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  From the report
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Preface
Summary
The Global Risks Landscape 2009
The Financial Crisis and Global Risks
Resource Challenges
Global Governance
The Risk Assessment
Global Risks Report
Contributors and Acknowledgements
  Global Risks 2009
    In collaboration with Citigroup, Marsh & McLennan Companies (MMC)
    Swiss Re, Wharton School Risk Center, Zurich Financial Services
Global Risks 2009 Home   

Global Governance: a Key to Global Stability
and Sustainability
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The financial crisis exposed fundamental flaws in global governance. In an historic meeting of countries representing 90% of world GDP, the G20 summit held in November 2008 discussed ways to coordinate a response and the need for a global, collaborative solution to the financial crisis. Indeed, as governments and corporations face the immediate challenge of rekindling growth, there is a risk that other challenges such as climate change, food security, poverty reduction, and failing and unstable states are pushed down the agenda, perhaps increasing the severity of these risks in the long run. Persistent governance gaps in many of these issues will only serve to exacerbate the related risks.

Where are the gaps?
Whether in the economic or security arena, most of the multilateral institutions that operate today were created in the period following World War II. Their mandates and capacities were not designed for the highly interconnected, multi-polar and, in many ways, more open world of today. Economic and demographic shifts have not been reflected in either their governance or decision-making structures. Equally, the shift in the roles between the public and private sectors has not been fully taken on board. Global risks know no borders and global solutions are also beyond the realm of any one government. Indeed, they will require not only intergovernmental collaboration but also public-private collaboration. Again, existing governance structures were not built to capitalize on the combined strengths of government, business and civil society.

Addressing global risks through better governance
At the World Economic Forum's inaugural Summit on the Global Agenda in Dubai in November 2008, the Global Agenda Council (GAC) on Global Governance made some recommendations as to how to address governance gaps. They included: fostering greater commitment and new leadership on global issues; developing frameworks to draw on expertise and to generate debate and awareness; marrying public authority and regulatory capacity with incentives for the private sector to innovate; reforming existing institutions, specifically reforming the UN Security Council; exploring new mechanisms to provide necessary resources.

Looking at the global risks tracked by the Global Risk Network for the past five years with these recommendations in mind provides a gauge of how much more can be done to improve governance. On climate change and resources, the picture is mixed. On the one hand, the Intergovernmental Panel on Climate Change has advanced dialogue by encouraging debate among the scientific community resulting in improved awareness and a greater common understanding. On the other hand, the Kyoto Protocol proved ineffective not only because key governments failed to engage but also because it was unable to offer a framework encompassing incentives and adaptation.

Where better and more innovative governance has shown results is in the area of global health risks. For HIV/ AIDS treatment, The Global Fund, a UN-backed public-private structure has succeeded in making antiretroviral drugs more easily available to populations at risk. The WHO has developed an effective monitoring and information network for pandemics that operates globally. The risk of infectious disease remains high but these examples illustrate that new forms of governance can be effective even for some of the most borderless and tenacious of global risks.

On water-related risks however, there is currently little oversight and shared understanding among governments and business about not only environmental and security but also economic implications. In the absence of frameworks that offer a common base for national and regional dialogue and action around water pricing, sustainability and infrastructure, water-related risks may go unaddressed. As discussed in the previous section, water scarcity and quality are highly connected to energy, food and health risks. As a global good and a global risk, water is perhaps an issue most in need of global governance for mitigation.

Better governance to avoid retrenchment
The spread of the financial crisis and the resulting global downturn has increased the risk of retrenchment from globalization in developed and especially in developing economies (as illustrated in Figure 11).

Over the past several decades, globalization has meant countries and businesses building economic and societal ties across the world, opening new markets, providing services, generating employment and reducing poverty. This momentum has raised hundreds of millions of people out of poverty but more progress is needed. A global downturn will undoubtedly place greater pressures on many economies, developed and developing, but retrenchment, in the form of economic protectionism or unwillingness to engage on climate change, resource or security issues, could create even greater pressures. Now seems like an appropriate time address governance gaps and thus provide frameworks offering greater certainty to 22 | Global Risks 2009 both governments and business and that will enable solutions that will benefit all.

