davos world economic forum 2011 -global risks

8/7/2019 DAVOS World Economic Forum 2011 -GLOBAL RISKS

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World Economic Forumin collaboration with :

Marsh & McLennan CompaniesSwiss Reinsurance CompanyWharton Center for Risk Management,University of PennsylvaniaZurich Financial Services

Global Risks2011Sixth EditionAn initiative of the Risk Response Network

World Economic ForumJanuary 2011



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 veried andno representation or warranty, express or implied, is made as to the accuracy or completeness of anyinformation obtained from third parties. In addition, the statements in this report may provide currentexpectations of future events based on certain assumptions and include any statement that does notdirectly relate to a historical fact or a current fact. These statements involve known and unknown risks,uncertainties and other factors which are not exhaustive. The companies contributing to this reportoperate in a continually changing environment and new risks emerge continually. Readers are cautionednot to place undue reliance on these statements. The companies contributing to this report undertake

no obligation to publicly revise or update any statements, whether as a result of new information, futureevents or otherwise and they shall in no event be liable for any loss or damage arising in connection withthe use of the information in this report.

World Economic Forum 91-93 route de la CapiteCH-1223 Cologny/Geneva

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ISBN: 92-95044-47-9

978-92-95044-47-0

REF: 050111



Figure 1 | Global Risks Landscape 2011:Perception data from the World Economic Forum’s Global Risks Survey

Economic Risks Asset price collapseExtreme commodity price volatilityExtreme consumer price volatilityExtreme energy price volatilityFiscal crisesGlobal imbalances and currency volatilityIn rastructure ragilityLiquidity/credit crunchRegulatory ailures

Retrenchment rom globalizationSlowing Chinese economy (<6%)

Environmental Risks Air pollutionBiodiversity lossClimate changeEarthquakes and volcanic eruptionsFloodingOcean governanceStorms and cyclones

Societal RisksChronic diseasesDemographic challengesEconomic disparityFood securityIn ectious diseasesMigrationWater security

Geopolitical RisksCorruptionFragile statesGeopolitical confictGlobal governance ailuresIllicit tradeOrganized crimeSpace security

TerrorismWeapons o mass destruction

Technological RisksCritical in ormation in rastructurebreakdownOnline data and in ormation security

Threats rom new technologies



Figure | Risks Interconnection Map (RIM) 20112



Global Risks 2011 | 3

Contents

Preface 4

Executive summary 6

Cross-cutting global risksEconomic disparity and global governance failures 10

Risks in focus 1 The macroeconomic imbalances nexus 14

Risks in focus 2 The illegal economy nexus 22

Risks in focus 3 The water-food-energy nexus 28

Risks to watch 36

Conclusion 41

Appendix 1De nitions and methodology 42

Appendix 2Survey data overview 2011 44

Appendix 3Common global risk response strategies 48

Appendix 4Guide to online global risks 2011 resources 50

References and further reading 51

Acknowledgements 52

Project team 56



4 | Global Risks 2011

Preface

Since 2006 the World Economic Forum’s Global Risksreport has provided a unique and timely analysis o the risks that are shaping the global environment.Underscored by an unprecedented pace o change,stakeholders rom across business, government andcivil society ace a new imperative in understanding

and managing emerging risks.

Global Risks 2011, Sixth Edition provides a high-level overview o 37 selected global risks as seenby members o the World Economic Forum’s Global Agenda Councils and supported by a survey o 580leaders and decision-makers around the world. Thereport also benefts rom the expertise and thoughtleadership o the World Economic Forum’s GlobalRisk Partners: Marsh & McLennan Companies, SwissReinsurance Company, Wharton Center or Risk

Management, University o Pennsylvania, and ZurichFinancial Services.

This report aims to enhance understanding o how acomprehensive set o global risks are evolving, howtheir interaction impacts a variety o stakeholders,and what trade-o s are involved in managing them.Global Risks 2011, Sixth Edition is a use ul tool orpolicy-makers, CEOs, senior executives and thoughtleaders around the world. It aims to equip institutionsto understand and respond to global risks and toembrace change as a source o innovation.

Most importantly, I hope that ocusing on the criticalconnections between key global risks, stakeholdersand decision-makers will inspire all to engagecollectively in e orts to improve the global system’soverall resilience.

At the World Economic Forum Annual Meeting2011 in Davos-Klosters, the Forum will go beyondits current global risk work in launching the RiskResponse Network (RRN). The RRN will build on theunderstanding embodied inGlobal Risks 2011, Sixth

Edition to provide a plat orm or our Partners andconstituents to collaborate in multistakeholder e ortsto shape a more secure, innovative and resilient uture.

I hope you fnd the report both in ormative andprovocative.

Klaus SchwabFounder and Executive ChairmanWorld Economic Forum




The World Economic Forum’s Risk Response Network

Global Risks 2011, Sixth Edition is a agship product o the World Economic Forum’s new Risk ResponseNetwork (RRN).

