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  From the report
Executive Summary
The Global Risks Landscape 2010
Fiscal Crises and Unemployment
Underinvestment in Infrastructure
Chronic Diseases
Risks to Keep on the Radar
Managing Global Risks
Processes and Definitions
Global Risks Barometer 2010
Contributors and Acknowledgements
  Global Risks 2010
    In collaboration with Citi, Marsh & McLennan Companies (MMC)
    Swiss Re, Wharton School Risk Center, Zurich Financial Services
Global Risks 2010 Home

The Global Risks Landscape 2010 Printer friendly version  Send to a friend

The rationale behind the 2010 highlighted risks
The choice of risks to focus on in the annual report is driven by several factors. The more highly interlinked the risk, the more its impact and severity is amplified, so its level of interconnectedness on the Risks Interconnection Map (RIM) and its position on the Global Risks Landscape are important. Hence, using these criteria and the input from roundtables with the Global Risk Network throughout the year, the following risks were selected as the focus of discussion in this report: Fiscal Crises, Underinvestment in Infrastructure, and Chronic Diseases.

Click here for the full Risks Interconnection Map (RIM) 2010.

These risks are covered through the lens of the themes that emerged from these different sources in society and the global economy over the next 10 years: systemic and creeping risks; global shifts; and the tension between the need for effective global governance and collective commitment to risk management and adaptation, with the often pressing and divergent priorities on regional, national and corporate agenda.

Fiscal crises
In response to the financial crisis, many countries are at risk of overextending unsustainable levels of debt, which, in turn, will exert strong upwards pressures on real interest rates. In the final instance, unsustainable debt levels could lead to full-fledged sovereign debt crises.

Underinvestment in infrastructure
Multiple studies across the world repeatedly highlighted that vast segments of our water, energy or transport infrastructure are structurally deficient or functionally obsolete, requiring considerable annual investments to avoid catastrophic failure.

Chronic diseases
As a consequence of profound socio-demographical transitions among large sections of the world population, changing physical and dietary habits, chronic diseases including cancer, diabetes, cardio-vascular and chronic respiratory disease are continuing to spread rapidly throughout the developed and developing world, driving up health costs while reducing productivity and economic growth.

A note on three other key risks
While not explored in depth in this edition, "asset price collapse", "China's growth falling to less than 6%", and "Afghanistan" featured highly on the Global Risks Landscape. All are referred to in the following chapters and indeed Global Risks 2008 discussed asset price collapse and its implications for systemic financial risk. The role of China is referred to through several sections of this report and will remain to the fore of the Global Risk Network's dialogue over the coming year and beyond.

Asset price collapse
The last edition of this report discussed the longer term implications of the financial crisis, exploring the tight interconnections among economic and resource-related risks. The fact that the risk of an asset price collapse remains the strongest risk on the landscape on the severity and likelihood axes illustrates the continuing uncertainty about the resilience of the global economy and the effectiveness of fiscal and monetary responses, governance and regulation. Concerns abound about the decline in the dollar and low interest rates fuelling another bubble, this time liquidity rather than debt-driven. Experts are also worried about a lag in the impact of the recession in a number of areas. The level of corporate bankruptcies, particularly among small and medium size enterprises remains high. Credit card default rates, which are highly correlated with unemployment, are already at historic levels. The current unemployment rate of more than 10% in the US is considerably higher than the 6.5% unemployment rate that most credit card lending models assume. Finally, though residential house prices have fallen considerably in those markets considered to have been the most overheated, concerns persist about commercial real estate. As illustrated by the events in Dubai in December 2009, debt loads remain high; as refinancing needs arise, which are only expected to peak between 2011 and 2013, further shocks could emerge.

China's growth falling to 6% or less
China appears to have successfully navigated the financial crisis and global recession. However, much of the domestic impulses derive from high credit growth, which entails an increased risk of misallocation of capital and renewed bubbles in financial asset prices and real estate. These can always carry the risk of a sharp and potentially recessionary correction. A loss in China's growth momentum could adversely affect global capital and commodity markets. The Chinese government faces a number of challenges: the need to increase domestic demand to counter the loss in exports and the need to maintain a stable renminbi given China's vast accumulation of foreign reserves. The implications of a fall in China's growth would be particularly acute for its trading partners if it should happen before the global economy is on a more resilient path.

