We live in an increasingly interdependent world in which complexity has been magnified as computers and technology progressed. The relationships between businesses, industry and government are like a spider's web with many nodes. For the whole web to remain intact, individual nodes must be attached at all times. Computers have made us interdependent as never before. Y2K has revealed this to us in a stunning fashion.
This networked interdependency of the economy is not as resilient as it may appear. In fact, it is more fragile as there are more nodes to fail in a complex modern industrial economy. The problem is that we have got a computer at every second node.
As long as there are no major shocks everything runs smoothly. When there is an outside shock (like the 1970's oil shortages), the resulting economic dislocation cascades through every sector causing immediate and staggering losses. The sudden rise in oil prices raises business costs, which in turn lead to cut backs, lower profits and layoffs. Some companies will go out of business, causing a downturn in the general economy which then feeds on its self in a downward spiral.
The millennium bug is quite different and much more severe than oil shocks, however, as it affects businesses and organizations across every region of the economy which will be affected and interacting in the same year (including oil production and supply).
What really is at stake regarding y2k, is the collapse of the flow and processing of information. Not only information within a computer system, but an entire organization to which routine business functions are controlled by computers. In the 1990's almost all medium and large firms are under this category. An organization that manages to get 70% of its mission critical computers repaired will see a drastically reduced ability to conduct business. Its productivity being lowered to the point where it would have to lay off workers, or even shut its doors. A great number of firms will have no choice but to automatically claim bankruptcy after 2000 due the inability to conduct any business whatsoever. It can be conservatively estimated (By Forrester Research) that 15% of U.S. firms will fall into this category-- even with full scale remediation efforts under way. These failures will not be in any one industry sector, but sprinkled throughout the whole economy. We must then consider the resulting domino effect would have on the remainder of businesses that are able to function. The near simultaneous failure of (say 15%) of companies would soon knock down many more businesses in a economic ripple effect, forcing another 5 or 10% to shut their doors. But if this many fail, the marginalized fault tolerance level of our industrial economy could be overloaded and collapse.
Then we must deal with business failures and disruptions of suppliers to which the death of only a few would severely hamper or completely halt any large and complex large corporation's ability to produce a product or service. So even if company 'A' gets its computers functioning, it will have to deal with suppliers who may not be able to deliver from their failures and disruptions. Losses are enormous if company 'A' cannot temporarily deliver its product and therefore collect sales revenue. By the time it finds and co-ordinates (y2k compliant) suppliers to keep its production or business running, it may already be too late; it will have gone bankrupt. With y2k, this will be happening simultaneously, and will affect every firm, regardless of whether they claim to be compliant or not.
The domino effect becomes most obvious in large companies where the complexity factor is at its greatest. Such is also true among large government agencies. The US government is enormously large , computerized and complex. In addition to the challenge of getting individual agencies functional, it must then be realized that these agencies exchanging data, interact, and rely on each other to accomplish the larger goal of delivering public services. Social Security might be able to get most of its computers working (as it recently claimed) , but it won't be able distribute benefits if the Internal Revenue Service cannot collect taxes because its computerized processing is defective, or if the Treasury Department's computers are unable to print the 50 + million checks it issues for Social Security every month (The FMS delivers 600 million payments annually). Also, the banking system is an integral part of modern government will be suffering y2k distruptions: both are intertwined, and the ability to deliver expected services requires this entire system to be functional. Who will cash the government checks when the banks are shut down? How will the government be able to remain legitimate when these checks go unpaid? With governments making up 25 to 50% of Western Society's GDP, the loss of ability to collect taxes and re-distribute funds would be devastating...Not just to business sectors and individuals dependent on government funds, but to the entire economy as we've never seen before, and according to IRS's ex-CIO Arthur Gross:
"There's no point in sugar-coating the problem...Failure to achieve compliance with the year 2000 will jeopardize our way of life on this planet for some time to come."
Aside from failures within industries and suppliers, organizations must worry about outside factors which enable it to conduct business. This means water, electricity, heat and fuel must be freely flowing, and a means of payment, financing and capitalization (banking and stock market) be operational. Business virtually ceases until the above are functioning and restored if brought down by y2k. This is the circle of dominoes which y2k threatens: to keep fuel flowing, you need electricity. To keep electricity flowing, you need fuel. To keep both operational, you need a means of payment. To keep a (modern) means of payment going, you need functional telecommunications system to transfer funds. With out a functional telecommunication or banking system, the economy and division of labor would utterly collapse, reducing our GDP by more than 80% and effectively bankrupting most Fortune 5000 corporations. If a company (or even an entire industry sector) manages to get compliant and establishes contingency plans and triage with suppliers, its ability to stay in business in 2000 would be close to zero if significant portions of the economy do not make it, or if water supplies and electrical power shut down.
Moving beyond local and regional interdependencies is the relationship of finance and trade between modern nations which, to a degree, has recently created a Global Economic Instability which will create financial havoc in 2000. As described in the above essay, the United States has become dependent on Japan and other foreign nations for excess investment capital to finance high debt levels, just as these nations depend on the US to sell their goods. Entire industry sectors in the US have been replaced and are now supplied by foreigners (Clothing, electronics) Given many recent reports, it appears that many of these foreign regions have little or no understanding of y2k, or are making negligible progress, and will pay a very large economic price in 2000. They will not suffer alone, however, these effects will cascade to every economy on the globe. Given the nature of our now global economy, the ability of the US to get most of its computers repaired (which it will) is moot if the entire Asian region collapses from the inability to function due to y2k, or if several European power-grids and infrastructures experience long term collapse. Companies that rely on foreign businesses for critical goods, services and capital may be left in the dark in 2000...literally.
As we can see, y2k is a very serious threat to the global economy, and perhaps devastating if disruptions are widespread and prolonged. Business failures from y2k will work in a top-down AND bottoms-up fashion due to the democratic nature of this bug. Contrary to popular belief, the largest companies may suffer the greatest due to the complexity factor and domino effect and with the inability to move gargantuan systems to less productive paper-based systems when their computers fail, or the failure of small and medium sized suppliers to deliver. This may mean a great shift in decentralization of organizational and institutional power to the local level lies ahead. It could also mean a historic consolidation of power into the oligopolies. Or even a combination thereof. In the case of y2k it could very well be true: bigger they are the harder they fall. One thing is certain about y2k... the dominoes will be very large, and will fall very hard.
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