The RRN is a unique plat orm or global decision-makers to better understand, manage and respond tocomplex and interdependent risks. It will bring a rigorous approach to understanding the complexity o risks that ace corporate, government and civil society leaders, and will provide tools enabling them tobetter mitigate risks and capture associated opportunities. It will combine:

• The most compelling insights , drawn rom the World Economic Forum’s communities andcontributors, including active expert groups such as our Network o Global Agenda Councils and a

ormal network o the world’s top universities and private sector content providers;

• The most relevant global decision-makers , brought together through a community o Risk O fcersrom top corporations, governments and international organizations;

• The most suitable tools and services , including analytic tools and risk management processes toenable decision-makers to better understand key risks in depth and in context, to respond to themproactively and mobilize quickly and e fciently in times o crisis.

This report lays the oundations or the RRN by highlighting three ways or leaders to improve theirresponse to complex and interdependent risks:

• Proactively address the causes, rather than the symptoms, of global risk , identi ying e ectivepoints o intervention in underlying structures and systems – in particular with respect to globalgovernance ailures and economic disparities;

• Devise coordinated response strategies to address the existence o di fcult trade-o s and thethreat o unintended consequences caused in part by increased interconnectedness;

• Take a longer-term approach to assessment and response , particularly when seeking to manageglobal risks that emerge over decades rather than months or years.

The RRN will build on these insights over the coming months by launching a series o initiatives andworkstreams ocused on a variety o global risks highlighted in this Report. We hope that you will fndGlobal Risks 2011, Sixth Edition to be thought-provoking. But, more importantly, we hope many o you will join the World Economic Forum’s initiative to collectively better understand and respond to the new worldo risk.




The world is in no position to ace major,new shocks. The fnancial crisis hasreduced global economic resilience,while increasing geopolitical tension andheightened social concerns suggestthat both governments and societiesare less able than ever to cope withglobal challenges. Yet, as this reportshows, we ace ever-greater concerns

regarding global risks, the prospect o rapid contagion through increasinglyconnected systems and the threat o disastrous impacts.

In this context,Global Risks 2011, SixthEdition reveals insights stemming roman unparalleled e ort on the part o theWorld Economic Forum to analyse theglobal risk landscape in the coming

decade.1

Two cross-cutting global risks Two risks are especially signifcant given their highdegrees o impact and interconnectedness.Economicdisparity 2 and global governance 3 ailures bothin uence the evolution o many other global risks andinhibit our capacity to respond e ectively to them.

In this way, the global risk context in 2011 is defned bya 21st century paradox: as the world grows together, itis also growing apart.

Globalization has generated sustained economic

growth or a generation. It has shrunk and reshapedthe world, making it ar more interconnected andinterdependent. But the benefts o globalization seemunevenly spread – a minority is seen to have harvesteda disproportionate amount o the ruits. Althoughgrowth o the new champions is rebalancing economicpower between countries, there is evidence thateconomic disparity within countries is growing.

Issues o economic disparity and equity at both thenational and the international levels are becomingincreasingly important. Politically, there are signs o resurgent nationalism and populism as well as social

ragmentation. There is also a growing divergence

o opinion between countries on how to promotesustainable, inclusive growth.

To meet these challenges, improved global governanceis essential. But this is another 21st century paradox:the conditions that make improved global governanceso crucial – divergent interests, con icting incentivesand di ering norms and values – are also the onesthat make its realization so di fcult, complex andmessy. As a result, we see ailures such as the DohaDevelopment Round o the World Trade Organization(WTO) and the lack o international agreement at theCopenhagen Con erence on climate change. The G20is seen as the most hope ul development in global

governance but its e fciency in this regard has notbeen proven.

Executive summary

1For more information see Appendix 2. 2Wealth and income disparities, both within countries and between countries3Weak or inadequate global institutions, agreements or networks




Three important risks in ocusBeyond these two cross-cutting global risks, threeimportant clusters o risks have emerged in this year’sanalysis:

The “macroeconomic imbalances” nexus : Acluster o economic risks including macroeconomicimbalances and currency volatility, fscal crises andasset price collapse arise rom the tension betweenthe increasing wealth and in uence o emergingeconomies and high levels o debt in advancedeconomies. Savings and trade imbalances within andbetween countries are increasingly unsustainable whileun unded liabilities create extreme long-term pressureon fscal positions. One way out o these imbalanceswould be coordinated global action but this ischallenging given the con icting interests o di erentstates.

The “illegal economy” nexus : This nexus examinesa cluster o risks including state ragility, illicit trade,organized crime and corruption. A networked world,governance ailures and economic disparity createopportunities or such illegal activities to ourish. In2009, the value o illicit trade around the globe wasestimated at US $1.3 trillion and growing. These risks,while creating huge costs or legitimate economicactivities, also weaken states, threatening developmentopportunities, undermining the rule o law and keepingcountries trapped in cycles o poverty and instability.International cooperation – both on the supply sideand on the demand side – is urgently needed.

The “water-food-energy” nexus : A rapidly risingglobal population and growing prosperity are puttingunsustainable pressures on resources. Demand orwater, ood and energy is expected to rise by 30-50%in the next two decades, while economic disparitiesincentivize short-term responses in production andconsumption that undermine long-term sustainability.Shortages could cause social and political instability,geopolitical con ict and irreparable environmentaldamage. Any strategy that ocuses on one part o the water- ood-energy nexus without consideringits interconnections risks serious unintendedconsequences.

