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7 The Emergence of Systemic Risks If a man will begin with certainties he shall end in doubts, but if he will be content to begin with doubts, he shall end in certainties. — Sir Francis Bacon, Of the Proficience and Advancement of Learning, Divine and Humane (1893) A s we pointed out in Chapter 2, contemporary risk governance is challenged with a new category of risks: systemic risks. The most obvious example of such risks was the world financial crisis of 2008, in which the entire global financial system nearly collapsed. It all began with a crisis in subprime mortgage deficiencies. Early warnings indicated that the market was inflating and that the expectations of ever rising real estate values were based on weak assumptions. Steven Schwarcz (2008: 78) provided one warning on the verge of the crisis: “the recent subprime mortgage meltdown is undermining financial market stability and has the potential to cause a true systemic breakdown , collapsing the world’s financial system like a row of dominoes.” George Kaufman and Kenneth Scott (2003) provide a widely cited definition of a systemic risk. While they define systemic risks in the context of financial systems, their definition is robust enough to accommodate much broader systems, such as the global climate. “Systemic risk refers to the risk or probability of breakdowns in an entire system, as opposed to breakdowns in individual parts or components, and is evidenced by co-movements (correlation) among most or all parts” (Kaufman and Scott 2003: 372). It is the totality of the threat—the probability that the entire system can collapse—that distinguishes systemic from other types of risk. The term “systemic risk” has been used not only for characterizing financial risks and their repercussions on the world economy but also for health and environmental risks (Brigg 2008). The main features of systemic risks include ripple effects beyond the domain in which the risks originally appear and the threat of a multiple breakdown of important or critical services to society (De Bandt and Hartmann 2000). The main problem is that it is often difficult to predict when a system 124 Risk Governance will suffer a breakdown or collapse. Threats to entire systems, such as climate change, may be hidden in small, incremental effects that provide no hint about when thresholds have been reached. Or a collapse may occur due to a domino effect in which a small glitch is released that affects multiple elements within a system or even multiple systems in parallel, thereby amplifying the overall risk (Renn et al. 2002). The recent emergence of systemic risks prompts the question “What are the main drivers of systemic risks?” The answer is short but complex. Key drivers of systemic risks are major structural changes in society, including • Increases in population and population density. • Increased consumption threatening the climate and world resource system (Rosa, York, and Dietz 2004). • Increased encroachment onto hazard-prone land for residential and productive uses (Rundle, Turcotte, and Klein 1996). • Increased interdependence among and between technical, social, and cultural hazards, leading to multiple and often nonlinear interactions that make predictions particularly difficult (Klinke and Renn 2000). Interacting with these drivers are changes in the social definition of what is regarded as detrimental or hazardous (Freudenburg 1993), accelerated by the growing diversity of lifestyles and subcultures within and across societies (Sklair 1994). Also, larger populations increasingly concentrate in geographic areas exposed to more natural hazards and technological risks. Forty of the fifty fastest growing urban centers in the world are located in earthquake-­ endangered areas (Rundle, Turcotte, and Klein 1996). Figure 7.1 displays the trend in financial costs for major natural catastrophes between 1950 and 2010. The geographic shift above has reshaped a variety of systemic risks, creating a dramatic increase in financial losses and loss of human life, as well as a serious erosion of natural capital and services due to natural disasters over the past three decades, as seen in Figure 7.1. The estimated number of fatalities caused by the ten largest natural disasters from 1980 to 2010 is 1,089,570, according to the German insurance company Munich Re (2011; cf. Organization for Economic Cooperation and Development 2003). Furthermore, anthropogenic climate change and other human interventions into geochemical cycles are expected to increase the intensity of hazards in the near-future (Intergovernmental Panel on Climate Change 2001). Traditional risks have obvious negative physical effects. But those effects are typically bounded. A fire, for example, may destroy a school, which could...

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