World Economic ForumJanuary 2009

Global Risks 2009A Global Risk Network Report

COMMITTED TO IMPROVING THE STATE

OF THE WORLD

A World Economic Forum Report in collaboration with CitigroupMarsh & McLennan Companies (MMC) Swiss ReWharton School Risk CenterZurich Financial Services

The World Economic Forum is an independentinternational organization committed to improvingthe state of the world by engaging leaders in part-nerships to shape global, regional and industryagendas.

Incorporated as a foundation in 1971, and basedin Geneva, Switzerland, the World EconomicForum is impartial and not-for-profit; it is tied to nopolitical, partisan or national interests.(www.weforum.org)

This work was prepared by the Global Risk Network of the World Economic Forum.

World Economic Forum91-93 route de la CapiteCH-1223 Cologny/GenevaSwitzerlandTel.: +41 (0)22 869 1212Fax: +41 (0)22 786 2744E-mail: globalrisks@weforum.orgwww.weforum.org

© 2009 World Economic ForumAll rights reserved.No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system.

ISBN: 92-95044-15-0978-92-95044-15-9REF: 060109

The information in this report, or on which this report is based, has been obtained from sources thatthe authors believe to be reliable and accurate. However, it has not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness ofany information obtained from third parties. In addition, the statements in this report may provide current expectations of future events based on certain assumptions and include any statement thatdoes not directly relate to a historical fact or a current fact. These statements involve known andunknown risks, uncertainties and other factors which are not exhaustive. The companies contributingto this report operate in a continually changing environment and new risks emerge continually.Readers are cautioned not to place undue reliance on these statements. The companies contributingto this report undertake no obligation to publicly revise or update any statements, whether as a resultof new information, future events or otherwise and they shall in no event be liable for any loss or damage arising in connection with the use of the information in this report.

Figure 1: Global Risks Landscape 2009: Likelihood with Severity by Economic Loss

Likelihood

below 1% 1-5% 5-10% 10-20% above 20%

2-10

bill

ion

10-5

0 bi

llion

50-2

50 b

illio

n25

0 bi

llion

-1 tr

illio

nm

ore

than

1 tr

illio

n

Seve

rity

(in U

S$)

Based on an the assessment of risks over a 10 year time horizon by the Global Risk Network

Key: Boxes indicate change since last year’s assessment

New risk for 2009

DecreasedIncreased

Stable Likelihood Severity

34

36

35

29

30

31

32

33

20

21

22

23

24

25

26

27 28 12

13

14

15

16

1718

19

11

1

3

4

5

89

10

2 67

Source: World Economic Forum 2009

ECONOMIC1 Food price volatility2 Oil and gas price spike3 Major fall in US$4 Slowing Chinese economy (6%)5 Fiscal crises6 Asset price collapse7 Retrenchment from globalization (developed)8 Retrenchment from globalization (emerging)9 Regulation cost10 Underinvestment in infrastructure

GEOPOLITICAL11 International terrorism12 Collapse of NPT13 US/Iran conflict14 US/DPRK conflict15 Afghanistan instability16 Transnational crime and corruption17 Israel-Palestine conflict18 Violence in Iraq19 Global governance gaps

ENVIRONMENTAL20 Extreme climate change related weather21 Droughts and desertification22 Loss of freshwater23 NatCat: Cyclone24 NatCat: Earthquake25 NatCat: Inland flooding26 NatCat: Coastal flooding27 Air pollution28 Biodiversity loss

SOCIETAL29 Pandemic30 Infectious disease31 Chronic disease32 Liability regimes33 Migration

TECHNOLOGICAL34 CII breakdown35 Emergence of nanotechnology risks36 Data fraud/loss

Danny Quah, Professor of Economics, London School ofEconomics and Political Science, United KingdomGeoff Riddell, Member, Group Executive Committee andChief Executive Officer, Global Corporate Business, ZurichFinancial Services, SwitzerlandVanessa Rossi, Senior Research Fellow, InternationalEconomics Programme, Chatham House, United KingdomMelinda Roth, Head of the Integrated Risk ManagementTeam, World Bank, USATamer Saka, Chief Risk Officer, Haci Ömer Sabanci HoldingAS, TurkeyArmen Sarkissian, President and Founder, Eurasia HouseInternational, United KingdomAnthony Scaramucci, Managing Partner, Skybridge Capital,USACuneyt Sezgin, Board Member, Garanti Bank, TurkeyDaniel Shapiro, Director, Harvard International NegotiationInitiative, Harvard Law School, USADennis Snower, President, Kiel Institute for the WorldEconomy, GermanyAndreas Spiegel, Vice-President, Senior Climate ChangeAdvisor, Swiss Re, SwitzerlandRory Stear, Executive Chairman, Freeplay Energy Plc, UnitedKingdomRolf Tanner, Director, Head of Political and Sustainability RiskManagement, Swiss Re, SwitzerlandAlper Ugural, Chief Risk Officer, Dogus Group, TurkeySinan Ülgen, Chairman, Centre for Economic and ForeignPolicy Studies (EDAM), TurkeyGündüz Ulusoy, Faculty Member, Faculty of Engineering andNatural Sciences, Sabanci University, TurkeyOya Unlü Kizil, Director, Corporate Communications, KoçHolding AS, TurkeyLevent Veziroglu, Executive Vice-President (EVP), Office ofthe Chairman, Dogus Group, TurkeySuna S. Vidinli, Chief Communications Officer, Calik HoldingAS, TurkeyDiego Visconti, International Chairman, Accenture, ItalyBob Ward, Director, Public Policy, Risk ManagementSolutions, United KingdomMark Weaser, Chief Investment Officer, Modern TerminalsLtd, Hong Kong SARMartin Weymann, Vice-President, Senior Risk Manager,Swiss Re, SwitzerlandCarolyn Williams, Development Manager, The Institute of RiskManagement, United KingdomPatricia Wouters, Director, UNESCO Centre for Water Law,Policy and Science, University of Dundee, United KingdomSelcuk Yorgancioglu, Executive Director, Abraaj Capital,United Arab EmiratesLinda Yueh, Fellow in Economics, University of Oxford,United KingdomSimon Zadek, Chief Executive, AccountAbility, UnitedKingdom

Internal reviewers

A particular note of thanks to Miguel Perez, Manager IssueMonitoring, Strategic Insight Team, for his input andguidance on the Global Risks Perception Survey

In addition, the project team expresses its gratitude to thefollowing colleagues from the World Economic Forum fortheir excellent advice and support throughout the project:

Jennifer Blanke, Director, Senior Economist, Head of theGlobal Competitiveness NetworkMatthias Catón, Knowledge Manager, Global AgendaCouncil; Global Leadership FellowBrindusa Fidanza, Senior Project Manager, EnvironmentalInitiatives; Global Leadership FellowChristoph Frei, Senior Director, Head of Energy IndustriesLena Hagelstein, Programme Manager; GlobalLeadership FellowRandall Krantz, Associate Director, Environmental InitiativesJohanna Lanitis, Project Associate, Energy TeamCarina Larsfälten, Associate Director, Governments andStakeholdersSylvia Lee, Associate Director, Environmental Initiatives;Global Leadership FellowOksana Myshlovska, Knowledge Manager, GlobalAgenda Council; Global Leadership FellowMartin Nägele, Knowledge Manager, Global AgendaCouncil; Global Leadership FellowGareth Shepherd, Associate Director, InvestorsCommunity; Global Leadership FellowFabienne Stassen Fleming, Head of Knowledge Capture,Global Agenda CouncilsDominic Waughray, Senior Director, Head ofEnvironmental Initiatives

3|G

lobalR

isks2009

Preface

4

Executive

Sum

mary

5

1.The

GlobalR

isksLandscape

20096

2.The

FinancialCrisis

andG

lobalRisks

9

3.R

esourceC

hallenges,Sustainability

andC

ompetition

16

4.G

lobalGovernance:a

Key

toG

lobalStability

andS

ustainability21

Appendix

1:TheR

iskA

ssessment

andR

iskB

arometer

27

Appendix

2:GlobalR

isksR

eport:Process

andD

efinition32

Contributors

andA

cknowledgem

ents33

Contents

Co

nclusion

26

Preface

4| G

lobal R

isks 2009

2009 will be a year of learning the lessons of the financial

crisis; a year where its reach in term

s of time and scope

becomes m

ore evident; a year that calls for a newfinancial architecture to be shaped. A

t the same tim

e, itw

ill be a year that will test the resolve and w

illingness ofw

orld leaders to collaborate and take action to move

beyond this crisis. The global risks landscape is acrow

ded one and the window

of opportunity we have to

address some of the largest challenges of our tim

e isnarrow

.

Global R

isks 2009looks at the risks, econom

ic and other,that could em

erge as the financial crisis continues tounfold. The report considers the im

plications of a suddendrop in C

hina’s growth to 6%

or below; deteriorating

fiscal positions;and further asset price falls. Given the

vulnerable state of the global economy, and as

deleveraging continues across the financial system,

further shocks could have severe and far-reachingconsequences. The degree to w

hich the world has lost

confidence in its institutions and systems is serious.

Without confidence w

e could face a protracted andpotentially calam

itous, downw

ard spiral. Governm

ents,central banks and regulators m

ust avert this but must

also avoid inadvertently sowing the seeds of future crises.

They need to restore confidence at all levels; toconsum

ers and house-owners, to investors,and in and

among financial institutions. This crisis exposed the

weaknesses of governance system

s. Good governance

and leadership will help rebuild confidence, enable

alignment across regions and industries,and encourage

collaboration.

With w

orld attention focused on the imm

ediate economic

challenges, thisreport also w

arns against losing sight of

longer term risks. N

ow is the tim

e for leaders to lookahead. R

isks related to climate change, unresolved

resource issues and potentially more defensive and

protectionist stances by states could lead to a conflationof these global risks w

ith significant societal andeconom

ic costs. Again, better governance at corporate,

country and global level is necessary to provide thefram

eworks for stable international relations, and for

states and corporations to create greater certainty andtrust. S

uccessful mitigation of global risks w

ill only bepossible once confidence in global governanceinstitutions is restored, starting by ensuring that they areadapted to today’s challenges and revising their m

andateand pow

ers accordingly. They must be able to function in

a proactive and coordinated fashion, fosteringcooperation across all regions, industries and stakeholdergroups.

Global R

isks 2009builds on the insight and experience of

the Forum’s unparalleled netw

ork of political and businessleaders, experts and academ

ics. We are grateful for the

continued comm

itment of our partners on this report:

Citigroup, M

arsh &M

cLennan Com

panies (MM

C), S

wiss

Re, The W

harton School R

isk Center and Zurich Financial

Services. This report takes a long-term

approach to risk,looking ten years ahead, w

hile not forgetting thatdecision-m

akers must respond to the crisis

today with

the consequences that carries for their countries andenterprises. A

bove all, Global R

isks 2009provides a

framew

ork for leaders to think about risk and how the

risks that they face in the shortterm

in their region andbusiness link to the longer

term risks, w

ith globalim

plications. While the m

itigation of the risks consideredhere w

ill demand leadership, com

mitm

ent and resourcesacross all stakeholder groups, they m

ay also yieldopportunities and strengthen the ties betw

een differentparts of the w

orld. 2008 has proven the extent to which

the world is subject to global risks; let 2009 be the year

where the w

orld finds a comm

on agenda to beginm

itigating their impact.

Klaus S

chwab

Founder and Executive C

hairman

World E

conomic Forum

Executive Sum

mary

5| G

lobal R

isks 2009

2008 was an historic year. Financial disruptions triggered

by declining house prices in the US

grew into a global

credit crisis of systemic proportions. B

y the second halfof the year, m

ost advanced economies had entered a

recession. The downturn spilled over into em

ergingm

arkets,increasing the likelihood of a global contractionin 2009. A

lthough the world has seen several financial

crises, this one differs in two respects. First, it has

demonstrated just how

tightly interconnectedglobalization has m

ade the world and its system

s.S

econd, this crisis was driven by developed econom

iesusing unprecedented levels of debt and leveragethroughout the financial system

. Thus, risks that hadbeen identified in the past tw

o editions of this report – therisk of a global m

eltdown in asset prices (2007) and the

widespread m

ispricing of risk and the potentialim

plications of systemic financial risk (2008) – have

materialized w

ith huge consequences.

