1/18/2010 Global Risks 2010 - Risks to Keep on the Radar
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  From the report
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Preface
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
Conclusion
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

Risks to Keep on the Radar Printer friendly version  Send to a friend

This section considers a selection of risks that might not feature prominently on the Global Risks Landscape but that are highly interconnected and reflect the potential for systemic risks and failures. The themes of this year's report also links the need for better governance and, in particular, institutions and mechanisms to share information and for long-term thinking as to their impact. These are not emerging risks but all demand greater attention of leaders and greater collaboration on solutions.

To highlight the need to integrate these risks more into thinking on systemic threats and vulnerabilities, they are examined through the lens of the Global Risk Network's "5i" framework. The 5i framework refers to insight, information, incentives, investment and institutions. Looking at each of these risks, using this simple approach, can help assess risks and the governance and other gaps that need to be addressed to better manage them in a collective and effective manner.

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

Transnational crime and corruption: endemic risks

The economic and social costs of transnational crime and corruption
If there is one area of global risk that epitomizes how the power of globalization can be misused, it is transnational crime and corruption. Some experts estimate that global organized crime and illicit trade accounts for 10% of global GDP. Transnational crime and corruption is highly interconnected with many of the global risks across the spectrum, ranging from geopolitical risks such as terrorism, instability in Afghanistan and nuclear proliferation, to biodiversity loss, and risks to critical information infrastructure. In the health sector, counterfeited drugs represent almost 10% of the worldwide pharmaceuticals market, equivalent to US$ 35 billion in revenues, causing millions of deaths each year.

Global business exposure
World Bank estimates from 2006 show that over US$ 1 trillion is paid in bribes each year, acting like a direct tax on doing business while severely undermining legitimate competition and innovation. Meanwhile, many studies show that every form of illicit trade is linked to the legitimate economy. Both human trafficking and forced labour, for instance, have widely penetrated the legitimate economy. Through their increasingly complex supply chains and vast distribution networks, corporations are more exposed to problems such as counterfeiting, intellectual property infringement and corruption at all levels. Businesses need to engage with other stakeholders, if they are to beat what is fast becoming their biggest competitor, as well as better educate their customers. As value chains lengthen and become more complex, multinational corporations need information and must have better oversight of who they are linked to further up and down the chain.

Partnering Against Corruption
The World Economic Forum's Partnering Against Corruption Initiative (PACI) created a multinational task force of participating companies from all over the world, adopting benchmark "Business Principles" that address ethical conduct regarding bribes, facilitation payments, political and charitable contributions, as well as gifts and sponsorships. Since its formation in 2003, more than 140 companies from all industry sectors have signed on to the PACI and, in so doing, they have agreed to maintain a zero-tolerance policy towards bribery and corruption and to implement a broad-based anti-corruption programme to guide the behaviour of their employees.

The Global Risks 5i Framework applied to transnational crime and corruption

Insight: Crime and corruption thrive on the increasing complexity and opacity of supply chains and global markets. While various actors and institutions have visibility into segments of the chain, most often they lack the complete overview of the chain and interactions within it. Forward-looking risk management must therefore identify these interlinkages and account for the entire sequence of exchanges from the source to the distribution to end customers, identifying the trading routes and facilitators connecting each step.

Information: More information needs to be systematically shared among international institutions and national agencies and bodies to maintain oversight and match transactions with the instigators and intermediaries involved. Improving traceability and transparency would help both business and endconsumers make informed decisions. The UN Convention against Corruption, which has been signed by 140 countries and ratified by 136, provides mechanisms for information sharing and reporting, which could be used to engage leaders in proactive measures against corruption.

Incentives: Crime and corruption prosper whenever the expected returns of proceeds far exceed any real or perceived barriers to abide by the stipulated rules and regulations. Minimum and guaranteed wages could reduce some of the incentives for crime and corruption in many countries, while lower expected returns for exchanged counterfeit or other illegal goods coupled with enforced transnational regulation would decrease incentives to enter the black market.

Investment: Efforts to restructure and improve both national and global collaboration efforts on crime and corruption will call for resources to improve the sharing of information, tracking and connecting agencies with different areas of responsibility, including customs agencies, law enforcement organs, as well as industry and trade agencies. Greater funding is required for existing measures to combat corruption, such as country visits with peer reviewers from other countries and improved reporting.