Node size: denotes severity
Node colours: red - economics; dark green - geopolitics; light green - environmental; purple - technology; blue - society
Lines: line thickness denotes the strength of the interlinkage. The direction of a thicker line segment indicates when one risk is the stronger in the relationship.
Proximity: the map shows risks that are tightly interlinked to many other risks as closer to one another.

Climate change, natural catastrophes and geopolitical risk
Ninety per cent of all natural catastrophes are related to weather and severe weather incidents have been on the rise over the past decade. Many of the catastrophes, flash floods, droughts and tropical storms affect developing countries far more than developed countries. The losses, both of life and earnings, that these populations experience due to natural catastrophes, are compounded by the fact that insurance penetration is low in emerging markets. Thus their recovery is more difficult.

However, even before the financial crisis, emerging economies were reluctant to accept the trade-off between economic growth and the costs of containing climate change effects. Now that economic growth is slowing, the risk is that this trade-off becomes even less acceptable. Developing nations in the regions that are likely to suffer the most from climate change may not only see their growth and development impaired, they may also have to manage rising tensions with neighbouring states as pollution levels and pressure on natural resources rise. Once again, only globally coordinated and nationally supported efforts will be effective to address the challenges related to climate change, the management of scarce resources and geopolitical tensions.

Mitigating the Effects of Natural Disasters

During 2008, the World Economic Forum formed 68 Global Agenda Councils (GACs) for the express purpose of bringing experts and leaders together to capture state-of-the-art knowledge and propose solutions for the most crucial issues facing the world today. The Global Agenda Council (GAC) on Mitigation of Natural Disasters focuses on strategies for reducing losses from events that can have catastrophic global impacts. This Council and a number of other GACs agreed that there is a need to develop innovative long-term strategies for coping with myopic behaviour by decision-makers and dealing with an increasingly interconnected world. They suggest the following principles for thinking about natural catastrophes that lend themselves to other areas of risk, such as a technical accident or major terrorist attack:

Principle 1. Appreciate the importance of assessing risks and characterizing uncertainties surrounding such assessments

Principle 2. Recognize the interdependencies associated with risks and the dynamic uncertainties that result from these interdependencies

Principle 3. Understand behavioural biases and heuristics used by decision-makers, such as misperceptions of probability, myopia and "the disaster won't happen to me" attitude in developing risk management strategies

Principle 4. Appreciate the long-term impact of disasters on a area's or country's economy, politics, culture and society

Principle 5. Implement risk-based pricing of economic goods exposed to natural catastrophes and create resiliency by considering measures that prevent and mitigate the risks of natural disasters and their social and economic impacts

Principle 6. Deal with trans-boundary risks by developing strategies that transcend political boundaries

Principle 7. Consider inequalities with respect to the distribution and effects of natural disasters. Where possible, cooperative agreements should be facilitated so that those with few resources are assisted by those with a greater capacity to help

Principle 8. Develop organizational leadership that is prepared to anticipate the risks of large-scale natural disasters and mobilize the organization in the immediate wake of a calamity

An Overview of the Geopolitical Landscape

The Russo-Georgian conflict during the summer of 2008 was a reminder of how geopolitical events and security considerations can suddenly expose a diverse set of risks and interrelations, and how little effect existing security institutions have. The conflict strained Russia's relations with Europe and its neighbours in Central Asia, raising the issue of energy security and dependence. These concerns have been compounded by even more recent events as Russia again cut off the gas supply to Ukraine as 2009 began.