The fo

cus of the rep

ort

This year’s report focuses on the effects of the globalfinancial crisis and its im

plications for those risks thatcam

e to the fore of the Global R

isk Netw

ork assessment

for 2009. They include: a sudden further drop in China’s

growth to 6%

or below; deteriorating fiscal positions;

further asset price falls;increasing resource-related risksdue to clim

ate change;and the failure of globalgovernance to m

itigate global risks. The highlyinterconnected nature of these risks m

eans that theirim

pact is truly global. The economic outlook for 2009 is a

grim one for m

ost economies; m

arkets remain volatile,

liquidity has not returned, unemploym

ent is rising,andconsum

er and business confidence has fallen to recordlow

s. In this climate, risks becom

e even more potent in

their impact and, as discussed in previous reports, the

tendency towards panic and short-term

responses arem

ore pronounced. This report explores the dangers ofm

anaging out of this crisis, without considering the

broader, long-term consequences of today’s decisions. It

also stresses the need for a determined, global focus on

balancing the response to the imm

ediate challenges with

a concerted effort to mitigate longer

term risks, not least

those relating to climate change and resources.

The report also considers the impact of the financial crisis

and economic environm

ent on a few risks introduced for

the first time in 2008 and others that the G

lobal Risk

Netw

ork has tracked for several years. Many of these are

particularly pertinent to the current environment. Linking

to the discussion on the response to the financial crisis,the risk of over-regulation and lack of a coordinatedapproach to regulation at a global level m

akes its firstappearance in the assessm

ent. The same is true of

underinvestment in infrastructure, a risk that is highly

interconnected with a num

ber of economic,

environmental and societal risks. In term

s of botheconom

ic impact and loss of life, health risks, including

chronic and infectious diseases, as well as the ongoing

risk of a major pandem

ic, continue to dominate.

Conflicts, in particular intra-state conflict, and terrorism

continue to mar the lives of m

illions worldw

ide and theireffects reach far beyond the costs to the populations theydirectly touch.

Global R

isks 2009offers an assessm

ent of how the focus

risks interconnect with others and how

they may evolve

over time. It also raises m

any questions about the risk ofignoring other potential crises w

hen dealing with a current

one.The events of 2008 underscored the importance of

two m

ajor ideas behind the work of the G

lobal Risk

Netw

ork: global risks can only be understood when

explored in the context of their interlinkages with other

risks and no one group acting alone can mitigate them

effectively.These aspects of global risks are also why

they pose such a challenge for policy-makers and

business leaders alike. How

ever, as they try to resolvethis situation as quickly as possible, leaders m

ust bem

indful of the long-term im

plications of today’s decisions.

1. The Global R

isks Landscape 2009

6| G

lobal R

isks 2009

Ho

w the g

lob

al risksland

scape has evo

lved since

last yearThe follow

ing risks came to the fore in the assessm

entfor 2009, both in term

s of likelihood and severity and thedegree to w

hich they are “pivotal” risks, i.e. that they areat the nexus of m

any risks.

Deterio

rating fiscal p

ositio

nsThe deterioration of fiscal balances in several m

ajor G8

countries and other economies w

as judged asincreasing in both likelihood and severity. From

theinterconnections m

ap it can be seen that this risk islinked to a num

ber of other central economic, societal

and economic risks:retrenchm

ent from globalization, a

fall in the US

dollar, further asset price declines, the riseof chronic diseases and underinvestm

ent in publicinfrastructure.

Node size:denotes severity, N

ode colours:red – economics; dark green – geopolitics; light green – environm

ental; purple – technology; blue – society

Lines:line thickness denotes the strength of the interlinkage. The direction of a thicker line segment indicates w

hen one risk is the stronger in the relationship.

Proxim

ity:the map show

s risks that are tightly interlinked to many other risks as closer to one another.

China hard

landing

Though the most recent W

orld Bank forecast (N

ovember

2008) suggests China w

ill still achieve growth of 7.5%

in2009, given the im

portance of China in term

s of itspotential to be a source of global grow

th and given itsm

assive net-creditor position mainly w

ith respect to theU

S, a slow

down to 6%

or below in C

hina’s growth rate

would have significant im

pact on the already weak

global economy. This risk is highly connected to a fall in

the US

dollar, to energy and food price risks, and tohealth risks.

Asset p

rice collap

seThough the effects of sharply declining asset prices arealready playing out, the assessm

ent continues to placethis risk as very high on both the likelihood and severityscale across different asset classes and regions. M

any

Source: W

orld Econom

ic Forum 2009

Figure 2: R

isks Interconnectio

n Map

(RIM

) 2009

These p

ages sho

uld b

e read w

ith the front insid

e flap o

pen fo

r an overview

of all charts

7| G

lobal R

isks 2009

experts expect the decline in asset prices to continueover the com

ing months as the financial crisis unw

indsfurther and the recession leads to bankruptcies andcredit defaults.

Reso

urce challenges

Linking several of the risks on the assessment, including

climate change-related w

eather events and decliningw

ater quality and availability as well as energy, these

longer term risks have rem

ained almost constant since

the last assessment. N

early half of the world’s population

already live in high water stressed areas and the links to

food security, geopolitical and health risks are strong. Inthis report, the linkage betw

een energy, water and land

is discussed more fully.

Glo

bal g

overnance g

aps

Introduced for the first time in the 2009 assessm

ent,experts and G

lobal Risk N

etwork m

embers deem

ed theabsence or lack of effective and inclusive governance onglobal issues such as financial stability, trade, clim

atechange, w

ater and security as a source of risk in and of

itself. The assessment places this gap as highly likely

and severe in its impact. A

s the interconnections map

shows, w

eak global governance sits at a central positionbetw

een geopolitical, economic and environm

ental risks.

A no

te on health-related

risksThough not discussed extensively in this report, chronicdisease, infectious disease and pandem

ics all remain

high on the assessment, particularly in term

s of potentialseverity in econom

icand loss of life indices. C

hronicdisease, in particular, is not only prom

inent in theassessm

ent but is also central on the interconnectionsm

ap, linking strongly to food prices and infectiousdisease but also to C

hina’s growth and fiscal crises.

According to the W

orld Health O

rganization (WH

O),

chronic diseases (including heart disease, stroke, cancer,chronic respiratory disease and diabetes) are currentlythe cause of 60%

of deaths annually worldw

ide, ofw

hich 80% occur in low

- and middle-incom

e countries.H

ealth spending already represents a significant burdenon public spending, w

hich will increase as fiscal

positions deteriorate and budgets come under pressure.

Likelihood

below 1%

1-5%5-10%

10-20%above 20%

1,600-8,000 8,000-40,000 40,000-200,000 200,000-1,000,000 >1,000,000

Severity (number of deaths)

3435

29

30

31

33

20

21

22

23

24

25

26

11

12

1314

15

16

17

18

19

1

10

Figure 3: G

lob

al Risks Land

scape 2009: Likeliho

od

with S

everity by N

umb

er of D

eaths

Source: W

orld E

conomic Forum

2009

Please see insid

e flap for key

8| G

lobal R

isks 2009* For a note on the tool behind this chart please see A

ppendix 2

Co

untry expo

sure to g

lob

al risksA

s the Risk Interconnections M

ap (RIM

) offers an overview of linkages, a com

plementary approach is to consider

theram

ifications of these interactions at regional and country level. The chart below is derived from

a model looking at

the global risk exposure of 160 countries*. The model uses 24 of the global risks that are assessed in this report.

Below

, country exposures to economic risks (on an increasing scale, from

low to high), w

hich can change rapidly, aredepicted on the horizontal axis. E

xposures to more slow

-moving environm

ental, geopolitical, health and technologicalrisks are displayed vertically (also on an increasing scale, low

to high).

Looking at different clusters, the chart underscores regional clusters and outliers. It reveals a fairly high level ofcohesion w

ith respect to economic risks am

ong European countries. In contrast, the variation in risk exposures is far

larger along the domain that includes geopolitical, environm

ental, health and technological risks. A closer analysis of

the individual risks (not shown here) suggests that drivers for dispersion in E

urope are mainly geopolitical and, to a

lesser degree, environmental risks, w

ith particularly high exposures to geopolitical risks in countries of the former

Soviet U

nion.

The picture for Asia is reversed. A

sian countries are much m

ore diverse with respect to their exposures to econom

icrisks, but com

paratively tightly clustered – however at a higher m

edian risk level – when it com

es to the geopoliticaland environm

ental risk dimensions.

African countries form

, in general, a comparatively tight cluster w

ith respect to environmental, geopolitical, health and

technological risks dimensions. N

ote that their median exposure is low

er than that for Asian countries, and also that

Africa is not quite as strongly exposed to econom

ic risks as is Asia. Though this chart should only be taken as a tool

to explore possible risk exposure, it does suggest that certain regions and countries have the potential to reduce theiroverall risk exposure along one or the other axis.

Figure 4: E

xpo

sure of 160 C

ountries to

24 Glo

bal R

isks

Sou

rce: Zu

rich Fin

ancial Services, 2008

ZW

SN

CD

ET

SD

LY

CN

IN

ID

SG

HK

QA

SA

TM

IQ AF

PK

KW

NZ

AL

UK

ISL

SE

FI

GE

NO

CH

AT

US

CA

BR

0.0

0.2

0.4

0.6

0.8

1.00.00.2

0.40.6

0.81.0

Econom

ic risks

Geopolitical, Environmental, Health, Technical risks

Africa

Asia

Australia P

acific E

urope N

Am

erica S

Am

erica

Asian countries

African countries

European countries

2.The

FinancialCrisis

andG

lobalRisks

1Pension

andhealthcare

reformis

examined

ina

recentW

orldE

conomic

Forumstudy

entitledFinancing

Dem

ographicS

hifts:TheFuture

ofPensions

andH

ealthcarein

aR

apidlyA

geingW

orld:Scenarios

to2030,W

orldE

conomic

Forum,2008.

Acrisis

inan

interconnected

wo

rldO

verthe

past18

months,a

crisisthat

beganin

asm

allsegm

entofthe

US

housingm

arketevolved

intoa

globalcredit

crisisofsystem

icproportions.A

fterthe

demise

ofLehm

anB

rothersand

thenear-collapse

ofAIG

inS

eptember

2008,creditm

arketsbecam

edysfunctional

andcapitalflow

sthat

hadalready

slowed

groundto

ahalt.A

sglobalbanks

continuedto

reduceleverage,the

impact

ofthecrisis

beganto

engulfhouseholdsand

businessesaround

thew

orld.By

theend

of2008,most

advancedeconom

iesw

eresim

ultaneouslyin

recessionfor

thefirst

time

sinceW

orldW

arII,reducing

growth

prospectsin

emerging

markets

dueto

lower

demand

forexport

goods.As

aconsequence,globalgrow

this

expectedto

remain

belowpotentialin

2009and

2010.

Thespeed

atw

hichthese

eventsunfolded

was

unprecedented.InG

lobalRisks

2008,“panic”w

asidentified

asan

element

oftheanatom

yofa

systemic

financialcrisisthat

inthis

caseexacerbated

pressureon

assetprices

andinduced

contagioneffects

tothe

restof

thefinancialsystem

andaround

theglobe.In

thissense,

2008served

asa

reminder

ofhowthe

world

andits

risksare

highlyinterconnected.C

ontagionnot

onlyarises

throughlinkages

intrade

andfinance,but

alsothrough

theoften

complex

interactionofrisks

thatincreases

uncertaintyand

rendersdecisions

more

difficult(see

Figure2,page

6).