Five risks to watchFive risks have been designated as “risks to watch”,as survey respondents assessed them with highlevels o variance and low levels o confdence whileexperts4 consider they may have severe, unexpectedor underappreciated consequences:

• Cyber-security issues ranging rom the growingprevalence o cyber the t to the little-understoodpossibility o all-out cyber war are

• Demographic challenges adding to fscal

pressures in advanced economies and creatingsevere risks to social stability in emergingeconomies

• Resource security issues causing extremevolatility and sustained increases over the long runin energy and commodity prices, i supply is nolonger able to keep up with demand

• Retrenchment from globalization through populistresponses to economic disparities, i emergingeconomies do not take up a leadership role

• Weapons of mass destruction , especiallythe possibility o renewed nuclear proli eration

between states

E ective risk response is not only about proactivelyreducing the downsides associated with global risks;it is also about seizing the opportunities or innovationand growth that may arise. Throughout this report, aseries o risk response strategies are explored that canhelp stakeholders achieve both goals.

4Unless otherwise noted, in this report “experts” refers to the Global Agenda Council members and other contributors who areacknowledged at the end of this report. They provided input through various means, including participating in the Global Risks Survey,taking part in workshops, reviewing the report and providing individual advice and counsel.

Executive summary



Cross-cutting global risksEconomic disparity and globalgovernance failures




Economic disparity and global governance ailuresemerged rom the Forum’s Global Risks Survey 2010as the two most highly connected risks and wereperceived as both very likely and o high impact (seeFigure 1, Global Risks Landscape, and Figure 2,Risks Interconnection Map, at the beginning o thereport). They in uence the context in which global risksevolve and occur in two critical ways: frst, they canexacerbate both the likelihood and impact o otherrisks; second, they can inhibit e ective risk response.

Economic disparityand social fragmentation

De inition: Wealth and income disparities, both within countriesand between countries, threaten social and political stability aswell as economic development.

The Global Risks Survey identifedeconomic disparity as one o the most important risks in the comingdecade. The Forum’s Global Agenda Council surveyalso supports this fnding, having ranked economicdisparity as the second most important trend in termso impact on the business community and as the mostunderestimated trend in terms o its impact.

Economic disparity is tightly interconnected withcorruption, demographic challenges, ragile states,global imbalances and asset-price collapse.Respondents perceived economic disparity asin uencing chronic diseases, in ectious diseases,illicit trade, migration, ood (in)security, terrorism andweapons o mass destruction. They saw economicdisparity as in uenced by climate-change related risksand global governance ailures. The data indicate thateconomic disparity and geopolitical con ict rein orceone another.

Economic disparity plays out between and withincountries. Ease o communication has madeinequalities between countries more visible. Despiterobust growth in some emerging economies, manycountries remain trapped in a cycle o poverty withtremendous implications ranging rom lack o accessto basic social in rastructure such as good education,healthcare and sanitation to political ragility o thestate.

Stakeholders also expressed concerns over evidenceo rising economic disparity within countries, inadvanced and emerging economies alike. Economicanalysis by the OECD and others suggests that realincome growth o the top income quintiles o thepopulations in Finland, Sweden, the United Kingdom,Germany, Italy, and the USA was twice as large asthat o the bottom quintiles between the mid-1980sto mid-2000s.5 Income inequality as measured by theGini Index over the past decade has also increasedrapidly in emerging economies such as India, China,or Indonesia. While such studies are subject tomethodological criticisms and there is disagreementover the fndings, the risk o rising economic disparity,even in terms o perception alone, is concerning.

Many actors may have contributed to this trendwithin countries, including the erosion o employmentculture, the decline o organized labour, and ailures o education systems to keep pace with the increasingdemands o the workplace.

Economic disparities are also seen as contributing toa broader process o global social fragmentation .Globalization has led to di erent groups withincountries having divergent economic interests,undermining a sense o broader national solidarity. At the same time, transnational associations arebecoming more important in individual and groupidentity, enabled by the internationalization o mediaand communication. Traditional orms o associationhave been eroded. Trust in institutions seems to havedropped.

In part, it may be that vertically-integrated nationalsocieties are being replaced by more uid,transnational societies. This naturally o ers a rangeo opportunities or cross-cultural communicationand community- orming unhindered by geography.However, it also creates tensions within countries thatlead to global risks, and undermines governments’political capacity to respond to local mani estations o those risks.

Cross-cutting global risks:Economic disparity and global governance failures

5 OECD (2008), Growing Unequal? Income Distribution and Poverty in OECD Countries




Global governance failures

De inition: Weak or inadequate global institutions, agreementsor networks, combined with competing national and political interests, impede attempts to cooperate on addressing global risks.

While risks are increasingly globalized andinterconnected, global governance capacities arehighly ragmented.Global governance failurescreate and exacerbate systemic global risks, Surveyresults showed strong interconnections between

global governance ailures and regulatory ailures,corruption and economic disparity, with retrenchmentrom globalization and global governance ailures being

seen as mutually rein orcing.

