After the covid-19 pandemic in 2019 and the Russian invasion of Ukraine, the world has come to recognize the importance of flexibility. This flexibility involves finding a balance between different aspects such as centralization and decentralization, diversity and focus, independence and interdependence.
For instance, in the realm of free trade, figures like US Trade Representative Catherine Tay emphasize the need to encourage flexibility rather than just efficiency. Sabine Wiand, the director general for trade at the European Commission, similarly stresses the importance of balancing these priorities in policymaking. It’s not just about efficiency in today’s trade relations, but finding a middle ground between extremes. Roger Martin, a researcher and former management consultant, aptly captures this dilemma: achieving flexibility without performance is as challenging as striving for performance without flexibility. The key difference lies in the consequences. Systems that lack resilience can collapse suddenly, as they become overly concentrated and lack diversity. In contrast, inefficient systems gradually fade away when they can’t compete with more efficient ones. To thrive in the long term, systems need to strike a compromise between efficiency and flexibility, aiming to minimize risk and maximize rewards. Short-term risk reduction strategies can leave countries vulnerable to future challenges, just as individuals who’ve never encountered viruses may have weakened immune systems.
During the covid-19 pandemic, countries like Singapore, South Korea, and Taiwan, which had prior experience with respiratory viruses, demonstrated more effective responses. Risk analyst Naseem Nicholas Taleb calls such systems “anti-fragile,” as they grow stronger when exposed to moderate stressors. On the other hand, pursuing short-term rewards may make countries susceptible to future shocks. Relying on profitable industries can lead to a monopolistic culture that’s vulnerable to environmental and market changes. The right balance between risk and reward involves taking calculated risks only when the system can absorb, adapt to, or transform them into advantages. In the context of 5G networks, countries have taken steps to decouple from providers like Huawei due to the perceived risks of espionage or sabotage.
Countries with adaptability tend to maintain interdependence, even in the face of economic coercion. For instance, when China imposed trade sanctions on Australia, not all exporters were equally resilient. High-end product sellers struggled to find alternative markets, while those dealing in commodities managed to adapt.
Flexibility allows countries to take more risks in pursuit of rewards, as they can retreat if necessary. Diversification is often a practical path, particularly for commodities like agricultural products and raw resources. Additionally, flexibility aids in adapting to changing circumstances, and sometimes, transformative approaches are needed for long-term resilience.
This is why many Western countries are turning to industrial policies to address climate change and growing geopolitical tensions. In some situations, governments use industrial policies to promote innovative changes that decrease risks and enhance resilience. For instance, the US government has invested in developing open radio access networks, a new mobile network technology that operates in the cloud and severs the ties between 5G network providers and 5G service providers. This technology allows customers to freely choose their network providers, potentially reducing risks in 5G networks and making them more robust. This opens up 5G markets, making it easier for countries and companies to switch providers if the network is misused.
Government officials often focus on upcoming elections, while their departments engage in bureaucratic conflicts. However, failing to embrace systemic flexibility doesn’t just mean sacrificing the benefits of economic integration; it could also create new vulnerabilities that may be disastrous in the future.
In other cases, governments employ industrial policies to secure future benefits while minimizing risks. The Usa is actively supporting the development and adoption of green technologies, not only to address climate change risks but also to ensure that US companies gain a larger share of emerging markets, including electric vehicles.
This involves legislation like the Chips and Science Act, which seeks to boost the domestic semiconductor industry, the Inflation Reduction Act, which invests significantly in clean energy, and the Investing in Infrastructure and Jobs Act, which upgrades infrastructure in areas such as bridges, rail, and broadband. These laws passed in 2021 and 2022, aim to reduce supply chain risks by providing incentives to manufacturers of renewable energy, batteries, electric vehicles, and semiconductors, as well as by expanding access through a national network of electric vehicle chargers and improving the country’s electricity grid for cleaner energy distribution.
There’s no one-size-fits-all approach to balancing risk, reward, and flexibility. The right balance is subjective and varies among different actors, depending on their risk tolerance and optimism about the future. Expectations play a significant role because what may be a good decision in a stable and predictable environment might be a poor choice in a turbulent and uncertain one. In calm and predictable times, countries tend to focus on maximizing rewards, as seen after the Cold War during the rise of globalization. However, in times of high turbulence and unpredictability, flexibility becomes a priority.
Traditional risk management methods focus on calculating the probability and potential impact of various risks, but some risks and rewards involve unknown events. For example, it’s impossible to predict the probability or impact of a potential Chinese attack on Taiwan. When uncertainty is high, actors prefer to maintain flexibility and minimize potential losses.
As the world becomes (or is perceived to be) more dangerous and turbulent, countries increasingly adopt conservative strategies, prioritizing the protection of critical needs such as infrastructure, supply chains, minerals, and technologies. This approach reflects a pessimistic outlook that favors risk reduction in difficult times over reward maximization in good times. The world faces significant challenges, including great power competition and the climate crisis. To succeed and prosper, countries must understand the factors influencing risk, reward, and resilience, their interplay, and the trade-offs they entail.
Competition among great powers may affect cooperation on climate change by triggering a race for clean energy. Enhancing resilience might involve reducing interdependence among rivals while strengthening it among allies. Resilience may sometimes require building national capabilities and other times necessitate forming coalitions. Approaching resilience systematically will be challenging, especially in a world marked by polarization and specialization.
Government officials often focus on upcoming elections, while their departments engage in bureaucratic conflicts. However, failing to embrace systemic flexibility doesn’t just mean sacrificing the benefits of economic integration; it could also create new vulnerabilities that may be disastrous in the future.