Increasedsho

rt-termeco

nom

icrisks

andfo

cuso

nthe

long

termA

sdiscussed

inthe

lasttw

oglobalrisks

reports,thecollapse

ofassetprices

marked

onlythe

beginningofa

complex

chainofevents

thatexposed

numerous

systemic

vulnerabilitiesand

triggeredother

risksand

potentiallyadverse

developments.The

salientrisks

likelyto

affectthe

globaleconomy

through2009

include:

•D

eteriorating

fiscalpo

sitions.The

US

,United

Kingdom

,France,Italy,Spain

andA

ustraliaare

allalready

runninghigh

deficits.Massive

government

spendingin

supportoffinancialinstitutions

andgrow

thare

threateningto

worsen

fiscalpositionsthat

arealready

precariousin

many

countries.Theconvergence

ofthisdecline

with

risinghealth

andpension

costsin

industrializedeconom

iesdue

todem

ographictrends

willplace

furtherfiscalpressure

ongovernm

ents 1.

•A

furthersig

nificantred

uction

inC

hina’sg

row

th.The

declinein

exportdem

andhas

ledto

asubstantial

reductionin

China’s

overalleconomic

growth,

increasingconsiderably

therisk

ofahard

landingthat

would

stressthe

financialsystemand

couldgenerate

socialtensionsw

ithinC

hinaand

beyondas

othereconom

iesface

similar

declines.Over

recentyears,

China

builtup

nearlyU

S$

2,000billion

inforeign

reservesto

preventthe

renminbiappreciating.A

lthoughstarting

mid-2007

China

beganto

allowa

moderate

appreciation,thetrend

reversedtow

ardsthe

endof

2008w

iththe

rapidrise

oftheU

Sdollar

relativeto

most

othercurrencies.

•C

ontinued

dep

reciation

of

assetp

rices.Although

globalequitym

arketshave

declinedon

averageby

more

than50%

ina

veryshort

time,the

viciouscircle

between

fallingasset

values,write-dow

nsand

attendantpressure

onthe

capitalpositionoffinancial

institutionsand

continueddeleveraging

appearsto

beunbroken.This

viciouscircle

isnow

affectingm

anufacturing,servicesand

householdsaround

thew

orldand

thecredit

crunchhas

generateda

substantialweakening

ofeconomic

activityand

growing

creditlosses.

•D

eflation

replaces

inflation

asa

keyco

ncern.In

GlobalR

isks2008,the

impact

ofhighenergy

andfood

pricesin

combination

with

rapidcredit

growth

were

stronglylinked

toconcerns

aboutinflation.A

yearlater,uncertainty

inthe

financialsector,fallingasset

prices,poorcredit

conditions,weak

demand

andrising

unemploym

entcould

createa

deflationaryspiral.

How

ever,theshort-term

riskofdeflation

must

beseen

inthe

contextofa

long-terminflation

riskcaused

bythe

largem

onetarystim

ulusin

pursuitoffinancialand

economic

stabilityand

therisk

posedby

thegrow

ingpublic

debt.Econom

ichistory

islittered

with

periodsduring

which

governments

reducedtheir

debtburden

throughinflation.

9|G

lobalR

isks2009

10| G

lobal R

isks 2009* For a note on the tool behind this chart please see A

ppendix2

Co

untry Exp

osure to

Asset B

ubb

les and E

cono

mic R

isksB

efore the current global downturn, it w

as often claimed that em

erging markets had decoupled from

advancedeconom

ies. It is clear, however, that w

ith respect to cyclical changes, emerging and advanced econom

ies continue tobe closely correlated; a fact that m

ay have been masked by years w

ithout sharp recessions.

Developing and em

erging market countries are tightly clustered w

ith respect to economic and asset bubble risks but

to different degrees. African countries, for exam

ple, have relatively fewer financial and real assets, and thus low

erexposure to asset bubbles. E

ven their overall exposure to economic risks is sm

all, reflecting in part their laggingintegration into global m

arkets.

In contrast, East A

sia shows high exposures to econom

ic and asset bubble risks; in fact, their overall exposure is verysim

ilar to Japan and the US

. Most A

sian economies are heavily exposed to a hard landing in C

hina. Asia is also

subject to risks related to the price of oil, dollar fluctuations and a retrenchment from

globalization, with the latter

being especially acute for the small and open econom

ies of Hong K

ong SA

R and S

ingapore.

Figure 5: C

ountry E

xpo

sure to A

sset Bub

bles and

Eco

nom

ic Risks

Sou

rce: Zu

rich Fin

ancial Services, 2008

SO

LR

DZ

NG

ZA

PK

JPTH

SG

VN

HK

KR

CN

UZ

AF

LT

NO

US

BO

EC

PY VE

CO

AR

BR

CL

PE

0.0

0.2

0.4

0.6

0.8

1.0

0.00.2

0.40.6

0.81.0

Econom

ic risks

Asset bubble risk

Africa

Asia

Australia P

acific E

urope N

&C

Am

erica S

Am

erica

Eastern E

uropean

East A

sian W

estern European

Africa

11| G

lobal R

isks 2009

Bew

are of unintend

ed co

nsequences

The risks associated with a decline in C

hina’s growth,

deteriorating fiscal positions and deflation illustrate theneed for forw

ard-looking policies. While it is essential for

leaders to respond forcefully to the current financialm

arket instability and the risk of a global recession, theym

ust also be mindful of the im

plications that today’sdecisions have in the long term

. Risks related to

underinvestment in infrastructure, for exam

ple, or thedegradation of natural resources and clim

ate change,m

ay be low in the short term

, but these risks andassociated losses increase in a longer tim

e horizon.

Policy-m

akers must also consider the unintended

consequences arising from regulation and governm

entinterventions. M

arket participants always react to

incentives and one can argue that the growth of

unregulated and highly leveraged investment vehicles w

asin som

e part due to market participants’ activities

designed to avoid regulation that they perceived asonerous. Indeed, this regulatory arbitrage added to theopacity that m

ade it difficult to spot the extent of thew

eaknesses in the system. H

ence, future financial market

regulation must strike a fine balance betw

een fostering anenvironm

ent conducive to innovation and reducing therisk of system

ic failure. This calls inter alia for regulatorym

easures that reduce pro-cyclicality and assignaccountability to reduce incentives for excessive risktaking that can have disastrous results.

Governm

ent interventions in support of the financial andm

anufacturing sectors carry the risk of rewarding failure

or propping up inefficient corporations and industries.There is also an inherent risk of creating uneven playingfields for com

panies excluded from access to

government funds. This tends to im

pede competition

among locally and globally active corporations, w

hich will

ultimately hurt consum

ers. If interventions are necessary,then governm

ents should develop exit strategies bysetting firm

milestones for their duration and clear

conditions for the industries concerned.

Imp

roving

risk manag

ement

The credit crisis has revealed glaring gaps in riskm

anagement. B

anks, for example, learned at their peril

that the underestimation of liquidity had created severe

systemic risk. M

oreover, there was a significant lack of

clarity about the extent of risk exposure in each part ofthe system

and financial organizations were not proactive

enough in seeking out that information.

How

ever, identifying and understanding individual risks isnot enough. R

isk managem

ent must also account for

interlinkages and remote possibilities. Low

-probability,high-severity events, such as the terrorist attacks of 9/11,the A

sia tsunami of 2004 and the current global credit

crisis do happen. All of these events w

ere consideredoutside the norm

al distribution of experience and allim

posed high human and econom

ic costs, which affect

people, regions and industries that are often quite farrem

oved from the epicentre of the catastrophe.

But this should be no reason for paralysis. R

iskm

anagement that considers extrem

e events, employs

stress testing and calibrates quantitative approaches with

informed qualitative judgm

ents can make a difference.

Today’s arsenal of tools is impressive. B

ut models have

their limits and decision-m

akers need to be mindful of the

assumptions, sensitivities and lim

itations of the models

used in the analysis and anticipation of risk, and of theirow

n inherent biases.

12|G

lobalR

isks2009

Hum

anrisk

perceptionand

behaviourhave

beenscrutinized

byeconom

ists,psychologistsand

neuroscientistsin

recentyears.A

sa

more

recentinterdisciplinary

subject,behaviouraleconomics

isstill

developingand

itspolicy

implications

areonly

beginningto

beunderstood.H

owever,basic

elements

arecom

ingm

oreclearly

intofocus.R

iskperception

isone

suchelem

ent.When

facedw

ithrisks,hum

ansoften

respondin

ways

thatare

deeplyrooted

intheir

physiologicalandneurologicalm

ake-up.Fear,doubt,fightor

flightare

allem

otionsand

responsesthat

limit

ourcapacity

forrationaldecision-m

aking.Fearofloss

isan

example

ofone

typeofrisk

behaviour.Inm

anydifferent

experiments,

researchhas

foundthat

peopleexhibit

lossaversion

byavoiding

short-termexpenditures,even

thoughthey

couldactually

resultin

significantlong-term

gains.More

specifically,peopleoften

miss

anopportunity

tom

itigaterisks

bynot

actingw

itha

long-termperspective

andby

nottaking

interdependenciesinto

account.

An

examp

lefro

md

isasterm

itigatio

nD

isasterpreparedness

andresponse

planningis

agood

example

ofhowpeople

failtotake

sufficientaction

eventhough

theyknow

theyare

exposedto

aserious

risk.P

ropertyow

ners,lenders,investorsand

government

agenciesoften

ignorew

orst-casescenarios

anddo

notinvest

adequatelyin

infrastructureor

enforceregulations

designedto

reducethe

riskofcatastrophes

andaccidents.

How

canone

explainthis

behaviour?P

artofthe

responseis

thatpeople

rarelylook

atprobability

estimates

inchoosing

between

alternativesand

tendto

ignorerisks

with

perceivedlikelihoods

fallingbelow

some

thresholdofconcern.For

instance,despitethe

firstterrorist

attackagainst

theW

orldTrade

Center

in1993

which

costinsurers

severalhundredm

illiondollars,

terrorismrisk

continuedto

beincluded

asan

unnamed

perilinm

ostU

Scom

mercialinsurance

policies.When

the9/11

attacksoccurred,insurers

andreinsurers

fromallover

thew

orldhad

topay

US

$35

billionofinsured

losses.

Thereis

anotherreason

why

many

peopledo

notact

untilaftera

crisishas

occurred.Individualsand

corporationshave

shorttim

ehorizons

when

planningfor

thefuture

sothey

may

notfully

weigh

thelong-term

benefitsofinvesting

todayin

lossreduction

measures

thatcould

benefitthem

inthe

future.Theupfront

costsofm

itigationloom

disproportionatelylarge

relativeto

thedelayed

expectedbenefits

overtim

e.Applied

tobusinesses,short-term

horizonscan

translateinto

aN

IMTO

Fperspective

(Not

inM

yTerm

ofOffice).In

otherw

ords,ifam

ajorcrisis

occurseveryone

hopesit

isnot

ontheir

watch.

Overco

ming

myo

pia:thinking

aheadO

new

ayto

overcome

thebehaviouralbiases

causedby

myopia

andm

isperceptionofrisk

isto

changethe

decisiontim

efram

ein

which

riskinform

ationis

presented.Forexam

ple,recentresearch

2show

sthe

importance

ofreframing

theprobability

dimension

sothat

peoplepay

attentionto

theconsequences

ofanevent.R

atherthan

specifyingthat

thechance

ofadisaster

occurringnext

yearis

greaterthan

1in

100,experts

couldindicate

thatthe

chancesofa

disasteroccurring

inthe

next25

yearsexceeds

1in

5.Thesetw

oprobabilities

areidenticalexcept

thatthe

time

horizonhas

beenstretched

toobtain

thelatter

figure.Em

piricalstudies

haveshow

nthat

peopleare

much

more

likelyto

overcome

theirrisk

misperception

andto

considerundertaking

protectivem

easuresw

henthey

focuson

aprobability

ofgreaterthan

1in

5over

25years

ratherthan

1in

100next

yearbecause

thelon

gertim

ehorizon

isabove

theirthreshold

levelofconcern.