Global governance ailures cited by experts include:UN climate change negotiations; the uncompletedDoha Development Round o trade negotiations; lacko progress on some o the Millennium DevelopmentGoals; the stalling o United Nations’ Security Councilre orm; and challenges to rameworks designed toprevent the proli eration o the capability o nuclearweapons. There is a growing sense o paralysis inresponding to global challenges. The Washington

Consensus is no longer accepted as the baselinemodel or economic development, but neither has itbeen replaced by an alternative set o unifed values.

The United States’ National Intelligence Counciland the European Union’s Institute or SecurityStudies recently concluded that current governance

rameworks will be unable to keep pace with loomingglobal challenges unless extensive re orms areimplemented. Increasingly, emerging economies

eel that un airly they have insu fcient in uence ininternational institutions as they are currently designed. Yet there is uncertainty over the ability and willingnesso rising powers to shoulder a greater share o global

responsibilities, as well as reluctance on the part o established powers to recognize the limits o their ownpower.

It is uncertain whether global governance will muddlealong with an increasingly ill-ftting institutional

ramework, whether we will fnd the capacity and willto embrace more agile structures enabled by globalnetworks and new orms o collaboration, or whetherthe idea o coordinated global governance will bediscarded entirely.

E ective global governance is also held back byine ective decision-making structures at the nationallevel. Arguably, technological and social shi tshave weakened the ability o leaders to implementinternationally agreed commitments which areunpalatable in the short-term, as the cost o mobilizinginterest groups has allen. The di fculties in achievingan international climate change agreement, aswell as resistance to internationally coordinatedmacroeconomic policy measures, are cases in point.

A counterbalance would be a well-in ormed andwell-mobilized global public opinion sharing normsand values o global citizenship, but this is not yet ullydeveloped.

Recognizing the importance o globalgovernance ailures, the World EconomicForum in 2009 launched theGlobal RedesignInitiative . Its purpose has been to stimulatea strategic thought process among allstakeholders about ways in which internationalinstitutions and arrangements should and couldbe adapted to contemporary challenges.

A series o specifc proposals on how someo the gaps and ailures in internationalcooperation might begin to be addressed waspresented or initial discussion with seniorrepresentatives o about 50 governments and20 international organizations at a specialsummit in Doha, Qatar, on 30-31 May 2010.

The proposals are also available at:http://www.we orum.org/globalredesign

Cross-cutting global risks:Economic disparity and global governance failures



Risks in focus 1 The macroeconomic imbalances nexus




Risk descriptionand impacts This cluster o three economic risks –globalimbalances and currency volatility, scal crisesand asset price collapse – is characterized by bothinternal imbalances (within countries) and externalimbalances (between countries).

Internal imbalances are produced by many actors,including government policies and private sectorbehavior and are in uenced by the stage o economicdevelopment. Fiscal imbalances in advancedeconomies have widened because o governmentpro igacy. They were exacerbated by the impact o thefnancial crisis. First, many governments were orcedto set aside large packages to bailout ailing banksand stabilize the fnancial system. Second, and moreimportantly, many governments provided large fscalstimuli to mitigate the recessionary impact o the crisis.

The combination o bailout and stimulus packagesresulted in burgeoning defcits and expanding debt-to-GDP ratios, particularly in advanced economies. Achieving fscal consolidation while avoiding hamperingthe ragile recovery is a short-term challenge. Howeverin the long-term, a key fscal challenge will befnancing the un unded liabilities o current and uturegenerations (see discussion below and Risk to WatchDemographic Challenges ).

Related to this point, external imbalances betweencountries are also o concern. At the heart o globalimbalances is a mismatch between saving andinvestment. Defcit countries do not save enoughrelative to their investments, and surplus countries donot invest enough given their high savings. In principle,external imbalances are not bad. Capital will tend to

ow to the most proftable use; in a globalized system,that includes cross-border capital ows. As long asthe recipients o such ows put them to productiveuse (i.e. as long as the resulting investments generaterevenue that is high enough to serve and amortizethe debt incurred) no major problem arises.6 Externalimbalances become a problem i they contribute to anunsustainable accumulation o debt or, or countriesthat actively control their exchange rates, i they lead toan unsustainable accumulation o oreign reserves.

These imbalances lead to two primary risks. First, theylead to slow growth, increasing accumulation o debtand fscal pressures create risks o sovereign de aultsin certain advanced economies which could also a ectbanking systems worldwide (and vice-versa). Second,such weakness creates the risk o excessive capital

ows to emerging markets, increasing the bubble riskand potentially leading to asset price collapse. Whileglobal imbalances will continue to imply a net ow o capital rom surplus to defcit countries, these risksarise when increases in gross ows o capital romadvanced to emerging economies are not matched bythe commensurate ability o economies to absorb such

ows productively.

Figure 3 shows how these risks are linked graphically,and Table 1 provides a non-exhaustive list o the directand indirect impacts o these risks to stakeholders.

These risks link strongly to other global risks. Forexample, fscal pressures in advanced economieswill accelerate the ongoing power shi t towards Asia,increasing the risk o geopolitical tensions. All threerisks could also exacerbate global governance ailuresas countries resort to zero-sum calculations and short-term, populist solutions.

6Some prominent economists, including US Federal Reserve Chairman Ben Bernanke, have argued that global imbalances contributed materially to the recent global inancial crisis by lowering the cost of debt and encouraging investors to search for higher yields in riskier assets such as the US housing market.

