competitiveness, secure commercial success and economic prosperity. Global risk awareness fell to a low point in the meantime, resulting in generally fragile resilience against adverse global risk events. This when the growing interdependencies in the global system, built out on the principle of efficiency, made it easier for risks to travel around the world and build their destructive potential along the way. Growing vulnerability as the consequence of connectivity and the under-appreciation of the global community’s collective risk exposure, in short, has been the situation at the eve of the pandemic outbreak in late 2019. In a matter of weeks, SARS-CoV-2 was able to travel the world through the highways created by globalization, hitting large parts of the global community unprepared.
The global community reacted by incrementally adapting to the new hazard. It blocked the pathways the virus used to spread by putting in place travel restrictions, shut- and closedowns, social distancing or simple measures of hygiene. It developed more promising therapeutic capabilities, capable vaccines, and built production and distribution capacities. In other words, after an initial shock, global society and its individual constituents have been in the process building out ever higher levels of resilience, responding to the continued challenges posed by the virus and its subsequent mutations.
Yet, the fight against the pandemic came with tremendous costs for efficiency. Risk mitigation instruments which had to be put in place by public authorities transformed a health hazard into a risk for global efficiency with catastrophic consequences for the world economy. Global growth in 2020 contracted by more than 3 percent. Labor markets were disrupted on a historically unprecedented scale. 8.8 percent of global working hours were lost, equivalent to 255 million full-time jobs. Government support reaching trillions of dollars to mitigate the effects of the pandemic on consumption and global output resulted into estimated global public debt reaching 98 percent of GDP by the end of 2020, 14 percentage points more than the IMF had initially projected for the year. In other words, the efficient allocation of resources on the aggregate level was severely disrupted across the world economy, though playing out very differently across geographies, industries, or societies.
This is where we stand right now: At the turn of 2020/21, and despite the continued pressure of the pandemic on the health conditions in most world regions, resilience overall has profoundly increased, though it is currently unclear at what point the global community can declare victory and move on. Yet at the same time, aggregate efficiency has fallen well below the beginning of the outbreak.
Moving beyond this unsustainable situation, it is thus blatantly clear that the resilience / efficiency debate needs to advance in two dimensions. The first is the immediate one: developing the conditions under which economic efficiency can be restored without giving up, but rather further building out resilience against the pandemic.
The second is more far-reaching and strategic: how to build the capacity on global, national and local levels of governance, across private and public sectors balancing resilience and efficiency, blending one into the other over the long run. As said, resilience and efficiency have traditionally been seen at opposing ends of the spectrum, as antipodes. But if global interdependencies are here to stay, as they likely are, global risks remain a distinct variable determining outcomes more frequently. For many public and private entities, the pandemic has been about continuity and survival. The thought of breaking new ground now in the efficiency / resilience debate seems farfetched for those who are not in one of the few sectors that have grown since the pandemic begun. But how does one thrive in altered circumstances – circumstances that are shaped not only by the pandemic, but by the profound reconfiguration of the global risk environment, resulting from globalization processes of the past decades? And how does one build a fresh relationship between resilience and efficiency on the back of innovation? Developing a new approach in that debate will be the key for future competitiveness, and indeed survival.
The World Economic Forum's Global Risk Report 2021 and Strategic Risk Management in the Post-Covid-19 Era
Never since the global financial crisis has the work of the World Economic Forum on Global Risks been more relevant than today, the age of the Covid-19 pandemic. It provides a central reference point for a debate across the global community about strengthening its collective resilience confronting risks that emerge from a highly interdependent global system. And it provides such a reference point for a deeper conversation within organizations about how to operate in a more complex and riskier global setting. Yet, at the same time, it is depressing to see that the findings of the WEF’s Global Risk Program, initiated more than 15 years ago, have had only very modest policy consequences. The current pandemic is a case in point.
Back in 2006, one of the first editions of the program's annual reports argued that “if person-to-person infection were to become commonplace, the vulnerabilities of our interconnected global systems would intensify the human and economic impact. A lethal flu, its spread facilitated by global travel patterns and uncontained by insufficient warning mechanisms, would present an acute threat.” Fast forward to 2020/21 and the pandemic scenario laid out 15 years ago is on the mark.