So

howm

ightthis

conceptbe

appliedto

encouragelong-term

thinking?O

neproposalin

thecontext

ofcatastrophe

riskfinancing

isto

move

fromthe

usualone-year

contractstow

ardsthe

development

oflongerterm

contracts.Sim

ilarstrategies

may

alsobe

appropriateto

encouragelonger

termthinking

inother

areas.Forexam

ple,thestandard

annualbonussystem

implem

entedby

many

organizationscould

bem

odifiedso

thata

more

significantportion

ofmanagers’

remuneration

packagesare

contingenton

multi-year

performance

ratherthan

onjust

thepast

12m

onths.This

might

inducem

anagersto

considerm

oresystem

aticallythe

potentialconsequencesoftheir

imm

ediateactions

inthe

longrun

andto

paym

oreattention

tow

orst-casescenarios

ratherthan

hopingthat

theyw

illnotoccur

bythe

endofthe

currentyear.

Furthermore,given

theinterconnectedness

ofthew

orldtoday,actions

takenin

onepart

ofthew

orldcan

haveripple

effectsthousands

ofmiles

away

andm

onthsand

yearsafter

thesedecisions

havebeen

made.Innovative

strategiesw

illbecrucialto

helpbusinesses

andindividuals

focuson

thelong

termand

tom

ovebeyond

“itcannot

happento

us”to

“what

ifitoccurs”

–a

mentality

bettersuited

tothe

currentclim

ateof

interdependentglobalrisks.

The

Imp

lications

of

Risk

Myo

pia

andM

ispercep

tion

2How

ardKunreuther

“Protective

Decisions:Fear

orPrudence”

inWharton

onMaking

Decisions

(Stephen

J.Hoch

andHow

ardC.K

unreuthered),W

iley2001

http://opim.wharton.upenn.edu/risk/dow

nloads/01-41-HK.pdf

13| G

lobal R

isks 2009

2008 saw com

modity prices fall sharply from

historichighs. The price of crude oil (W

TI) declined from a peak

of US

$ 147 a barrel in mid-July 2008 to below

US

$50 in

Decem

ber2008. O

ther comm

odities experienced similar

declines. Betw

een March 2008 and A

ugust 2008, steelfell by 68%

, wheat by 67%

and ethylene by 50%.This

boom and bust further highlighted just how

exposedm

any economies and industries are to the im

pact ofcom

modity prices. P

roducing nations have seen theirgrow

th prospects deteriorate, increasing theirvulnerability to other risks. From

a corporate perspective,it underlined the need for new

approaches to managing

both price levels and volatility patterns.

Heavy com

modity users are now

facing a new paradigm

where reduced prices but higher volatility is not

necessarily giving the expected economic benefit. A

newphenom

enon has emerged w

hereby reduced price levelsshould support increased industrial activity;how

ever, thehigher price volatility adds m

ore uncertainty and,therefore, potentially reduces econom

ic activity. While,

until recently,comm

odity/raw m

aterial users had tom

anage margin com

pression as a consequence ofincreasing com

modity prices, the pressure has now

shifted to the supply side. Producers are now

sufferingfrom

both a drop in comm

odity prices and reduceddem

and. Both m

arket situations impose particular

managem

ent challenges beyond pure financial hedgingfor both the dem

and and supply side. Throughout thehigh price period, businesses found it difficult to securesupply, achieve price certainty and, ultim

ately, pass theincreased costs on to custom

ers. The prospect for 2009m

eans that heavy comm

odity users are seeking to adaptto a new

context and to reflect the lower price/higher

volatility situation in their comm

odity risk managem

entapproach.

Corporate com

modity risk m

anagement clearly needs to

be more responsive to changing price levels and higher

than expected volatility. For most com

modity users this

means a fundam

ental reassessment of their hedging

objectives over a longer period of time; the incorporation

of uncertainty in price and volatility forecasts; a betterunderstanding of exposures;and finding a m

oresophisticated w

ay of assessing the range of hedgingtools and approaches available to m

anage thecashflow

/earnings volatility. In other sectors, such asenergy and m

etals, these tools are already an integralpart of industry best practice but previously less-exposed sectors, such as chem

icals and fast-moving

consumers goods, are now

looking at these tools.

The aim is to have a clear understanding of net

exposure, which is often a com

bination of a number of

transactions including foreign exchange components.

Com

modity price risk m

anagement tools involve a range

of financial instruments, physical contracts and the

pricing mechanism

for the sales contract. For a number

of comm

odities, proxy hedges (using a hedging with a

different comm

odity than the underlying exposure) aredeployed due to the lack of liquid hedging m

arkets. Inthese circum

stances, the basis risk needs to bequantified and m

onitored.

In making these hedging decisions, com

panies are usinga num

ber of metrics and sophisticated optim

ization toolsthat allow

companies to determ

ine their risk appetite andevaluate hedging strategies accordingly. H

owever, to

implem

ent these approaches companies need to

improve the transparency of their exposures and include

a cross section of functions such as procurement, sales,

treasury and controlling to ensure alignment and

coordination of actions.

Hed

ging

Co

mm

od

ities Risk: Lesso

ns Learned

Figure 6: C

om

mo

dity P

rice Vo

latility

Source: D

atastream, graph courtesy of O

liver Wym

an (MM

C)

0

100

200

300

400

500

600

700

800

900

100020032004

20052006

20072008

Crude O

ilN

atural Gas

Coal

Steel

Alum

inium

Alu A

lloy C

opperLead

Nickel

Tin Zinc

Price change (%)

14| G

lobal R

isks 2009

Ad

dressing

go

vernance gap

s and avo

iding

regulato

ry overreactio

nThe financial crisis has underscored the need for policyresponses that account for the global nature of crises. Ithas revealed the lim

its of the current financialarchitecture, show

n the inadequacy of early warning

systems, and exposed deficiencies in the coordination

among policy-m

akers, regulators and supervisors. At

national level, the financial crisis also exposed the limits of

supervision that is geared only to local entities andneglects the system

ic implications of financial institutions

with global reach. There can be little doubt that global

governance and the institutions charged to develop thefram

eworks and carry out such governance should be

strengthened.

How

ever, this is easier said than done. The historicdevelopm

ent of different legal systems, to point to just

one difficulty, virtually ensures that regulatory authority will

continue to reside primarily w

ith national bodies. Hence,

the financial architecture of the near future should focuson setting broad standards for coordination andcooperation am

ong regulators that improve the

surveillance of economic and financial activities and

support the implem

entation of corrective measures.

Regulation can help create a clim

ate of confidence,stability and certainty that prom

otes innovation, growth

and competitiveness. H

owever,poorly designed or

implem

ented regulation can also drive up the cost ofdoing business, operate as a barrier to trade and capitalflow

s or simply shift risk into less regulated parts of the

system. O

ne extreme, but plausible,scenario that should

be considered is a regulatory overreaction to the recentcrisis w

hich increases transaction and compliance costs

while ultim

ately proving ineffective in the face of the “next”crisis

3. Policy-m

akers and regulators must be careful to

weigh the costs and consequences of regulatory shifts to

ensure that they produce a net benefit in terms of both

system efficiency and stability. From

the corporateperspective, the current uncertainty about the extent ofthe changes that m

ay happen over 2009 is difficult tom

anage. The changes need to be measured but to

reduce uncertainty they must be com

municated sw

iftly toallow

business to track them across their m

arkets andtake the necessary actions.

The “5i” framew

ork based on insight, information,

incentives, investment and institutions discussed in

Global R

isks 2007can also be applied to analyse the

global credit crisis. It can help us to identify the risks,assess their interaction and design m

itigation activities.

•Insig

ht: Financial innovation appeared to increase thefinancial system

’s efficiency by spreading risks to aw

ide spectrum of m

arket participants. How

ever, thefailure to cut through the opaqueness of m

anystructured products and assess the m

ultilayeredleverage pyram

id created systemic risk. H

ence,forw

ard-looking risk managem

ent must identify

interlinkages and account for low probability/high

severity events.

•Info

rmatio

n: Financial m

arkets must alw

ays copew

ith imperfect inform

ation and moral hazard.

Transparency is the antidote to remedy deficiencies

arising from the asym

metric distribution of inform

ation.The grow

th of the credit bubble can be partly tracedback to the fact that investors w

ere in the dark aboutthe m

agnitude of liabilities accumulated in structured

investment vehicles due to their com

plexity and thatthey w

ere not covered by the consolidated reportingof banks and broker-dealer institutions.

•Incentives: M

arket participants respond to economic

incentives. The separation of risk origination and riskow

nership within the originate-to-distribute (O

TD)

business model introduced by banks over the last 30

years led to a lack in due diligence and accountability.

•Investm

ent: Financial markets depend on structures

that support the flow of inform

ation and the timely

settlement of trades. C

redit default swaps, for

example, w

ere and continue to be traded over thecounter only and the settlem

ent of contracts used totake w

eeks (now days). H

ence, creating a centralclearing facility for credit derivatives and enabling themto be traded on regulated exchanges w

ould helpim

prove the market structure and reduce both

settlement and system

ic risk.

•Institutio

ns: The global credit crisis demonstrated a

major governance gap and the need to im

proveprudential oversight and regulation. Financial m

arketstability is a public good,and globalized financialm

arkets require a globally coordinated effort to createand m

aintain this public good. The financialarchitecture of the future m

ust have an element that

transcends national borders. To ensure success itsinstitutions should include broad representation in rule-m

aking bodies, macro prudential surveillance and

have agreed procedures for systematic enforcem

ent.

The G

lob

al Risks 5i Fram

ewo

rk Ap

plied

to the C

redit C

risis

3This topic is discussed in greater depth in the World Econom

ic Foum W

orld Scenarios S

eries report The New

FinancialA

rchitecture: Scenarios to 2020, W

orld Economic Forum

2009

15| G

lobal R

isks 2009

Geo

po

litical risks and o

il dep

endency

By focusing on the geopolitical dim

ension (comprising risks of terrorism

, interstate wars, state failure and transnational

crime) and oil price risk, the follow

ing graph illustrates the interaction between tw

o classes of risks that are usuallyconsidered to be S

iamese tw

ins. Three points emerge.

•First, oil-producing and oil-consum

ing countries form tw

o very distinct and separate clusters.•

Second, oil producers are exposed to geopolitical risks in varying degrees, w

ith Norw

ay on the low end and Iraq on

the high end of that particular risk spectrum. M

exico and Great B

ritain, although oil producers too, are set apartand m

uch closer to the oil-consuming countries of E

urope.•

Third, it is worthw

hile noting that Hong K

ong SA

R and S

ingapore are both clustered with the E

uropean countriesinstead of w

ith their geographic neighbours in East A

sia. They demonstrate a low

er exposure to geopolitical risk,w

hile maintaining a relatively high exposure to a rising oil price.

The analysis points to broad scope for collective action. High oil dependency exposes consum

er countries indirectlyto geopolitical risk. A

dvanced economies in particular are show

n to have a powerful incentive to reduce their oil

consumption not only for environm

ental reasons (to cut carbon emissions), but also for reduction of their indirect

exposure to geopolitical risk.

Figure 7: G

eop

olitical risks and

oil d

epend

ency

Sou

rce: Zu

rich Fin

ancial Services, 2008

CD

NG

AO

SO

EG

LY

SG

HK

SA

IQIR

KZ

KW

QA

AE

CN

TWTH IN

RU

NO

SI

IS

NZ

LUFI

SE IT

UK

HR

SP

FR

MX

0.0

0.2

0.4

0.6

0.8

1.00.00.2

0.40.6

0.81.0

Risk of oil price rise

Geopolitical risks

Africa

Asia

Australia P

acificE

uropeN

&C

Am

ericaS

Am

erica

East A

sian consumers

Oil producers

European

consumers

3. Resource C

hallenges, Sustainability and C

ompetition

16| G

lobal R

isks 2009

Dem

og

raphics, reso

urces and clim

ate change

Despite a slow

down in the rate of global population

growth,the w

orld’s population is still growing and

expected to peak at 9 billion people in 2050, up from6.6 billion in 2006. The past decades have seenurbanization accelerate to the point w

here over half thew

orld’s population now live in cities, a trend that is

expected to continue. These shifts are placing greaterpressure on resources and are contributing directly andindirectly to the rising em

issions linked to climate change

and the resulting consequences for the environment.

More intensive agricultural m

ethods, greaterindustrialization and grow

ing energy needs, urbanizationand rising incom

es in emerging econom

ies are alreadysources of pressure on w

ater resources. Globally,

agriculture accounts for 69% of all renew

able water

consumption, industry for 23%

and domestic use for

8%. The push to im

prove agricultural productivity in anum

ber of countries will drive w

ater consumption higher.