Institutions: The rise of transnational crime and corruption illustrates a major gover nance gap and the need to improve global oversight and regulation. Nation states have difficulty apprehending criminals that operate out of their jurisdiction, while excessive attention and resources are often applied to certain highly visible illegal activities, ignoring the larger picture and connections among many forms of illicit activity. The role of current inter national organizations is often limited by jurisdiction as well as the unwillingness of their members to share information and collaborate on a global basis. Combating illicit trade calls for stronger global focus on the provenance, trading routes, facilitators and means of distribution to end customers. Such oversight architecture of the future must include an element that transcends national borders and ensures broad representation in rule making with agreed and rapid procedures for systematic enforcement. In all of these areas, a driving factor for the success of institutional measures will be political will and action at national level and the active engagement of existing and emerging business efforts to mitigate these risks.

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

Biodiversity loss: the systemic implications of ecosystem risk

Rules governing biodiversity and ecosystems and their services (i.e. the benefits people receive such as food, freshwater, timber, protection from natural hazards, erosion pharmaceutical ingredients and recreation) have been largely excluded from global decisionmaking processes. As a result, approximately 60% of the earth's recognized ecosystem services have been degraded in the last 50 years. Since 1900, over 50% of wetlands has been lost; the global forest area has shrunk by 40% over the past 300 years; and by some estimates the rate of species extinction is thought to be up to 1,000 times more rapid than the natural rate of extinction. Annual economic losses due to deforestation and land degradation alone were estimated at US$ 2 to US$ 4.5 trillion, the equivalent of between 3.3% and 7.5% of global GDP in 20088.

The consequences of these ongoing losses will not only affect businesses dealing directly with natural resources, but will also touch the supply chains and growth objectives of most industry sectors in the developed and developing world. Through their natural carbon sequestration and storage function, forests can mitigate against the effects of climate change. Biodiversity and ecosystems services are inextricably linked with freshwater provision, sustainable agricultural production and climate. They are also linked to food security, migration and political stability, as the habitats and livelihoods of some of the world's poorest populations are directly affected by biodiversity loss. The foreseeable path of population growth and consumption trends bode ill for biodiversity. Land and the fauna and flora that live on it are under threat from more intensive agricultural needs, from residential and commercial development, waste and pollutants, and from climate change.

The business impact of biodiversity loss
In conjunction with the World Economic Forum's Global Agenda Council on Ecosystems and Biodiversity and PricewaterhouseCoopers, the Global Risk Network has produced a short briefing on this topic: copies and an online version can be found at: www.weforum.org/en/initiatives/globalrisk/index.htm

Costing the earth: pricing biodiversity loss
As with many areas of systemic risk, the complexity of the interconnections renders it difficult to get a full picture of the costs and implications for biodiversity. The Economics of Ecosystems and Biodiversity, or TEEB, report, is a major project to address this problem. It is a comprehensive effort to design and present metrics that account for natural capital and to give them credibility through consensus and standardization. From this basis, TEEB focuses on the cost of inaction weighed against the cost-benefit of investments in protection and adaptation. The interim report, released in May 2008, already highlighted some of the costs of inaction.

In 2007, the collapse of bee colonies was calculated to have cost US agricultural producers US$ 15 billion9. The effects of climate change are putting coral reef systems in danger of reaching a tipping point: if they disappear, they take with them around US$ 152 billion of annual economic revenues10. On a more positive note, research also shows that investment in ecological infrastructure is not only cost-effective when compared with man-made alternatives (if available), but also essential for effective climate change adaptation and mitigation strategies.

(8, 9, 10 all figures from "The Economics of Ecosystems and Biodiversity (TEEB)", Interim Report 2008: www.teebweb.org)

The Global Risks 5i Framework applied to biodiversity loss

Insight: While the links between population growth, climate change and energy are understood, biodiversity loss has been seen as a "local" issue. There is a need to raise awareness of the systemic nature of biodiversity loss for it to be an integral part of policy-making and business strategy. The United Nation's sponsored "Year of Biodiversity" in 2010 will increase media and public understanding, but decision-makers should already include it in their thinking.

Information: The Economics of Ecosystems and Biodiversity is already influencing policy and economic agendas with the release of a Climate Issues Update and a report for policy-makers in the autumn of 2009. In the summer of 2010, TEEB will release a report aimed specifically at the business sector. These reports will help address information gaps, improve measurability and, it is hoped, lead the way for more information sharing on this risk and its linkages to other risks.

Incentives: Building an effective baseline through cost-benefit analysis will support the creation of better policies and trade and finance mechanisms that will encourage private sector investment in "greener" technologies, industry methods and product design and manufacture.

Investment: As discussed in earlier sections, infrastructure investment choices could play a determining role in the prevention and/or management of a series of risks. Private capital must be a part of the solution, together with public policy reforms and public investment, to ensure that biodiversity conservation and restoration is profitable.