Risks in focus 1: The macroeconomic imbalances nexus




Figure 1

Table 1

System diagram for risks associated with the macroeconomic imbalances nexus

Impact of risks related to macroeconomic imbalances (non-exhaustive)

Impacts Direct Impacts Indirect Impacts

Impact ongovernments

• Advanced economies: Tough budgetdecisions in balancing stimulus and austerity;debt de aults, rescheduling or rescue

• Emerging economies: Increased need toexplore currency adjustment

• Lack o political will to address otherglobal challenges such as climatechange

Impact on society / populations

• Advanced economies: Low growth inace o severe austerity; inability to meet

entitlement commitments

• Emerging economies: Social adjustmentsthrough shi t towards domestic demandrather than exports (need or redistributionand social security schemes to boostconsumption and lower savings)

• Wel are increases in China in thelonger term as a result o greaterreliance on domestic consumptiononce rebalancing takes place

Impact on business • Protectionist (trade and fnancial) pressures

• Threat o collapse o banking system alongwith government fnance; uncertainty

• Realignment o business models asglobal adjustments and retrenchment

rom globalization shi t demandpatterns

Figure 3

Table 1


Source: World Economic Forum





1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

3.0

2.0

1.0

0

-1.0

-2.0

-3.0

DiscrepancyOil exportersChina and East AsiaGermany + JapanROW

US %

o f W o r l d

G D P

Major trends anduncertainties

As Figure 4 shows, global imbalances increasedsignifcantly between 1996 and 2009. While thefnancial crisis acted to reduce these somewhat romrecent highs, the IMF and others expect them toincrease again in the uture. Running sustained andlarge current account defcits requires capital in owson the part o defcit countries. This implies an increasein public debt when accompanied by fscal defcits.Figure 5 shows the long-run trends or governmentdebt or G7 economies, including recent increases.

Figure 4

Figure 5

Global current account imbalances 1996-2009

Average government debt ratios in G7 Economies,1950-2010 (PPP-weighted)

Source: Long-Term Trends in Public Finances in the G-7 Economies, IMF Staff Position Note SPN/10/13, 1 September 2010

Source: IMF World Economic Forum Outlook, April 2010

1 9 5 0

1 9 5 5

1 9 6 0

1 9 6 5

1 9 7 0

1 9 7 5

1 9 8 0

1 9 8 5

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

2 0 1 0 Gross Debt

Net Debt

120

100

80

60

40

20

0

% o

f G D P





Figure 6 Net present value of the impact on scal imbalance de cits of the nancial crisisand ageing-related spending for selected countries

There is a high degree o risk and uncertainty regardinghow much debt can be borne by the public sector,particularly in advanced economies, be ore the debtburden seriously impacts economic growth throughincreasing borrowing costs, politically unacceptableamortization payments, and the subsequent need orfscal austerity. Based on a sample o 44 countries overa period o 200 years Kenneth Rogo and CarmenReinhart have ound that there are distinct debt-to-GDP thresholds where debt growth becomes non-linear. Specifcally, or public debt held by advancedand emerging economies they ound this thresholdto be approximately 90%.7 A ter this threshold, theburden o debt reduces median GDP growth by roughlyone percentage point and average GDP growth byconsiderably more. Depending on which measures o debt are used, US public debt is either ast approachingor even just past this threshold, while many Europeancountries are well beyond it. Further, i current spendingand income trends continue, IMF analysis indicates thatnet government debt or G7 economies could rapidlyincrease to unprecedented levels.

However, some economists argue that the standarddebt-to-GDP ratios reported widely by o fcialagencies ail to measure a country’s true long-termfscal prospects. A more accurate measure o fscaloutlook is to actor in uture liabilities not countedas current debt by calculating the net present value(NPV) o all uture obligations relative to the NPV o all uture income streams. Figure 6 summarizes suchan IMF calculation or selected countries, with theaverage o the sample representing an NPV o 444%o GDP. While there are large uncertainties in thesecalculations, such analysis suggests that the impacto uncounted uture liabilities is very large, and that theimpact o age-related liabilities will dwar short-termissues such as the cost o fscal stimulus.

7 Reinhart, Carmen M. and Kenneth S. Rogoff (2010), “Growth in a Time of Debt”, NBER Working Paper No. 15639, January 2010

Source: Fiscal Implications of the Global Economic and Financial Crisis, IMF Staff Position Note, SPN/09/13, 9 June 2009

J A P

I T A T U R

M E X

F R A

G E R

G B R

A v e r g a g e

A U S

U S A

E S P

K O R

C A N Aging

Crisis

800

700

600

500

400

300

200

100

0

N P V %

o f G D P





Given the magnitude o uncovered uture liabilities, theIMF and Bank o International Settlements analysisimplies that without signifcant adjustments in themedium-term, almost all advanced economies aceserious threats to fscal solvency in the long-run.8 This suggests that countries will have to embarkon major fscal consolidation exercises, increasingtaxes or reducing spending, in order to cover the gapbetween expected uture liabilities and expected utureincome. Experts argued that there is a distinct risk thatpoliticians will not be able to muster the necessary willto prevent severe fnancial market turbulences and,ultimately, protect their countries against de ault.