The flipside is that the focus on increasing agricultural

production,through what is often referred to as a

“second green revolution”, could also be used as anopportunity to introduce m

ore water-efficient irrigation

techniques and drought-resistant crops that require lessw

ater. Nonetheless, as the global population grow

s, andw

ater demand increases, the interest in fertile, w

ater-richland w

ill rise. This will be com

pounded by shifting rainfalland drought patterns due to clim

ate change. Farmers

from E

urope to South-E

ast Asia and A

ustralia arealready having to m

anage their crops and water

differently as droughts are prolonged, or monsoons are

heavier but shorter in duration.

Co

mp

etition fo

r land and

water

This demand on, and for, fertile land for food production

and associated water resources is prom

pting some

countries to take action to secure access to water both

within and beyond their borders. C

ountries such asS

audi Arabia and C

hina have already made significant

investments in infrastructure and agricultural productivity

to access land for food supplies in Kazakhstan and

Figure 8: W

ater: at the Nexus o

f Many R

isks

Source: W

orld Econom

ic Forum 2009

17| G

lobal R

isks 2009

Mozam

bique respectively. These agreements m

ay be thefirst of m

any, where countries and corporations lock

intheir access to arable land and w

ater supply to fulfil astrategic need or for w

hich they see a future market.

China’s arable land availability is decreasing due to soil

erosion, pollution and urbanization. Given its very lim

itedfresh w

ater resources,Saudi A

rabia has strategicallychosen to use its w

ater resources for household ratherthan agricultural use. In N

ovember 2008, S

outh Korea

announced that it had taken a 99-year lease on half thearable land in M

adagascar in return for employing local

labour and building road and storage infrastructure.

Private com

panies have also entered this arena, inparticular for w

ater. Water has becom

e an alternativeasset class. P

rivate companies in the U

S and Turkey

have already begun to operate or explore the possibilityof pipelines transporting w

ater over longdistances to

service demand in w

ater-poor areas. Hedge funds have

purchased rights to glaciers in Scandinavia.

Reso

urce risks and instab

ilityW

hat do these new arrangem

ents mean for international

relations? The past few years have seen a num

ber ofagreem

ents between resource-rich, cash-poor countries

with cash-rich, high-grow

th nations. Often tied to

infrastructure and capacity building, these agreements

provide benefits in the shortterm

but may prove

unsustainable over the longterm

in terms of

environmental and societal considerations. Land rights

are already a frequent source of tension between people

and state,and among political factions. O

ver time, as

the effects of climate change on both w

ater and landavailability becom

e apparent, the rising demand for food

and the pressures on land use for industrial andresidential purposes could trigger intra-state or eveninterstate tensions as sovereignty or contractual issuesarise.

The linked

dem

and fo

r energy and

water

While the focus on w

ater for biofuels captured publicattention, w

ater is in fact crucial to a range ofconventional and alternative energy and pow

ergeneration solutions. The com

bination of a need to meet

longerterm

increases in energy demand and to find

“cleaner” alternatives to oil and coal may in fact drive us

towards m

ore water-intensive energy paths. W

ater isused in the extraction of oil and coal m

ining,in refining,

for biofuels,in power plants for cooling, for therm

al-electric form

s of electricity generation and in nuclearpow

er plants. The water used in these processes is not

necessarily wasted, m

any are closed loop systems but it

is required in large quantities and in some cases it is

returned to natural water areas at a higher tem

peraturew

hich can cause pollution from algae and dam

age tom

arine life.

Dem

and for energy and water are tightly interrelated,

with w

ater critical to energy generation and supply andw

ater supply dependent upon energy for pumping,

treatment, distribution, heating and w

aste treatment. O

naverage, 50%

of the costs associated with w

ater supplyare related to energy. A

ccording to a 2008 OE

CD

report,just 2.8 billion people (44%

of the world’s population)

currently live in high water stress areas but this w

ill riseto 3.9 billion by 2030 (50%

the global population) ifbetter w

ater policies are not implem

ented. Energy

demand is also set to rise according to the International

Energy A

gency’s latest World Energy O

utlookestim

ates,and global dem

and will increase by 45%

, with 30%

ofthis rise com

ing from coal-fired plants.

Investing to

mitig

ate climate chang

e risksThe current financial crisis underlines how

important it is

to see risks in the context of a wider system

and tounderstand w

here vulnerabilities lie. Now

is anopportune tim

e for industries and governments to

consider the risks related to resources and climate

change,and what they could im

ply for them in the

future. At the national level, governm

ents should beconsidering policies that encourage efficient resourcem

anagement, especially for energy and w

ater and thatprom

ote investment in this direction. G

overnments m

ustbe long

term in their thinking about how

their regulatoryregim

es need to develop and how they should invest in

infrastructure, which w

ill be one of the key areas when it

comes to long-term

sustainable resource managem

ent.

Sustainab

le resource m

anagem

ent andinfrastructure investm

entA

s this report examines in the section on the financial

crisis and global risks, governments in both developed

and developing economies are facing tighter fiscal

conditions due to the economic dow

nturn. Likewise, the

financial crisis has dramatically reduced confidence and

made access to capital difficult. The U

S alone requires

18| G

lobal R

isks 2009

an estimated U

S$

1.3 trillion in investment to address

ageing infrastructure: the Environm

ental Protection

Agency says there is a gap of betw

een US

$300 billion

and US

$500 billion alone for w

aste water infrastructure.

In Novem

ber 2008, China announced a U

S$

586 billionpackage, m

ost of which w

ill go into infrastructure overthe next tw

o years. Over recent years, C

hina’sinfrastructure spending has averaged 9%

of its GD

P.India’s public spending on infrastructure has historicallyrepresented 3.5%

of GD

P;it plans to increase this

amount to 8%

in 2012. Worldw

ide it is estimated that

the global economy needs about U

S$

5 trillion forinfrastructure over the next five years alone – rangingfrom

transport networks to sanitation and pow

er – justto m

aintain the quality of the existing infrastructurenetw

ork and meet rising dem

and.

Today’s infrastructure investment choices are key, as

they represent a huge opportunity to spend on projectsthat w

ill result in better, long-term resource m

anagement

– from technology and plant choices to reduce

emissions and w

aste, to transport and buildingdevelopm

ent that will be m

ore energy and land efficient.A

lack of investment now

or investment in unsustainable

areas will result in further costs through clim

ate change,poor living conditions in crow

ded cities and, ultimately,

will be a drag on future grow

th. Governm

ents will need

to spend effectively but they will also need to im

plement

policies that encourage investors to understand the risksand take a long-term

view.

Figure 9: Infrastructure: A

n Investment in R

isk Mitig

ation

Source: W

orld Econom

ic Forum 2009

19| G

lobal R

isks 2009

2009 is a critical year for international climate change

issues. By year-end the countries at the C

openhagenconference, w

hich is a follow-up to the U

nited Nations

Framew

ork Convention on C

limate C

hange (UN

FCC

C)

Kyoto P

rotocol, must agree to a new

protocol to ensurethat international efforts to reduce global greenhouse gasem

issions continue beyond 2012. Recent studies

indicate climate change is occurring faster than

expected. Without resolute action w

e could faceirreversible changes to the clim

ate. There is pressure onthe discussions in C

openhagen to produce a concreteresult – a fram

ework far m

ore comprehensive, long term

and ambitious than the K

yoto Protocol, ironically at a

time w

hen the world econom

y is entering a major

economic slow

down.

The four cornerstone issues that the 2009 climate

negotiations need to address are discussed below:

1.A

long

-term g

lob

al go

al for em

ission red

uction

There is a need for an agreed global goal for emission

reductions by 2050 in the range of 50-80%, com

paredto 1990 levels. G

reenhouse gas emissions are an

expression of the market’s econom

ic failure toadequately value a public good – the clim

ate. To solvethis m

arket failure a combination of state-defined

conditions, caps, incentives and standards will be

necessary to give emissions a price and to rew

ardem

ission reduction measures.

2.E

nhanced natio

nal/international actio

n on

mitig

ation

Leaders from developed countries w

ill be under pressureto provide clear targets, m

ilestones and a strategy as tohow

the world econom

y can progress to a low carbon

future. All countries signing the U

NFC

CC

will need to

comm

it to a level of carbon emissions by a specific date.

Developing nations m

ust be a part of the solution, co-operating w

ith meeting the targets, but also allow

ed toachieve their econom

ic development goals.

3.E

nhanced actio

n on ad

aptatio

nIf em

issions continue to rise at the rate of the past 30years, atm

ospheric concentrations will increase to

700ppm or m

ore, corresponding to global averagetem

peratures of +6°C

or more by 2050

(Intergovernmental P

anel on Clim

ate Change (IP

CC

)2007 4th report; W

orld Energy O

utlook, InternationalE

nergy Agency 2008). E

ven if we stopped em

ittinggreenhouse gases altogether, the effects of globalw

arming are now

unavoidable. For these reasons,societies w

ill need to adapt to the unavoidableconsequences of clim

ate change.

Importantly, it is developing nations w

ho face the worst

consequences because they are more vulnerable to the

physical effects of climate change than developed

nations, due to their limited institutional fram

eworks and

financial adaptive capacities: •

In Africa alone, 75-250 m

illion people will be

exposed to water stress by 2020 (IP

CC

4 threport).

The area suitable for agriculture will decrease and

reductions in yields could amount to 50%

by 2020. •

Towards the end of the 21st century, projected sea-

level rise and storms w

ill affect low-lying coastal

areas with large populations potentially triggering

migration of people.

•W

eather-related disasters disproportionately affectthe agricultural sector in least developed countries(subsistence farm

ing) where m

ost farmers have only

limited access to financial m

eans such as micro-

credit and insurance solutions.

4.E

nhanced actio

n on techno

log

y develo

pm

entand

transferThe U

NFC

CC

estimates that 85%

of the capital requiredfor low

carbon investments needs to com

e from private

sources. Adjusting public policies to stim

ulate privateinvestm

ents, technology development and adaptation in

developing countries will be vital. A

major deal flow

ofprojects in both today’s realisable low

carbontechnologies and tom

orrow’s technologies (e.g. carbon

capture and storage, next generation photo-voltaics andbiofuels) w

ill be required. Financial and projectdevelopm

ent expertise from the international private

sector will need to partner w

ith governments and

multilateral developm

ent banks.

The R

oad

to C

op

enhagen: A

n Up

date

Figure 10: T

he Co

st of N

atural Catastro

phes

Source: S

wiss R

e, Econom

ic Research &

Consulting

0 50

100

150

200

250

Insu

redTo

tal

20052000

19951990

19851980

19751970

Natural catastrophe losses in U

S$ billion at 2007 prices

20| G

lobal R

isks 2009

In 2008, national energy security was challenged from

many different directions. Infrastructure has been

damaged by extrem

e weather events, for exam

pleduring tropical storm

Gustav in the G

ulf of Mexico.

Countries such as France and S

lovenia have had toclose nuclear plants for safety reasons. C

limate policies

have toughened, oil and gas prices have been highlyvolatile,and geopolitical tensions have led to thetem

porary closure of gas pipelines and heightenedresource nationalism

. The approval and delivery of newpow

er plants have faced lengthy delays in many

countries and large-scale mergers and acquisitions

among leading industry players have increased cross-

border ownership. The value of global energy-related

mergers and acquisitions betw

een May 2007 and the

last quarter of 2008 amounted to approxim

ately US

$500 billion.

Policy-m

akers and industry players are struggling toassess the m

any investment options open to them

in thelight of grow

ing energy demand, com

mitm

ents to reducecarbon em

issions, deteriorating infrastructure and thedepletion of fossil fuel resources. The scale of investm

entis high (according to the IM

F’s World Econom

ic Outlook,

between 2007 and 2030 the new

expenditure requiredto update and expand global energy infrastructure aloneam

ounts to US

$26.3 trillion), the tim

efram

es are longand the technological choices require significant trade-offs. D

ecisions can be piecemeal and often lack the

coherence, vision and follow-through that give

confidence to all parties.