Though geopolitical risks were not the focus of this year's report, among those tracked by the Global Risk Network, including Iran and Israel-Palestinian Territories, Afghanistan emerged highest on the Global Risks Landscape. It is also linked to nearly all the other geopolitical risks and several economic risks on the RIM. Moreover, Afghanistan's instability cannot be dissociated from rising concerns over the situation in Pakistan. The border between the two countries has become a hotspot.
The instability in the region is already a source of suffering for the local population. Their plight is compounded by the stress that rapid population growth and the impact of climate change are placing on resources, in particular water. Afghanistan's population (currently 28 million) is expected to increase by over 30% in less than 10 years. Pakistan's population is set to reach 225 million within a decade (from 41 million at independence in 1949). The World Bank has warned that population growth is already causing water stress and could soon result in outright scarcity. The social and economic consequences of this should be as much a focus for the international community as the geopolitical implications.

The Risks Interconnection Map 2010 (RIM)
The 2010 Risks Interconnection Map (RIM) (Figure 14) shows the results of the 2010 Global Risks Expert Perception Survey, which the World Economic Forum runs every year to survey experts in several disciplines2 all over the world on their perception of risk interdependencies and relations.

(2 Expertise of the Global Risk Network includes academics and practitioners in the areas of economics, geopolitics, environment, society and technology.)

Click here for the full Risks Interconnection Map (RIM) 2010.

Governance gaps
Global governance gaps remain high on the Global Risks Landscape and are the most significant source of risk in terms of interconnectedness, meaning that independent from the expert's background the risk of governance gaps has been selected most of the time as a top connection and highly related to other risks. This shows that experts have identified weak or inadequate institutions or agreements in almost all of the risks covered. However, it also raises a red flag in terms of expectations as to which fields and concrete issues global governance bodies should take steps and get involved. Thus, the Forum is examining where the biggest gaps in governance are and how these gaps might be addressed with the tools and thinking of the 21st century.

Global governance's relation with geopolitical risks has not changed from 2009. Economic and environmental risks are the areas where there has been a marked increase in the perception of interdependencies. This suggests that the recession and the Copenhagen Climate Conference 2009 call for collaboration have had an impact on heightening awareness, developing insights and understanding risk interrelations, which has been translated in our survey in the form of more and stronger connections with this particular risk. It also reinforces the message of the Global Risks 2009 report of how crucial it is to focus on global governance not as an end in itself but as a means to address many critical global risks over the coming years.

Retrenchment from globalization
Throughout the year and across different countries, experts from the Global Risk Network have convened to reflect on and debate the outlook for the Global Risks Landscape over the coming years. On several occasions, experts have expressed concern that it is highly likely the next economic cycle will be politically more unstable once the global economy emerges from the current crisis. Despite a significant drop in global trade and investment flows, these are now recovering and the expected backlash to globalization has not materialized, trade disputes have not increased and the rise of the G20 has been welcomed as recognition that a wider group of countries has a role to play on the global stage. However, should the recovery progress without a concomitant improvement in employment, the risk of "retrenchment from globalization" (in both developed and emerging countries) could emerge more strongly. Rising protectionism, coupled with the macroeconomic instability and social unrest due to rising unemployment, adds pressure to the global outlook. Some elements of recent stimulus packages could be read as protectionist measures, discouraging crossborder investment flows. A sustainable recovery will require healthy flows of trade, investment and people and any moves to counter these should be watched with caution.

Click here for the full Risks Interconnection Map (RIM) 2010.

It is important to take into account that retrenchment from globalization goes beyond protectionist economic policies. A political or social backlash to globalization generating high levels of social turbulence or destabilizing a government is also incorporated in this risk. A major retrenchment coming from areas other than economic policy, such as societal attitudes toward multilateralism, will have equally damaging consequences on growth and development worldwide.

As global governance institutions and the remodelling of multilateralism become a channel to adjust to current challenges, national interests must correspond, support and adhere to global governance organizations and agreements. Given the unprecedented levels of interconnectedness, global leaders from all spheres need to find a common platform to debate and push forward reforms and policies to ensure a sustainable global economy.

Increasing interconnectedness: systemic risks, systemic responses
One of the major conclusions from the analysis of the results of the 2010 Global Risks Expert Perception Survey which drives the RIM (Figure 14)3 is the marked increase in interconnectedness among the risks covered by the Global Risk Network (see inside front cover for the risk descriptions). Risk interdependency has always been at the core of our analysis but, particularly this year, it seems to have gained even more attention and generated strong interest among experts of different disciplines. This year's survey shows that both the number and strength of interconnections among risks have increased notably. This upsurge can be interpreted as an indication of success in terms of improving the awareness, discussion and, in some cases, understanding of systemic risks.

