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Governments and businesses under-prepared for high-impact low-probability events
Widespread disruption and business failure in the UK economy can be staved off for at most a week in the case of a natural disaster or major terrorist attack. This is the key finding of a major new report from Chatham House.
Preparing for High-impact, Low-probability Events: Lessons from Eyjafjallajökull says that:
- Governments and businesses are under-prepared to respond to high-impact, low-probability events (HILP) with worst-case scenarios rarely factored into contingency planning.
- The current fragility of the global economy leaves it particularly vulnerable to unforeseen shocks. As much as 30% of GDP for developed countries can be directly threatened by crisis, especially in key sectors such as manufacturing and tourism, which are vital for many countries' economic recovery and growth.
- A one week disruption is the maximum tolerance of our 'just-in-time' global economy. Beyond this threshold, costs start to escalate rapidly as production stalls and businesses start to fail. Yet for business, deviating from the ‘just-in-time’ model means potentially offsetting short-term profitability.
Bernice Lee, a report author, says:
'The frequency of HILP events in the last decade such as Hurricane Katrina, the Deepwater Horizon oil disaster and the nuclear crisis and tsunami in Japan signals the emergence of a new ‘normal’ – the beginning of a crisis trend. Industries – especially high-value manufacturing – may need to re-consider their just-in-time business model in an interdependent world.
'Contingency and business planning often assumes the return of status quo ante post-crisis. But this approach will be inadequate in a world of complex economic and social risks, when there is no return to business-as-usual practices. Slow-motion crises like climate change and water scarcity will also bring additional risks and vulnerabilities, and experts agree this trend is only set to continue.'
Chatham House interviewed key business leaders and experts while also undertaking an in depth case study of the Iceland volcano in 2010, drawing out critical lessons in order to better prepare and respond to other crisis events.
The Icelandic ash cloud event of 2010 cloud brought chaos over Europe’s skies: more than 100,000 flights were cancelled and around 10 million passengers were unable to travel. It cost the EU between 5 to 10 billion Euros when many countries were still recovering from the economic crisis. When asked about the event, 50% of those companies that faced a significant problem due to the closure of airspace did not have this risk on their register in advance – and for those that did, one week was generally the longest period that had been considered during planning.
The devastating tsunami and nuclear crisis in Japan underscored the ongoing vulnerability of our society and economy to 'low-probability, high-impact' events. The World Bank estimated that global industrial production declined 1.1% in April 2011 in the wake of Japan’s disaster, probably reflecting supply-chain disruptions.
'Black swan' events raise questions about how we build capacity to respond to an event that has not, in advance, been conceived as a serious threat. There is a high degree of uncertainty concerning the frequency, type and pattern of future extreme events. Managing high consequence events means taking decisions against a backdrop of uncertainties. If interests between key players are not aligned, better scientific information will rarely be enough in itself to optimize decision making.
The report considers how governments and businesses and the global economy could be made more resilient and the role of communications in a crisis. Reacting too slowly can cede control of the message to other stakeholders who have quite different interests. Much more could be done to harness the power of social networks in a crisis.
Notes to Editors
Bernice Lee is available for interview. Please contact the press office to arrange an interview or for other media enquiries:
+44 (0)20 7957 5739