In this context it is helpful to conceptualize energysecurity as having four objectives:

•A

utono

my: energy supply that is w

ithin the control ofa country and is not vulnerable to disruption byexternal agents

•R

eliability: energy distribution that is safe and secure

in both the short and long term and m

eets demand

without interruption

•A

fford

ability: energy prices that are com

mensurate

with the buying pow

er of domestic and business

consumers – at the sam

e time this objective is,

however, often difficult to achieve in a m

annerconsistent w

ith the final objective•

Sustainab

ility: energy use that is sufficient to supporta high quality of life but does not dam

age theenvironm

ent to an unacceptable degree

This framew

ork is useful for decision-makers not only to

analyse how their existing infrastructure and renew

alplans m

atch up against the different objectives but alsoto understand w

here their principal exposures lie. This isthe basis for a long-term

strategy that not only providesfor a supply m

ix appropriate to national circumstances

but also policies that will im

prove productivity throughincreased energy efficiency and dem

and reduction.S

uch a strategy will also need to anticipate the

systematic disruption that m

ight be caused byinnovations such as the introduction of distributedgeneration or the rapid uptake of plug-in electricvehicles.

Effective governance arrangem

ents as well as strategic

vision are critical to underpinning decisions at both theplanning and im

plementation stages. P

olicy-makers and

other energy system players should therefore address

the following questions:

1.Does our energy policy fully dovetail w

ith our climate

policy in terms of its goals and m

easures?2.A

re our regulatory and investment incentives strong

enough to drive the development of optim

al supplysolutions, grid infrastructure renew

al, energy efficiencym

easures adoption and new technology

development?

3.Is there a need to streamline national regulations,

harmonize international law

s and strengthen bilateraltrading agreem

ents? 4.D

oes our engagement w

ith the different stakeholdergroups enable us to deploy their different strengths toturn the optim

al energy solutions into reality?

Energ

y Security: R

econciling

Gro

wth and

Sustainab

ility in FutureInfrastructure Investm

ent

4. Global G

overnance: a Key to G

lobal Stability

and Sustainability

21| G

lobal R

isks 2009

The financial crisis exposed fundamental flaw

s in globalgovernance. In an historic m

eeting of countriesrepresenting 90%

of world G

DP, the G

20 summ

it held inN

ovember 2008 discussed w

ays to coordinate aresponse and the need for a global, collaborative solutionto the financial crisis. Indeed, as governm

ents andcorporations face the im

mediate 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 longrun. P

ersistent governance gaps in many of these issues

will only serve to exacerbate the related risks.

Where are the g

aps?

Whether in the econom

ic or security arena, most of the

multilateral institutions that operate today w

ere created inthe period follow

ing World W

ar II. Their mandates and

capacities were not designed for the highly

interconnected, multi-polar and, in m

any ways, m

oreopen w

orld of today. Econom

ic and demographic shifts

have not been reflected in either their governance ordecision-m

aking 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 globalsolutions are also beyond the realm

of any onegovernm

ent. Indeed, they will require not only

intergovernmental collaboration but also public-private

collaboration. Again, existing governance structures w

erenot built to capitalize on the com

bined strengths ofgovernm

ent, business and civil society.

Ad

dressing

glo

bal risks thro

ugh b

etter go

vernanceA

t the World E

conomic Forum

’s inaugural Sum

mit on the

Global A

genda in Dubai in N

ovember 2008, the G

lobalA

genda Council (G

AC

) on Global G

overnance made

some recom

mendations as to how

to addressgovernance gaps. They included: fostering greatercom

mitm

ent and new leadership on global issues;

developing framew

orks to draw on expertise and to

generate debate and awareness; m

arrying publicauthority and regulatory capacity w

ith incentives for theprivate sector to innovate; reform

ing existing institutions,specifically reform

ing the UN

Security C

ouncil; exploringnew

mechanism

s to provide necessary resources.

Looking at the global risks tracked by the Global R

iskN

etwork for the past five years w

ith theserecom

mendations in m

ind provides a gauge of how m

uchm

ore can be done to improve governance. O

n climate

change and resources, the picture is mixed. O

n the onehand, the Intergovernm

ental Panel on C

limate C

hange

has advanced dialogue by encouraging debate among

the scientific comm

unity resulting in improved aw

arenessand a greater com

mon understanding. O

n the otherhand, the K

yoto Protocol proved ineffective not only

because key governments failed to engage but also

because it was unable to offer a fram

ework

encompassing incentives and adaptation.

Where better and m

ore innovative governance has shown

results is in the area of global health risks. For HIV

/AID

Streatm

ent, The Global Fund, a U

N-backed public-private

structure has succeeded in making antiretroviral drugs

more easily available to populations at risk. The W

HO

hasdeveloped an effective m

onitoring and information

network for pandem

ics that operates globally.The risk ofinfectious disease rem

ains high but these examples

illustrate that new form

s of governance can be effectiveeven for som

e of the most borderless and tenacious of

global risks.

On w

ater-related risks however, there is currently little

oversight and shared understanding among governm

entsand business about not only environm

ental and securitybut also econom

ic implications. In the absence of

framew

orks that offer a comm

on base for national andregional dialogue and action around w

ater pricing,sustainability and infrastructure, w

ater-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,w

ater is perhaps an issue most in need of global

governance for mitigation.

Better g

overnance to

avoid

retrenchment

The spread of the financial crisis and the resulting globaldow

nturn has increased the risk of retrenchment from

globalization in developed and especially in developingeconom

ies (as illustrated in Figure 11).

Over the past several decades, globalization has m

eantcountries and businesses building econom

ic and societalties across the w

orld, opening new m

arkets,providingservices, generating em

ployment and reducing poverty.

This mom

entum has raised hundreds of m

illions ofpeople out of poverty but m

ore progress is needed. Aglobal dow

nturn will undoubtedly place greater pressures

on many econom

ies, developed and developing,butretrenchm

ent, in the form of econom

ic protectionism or

unwillingness to engage on clim

ate change, resource orsecurity issues, could create even greater pressures. N

owseem

s like an appropriate time address governance gaps

and thus provide framew

orks offering greater certainty to

22| G

lobal R

isks 2009

both governments and business and that w

ill enablesolutions that w

ill benefit all.

Clim

ate change, natural catastro

phes and

geo

po

litical riskN

inety per cent of all natural catastrophes are related tow

eather 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 thesepopulations experience due to natural catastrophes, arecom

pounded by the fact that insurance penetration is lowin em

erging markets. Thus their recovery is m

ore difficult.

How

ever, even before the financial crisis, emerging

economies w

ere reluctant to accept the trade-offbetw

een economic grow

th and the costs of containingclim

ate change effects. Now

that economic grow

th isslow

ing, 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 m

ay not onlysee their grow

th and development im

paired, they may

also have to manage rising tensions w

ith neighbouringstates as pollution levels and pressure on naturalresources rise. O

nce again, only globally coordinated andnationally supported efforts w

ill be effective to addressthe challenges related to clim

ate change, them

anagement of scarce resources and geopolitical

tensions.

Figure 11: T

he Risk o

f Pro

tectionism

in Em

erging

Markets

Source: W

orld Econom

ic Forum 2009

Node size:denotes severity

Node colours: red – econom

ics; 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 w

hen one risk is the stronger in the relationship.

Proxim

ity:the map show

s risks that are tightly interlinked to many other risks as closer to one another.

23| G

lobal R

isks 2009

During 2008, the W

orld Econom

ic Forum form

ed 68G

lobal Agenda C

ouncils (GA

Cs) for the express purpose

of bringing experts and leaders together to capturestate-of-the-art know

ledge and propose solutions for them

ost crucial issues facing the world today. The G

lobalA

genda Council (G

AC

) on Mitigation of N

atural Disasters

focuses on strategies for reducing losses from events

that can have catastrophic global impacts. This C

ounciland a num

ber of other GA

Cs agreed that there is a need

to develop innovative long-term strategies for coping

with m

yopic behaviour by decision-makers and dealing

with an increasingly interconnected w

orld. They suggestthe follow

ing principles for thinking about naturalcatastrophes that lend them

selves to other areas of risk,such as a technical accident or m

ajor terrorist attack:

Princip

le 1.Appreciate the im

portance of assessingrisks and characterizing uncertainties surrounding suchassessm

ents

Princip

le 2.Recognize the interdependencies

associated with risks and the dynam

ic uncertainties thatresult from

these interdependencies

Princip

le 3.Understand behavioural biases and

heuristics used by decision-makers, such as

misperceptions of probability, m

yopia and “the disasterw

on’t happen to me” attitude in developing risk

managem

ent strategies

Princip

le 4.Appreciate the long-term

impact of

disasters on a area’s or country’s economy, politics,

culture and society

Princip

le 5.Implem

ent risk-based pricing of economic

goods exposed to natural catastrophes and createresiliency by considering m

easures that prevent andm

itigate the risks of natural disasters and their social andeconom

ic impacts

Princip

le 6.Deal w

ith trans-boundary risks bydeveloping strategies that transcend political boundaries

Princip

le 7.Consider inequalities w

ith respect to thedistribution and effects of natural disasters. W

herepossible, cooperative agreem

ents should be facilitatedso that those w

ith few resources are assisted by those

with a greater capacity to help

Princip

le 8.Develop organizational leadership that is

prepared to anticipate the risks of large-scale naturaldisasters and m

obilize the organization in the imm

ediatew

ake of a calamity

Mitig

ating the E

ffects of N

atural Disasters

24| G

lobal R

isks 2009

The Russo-G

eorgian conflict during the summ

er of 2008w

as a reminder of how

geopolitical events and securityconsiderations can suddenly expose a diverse set ofrisks and interrelations, and how

little effect existingsecurity institutions have. The conflict strained R

ussia’srelations w

ith Europe and its neighbours in C

entral Asia,

raising the issue of energy security and dependence.These concerns have been com

pounded 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 R

isk Netw

ork over the past five years are theIsrael-P

alestine tensions, Iraq and Afghanistan. A

s thisreport w

as going to press, Ham

as, having called an endto a six-m

onth cease fire, was sending rockets into Israel

and Israeli troops had entered Gaza follow

ing a week-

long campaign of airstrikes. W

hile the situation on theground in Iraq m

ay 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 A

fghanistan, despite NATO

’s ongoingpresence, the level of violence rem

ains high and thesituation along the A

fghan-Pakistan border is a source of

instability throughout the region and beyond. Indiasuffered a m

ajor terrorist event in Mum

bai. Though,previous attacks have been equally severe in the term

s

of fatalities, the nature of this attack and the targets may

signal the new direction for terrorism

on thesubcontinent. G

iven this and the potential for instability inP

akistan, with its troubled borders w

ith Afghanistan and

India, the world m

ust remain on the alert about events in

this region, dominated by tw

o nuclear powers and, if

necessary,ready to act in an aligned manner.

In Latin Am

erica, problems of violence, corruption and

political instability continue to plague parts of thecontinent and uncertainty abounds on theconsequences of the political directions that have beentaken by several countries. O

n the African continent,

Som

alia, Sudan and Zim

babwe have the unenviable

distinction of being the states “most at risk of failure” as

they fill the top three positions of Foreign Policy’s

FailedS

tates Index. And recent events in the D

emocratic

Republic of C

ongo have resurrected the complications

between tribal and national boundaries.

Though periodic incidents bring these situations to thefore from

time to tim

e, thew

orld does have to bear thehum

an and economic losses from

enduring conflicts.Though

they can be considered as “local” in nature theyappear

on the risk landscape with a relatively high

degree of potential severity. Their persistent non-resolution m

eans that there is a permanent risk that

they spill over, causing greater loss of life and evendestabilizing other countries. These conflicts can affectregions far beyond their borders

throughterrorism

,sudden m

ovements of refugees, ongoing illegal

migration and direct m

ilitary conflict.

An O

verview o

f the Geo

po

litical Landscap

e

25| G

lobal R

isks 2009

In Global R

isks 2008, principles of country riskm

anagement and the concept of a C

ountry Risk O

fficer,first introduced in 2007, w

ere explored. Many of the

challenges facing international governance are similar:

broad range of risks, divergent incentives, multiple

stakeholders and limited resources. H

owever, at a

country and international level, clear, transparentinform

ation and an integrated, comprehensive risk

assessment are essential.

