Shell-shocked world lacks capacity to deal with global risks—WEF

The report has identified economic disparity and global governance failures as central risks in the global risk landscape, especially significant given their high level of impact on, and interconnectedness to, other key risks. The forum has also identified macroeconomic imbalances, which contain risks that emanate from and are related to the financial crisis, the illegal economy and the water-food-energy axis as three key risk ‘clusters’ to emerge from this year’s analysis. There was a healthy divergence of opinion among the 580 expert respondents to the report’s survey on the key risks that currently face the global economy. But five key risks to watch have been identified that represent the dangerous unknown. They are cyber-security, demographic challenges, resource security, retrenchment from globalisation and weapons of mass destruction. hideSpeaking at the launch of the sixth edition of the ‘Global Risks Report’ Robert Greenhill, Managing Director and Chief Business Officer at the World Economic Forum (WEF) warned that the world is currently probably more vulnerable to future shocks than it has been in the last half century. The financial crisis has drained the world’s economy of some $2 trillion and has both reduced chances of meeting future risks and is itself an example of an underlying risk, he said. “Which is the inability of the global system to identify and address risks with the speed and interconnectedness that the risks themselves are demonstrating today.” “20th century systems are failing to manage 21st century risk; we need new networked systems to identify and address global risks before they become global crises,” Mr Greenhill continued. The report concludes that we face ever-greater concerns regarding global risks and with the prospects of rapid contagion through increasingly connected systems and the threat of disastrous impacts. The global nature of the world’s vulnerability to risk is a key theme of the report. “Risks are more present, more interconnected and faster-moving than they ever have been in history because of the globalised nature of our existence...The challenge we have is that our global governance systems have not changed as quickly,” explained WEF’s managing director. Indeed global governance failure is one of the two risks that the report deems especially important. This is because of the high level of impact and interconnectedness that the risk represents and its ability to influence the evolution of other global risks and inhibit our capacity to respond effectively to them. The other is economic disparity. Issues of economic disparity and equity at both national and international levels are becoming increasingly important, the report says. Politically there are signs of resurgent nationalism and populism as well as social fragmentation. There is also a growing divergence of opinion between countries on how to promote sustainable, inclusive growth, added the report. To meet this and other challenges global governance is essential. “But this is another 21st century paradox: The conditions that make improved global governance so crucial—divergent interests, conflicting incentives and differing norms and values—are also the ones that make its realisation so difficult, complex and messy,” the report suggests. Three important clusters of risk have emerged in this year’s analysis, including macroeconomic imbalances. This cluster of risks, including currency volatility, fiscal crises and asset price collapse, arise from the tension between increasing wealth and influence of emerging economies and high levels of debt in advanced economies, the report explains. “Saving and trade imbalances within and between countries are increasingly unsustainable while unfunded liabilities create extreme long-term pressure on fiscal positions. One way out of these imbalances would be coordinated global action but this is challenging given the conflicting interests of different states,” it adds. This risk nexus represents, to a certain degree, a spreading of the financial crisis into further related risks. Whilst the report does not flag up the crisis itself in great detail these related risks are highly rated in terms of both likelihood and potential impact in the reports Global Risk Landscape 2011 (see graphic). The financial crisis and its underlying drivers remains a real threat, said Daniel M Hofman, Group Chief Economist at Zurich Financial Services. “The point that we would make is that the underlying drivers of the recent financial crisis, the underlying drivers of macro economic imbalances within countries but also across countries have not disappeared and in fact they are re-emerging...that risk had not gone away in fact it may come back and bite us again,” he warned. The illegal economy, a second risk cluster highlighted, amounted to around $1.3 trillion in 2009 and is growing. These risks, while creating huge costs for legitimate economic activities, also weakens states, threatens development opportunities, undermines the rule of law and keeps countries trapped in cycles of poverty and instability, the WEF says. “International cooperation—both on the supply side and on the demand side—is urgently needed,” it stressed. The water-food-energy nexus is another set of risks flagged up in the report. It warns that the rapidly rising global population and growing prosperity are putting unsustainable pressures on resources. “Demand for food, water and energy is expected to rise by 30–50% in the next two decades, while economic disparities incentivise short-term responses in production and consumption that undermine long-term sustainability.” This nexus relates to one of the key risks to watch put forward by the report—demographic change. This risk includes the pressures created by growing and ageing populations (see related story). According to the report ageing populations in many advanced economies add to fiscal stress as the ratio of those of working age to elderly falls. For certain developing countries, the population size and growth rate are creating intense and rising pressure on resources, public institutions and social stability. Resource security is another risk to watch and includes extreme commodity and energy price volatility (see related story). With demand for these goods likely to increase because of a combination of population growth and a projected increase on per-capita consumption, there is uncertainty as to whether supply can keep up. In the long-term the world should expect at best, sustained increases in commodity prices, and at worst, shortages of key resources as well as be prepared for price fluctuation, the report says. Cyber security is another risk to watch and reflects a growing awareness that the real world is vulnerable to security threats from the virtual world. “But the complexity of ‘cyber security’ issues is still not well understood and its risks could be underestimated,” the report warns. It points out that there are four distinct global risk-related activities within the risk genre. One is cyber war. While an open war in cyber space is possible, the experts indicate that the interplay between cyber war and physical war poses a more likely risk for society, with aggression online not only serving but also potentially provoking conventional attacks. Cyber espionage is a further activity, which, whether carried out by the private or public sector, has brought the age-old practice of intelligence gathering into a new era, the report says. “Particularly insidious, as has been repeatedly shown in the past two decades, is the use of such techniques not only by countries generally understood as enemies but also by friendly allies,” it points out. Cyber theft and cyber terrorism, which is perhaps less understood than the other three practices, make up the cyber risk cluster. Retrenchment from globalisation is the fourth risk to watch. Economic difficulties mean that policy-makers are increasingly tempted to resort to protectionist measures and anti-globalisation rhetoric, the report says. “Some of the stimulus packages adopted during the financial crisis already entailed elements of protectionism. Countries with growing current account deficits will almost certainly continue to seek short-term adjustments through protectionist or other trade restricting measures,” it predicts. The threat of weapons of mass destruction (WMD) completes the five risks to watch. This covers a wide range of weapons of varying concern but the key WMD risk is felt by most experts to be that of nuclear proliferation, both among states and non-state actors, closely followed by the potential use of biological weapons. In response to all these issues the WEF launched a new Risk Response Network at its Annual Meeting 2011 in Davos, Switzerland, which took place on 26–30 January. The network will bring together a new approach to help address the complexity of risk that leaders are facing and enable them to capture the upside of those risks. “It will try and bring together stakeholders across different countries and levels of society, experts, governments and private sector leaders to actually take the analysis we have done over the last six years and take it to the next level,” said Mr Greenhill. “So we have not only a better appreciation of the risks but a better way of identifying the root causes and addressing them. That for us is the next frontier in how the world comes together to deal with these issues. So it is not all despair but a call to action,” he added.

Shell-shocked world lacks capacity to deal with global risks—WEF

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