But the report also suggested that “the longer it takes for a pandemic to emerge – as long as we maintain awareness of the risk – the better prepared we are likely to be.” A long time has passed since the World Economic Forum, and others, advocated for awareness of a global pandemic risk event. And whilst the global community has grown together, and whilst the resulting interdependencies have created the highways through which global risks, such as in form of the coronavirus, have been able to travel with ease and celerity, global risk awareness has been lost on the way. The supply of risk management solutions has not kept pace with the changing nature of a dynamically evolving global risk landscape. This has forced the global community and its members to fall back on the most archaic ways of all to deal with the Covid-19 pandemic: fight and flight (governments have balanced these approaches in very different ways).
This attitude will have to change. Once the current crisis will have ceased, there will be an urgent need to engage in a deeper conversation about how to confront broader strategic risks and strengthen collective and individual resilience. Christine Lagarde, then in her role as Managing Director of the International Monetary Fund, addressing the lessons from the global financial crisis, once pointedly suggested to “fix the roof when the sun is out.” The sun is not out today, and the roof is broken. But when it is out again tomorrow, building that roof must be high on the agenda. Three points, amongst many others, should inform that endeavor.
Statecraft and multilateral diplomacy need to be adjusted to the political circumstances of the post-Covid-19 era. Though the joint experience of the Covid-19 crisis will provide a powerful reference point for stakeholders to jointly confront the vast set of global challenges emerging in the post-Covid-19 era, its transformative dynamics will make it more challenging to translate that ambition into a cooperative reality. The costs of a global risk event are never equally distributed across the global community. Countries, industries, societies or generations are experiencing the effects of the Covid-19 pandemic in very different ways. Though the global community at large is suffering, some members are suffering more than others. The unequal distribution of costs has profound consequences for economic and political fortunes, consolidating themselves in from of a longer-lasting, structural transformation. The complex and constantly shifting mix of converging and diverging interests of the post-Covid-19 era will make it difficult to form global alliances around a new equilibrium, and to work out arrangements addressing other pressing global policy challenges, such as climate change, inequality, or nuclear proliferation. It has been difficult enough to identify the lowest common denominators as the bases for collective action on these issues in the pre-Covid-19 era. The transformative consequences of the current crisis will require even more skillful mediation to arrive at a “new deal” building the shared vantage point for the collective management of global risks.
Second, established risk management concepts need to be repositioned and more strategically used. For too long, risk management has been a fairly unpopular exercise. When the sun is out, warning about rain puts people in a bad mood. Talking risk can be depressing and suck energy out of the room. Risk management is largely seen as a cost factor. Resilience and efficiency are considered to be mutually exclusive concepts. Organizational slack and redundancies are assumed to be dead weight rather than meaningful contributions to the long-term survival of an organization. The very concept of risk is complex, and the language used by the risk management profession is highly codified. Risk management is largely seen as a decidedly specialized trade and the costs for accessing that world are considered to be prohibitively high. This is also why risk management has a difficult time finding its way into the mainstream conversations about wider policy or strategy formation. It is of note, that the Forum’s Global Risk Report does not make any reference to foundational work provided by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) or the ISO Risk Management Guidelines. Yet, this is not what the world can afford any longer. The concepts that the discipline has developed over the past decades need to be dusted off and become more accessible – they need to transcend organizational boundaries in the public and private sectors and lift the global risk conversation to another level. Risk management needs to be repositioned as a means to advance, not slow down, innovation and entrepreneurship. Efficiency and resilience should not be seen as mutually exclusive concepts but complementing each other. Indeed, thinking through what “efficient resilience”, or “resilient efficiency” mean in the post-Covid-19 era will become a driver for innovation in its own right.
Third, the overall attitude of the business community - a key audience of the WEF's global risk work - towards strategic risk management will have to change. The Covid-19 pandemic has made it painfully clear that companies need to become more systematic and comprehensive in dealing with their operating environments in their social, technological, economic, environmental and political (STEEP) dimensions, i.e. the sources of strategic risk. For the time being, the attention of corporate risk management systems has largely focused on risks located within a company, such as compliance, health, safety or IT risks and risks in their immediate environment such as legal and regulatory, finance and treasury risks. Some industries are required to respond to a very specific set of risk management regulation, such as the banking industry. Yet, broader, strategic risks are largely considered to be peripheral to commercial success. Rarely do companies engage in their rigorous and systematic analysis - and if they do, draw the necessary conclusions and increase their resilience. The Lufthansa Group, for example, over the past years has been permanently reviewing information from the World Health Organization, the Robert Koch Institute in Germany and other institutions in order to identify risks of an epidemic or pandemic as early as possible. Despite a pandemic being clearly on its radar screen, once the Covid-19 crisis grounded air travel across the world, Lufthansa eventually had to ask the German government for a € 9bn aid package which also saw the state obtaining a 20 percent stake through a capital issuance. Clearly, risk awareness did not translate into risk resilience. What is true for Lufthansa is true for the many thousand companies across the world who struggle to survive.