(3 The Global Risks Expert Perception Survey was conducted between July and October 2009. More than 200 experts from The Global Risk Network and the Forum's Global Agenda Councils were surveyed to assess the likelihood, severity and interconnections of the risks in our taxonomy. This report shows the results referring to the interconnections identified by the experts.)

In Global Risks 2008, systemic financial risk was described as a system-wide financial crisis typically accompanied by a sharp decline in asset values and economic activity and an abrupt loss of liquidity. During the last 18 months, there has been a significant amount of debate about the systemic nature of the financial crisis, its unintended consequences, and the appropriate strategies and policies which will create more resilient systems. The crisis unveiled fundamental questions about our ability to manage systemic failures. Systemic risks are inherent to every system, not only the financial industry. However, the universal scope of the financial crisis has raised awareness of interconnections and revealed the importance of thinking differently about the risk landscape, highlighting the key premise of the Forum's Global Risks work: global risks do not manifest themselves in isolation.

Since the Bretton Woods agreements in 1944, it is the first time where global leaders around the world agreed on the urgent need to reform the global financial system. However, real political will is necessary to muster cooperation adapted to today's reality and challenges. The response and management of the current crisis must also be systemic and global and it goes beyond financial market interventions. The increasing relevance of the G20 reflects the greater role that many emerging market countries are playing and a step towards healthier international cooperation and coordination.

A definition of systemic risk
A systemic risk is the potential loss or damage to an entire system as contrasted with the loss to a single unit of that system. Systemic risks are exacerbated by interdependencies among the units often because of weak links in the system. These risks can be triggered by sudden events or built up over time with the impact often being large and possibly catastrophic.

The financial crisis and ensuing recession uncovered major weaknesses and revealed just how interdependent the world has become. A major improvement of our insights into these interdependencies is essential to tackle the origins of the crisis and to avoid repetition in the future. Effective regulation will part be part of the solution. Systems need a certain level of flexibility to adapt to changing environments. Global decision-makers and regulators need to provide an adequate degree of freedom, while ensuring that regulation is effective in reducing risks through the necessary oversight and safeguards.

In the Global Risks Landscape 2010 (Figure 1, inside front cover), economic risks continue to feature as having the highest estimated potential severity of economic loss. This illustrates that the world economy is still in intensive care and that concerns remain about the adequacy of its global governance and measures taken at the national level. The prominence of the G20 as the group responding to the financial crisis represents a first step towards a better and more coordinated international policy-making process. Still, its efficacy has not been sufficient to fully galvanize leaders into taking action to push major reforms in global governance bodies and more effort needs to be devoted to this.

As a consequence of the financial crisis and the fallout from the global recession, the risks of a widening global governance gap and retrenchment from globalization feature prominently in the global risks map. Introduced in last year's report, the "global governance gap" is seen as likely and severe going into 2010, as in 2009, and there is a similar high overall assessment for the risk of a retrenchment from globalization.
Given the importance of both risks, the question remains how they affect individual countries. To do so we first translated the high-level definition of global risks into individual country risk metrics. To assess the global governance gap, we measured the degree in which countries participate in existing institutions of global governance, such as bodies governing trade, finance, environment, anti-terrorism, health and humanitarian activities. Likewise, to assess the risk of a retrenchment from globalization, we measured a country's involvement mainly, but not exclusively, in global trade and capital flows. Using an approach based on game theory, we assumed that countries staying on the sideline will eventually be sanctioned by the global community. Consequently, they are more exposed to these risks.

The risk of not addressing slow moving shifts
The Global Risk Network experts agreed in events and workshops throughout the year that predicting the next crisis is a risk in itself. However, there are large-scale, slow-moving shifts already underway for which current levels of preparedness are insufficient and whose implications could have far-reaching and highly costly consequences. Independently of what shape the global recovery will take, we might have expected that the "quake" in the fundamentals would lead to a significant behavioural change and systemic overhaul of norms and practices. This shift has not yet materialized, partially because signs of recovery came relatively fast in some areas and behavioural changes take time. It is slow in part because humans gravitate to what they know and postpone dealing with what they see as future risks. The result of maintaining the status quo and not pursuing major changes at an individual, business and government level is not an option any longer.

