In January 2010 the World Economic Forum published a Global Risk Network Report in collaboration with Citi, Marsh & McLennan Companies (MMC), Swiss Re., Wharton School Risk Center and Zurich Financial Services. The full research report is available on the website of the World Economic Forum.
After the shock to the global financial system and world economy in 2008, 2009 was a year of appraisal and adjustment. The risk landscape that this report has explored over the past five editions has in fact changed remarkably little. What has changed dramatically is the level of recognition that global risks, like the world, are now tightly interconnected and shocks and vulnerabilities are truly global, even if impact and response can still differ at the “local” level. This recognition is illustrated by the increased number of interlinkages on the 2010 Risks Interconnection Map (RIM)1.
Three themes provide the backdrop for discussion in this report. As the first chapter discusses, the increase in interconnections among risks means a higher level of systemic risk than ever before. Thus, there is a greater need for an integrated and more systemic approach to risk management and response by the public and private sectors alike. Second, while sudden shocks can have a huge impact, be they serious geopolitical incidents, terrorist attacks or natural catastrophes, the biggest risks facing the world today may be from slow failures or creeping risks. Because these failures and risks emerge over a long period of time, their potentially enormous impact and long-term implications can be vastly underestimated. These are risks linked to big shifts that are recognized and which will roll out over many years, even decades. For example, global population growth, ageing and the ensuing rise in consumption have implications for resources, climate change, health and fiscal policy. The emergence of multiple poles of economic and geopolitical influence is another shift. At the same time two nations, China and the US, will probably play a determining role through their choice of saving and investment paths. Finally, the third theme picks up the discussion of global governance gaps from last year’s report. In light of ongoing short-term pressures on governments, business and individuals, can the necessary reform of global governance be achieved across the range of issues where it is required? Improved coordination on macro-prudential supervision, effective climate and energy policies, and new mechanisms to protect resources and security are all key to reducing vulnerability and risk. The next years will test the political will, vision and willingness of governments, business and individuals alike to make tough choices and manage the challenges ahead.
Risks in focus
This year’s report explores a set of risks that share a potential for wider systemic impact and are strongly linked to a number of significant, long-term trends. First, there are those which feature highly on the Global Risks Landscape and which predated the recession but have been exacerbated by its impact through greater resources constraints or short-term thinking. These include:
- Fiscal crises and the social and political implications of high unemployment
- Underinvestment in infrastructure, both new and existing, and its consequences for growth, resource scarcity and climate change adaptation
- Chronic diseases and their impact on both advanced economies and developing countries
The report also notes how concerns over further asset bubbles remain strong, as indicated by the Global Risk Network Partner’s assessment for the Global Risks Landscape. The other risks discussed in this report are equally systemic in nature and also require better global governance but they currently feature less prominently on the Global Risks Landscape. The report raises these risks to understand if there is an “awareness gap” around these areas and suggests that they should not be forgotten in the focus on an integrated and longer term view of risks. These risks include: transnational crime and corruption; biodiversity loss; and cyber-vulnerability.
None of these risks feature in the upper right-hand quadrant of the Global Risks Landscape, but they are all connected to a range of other risks more likely to occur and with greater severity over the next 10 years. Thus, their impact will be truly global and cross industry, and will affect individuals as they will businesses or governments. The 2010 Global Risks Landscape is as crowded as ever. This report does not aim to cover all of the risks tracked by the Forum’s Global Risk Network. The landscape offers a view of where each risk lies relative to others. Indeed, the core set of risks behind the report are not exhaustive: it has evolved and will continue to be refined and adjusted as new issues emerge on the 10-year horizon. Some risks are not addressed in this edition, not because they are less important but because of the constraints of length and the need for focus. In particular, though cognizant of their weight, the discussion in this year’s report only touches on a few of the many geopolitical risks on the landscape. Afghanistan featured highly in discussions throughout the year, with concerns that the level of instability in the country poses a threat for its own population and the troubling events that are unfolding in neighbouring Pakistan. As discussed in last year’s report, though many of the geopolitical risks identified by the Global Risk Network may appear intractable and limited in their geographic reach, in reality each has an impact in terms of human suffering and the burden on development and growth. Each of these can be a source of wider regional instability or even broader conflict.
Decision-making in an interconnected world
The objective of the work of the Global Risk Network is to raise awareness of the level of interconnections among risks and the global impact of those interconnections. The report offers a framework for decision-makers to look at risks in an integrated manner and to provide an impetus to different stakeholders to focus on ways to manage systemic risks more effectively. The events of the past two years have shown how costly slow failures can be when they erupt in systems. The lessons learned were numerous but must be remembered and acted on in other areas, not only in the sphere of finance and economics. Much discussion has rightly centred on behaviour change and governance, but both are highly dependent on political and individual will and the choices acted on by decision-makers. For behaviour to evolve, a concerted effort is needed to provide the right mix of information, incentives and institutions; to stretch people’s time horizons and make them understand exactly what is at risk. All of this requires a longer term approach than usually dictated by electoral cycles or indeed financial reporting and executive tenure. The Forum is driving some of the thinking on how to work towards long-term solutions, while managing the immediate challenges. Its Global Redesign Initiative has this goal at its core: it leverages the Forum’s convening power to focus the minds of all stakeholders on new models of governance to manage complexity and risks to global growth and well-being. Equally, by taking the 10-year perspective and exploring interconnections, experts who contribute to the work of the Global Risk Network focus on the context in which strategies and policies are formed and the decisions taken to anticipate and manage, rather than merely reacting to risks.