Countries are subject to a m

yriad of risks includingnatural catastrophes, food safety, pandem

ics andterrorism

. Their governments are charged w

ith theresponsibility of m

aintaining critical infrastructureconsisting of w

ater, energy, transportation andcom

munication w

hile preserving lives and economic

livelihoods under increasing budgetary pressure. Despite

differences in organizational structures and risk priorities,there are tw

o principles highlighted in Global R

isks 2008

that governments have applied in practice: integrated,

comprehensive, long-term

risk assessment and

transparent, clear comm

unication to all stakeholders.W

hether through a comm

ittee of an existing body or anew

ly formed international institution, a com

prehensivefram

ework of risk assessm

ent, carefully evaluating

interconnectivity and interdependency, and clearcom

munication w

ith all stakeholders should be coreprinciples for risk m

anagement on a global scale.

Country R

isk Officers could serve as the focal point of

comm

unication between countries and w

ith internationalbodies for risks of a global nature.

Integrated

, com

prehensive fram

ewo

rk: As an

example, the governm

ent of Singapore has instituted a

“Whole of G

overnment –

Integrated Risk M

anagement”

(WO

G-IR

M) fram

ework 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 A

ssessment and H

orizon programm

e,S

ingapore has even constructed scenarios for energy,food security and clim

ate change illustrating the long-term

, comprehensive nature of their risk m

anagement

framew

ork.

Transparent d

ata and clear co

mm

unication o

f risksto

all stakehold

ers: Japan’s relatively small territory

(378,000 square km) suffered 20%

of the world’s

earthquakes between 1996 and 2005. S

eventy-five percent of Japan’s assets are concentrated in flood proneareas. The C

entral Disaster M

anagement C

ouncil(C

DM

C) of Japan is an inter-m

inisterial body establishedto form

ulate and promote a com

prehensive nationalstrategy for these and other risks. D

ata from the Japan

Metereological S

ociety and local governments,funnelled

through the CD

MC

,is used to clearly comm

unicate risksand response to its constituents. In addition, Japanprovides various risk m

aps to stakeholders as a riskm

itigation measure.

Better R

isk Manag

ement thro

ugh B

etter Go

vernance:W

hat Can W

e Learn from

Best P

ractices in Co

untry Risk M

anagem

ent?

Conclusion

26| G

lobal R

isks 2009

The areas of risk detailed in this report are inextricablylinked. W

hile they will influence decisions and grow

thover 2009, they also have longer term

effects whose

exact shape and reach may not be clear for several

years. For this reason, it is crucial for decision-makers to

take a step back and consider a bigger, broader pictureof the entire landscape of risks that extends both in tim

eand in space, even w

hen they are under pressure toresolve m

ore imm

ediate problems. The risk landscape

explored here offers a framew

ork for further discussionthat can be used by business leaders, risk experts andpolicy-m

akers in their thinking about risk and mitigation.

As this report points out, global risks can only be

effectively addressed if there is a comm

onunderstanding and a w

illingness to engage in dialogueand action w

ith multiple stakeholders internationally

across countries, industries and business sectors.

Previous editions of the G

lobal Risk report proposed the

creation of international coalitions of the willing or the

institution of a Country R

isk Officer as possible

approaches to building effective cross-border mitigation

strategies for global risks. At the local, corporate and

even national level, a great deal of work is being done on

mitigation, but building aw

areness around this work and

scaling it up with the appropriate exchange of

information, expertise, governance and m

anagement

structures – either within existing institutions or in new

ones – requires a coordinated and concerted approach.W

ithout this effort, ownership of risks w

ill remain

fragmented and the challenges posed by increasing

levels of interconnectedness will dam

pen prospects ofsuccessful collaboration.

Throughout 2009, the Global R

isk Netw

ork will continue

to work w

ith its partners to leverage its unique platformand netw

orks, explore existing and new m

itigationpossibilities and extend aw

areness of global risks usingthe fram

ework defined in the G

lobal Risks report as a

basis for discussion. To this end, it will draw

upon theW

orld Econom

ic Forum’s expertise in public-private

partnerships on global issues such as the environment

and health, as well as in com

petitiveness and scenariobuilding. The G

lobal Risk N

etwork w

ill also exploresynergies w

ith the Forum’s G

lobal Agenda C

ouncils anduse the Forum

’s regional platforms to im

prove itsunderstanding of the geographic distribution of globalrisks, and explore how

different countries tackle risk atthe corporate and institutional level. W

ith the question ofglobal governance very m

uch to the fore of world affairs,

it will be im

portant to highlight that risk managem

ent isas im

portant for governments as it is for businesses, and

that both of these stakeholders have much to learn from

each other in this area.

Appendix 1: The R

isk Assessm

entand R

isk Barom

eter

27| G

lobal R

isks 2009

The 36 risks were assessed in term

s of their likelihood and their severity. In addressing likelihood, actuarial principles were applied w

heresufficient data existed, though for certain risks only qualitative assessm

ents based on expert opinion are possible. In assessing severity,tw

o indices were considered: destruction of assets/econom

ic damage and hum

an lives lost. Both of these latter indices w

ere used,resulting in separate analysis of risks by the tw

o types of severity, though for some risks the lives lost criteria w

as deemed inapplicable. It

should also be noted that although some risks by definition evolve over a longer term

(e.g. climate change) and others could happen in

the near term (e.g. oil price shock), the likelihood of all risks w

as evaluated with a 10-year tim

e horizon.

The Global R

isks “barometer” below

shows how

the qualitative 2009 assessment (com

pleted in October 2008) of the likelihood and

severity of each risk compares w

ith the 2008 assessment.

Key:

same assessm

ent as last year

increase

d

ecrease

new risk

not ap

plicab

le for this risk

#E

conomic R

isksLikelihood

SeverityU

S$

SeverityN

o. ofD

eaths

1Food price volatility

Food prices peaked in mid-2008. E

xpectations are that food pricesm

ay be more volatile over the com

ing years.

2O

il and gas price spike

In the short term, slow

ing global demand and fears of a further drop

in global growth m

eans the outlook for price spikes over the next 12m

onths is unlikely despite the OP

EC

in production in Decem

ber2008. The long-term

trend is for rising demand and a potential return

to tighter conditions.

3M

ajor fall in US

$

Experts consider that the dollar could com

e under pressure asinvestors reflect on the long-term

impact of current m

onetaryexpansion, high fiscal deficits and the continuing fragility of the U

Sfinancial system

.

4S

lowing C

hinese economy (6%

)

Though China’s dom

estic market could help com

pensate for its lossof exports due to recession in the U

S and other m

arkets, thegovernm

ent will need to encourage private spending to boost

domestic consum

ption.

5Fiscal crises

Dem

ographic factors (ageing societies) are responsible for largeuncovered liabilities in social security and public healthcaresystem

s. The pressure on fiscal systems w

ill be exacerbated bycurrent bailout packages and fiscal program

mes to jum

p-startgrow

th.

28| G

lobal R

isks 2009

#E

conomic R

isksLikelihood

SeverityU

S$

SeverityN

o. ofD

eaths

6A

sset price collapse

Although prices for m

any assets (housing, equities, andcorporate bonds) have declined dram

atically, there is continuedscope for further losses over a broad class of assets in the shortterm

.

7R

etrenchment from

globalization (developed)

The outlook is stable but some retrenchm

ent is likely if governments

revert to protectionist strategies in an effort to protect jobs asunem

ployment rises. C

ross-border private investment m

ay alsodecrease until investor confidence returns.

8R

etrenchment from

globalization (emerging)

Experts considered that the risk of m

ore inward-looking

economic policies in em

erging economies could also increase in

reaction to the current financial turmoil.

9R

egulation cost

This risk was included in the assessm

ent for the first time for 2009.

10U

nderinvestment in infrastructure

This risk was included in the assessm

ent for the first time for 2009

#G

eopolitical R

isksLikelihood

SeverityU

S$

SeverityN

o. ofD

eaths

11International terrorism

The perceived risk has decreased overall internationally but the riskrem

ains relatively high in several countries such as Iraq, Afghanistan,

Pakistan and S

omalia.

12C

ollapse of NP

T

Though the controversial US

-India nuclear deal was signed in 2008

and no progress was m

ade on the Iranian programm

e, the outlook isfor neither im

provement nor deterioration com

pared to 2008.

13U

S/Iran conflict

With a new

US

administration entering office, the risk is perceived as

less likely

14U

S/D

PR

K conflict

With a new

US

administration entering office, the risk is perceived as

less likely.

29| G

lobal R

isks 2009

#G

eopolitical R

isksLikelihood

SeverityU

S$

SeverityN

o. ofD

eaths

15A

fghanistan instability

Experts judged that a degree of progress had been m

ade but thatthe severity rem

ains constant in cost and loss of life terms.

16Transnational crim

e and corruption

Corruption continues to cost over U

S$ 1 trillion annually.

Transnational crime rem

ains endemic and related to a num

ber ofother global risks.

17Israel-P

alestine conflict

The likelihood of increased tensions is neither greater or less than in2008. N

ote that this assessment w

as completed in O

ctober 2008.

18V

iolence in Iraq

The likelihood of more violence has decreased slightly relative to

2008 but the costs and loss of life remain constant.

19G

lobal governance gaps

This risk was included in the assessm

ent for the first time for 2009.

#E

nvironmental R

isksLikelihood

SeverityU

S$

SeverityN

o. ofD

eaths

20E

xtreme clim

ate change-related weather

As the effects of clim

ate change have begun to manifest them

selvesin w

eather events, this risk remains constant year on year but given

that many of these incidents affect developing regions the num

ber ofdeaths is likely to rise.

21D

roughts and desertification reduces agricultural yields

As the incidence of drought has risen, production has shifted w

herepossible to less drought-prone areas or to m

ore drought-resistantcrops. N

onetheless, desertification remains a risk to incom

es andhealth in vulnerable regions.

22Loss of freshw

ater

Greater aw

areness and education and improved sanitation is slightly

reducing the number of deaths but overall this risk is constant in

terms of likelihood and severity.

23N

atural catastrophe: cyclone

Improved building standards and better w

arning information have to

contributed to reducing loss of life from cyclones but the risk rem

ainsconstant for relevant areas.

30| G

lobal R

isks 2009

#E

nvironmental R

isksLikelihood

SeverityU

S$

SeverityN

o. ofD

eaths

24N

atural catastrophe: earthquake

The threat of earthquakes remains the sam

e as they are driven bygeophysics. Im

proved building standards and response mechanism

sare slightly reducing their im

pact.

25N

atural catastrophe: inland flooding

This risk rose over previous years, primarily due to flood plain

development and an expected increase in clim

ate change-relatedw

eather events but remains constant from

2008 to 2009.

26N

atural catastrophe: coastal flooding

This risk was included in the assessm

ent for the first time for 2009.

27A

ir pollution

This risk was included in the assessm

ent for the first time for 2009.

28B

iodiversity loss

This risk was included in the assessm

ent for the first time for 2009.

#S

ocietal Risks

LikelihoodS

everityU

S$

SeverityN

o. ofD

eaths

29P

andemic

Work continues on aw

areness and coordination among different

agencies but the risk is constant, as is uncertainty about the natureof a potential outbreak.

30Infectious disease

Though infection rates for some diseases are stabilizing in som

eregions, e.g. H

IV/A

IDS

in sub-Saharan A

frica, overall the risk remains

constant and severe in terms of loss of life.

31C

hronic disease

The incidence of chronic disease is rising across both the developedand developing w

orld. Medical advances and aw

areness can reducethe risk severity but chronic disease is still the m

ain cause of deathw

orldwide.

31|G

lobalR

isks2009

##SS

ociocietal

etalRisk

Riskss

LLikelihoodikelihood

SSevereverityityU

S$

US

$SS

everityeverityNN

o.o.ofof

Deaths

Deaths

32Liability

regimes

Experts

sawthe

riskofU

S-style

liabilityregim

esspreading

toother

countriesas

increasing.