To the fore among the geopolitical risks tracked by the Global Risk Network over the past five years are the Israel-Palestine tensions, Iraq and Afghanistan. As this report was going to press, Hamas, having called an end to a six-month cease fire, was sending rockets into Israel and Israeli troops had entered Gaza following a weeklong campaign of airstrikes. While the situation on the ground in Iraq may have improved slightly, civilians and military personnel continue to be the target of terrorist and insurgents attacks. Because of this, reconstruction, which is so necessary to restoring social order and economic opportunity for the population, is advancing painfully slowly. In Afghanistan, despite NATO's ongoing presence, the level of violence remains high and the situation along the Afghan-Pakistan border is a source of instability throughout the region and beyond. India suffered a major terrorist event in Mumbai. Though, previous attacks have been equally severe in the terms of fatalities, the nature of this attack and the targets may signal the new direction for terrorism on the subcontinent. Given this and the potential for instability in Pakistan, with its troubled borders with Afghanistan and India, the world must remain on the alert about events in this region, dominated by two nuclear powers and, if necessary, ready to act in an aligned manner.

In Latin America, problems of violence, corruption and political instability continue to plague parts of the continent and uncertainty abounds on the consequences of the political directions that have been taken by several countries. On the African continent, Somalia, Sudan and Zimbabwe have the unenviable distinction of being the states "most at risk of failure" as they fill the top three positions of Foreign Policy's Failed States Index. And recent events in the Democratic Republic of Congo have resurrected the complications between tribal and national boundaries.

Though periodic incidents bring these situations to the fore from time to time, the world does have to bear the human and economic losses from enduring conflicts. Though they can be considered as "local" in nature they appear on the risk landscape with a relatively high degree of potential severity. Their persistent nonresolution means that there is a permanent risk that they spill over, causing greater loss of life and even destabilizing other countries. These conflicts can affect regions far beyond their borders through terrorism, sudden movements of refugees, ongoing illegal migration and direct military conflict.

Better Risk Management through Better Governance: What Can We Learn from Best Practices in Country Risk Management?

In Global Risks 2008, principles of country risk management and the concept of a Country Risk Officer, first introduced in 2007, were explored. Many of the challenges facing international governance are similar: broad range of risks, divergent incentives, multiple stakeholders and limited resources. However, at a country and international level, clear, transparent information and an integrated, comprehensive risk assessment are essential.

Countries are subject to a myriad of risks including natural catastrophes, food safety, pandemics and terrorism. Their governments are charged with the responsibility of maintaining critical infrastructure consisting of water, energy, transportation and communication while preserving lives and economic livelihoods under increasing budgetary pressure. Despite differences in organizational structures and risk priorities, there are two principles highlighted in Global Risks 2008 that governments have applied in practice: integrated, comprehensive, long-term risk assessment and transparent, clear communication to all stakeholders. Whether through a committee of an existing body or a newly formed international institution, a comprehensive framework of risk assessment, carefully evaluating interconnectivity and interdependency, and clear communication with all stakeholders should be core principles for risk management on a global scale. Country Risk Officers could serve as the focal point of communication between countries and with international bodies for risks of a global nature.

Integrated, comprehensive framework: As an example, the government of Singapore has instituted a "Whole of Government - Integrated Risk Management" (WOG-IRM) framework to evaluate and prioritize risks in a holistic manner and to help identify cross agency risks that may have fallen through gaps in the system. As part of the Risk Assessment and Horizon programme, Singapore has even constructed scenarios for energy, food security and climate change illustrating the longterm, comprehensive nature of their risk management framework.

Transparent data and clear communication of risks to all stakeholders: Japan's relatively small territory (378,000 square km) suffered 20% of the world's earthquakes between 1996 and 2005. Seventy-five per cent of Japan's assets are concentrated in flood prone areas. The Central Disaster Management Council (CDMC) of Japan is an inter-ministerial body established to formulate and promote a comprehensive national strategy for these and other risks. Data from the Japan Metereological Society and local governments, funnelled through the CDMC, is used to clearly communicate risks and response to its constituents. In addition, Japan provides various risk maps to stakeholders as a risk mitigation measure.