Global Risks 2008

Introduction
Report World Economic Forum

“Over the last year, a series of risk issues – from the liquidity crisis in the financial markets to the emerging concerns over the long-term security of food supply – have focused global attention on the fragility of the global system. An awareness of risk and risk management is increasingly viewed as a prerequisite for effective control in both the private and public sectors.

This year will be no different. Uncertainty about the short- and medium-term future is as high as it has been for a decade. Economically, the uncertainty centres on how the global economy will respond to the spreading liquidity crunch of 2007. The mispricing of financial risk, a central theme of Global Risks 2007, may have further to unwind. Geopolitically, uncertainty is focused on the possibility of an escalation in tensions with Iran and concerns over the long-term integrity of the states of Iraq and Afghanistan.

The result of uncertainty could be inaction in dealing with other, less immediate, global risks. Action to mitigate climate change, for example, may be put in danger should the global economy weaken substantially – even though many of the political, economic and investment decisions which will shape the future path of global climate will need to be made in the next five years. Proactive management of globalization to ensure its long-term sustainability may be derailed by the prevailing currents of uncertainty. But inaction on long-term risks will only weaken the global capacity to manage future challenges.

Under conditions of global stress, one core question of global risk management will become more salient than ever: who owns the risk? Without a shared understanding of ownership, achieving the trade-offs which may be necessary to mitigate global risk equitably and sustainably will be extremely difficult. Without clarity on who is responsible for managing global risk, turning aspirations into actions will be impossible. Without frameworks which connect ownership of risk with the responsibility to mitigate it, and which share the upside and downside of risk among stakeholders efficiently, the market mechanisms for managing risk will fail to improve our aggregate global resilience in the face of inevitable risk events. And without leadership from the business and political communities on all of these issues, we may find our global future shaped more by risk events than by our power to anticipate, manage and mitigate them.

The present report looks at global risks from a range of different perspectives.

The first part of the report focuses on four emerging issues that are shaping the global risk landscape: systemic financial risk, food security, supply chains and the role of energy. On systemic financial risk, we put current market turmoil in the historical context and ask how the transformation of the global financial system over the last two decades may require us to rethink our expectations and understanding of systemic risk in the future. On food security, we discuss how the subject has moved from the periphery of the global risk landscape to its centre, and ask whether the world is ready to cope with the various trade-offs that the new food economy is generating. On supply chains, we investigate a potentially hidden set of vulnerabilities in the global economy to supply chain disruptions. Finally, on energy, we outline the emergence of a range of energy-related risks and ask if the world can move towards secure and sustainable energy.

The second part of the report presents our collective assessment of global risks in 2008, based on a revised taxonomy of risk, and building on the assessments of past years. In the third part, we look at the methodological hurdles around the representation of interconnectedness and demonstrate how risk “squeezing” and homogenization of risk are changing the way we perceive risk globally. In the fourth part of the report, we examine the role of financial markets as tools of risk transfer and risk mitigation for an increasingly broad range of global risks. Finally, in the fifth part, we take forward our discussions on the construction of risk mitigation coalitions and country risk management, establishing a set of principles for country risk management which the Global Risk Network will develop in 2008-2009.

The Global Risk Network, part of the World Economic Forum since 2005, will continue to generate discussion and dialogue between the corporate and public sectors. In 2008-2009, the World Economic Forum and partners of the Global Risk Report – Citigroup, Marsh & McLennan Companies, Swiss Re, the Wharton School Risk Center and Zurich Financial Services – will broaden the participation of the global business and policy community.”

Global Risks 2008