In light o the pressures o such fscal andmacroeconomic imbalances, discussions withexperts highlighted three non-exclusive and negativescenarios whereby this cluster o risks producessevere challenges to the global fnancial and economicsystems and beyond.

In the frst scenario, a combination o recessionarypressures and lack o market confdence in the short-term and un unded social obligations in the long-termcould drive both fscal and banking crises in selectedadvanced economies. In some countries, crises inpublic fnances will mean a all in value o governmentbonds, taking with them the value o assets investedby fnancial institutions. For countries with a higherproportion o private lending, as the threat o sovereignde ault rises, capital will ee banks that are seento ultimately be reliant on public rescues. In eitherevent, the direct impacts o fscal crises are likely tobe compounded by credit and banking crises withadverse systemic implications or the global fnancialsystem.

In the second scenario, emerging markets experiencean asset price collapse. Loose monetary policy andslow growth in advanced economies, together withhigh growth in emerging markets, is already attractingincreasing gross capital ows to emerging economiesand decoupling their stock markets rom those o advanced economies. This could result in assetbubbles as rising equity markets leak into real estateprices. Although some emerging markets are trying torestrain these capital in ows, it would be di fcult or allemerging markets simultaneously to resist the upwardpressure on their currencies. Such asset bubbles,driven as they are by excess liquidity rather thanincreases in underlying value, could result in severecrashes, damaging both emerging markets and theworld economy as a whole.

The fnal scenario, although regarded by many asunlikely, is a repeat o the “stag ation” o the 1970sin advanced economies. This scenario sees loosemonetary policy proving unable to stimulate economicactivity, while supply-side restrictions or commoditiesand energy arise because o geopolitical con ict in theMiddle East, or merely an outpacing o global supplyby robust growth in the emerging world, leading toa loss o confdence in the ability o central banksin advanced economies and emerging countries tocontrol in ation.

8See also IMF Country Report No. 10/248, 12 July 2010, Gokhale J, (2009) “Measuring the Unfunded Obligations of European Countries”,National Centre for Policy Analysis and Kotlikoff, L (2010), “A Hidden Fiscal Crisis?”, Finance and Development, September 2010





Levers andtrade-offsRecognizing trade-offs in managingglobal imbalancesLack o agreement on how to reduce globalimbalances makes it di fcult to create joint

responsibility at the international level. Diverginginterests in the short-term are driven by both politicaland economic actors. While advanced economies seecontinuing imbalances as economically unsustainable,emerging economies running trade surpluses ear thatadjustments involving currency appreciation would hurtemployment in export sectors and potentially threatensocial stability.

Political leaders in advanced economies are underincreasing pressure to seek short-term solutions – butuncoordinated actions, such as simultaneous currencydepreciation by multiple countries, could create newrisks. For all countries to attempt to devalue their

currencies at the same time would only have negativeimpacts.

There are three primary levers through which the risksdescribed above could be addressed.

Strengthening global coordination Although unlikely, experts consider that the G20 andIMF could play a key role in developing a strongerpolicy ramework to discourage the build-up o unsustainable imbalances. Renewed leadership onpromoting international exchange rate coordination is

particularly important to avoid currency wars.However, even more power ul would be cooperationon meaning ul growth policies that change theincentives or the use o income in both defcit andsurplus countries. Both price and income adjustmentsare required to reduce imbalances, and success uladjustment must include debtor and creditor (or defcitand surplus) countries.

Strengthening nancial systemsWeak fnancial systems are a likely source o risk in both advanced and emerging economies;strengthening regulation and institutions in generalis a key point o intervention. Many proposals havebeen made in this regard, including the Basel IIIprovisions, and implementation is now seen as o mostimportance. Possibilities or strengthening the globalfnancial system through regulation include:

• Better surveillance o the fnancial sector, includingall systemically relevant players

• Tighter capital and liquidity ratios or all bankinginstitutions (including non-banks), with higherratios or systemically relevant institutions

• Risk retention or securitization (so-called “skin inthe game”)

• Improved transparency and counterparty riskmanagement in “over-the-counter” derivativemarkets

As outlined in the Forum’sFinancial DevelopmentReport 2010 , strengthening fnancial systems inemerging economies by developing capital marketsand improving access to retail fnancial services couldincrease both domestic confdence and investmentopportunities, both o which could stimulateconsumption and help to o set global imbalances aswell as reduce the risk o asset bubbles.

Facilitating domestic transitionstowards balanced economiesWhile defcit countries will necessarily be required totake on ar-reaching price and cost adjustments toenhance the competitiveness o their exports, surpluscountries need to address weaknesses in privatedomestic consumption. This would not only increasethe wel are o surplus societies, but also acilitate thenecessary adjustments in defcit countries by raisingtheir exports.

Most importantly, advanced economies urgently needto recognize the rising challenge o fscal stress causedby un unded liabilities linked to ageing societies. To shi t dependence rom government-providedsocial insurance to private savings or pensions andhealthcare services, states will require a combination o care ul re orm, fnancial innovation, and private sectorsolutions to gradually but signifcantly reduce theburden on public fnances and o set the risk o uturefscal crises.