Many different conclusions will be drawn from the age of Covid-19 the world is currently living through. One lesson is that strategic risk management needs to move from the periphery to the center of awareness of the global community - and all the large and smaller players operating in an environment that allows risk events to proliferate. In the post-Covid-19 era, smart strategic risk management will become an essential component of effective corporate and global governance.
From Global Interdependence to Loose Coupling
We believe that the concept of "loose coupling" is the most useful point of reference for framing the debate about the shape of the post-Covid-19 global order. A loosely coupled world will oscillate between fragmentation and integration, between governments' desire for self-sufficiency and autonomy, and their desire to generate growth through cooperation. It will be built around the confidence which its different players place into their own risk management capabilities, but also trust in the integrity of their partners.
Global economic interdependence has been the default outcome of the world’s capital, labor, goods, services and technology market integration processes over the past 30 years. It has brought about tremendous economic and social benefits and has formed the environment in which its constituents - governments, companies, investors, civil society - have been operating for the past decades. But global connectivity and interdependence have also created an environment in which global risks have been able to travel geographic and system boundaries with more ease and at greater velocity. Interdependence provided Covid-19 with the “transmission channels” it needed to spread. Within weeks, SARS-CoV-2 was able to travel around the world creating a pandemic risk event impacting societies, the world economy, national and international politics.
Since the beginning of this year, the world has been muddling through the uncertainty of the Covid-19 outbreak. And only slowly is the global community learning to adapt and address its immediate consequences. But once the pandemic has ceased, in whatever form that might be, we will live in the wake of its transformative significance. The trauma of the pandemic will be profound, and the impulse of “going local” strong, reinforcing the protectionist and nationalist sentiment preceding the crisis. At the same time, it is unrealistic to assume that a de-globalized or disentangled world will necessarily be the consequence, or is indeed desirable. The benefits that global collaboration has brought about in the past decades are simply too significant and to untie global markets and the many other layers of globalization that have brought us together would come at too high a price. Yet the world is not going back to where it was before.
“Loose coupling” and corporate resilience
In between the interdependent global order of the past, and the prospects of a de-globalized one, we believe that balancing the returns generated by global integration with the risks brought about global interdependence will result in an order that is best described as “loosely coupled.” A loosely coupled world will look more fluid, oscillating between fragmentation and cooperation, between self-sufficiency, autonomy and integration. It will be built around risk perceptions and the confidence that its different players place into their risk management capabilities, but also trust into the integrity of their partners.
The concept of loose coupling was introduced into management sciences by Karl Weick in the 1970s and looked at the conditions that allowed organizations to endure. Lifted into the wider, global debate about what lies beyond the Covid-19 pandemic, it could become a reference point in the reconfiguration of the current system into a more resilient one. As such, the principles of loose coupling might become the central feature of an emerging global order.
Originally used to describe the ordering principles within an organization, loose coupling refers to the informal relationships that its various constituents build beyond its formal design and their contribution to ensuring the survival of the organization at large. While that formal design seeks to “tightly couple” its constituent parts to promote efficiency gains, their informal, loosely coupled relationships represents the “glue” holding an organization together. Each part has a keen interest to preserve its own identity and some evidence of physical and logical separateness to ensure its long-term survival. Efficient resource management, the diversification of relationships across the organization, and the acute awareness for sustaining acceptable levels of efficiency in an uncertain environment are key behavioral determinants. Yet to meet joint, organization-wide objectives, units develop ties much less prescribed and constricted than a formal organizational chart would suggest, but rather impermanent, dissolvable and tacit ones.
Lifting “loose coupling” into the debate about the post Covid-19 global system
Advocates of "loose coupling" suggest that organizations with a strong element of loose coupling are more adaptable to change in their operating environment. They benefit from a perceptive sensing mechanism, allow for localized adaptation and can retain a greater number of mutations and novel solutions than would be the case in a tightly coupled system. A breakdown of one part of the organization can be sealed off, preventing it from disrupting others. As such, they are much better at detecting external risks early on, cutting off the transmission channels that allow risks to spread across the organization, and more quickly reconfiguring a response to systemic shocks.