Today's challenges emerged in part from a lack of understanding of risk interconnectedness in the past. The slow-moving shifts seen today will be harmful in the next decade if we ignore their magnitude and the scope of their consequences. Some, such as chronic diseases might continue at their current pace. Others, such as underinvestment in energy infrastructure or IT security, might reach a tipping point and provoke a sudden shock. From our taxonomy of risks, we can identify some slow-moving shifts with a noteworthy potential effect globally. These big shifts are not new, neither in our taxonomy nor in the global debate. But in the midst of the economic turbulence, it is of utmost importance that they are addressed by the many policy and corporate decisions, as their materialization could be a catalyst for another systemic crisis. The worst case scenario of overlapping economic recessions with political instability and social turbulence, triggered by untenable fiscal deficits and unsustainable government debt burdens, might not, after all, be impossible.

A retrospective of the Global Risks Report

To mark the fifth year of Global Risks, we would like to take a moment to review the publication's goals. The Global Risk Network (GRN) was established in 2004 with a view to responding to a growing desire among Forum Members and constituents to understand and explore how risks were interconnected and the implications of those relationships over a 10-year time frame. Through a process of research and consultation, the GRN defined the criteria for global risks and identified an initial set of risks, which has been expanded over the past years. The GRN published its first Global Risks in 2006. Another important aspect of the work is the recognition that in today's globalized environment, risks can have enormous systemic implications and no one country, industry or organization can deal with them in isolation. Global risks require collective thinking and responses. Thus, the objective of the report is to build awareness of these factors and to offer a common framework for dialogue and responses among leaders from business, government, international institutions and other stakeholder groups.

A framework to track and assess risk
The report has evolved over the last five years by reflecting the unique events and risk trends that evolve through each year, while maintaining a long-term perspective on a set of core risks. The report does not predict when or how specific risks could occur. The Global Risk Network draws heavily on qualitative expert opinion rather than focusing only on historic data. This match of facts and expert analysis is an approach that avoids the work falling into a silo approach. While the risk landscape has evolved relatively gradually over the past five years, the awareness of interconnections among risks appears to have steadily risen.

In its first year, the Global Risks 2006 Report identified current and emerging risks, and looked at the links between them and implications over a 10-year time horizon. Global Risks 2007 focused on the fundamental disconnect between risk and mitigation, emphasizing that exercises in risk assessment are futile if they do not encourage action on the part of decision-makers. In 2008, a full section was devoted to dealing with the globalization of risk and rising interconnectedness as a series of risk issues, such as the financial crisis and concerns over the long-term security of food supply, focused attention on the fragility of the global economy. Last year's report warned against losing sight of longer term risks in the face of overwhelming short-term challenges.

As a reminder, the report is released in January of each year, based on analysis conducted in the third and fourth quarters of the previous year. The key risks and focus of each year's report are summarized in Figure 5 below.

Figure 4: Key risks and themes from the Global Risks reports over the past five years
2006 2007 2008 2009 2010
• Asset prices/indebtedness
• Chinese growth slowing to < 6%
• Fiscal crises
• Oil price spikes/supply shocks
• US current account deficit/fall in US$
• Critical infrastructure infrastructure
• Asset prices/indebtedness
• Chinese growth slowing to < 6%
• Fiscal crises
• Oil price spikes/supply shocks
• US current account deficit/fall in US$
• Asset prices/indebtedness
• Chinese growth slowing to < 6%
• Fiscal crises
• Oil price spikes/supply shocks
• Rising and volatile food prices
• An abrupt, major fall in the value of the US$
• Asset price collapse
• Chinese growth slowing to < 6%
• Fiscal crises
• Global governance gaps
• Chronic disease
• Increase resource-related risk (water, land and energy)
• Further falls in asset prices
• Chinese growth slowing to < 6%
• Fiscal crises
• Global governance gaps
• Chronic disease
• Underinvestment in infrastructure

As figure 5 highlights, though the number of risks it examines have evolved over the last five years, there are several issues that have remained constant. Concerns about fiscal crises have featured since the outset, as did concerns about overinflated levels of asset prices and indebtedness. The latter shifted to a concern about asset price collapse in January 2008, before the full impact of the financial crisis hit. Infrastructure was a focus in 2006, only to reappear in this year's report, perhaps a sign that long-term thinking is seen as critical given the events of the past years. Finally, the implication of a decline in China's growth has been a constant since the first edition of the report. Thus far, this risk has not materialized but it is clearly one that would have considerable implications for China and also for the global economy.