Risks in focus 2 The illegal economy nexus




Risk descriptionand impactsIllicit trade, organized crime and corruption arechronic risks that are perceived as highly likely to occurand o medium impact. As a highly interconnectednexus representing the illegal economy, however,experts see these risks as o central importance tothe global risk landscape. As Figure 7 illustrates,both survey data and experts suggest that this nexusheavily in uences three other important global risks– fragile states, terrorism and geopolitical con ict –which, in turn, have a signifcant and negative impacton global stability.

There is a eedback loop between this nexus andeconomic disparity. Economic disparity provides anenabling environment or illicit trade, corruption andorganized crime to grow in advanced and emergingeconomies. In turn, the proceeds rein orce the power o the privileged, while undermining economic developmentby raising the costs o doing legitimate business, therebyincreasing inequalities both within and between countries.

Similarly, while global governance ailures have createda growing space or illegal activities, these activitieshave, in turn, tended to undermine e fcient globalgovernance.

Although this nexus o risks is o ten seen as morepervasive in emerging economies, a signifcantproportion o the demand or illicit goods is generatedin advanced economies. Illegal networks also usethe international banking and real estate systems to

acilitate their fnancial management, laundering moneyand hiding profts rom tax authorities.

The impacts o this nexus o risks can also spreadar beyond emerging economies. For example, illicittrade o intellectual property-protected goods reducesincentives or innovation and investment. Trade incounter eit medicines risks human health globally.Security risks arising rom ragile states – terrorism andgeopolitical con ict – may have broad consequences. And as Table 2 below shows, corruption in bothemerging and advanced economies is a low-intensitytransaction cost that sti es growth, distorts marketsand undermines the rule o law.

Risks in focus 2: The illegal economy nexus

Table 1

Impact of risks related to the illegal economy nexus (non-exhaustive)



• Weakened institutions/undermining andcorruption o the rule o law

• Erosion o civil service unction/capture o state institutions by corruption

• Lack o continuity in policies a ectingbusiness

• Small tax base/loss o revenue

• Exodus o capital• Threats to political stability

• Decreased regional investments

• Shi t o power to disruptive groups


• Erosion o trust in public institutions

• Potential or draconian responses that limiteconomic opportunity (stricter migrationpolicies)

• Brain drain / skill depletion rom emigration

• Reduction in tourism

• Destruction o biosphere throughunregulated activities

• Criminalization/marginalization o segments o the population

Impact on business • Increased transaction costs

• Lost legitimate sales

• Deterred/appropriated investments• Exposure to threats, bribes and reduced

security o personnel

• Higher costs o capital

• Pressure to participate in corruptpractices through perceivedcompetitive disadvantage

Table 2






Figure 1 System diagram for risks associated with the illegal economy nexusFigure 7


Major trends anduncertainties The negative e ects o corruption, illicit trade,organized crime and ragility are easy to characterizebut extremely di fcult to quanti y. The opaqueness o this nexus o risks has resulted in too little attentionand too ew resources devoted to mitigating it, andthe signifcance o this nexus o risks has increasedconsiderably in recent years – in part because o globalgovernance ailures, as in ormal networks engage inlegal and regulatory arbitrage.

Illicit trade is now thought to represent between 7 and10% o the global economy – in some countries, illicittrade is the major source o income. Table 3 below isone example o attempts to judge the market size o illicit trade o di erent goods based on public sources.It must be stressed that these numbers are extremelyrough estimates and are the subject o signifcantdebate; the Forum’s Global Agenda Council on Illicit Trade is currently developing a methodology to tracke ectively the global impact o these activities.

It should be noted that even when ows o illicitgoods and criminal activity are small relative to globalmarkets, they can have an outsized e ect on ragilestates as the real value o such activity can dwar national salaries and government budgets.

The potential or this nexus o risks to cause contagionhas arguably been demonstrated recently in Kyrgyzstan.Members o the Forum’s Global Agenda Councilsargue that the undermining o state leadership andeconomic growth by corrupt o fcials and organizedcrime contributed signifcantly to social tensionswhich erupted in violent con ict in June 2010, causingwidespread destruction, hundreds o civilian deaths andthe displacement o 400,000 ethnic Uzbeks.

Figure 1 Rough estimated market size of illicitgoods based on public sources(in USD billion)

Table 3

Counter eit pharmaceutical drugs: 200

Prostitution: 190

Marijuana: 140

Counter eit electronics: 100Cocaine: 80Opium and heroin: 60Web video piracy: 60So tware piracy: 50Cigarette smuggling: 50Human tra fcking: 30Environmental crimes and natural resources trade: 20

Logging: 5 Art and cultural arte acts: 5Small arms: 1

Source: Havocscope and experts




Levers andtrade-offsRecognizing trade-offs in respondingto the illegal econnomy nexusWhy has so little progress been made in mitigatingthis nexus o risks? One reason is that structureswhich enable illicit activities also beneft many peoplewho would not consider themselves as engaging incriminal behaviour; or example, secrecy jurisdictionsallow individuals and corporations to avoid tax.Increasing transparency and reducing illicit trade wouldundoubtedly involve increased costs and lower profts

or many businesses. Similarly, there are large costsin shi ting populations who currently rely on producinggoods or illicit markets (such as poppy- armers in A ghanistan) to other, legal activities.