Institutions: Though only covering one aspect of ecoservices, the REDD+ (Reducing Emissions from Deforestation and Forest Degradation) initiative, which introduces the concept of payments for ecosystem services to link incentives and funding could serve as an example to design future governance mechanisms necessary for other ecosystem services and the accelerating threats to biological diversity.

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

Interconnected and Everywhere: The Rise of Cyber-vulnerability

Modern industrial societies are highly dependent on a limited number of utilities that provide electricity, water, oil and gas. In the past, the information systems controlling the infrastructure underlying these utilities typically consisted of closed, completely private networks managed from a single control centre, with only limited attention given to authentication or encryption issues. These proprietary networks, however, were expensive to run while the open, Internet Protocol-based networking standards offered substantial cost-saving prospects, which led engineers to connect the control systems to the Internet across utilities and other industry sectors around the globe over the last decade. With the emergence of cloud computing, a new era of complexity and risk is opening up. By its very nature, cloud computing will make risks more diffuse and, thus, their management more difficult. Cloud computing is a new system, but it will link to numerous existing, critical systems. In many ways it could be comparable to the financial system, global but with relatively little international oversight, and critical to the functioning of economies and societies. Cloud computing can bring many opportunities but in the absence of adapted models of governance and regulation it could also bring a new degree of vulnerability and systemic risk.

The convergence of closed and open industrial control systems, however, has created systemic vulnerabilities that are still very much off the radar, judging from the outcome of the Global Risks Perception Survey 2010, which revealed that most experts perceive the risk of a potential breakdown of "Critical Information Infrastructure" (CII), as well as of data fraud/ loss, as comparatively low - both in terms of likelihood and severity. Moreover, these two risks were assessed as being among the least interconnected risks, which is somewhat surprising given that IT systems increasingly represent the foundation of practically every service, transaction, communication and exchange required for the steady functioning of the global economy, security and individual well-being.

The increasing complexity and rapid development of dynamic systems and networks, the sophistication of changing threats and the presence of intrinsic vulnerabilities present demanding challenges to the information society. As network systems grow larger and ever more interconnected, the risk includes large system failures due to human error or lack of effective governance of digital assets. Technological, societal and economic incentives therefore need to become aligned to reduce the rapidly increasing risks of cybercrime, data fraud/loss, and CII system failure. This is particularly important at a time when a serious incident could have a severe impact and as technological systems represent a decisive factor for growth and development.

Confidence and security in critical information and communication systems are vital for building an inclusive, secure and global information society, and a shift in the way we think about data is urgently needed. Countries need to start the dialogue on global cybersecurity and stability by addressing international cooperation. Above all, governments and businesses need to recognize the extent to which information and communications technology (ICT) is inextricably interlinked with other complex systems, from finance and power generation to communications and safety controls.

The Global Risks 5i Framework applied to cyber risk

Insight: As the Internet and CII move from 1.0 to 2.0 and beyond, more content from multiple and varied sources will be housed together on the customer or end-user side, creating a highly complex environment for security governance and protection. The degree to which ICT systems are increasingly embedded in vital systems and services, from finance to transportation and energy, heightens the level of systemic risk and the potential for a cascade of failures with severe economic and social impact. Greater analysis and understanding is needed about potential weak links and possible mitigation strategies.

Information: Increasingly complex supply chains have led to a situation where the intellectual property developers and owners, software platform vendors, network operators and application vendors all end up trying to offload the risks and liabilities on each other, while the end-users have little power, knowledge or information over the risk to which they are exposing themselves. This has to be countered by better education and increased awareness of existing and emerging information technology-related risks among all stakeholders. Policy-makers, in particular should consider how cyber risks should be factored into other issues, such as energy security, communication and power networks, including operational continuity at corporate, community and national level.

Incentives: As new and existing technologies are applied to critical systems, ranging from smart grids to cloud computing, the appropriate regulatory frameworks and incentives have to be implemented to ensure that the required security technologies are integrated from the outset, rather than as an afterthought.

Investment: The infrastructure investments underlying emerging technologies need to be secure by default - not as an option. Furthermore, providing for a rapid, effective, transnational law enforcement mechanism will require resource commitments by both the public and private sectors, as will the sharing and compiling of threat and incident information among government and industry entities.

Institutions: Institutional prevention and preparedness should include a global repository of malware and security breach notification. A central clearinghouse would help ensure that all reported breaches can be located by the press, investors, researchers and sector regulators, with future laws/guidelines setting minimum standards for notification. Such a framework of universally accepted rules and standards is required to provide a globally accepted definition of a cybercrime and to criminalize offences. At the moment, a patchwork of national legislations prevents effective tracking, tracing and prosecution of criminals who operate globally, while effective security-oriented partnerships between government and industry have been difficult to establish.