Lifted out from management science debates from some fifty years ago into the current discussion about the shape of a future, post Covid-19 global system, loose coupling suggests that its constituents place much more focus on the preservation of their autonomy and integrity, and in consequence, the scaling back of dependencies on others. The desire for higher levels of resilience in a world that is perceived as uncertain and risky will compete with the desire to maintain high levels of efficiency. In the aftermath of Covid-19, this order will be less geared towards efficiency than a tightly-knit, interdependent one, but more towards building risk awareness and flexibility, appreciating slack and redundancy but also risk diversification as important instruments stabilizing the system at large. Over the long run that system will seek to find a new equilibrium, balancing efficiency and resilience.
All this will not mean that working together on a global scale is coming to an end, as the de-coupling argument would suggest. Global cooperation will continue to unlock value – but under different circumstances and in different constellations. As the parts of an organization do not intend to isolate themselves from their peers, the members of the global community will need to work out the novel conditions under which they are going to work together.
 Karl E. Weick “Educational organizations as loosely coupled systems,” Administrative Science Quarterly, Vol. 21, No. 1, March 1976, https://www.jstor.org/stable/2391875?read-now=1&seq=3#page_scan_tab_contents, accessed June 1, 2020.
Some Straightforward Principles When Dealing With Political Risk
Given the implications of a fragmented and more complicated geopolitical environment for executives and investors, it's obvious that sober and professional political risk analysis should now be part of any decision where to go and what to do. Here a couple of dos and dont's as you go along.
1) Accept that geopolitical and geoeconomic trends and events play an increasingly important role in explaining market outcomes and investment performance. Whilst the long-standing consensus has been that economics and finance are somehow decoupled from whatever happens in politics, the past few years have proved the opposite. Political risk does not explain all market volatility but it explains important parts of it and has become an important macro theme.
2) Acknowledge that geopolitical risk is not a random phenomenon but can be systematically analyzed and monitored. Develop the capacity to do so. As Henry Kissinger remarked, “an issue ignored is a crisis invited.” If the capacity of an institution to fully comprehend the political arena in which it is operating is not adequately developed, it could well face a crisis that hits it unprepared. It could choose to live with it, but the smarter move is to confront it more proactively.
3) Accept that political risk analysis is largely based on qualitative data – that it is a “soft science”. Whilst the discursive nature of political risk analysis has posed a serious obstacle to finding its way into quantitatively oriented economic and financial analysis, issues that count are often not countable (to paraphrase Albert Einstein). In that spirit, do not let inability to communicate across analytical disciplines prevent developing a full picture of what is going on.
4) Be aware of the transmission channels through which geopolitical and geoeconomic risks impact businesses or investment portfolios, even though these risks might often look too distant to really matter. The ways in which political events and trends are transformed into a relevant risk are often blurred. Uncovering them is a key challenge for setting up effective political risk management systems. Also, be conscious that political risks do not always announce themselves in big news headlines. Many are decidedly context specific and difficult to detect.
5) Avoid off-the-shelf political risk analyses. Political risks play out very differently for different actors. No political risk universe will look the same to one market participant, investment portfolio or corporate strategy as to another. The transmission channels and the impact of political risk will fundamentally differ; only a tailor-made political risk universe will help to distinguish between relevant information and noise.
6) Make the most of systematic political risk analysis. Markets tend to overprice current political risk events and underprice longer-term political trends. Thorough and timely political risk analysis can help to spot interesting opportunities created by political event-related market volatility. Be aware as well that sound political risk analysis can provide a competitive edge as it enables those using it to go with confidence where others – those uncertain about political risk/return constellations – choose not to go.
7) Finally, distinguish between normative beliefs about what politics should be doing and realistic assessments of the outcomes politics might produce. One might or might not agree with how Europe has been managing through the Covid-19 crisis. One might have strong views about how the international community deals with Iran and its nuclear programme, or how the U.S. should rebuild its relations to the rest of the world. But investors and corporates are not political actors and rarely have the ability to influence political results. They should therefore focus on identifying plausible outcomes and have a clear idea of what they mean to them.