33M

igration

Thisrisk

was

includedin

theassessm

entfor

thefirst

time

for2009.

##TTechnechnolological

ogicalRRisksisks

LikelihoodLikelihood

Sever

SeverityityU

S$

US

$SS

everityeverityNN

o.o.ofof

Deaths

Deaths

34C

riticalInformation

Infrastructure(C

II)breakdown

Abalance

between

vulnerabilitydue

toincreased

interconnectivityand

systemdependency

andim

provedsecurity

mean

thatexperts

judgedthis

riskas

stable.

35E

mergence

ofnanotechnologyrisks

As

thestudy

anduse

ofnanotechnologyand

materials

progresses,uncertainty

remains

aboutthe

potentialrisksinvolved.

36D

atafraud/loss

Thisrisk

was

includedin

theassessm

entfor

thefirst

time

for2009.

Appendix

2:G

lobalRisks

Report:

Process

andD

efinition

32|G

lobalR

isks2009

The

Risks

Interconnectio

nsM

ap(R

IM)

andp

erceptio

nsurvey

Aprim

aryobjective

oftheG

lobalRisk

Netw

orkis

toincrease

awareness

andunderstanding

oftheinterlinkages

among

risksand

thecom

plexitythis

implies

fordecisions

aboutrisk

managem

entand

mitigation.The

dataused

tobuild

theR

iskInterconnections

Map

(RIM

)(see

Figure2)is

drawn

fromtw

osources.The

connectionsand

strengthsare

developedusing

datafrom

theG

lobalRisks

Perception

Survey.This

Web-based

surveyw

ascom

pletedby

over120

riskexperts

andm

embers

oftheForum

’sG

lobalAgenda

Councils.The

nodeson

theR

IMrepresent

thesam

eassessm

entdata

for“severity”

asthe

barometer.The

thicknessofthe

linesconnecting

therisks

representthe

strengthofthe

relationshipbetw

eenthem

.Where

thefirst

partofa

lineem

anatingfrom

onerisk

isthicker

itindicates

thatrisk

asthe

dominant

one.

Ano

teo

nthe

regio

nalriskm

aps

pro

duced

by

Zurich

FinancialServices

Theanalysis

isbased

ona

methodology

anddata

setdeveloped

byZurich

FinancialServices.The

methodology

isbroadly

comparable

tostatisticalcluster

analysisthat

partitionsa

dataset

intosubsets

(orclusters)w

iththe

propertythat

thedata

ineach

subset(cluster)share

comm

oncharacteristics

–in

thiscase

thecharacteristics

arerisks.C

ountriesw

ithsim

ilarrisks

areclose

neighbourson

therisk

map;they

formclusters.In

contrast,countriesthat

aredissim

ilarw

ithrespect

totheir

risksare

displayedcom

parativelyfar

apartfrom

eachother;they

arenot

partofa

cluster.

Thedata

setcovers

160countries;the

24globalrisks

aregrouped

infive

riskclasses:econom

ic,environmental,

health,geopoliticalandtechnologicalrisks.H

arddata

isdraw

nfrom

establishedpublic

sourcesand

incorporatedinto

them

odelusingparam

etersfor

highto

lowrisk

developedby

ZurichFinancialS

ervices.Thedata

usedto

determine

theinterconnections

among

therisks

isdraw

nfrom

thequalitative

assessment

dataon

thoseinterconnections

establishedfor

GlobalR

isks2008.

The

criteriaused

tod

efineg

lob

alrisks

Thecriteria

forglobalrisks

havebeen

setas

follows:

Glo

balS

cop

e:Tobe

consideredglobal,a

riskshould

havethe

potentialtoaffect

(includingboth

primary

andsecondary

impact)at

leastthree

world

regionson

atleast

two

differentcontinents.W

hilethese

risksm

ayhave

regionaloreven

localorigin,theirim

pactcan

potentiallybe

feltglobally.

Cro

ss-Industry

Relevance:The

riskhas

toaffect

threeor

more

industries(including

bothprim

aryand

secondaryim

pact).

Uncertainty:There

isuncertainty

abouthow

therisk

manifests

itselfwithin

10years

combined

with

uncertaintyabout

them

agnitudeofits

impact

(assessedin

terms

oflikelihood

andseverity).

Eco

nom

icIm

pact:The

riskhas

thepotentialto

causeeconom

icdam

ageofaround

US

$10

billion.

Pub

licIm

pact:The

riskhas

thepotentialto

causem

ajorhum

ansuffering

andto

triggerconsiderable

publicpressure

andglobalpolicy

responses.

Multistakeho

lder

Ap

pro

ach:The

complexity

oftherisk

bothin

terms

ofitseffects

andits

driversas

wellas

itsinterlinkages

with

otherrisks

requirea

multistakeholder

approachfor

itsm

itigation.

The

Glo

balR

iskN

etwo

rkTo

refineits

understandingofrisk,the

GlobalR

iskN

etwork

conducteda

seriesofw

orkshops,interviews

andm

eetingsthroughout

2008and

expandedits

work

bothglobally

andon

aregionalbasis.This

includedthe

publicationofthree

regionalreports,A

frica@R

isk,Europe@

Risk

andIndia@

Risk,as

wellas

atopicalreport

onem

ergingm

arketsand

high-growth

companies,G

lobal

Grow

th@R

isk.

Overall,the

GlobalR

iskN

etwork

identifiedthis

yeara

totalof36specific

risksto

theinternationalcom

munity

overthe

next10

years,usingan

updatedtaxonom

y(com

paredw

ith31

risksfeatured

inthe

2008taxonom

y).R

isksthat

were

previouslyaggregated

forvarious

purposeshave

beendisaggregated

throughoutthis

reportfor

consistencyand

improved

comparability

yearon

year.A

number

ofriskson

theprevious

year’slist

havebeen

removed

orrephrased

becausethey

failedto

meet

thecriteria

oftherevised

methodology,w

hilethe

2009list

alsofeatures

eightnew

additions.

Contributors

andA

cknowledgem

ents

33|G

lobalR

isks2009

Thisreport

was

preparedby

theG

lobalRisk

Netw

orkofthe

World

Econom

icForum

inconjunction

with

itspartners.

Glo

balR

iskN

etwo

rk

IreneC

asanova,Associate

Director,G

lobalRisk

Netw

orkV

iktoriaIvarsson,P

rojectM

anager,GlobalR

isksR

eportS

téphaneO

ertel,Associate

Director,G

lobalRisk

Netw

orkFiona

Paua,S

eniorD

irector,Head

ofGlobalA

gendaC

ounciland

Strategic

InsightTeam

sP

earlSam

andari,TeamC

oordinator,Strategic

InsightTeam

sS

heanaTam

bourgi,Director,H

eadofthe

GlobalR

iskN

etwork;E

ditor,G

lobalRisks

2009

Glo

balR

isksR

epo

rtP

artners

Citigroup,

US

AJohn

Ingraham,M

anagingD

irector,Head

ofRisk

Aggregation,C

itigroup

Marsh

&M

cLennanC

ompanies

(MM

C)

Sara

Dixter,M

anager,Oliver

Wym

an(M

MC

),United

Kingdom

JohnD

rzik,President

andC

hiefExecutive

Officer,O

liverW

yman

Group,M

MC

,US

AD

avidFrediani,S

eniorV

ice-President,Internationaland

Client

Developm

ent,MM

C,U

SA

JohnJ.M

erkovsky,Managing

Director,M

arshR

iskC

onsulting,MM

C,U

SA

Roland

Rechtsteiner,P

artner,Oliver

Wym

an(M

MC

),S

witzerland

Alex

Wittenberg,P

artner,Oliver

Wym

an(M

MC

),US

A

Sw

issR

eA

nwarulH

asan,Vice-P

resident,Risk

Managem

ent,Sw

issR

e,Sw

itzerlandK

urtK

arl,Senior

Vice-P

resident,Head

ofEconom

icR

esearch&

Consulting,S

wiss

Re

Am

ericanH

oldingC

orp.,U

SA

RajS

ingh,ChiefR

iskO

fficer,Mem

berofthe

Executive

Board,S

wiss

Re,S

witzerland

TeriTaylor,Director,H

eadofE

merging

Risk

Managem

ent,S

wiss

Re,S

witzerland

LisaW

yssbrod,Director,S

eniorIssue

andP

artnershipM

anager,Sw

issR

e,Sw

itzerland

TheW

hartonS

chool,U

niversityofP

ennsylvania,U

SA

Witold

J.Henisz,A

ssociateP

rofessorofM

anagement

How

ardK

unreuther,Cecilia

YenK

ooP

rofessor;Co-D

irector,R

iskM

anagement

andD

ecisionP

rocessesC

enterE

rwann

Michel-K

erjan,Managing

Director,C

enterfor

Risk

Managem

entand

Decision

Processes,W

hartonS

chool,U

niversityofP

ennsylvania

ZurichFinancialS

ervices,S

witzerland

Roland

Cochard,R

esearchA

ssistant,Risk

Assessm

entR

oom

DanielM

.Hofm

ann,Group

ChiefE

conomist

Kerry

Karageorgis,D

evelopment

Director,R

iskA

ssessment

Room

AxelP.Lehm

ann,ChiefR

iskO

fficer,Mem

berofthe

Group

Executive

Com

mittee

Sam

uelSchenker,R

esearchA

ssistant,Risk

Assessm

entR

oom

Exp

ertW

orksho

ps

Over

thepast

year,theG

lobalRisk

Netw

orkhas

engagedw

itha

wider

groupofexperts

inw

orkshopsand

meetings

heldin

New

York,London,Dalian,D

elhiandZurich.These

workshops,along

with

therisk

assessment

processand

meetings

inN

igeria,Kenya,S

outhA

frica,China,Turkey

andIndia,have

providedbroad

expertiseand

invaluableinsight

forthis

report.Theyare

anintegralpart

oftheG

lobalRisk

Netw

ork’sm

andateto

fosterand

supportm

ultistakeholderdialogues

toim

proveunderstanding

ofglobalrisksand

toincrease

thepossibilities

forrisk

mitigation.

We

would

liketo

thankallofthose

who

contributedfor

theirtim

eand

aboveallfor

theirinsights:

Ahm

etA

karli,Executive

Director,G

oldman

Sachs

International,United

Kingdom

Efkan

Ala,U

ndersecretaryofthe

Prim

eM

inistryofTurkey

Towfiq

M.A

l-Bastaki,A

ssistantG

eneralManager,R

iskM

anagement

&C

ompliance

Division,S

hamilB

ankof

Bahrain,B

ahrainLaura

Alfaro,A

ssociateP

rofessor,Harvard

Business

School,

US

AB

errakA

lkan,Editor,C

hairman’s

Office,D

ogusG

roup,TurkeyR

ossA

nderson,Professor

ofSecurity

Engineering,U

niversityofC

ambridge,U

nitedK

ingdomY

ilmaz

Argüden,C

hairman,A

RG

EC

onsulting,TurkeyA

ttilaA

skar,President,K

oçU

niversity,TurkeyC

urtisB

aron,Director,B

usinessC

ontinuity,Europe,

Information

Technology,Credit

Suisse

Securities

(Europe)Ltd,

United

Kingdom

Guy

Battle,O

riginatorand

Founder,Dcarbon8,U

nitedK

ingdomE

stherB

aur,Director,H

eadIssue

Managem

ent,Sw

issR

e,S

witzerland

Erik

Berglöf,C

hiefEconom

ist,European

Bank

forR

econstructionand

Developm

ent(E

BR

D),London

Kip

Berkley-H

erring,Group

Risk

Manager,B

TP

lc,United

Kingdom

Sim

onB

iggs,Director,Institute

ofGerontology,K

ing’sC

ollegeLondon,U

nitedK

ingdomJaim

ede

Bourbon

Parm

e,Head,C

risisR

esponseO

perations,Ministry

ofForeignA

ffairs,Netherlands

Philippe

Brahin,D

irector,Head

ofGroup

Regulatory

Affairs,

Sw

issR

e,Sw

itzerlandIan

Brem

mer,P

resident,Eurasia

Group,U

SA