However, i global leaders appreciate the importanceo this issue as a collective challenge, a number o measures could be employed.

Improve global coordination withstronger multilateral frameworksStronger links between international civil society and legalinstitutions in advanced economies would assist activistsand law en orcement in emerging economies in trackingand halting ows o illicit capital out o ragile states. Thiswas exemplifed in the recent ruling by France’s SupremeCourt allowing a judicial inquiry into complaints o allegedcorruption and the removal o government assets fledagainst three A rican heads o state.

Reducing variation in regulation and en orcementcapacity would inhibit the capacity o illicit activitiesto shi t to the least-vigilant jurisdictions. National lawscontaining extraterritorial provisions to hold companiesliable or corruption, such as the US Foreign CorruptPractices Act and the United Kingdom Anti-BriberyBill, o er a potential illustration example o howregulations could be extended and harmonized across jurisdictions.

Increase the transparency ofinternational nancial and trade ows The global fnancial system allows the profts o illicit trade, organized crime and corruption to betrans erred and hidden. This protects participants,deprives governments o tax revenue and shi ts taxburdens rom capital onto wages and consumption.Ensuring transparency o fnancial ows would reduceopportunities or money to be laundered or trans erredout o emerging economies, as well as enabling moree ective law en orcement.

The Task Force on Financial Integrity & EconomicDevelopment recommends fve steps to achievinggreater transparency to ensure that fnancial ows canbe tracked, verifed and taxed:

• Requiring benefcial ownership to be a matter o public record, to reveal the true owners o capital

• Requiring multinational companies to undertakecountry-by-country reporting o all sales, proftsand taxes

• Requiring all trade pricing to be conducted underthe OECD arms-length principle and with pricingdeclarations and online data available to customsauthorities, to curtail trade mispricing that avoidstaxes and duties

• Implementing global automatic tax in ormationexchange or all non-resident individuals,corporations and trusts

• Harmonizing anti-money laundering laws globallyto standardize the predicate o ences or moneylaundering, reduce legal arbitrage and ensureen orcement can proceed across di erent jurisdictions

Transparency in physical movement o goods similarlyneeds to be increased, to track the movemento products that may constitute illicit trade or beassociated with organized crime and corruption. Moreresponsible monitoring o supply chains could have alarge impact.


Figure 1




Increased demand side interventionExperts argue that a greater understanding o thehuman and economic impact o engaging in illicit tradewould reduce demand or illicit goods in advancedeconomies. This implies a ocus on education, ethicstraining and the construction o new norms.

Similarly, rather than viewing it as an end in itsel toreduce illicit trade, organized crime and corruption,this goal could be re ramed as a means to supporteconomic growth and human security. Such are raming could shi t priorities and behaviour whiledriving greater cooperation among institutions.

For certain elements o illicit trade, there may be a caseor reducing the profts on o er to organized crime

by bringing trade within the ramework o the law, asproposed recently in Cali ornia with the legalization o marijuana.

For the corporate sector, re raming corruption rom anissue o compliance to an issue o risk could increasevigilance in monitoring legal or reputational exposure. This requires a more precise assessment o the costso this nexus to businesses and government taxbases. 9 The Forum is convening private sector actorsthrough itsPartnering Against Corruption Initiative toclari y the business impacts o corruption and developcollective solutions with government and civil society.

Reducing economic disparityEconomic disparity is an enabling environment orthis nexus, as it provides the incentive or individualsto supply and consume the outputs o illicit trade,organized crime and corruption.

Reducing economic disparities is a major challenge;it must be aced at a structural level. An empiricallyreliable long-term strategy is to invest in universaleducation, equipping populations with the knowledgeand skills to contribute ully to economic activity.Similarly, investments that attempt to correct orstructural unemployment should be investigated.

9See for example Transparency International, the International Chamber of Commerce, the UN Global Compact and the World EconomicForum (2008) Clean Business is Good Business: The Business Case against Corruption http://www3.weforum.org/docs/WEF_PACI_BusinessCaseAgainstCorruption_2008.pdf




Risks in focus 3 The water-food-energy nexus




Risk descriptionand impactsWater security, ood security and energy securityare chronic impediments to economic growth andsocial stability. Figure 8 shows their interrelatedness:

ood production requires water and energy; waterextraction and distribution requires energy; and energyproduction requires water. Food prices are also highlysensitive to the cost o energy inputs through ertilizers,irrigation, transport and processing.

Economic growth and population growth are commondrivers or all three risks, especially as improvingliving conditions in emerging economies results inmore resource-intensive consumption patterns.Environmental pressures also drive resource insecurity– rom climate shi ts to extreme weather events thatalter rain all and a ect crop production.

Governance ailures in terms o managing sharedresources – such as trans-boundary water and energysources and ood trade agreements – create tensionsthat can lead to con ict, as seen recently in Yemen.Economic disparity also o ten exacerbates this nexuso risks as governments and consumers seek short-term, unsustainable solutions to economic hardshipsuch as growing high-value, water-intensive exportcrops in water-deprived regions.

It is at the local level that most opportunities can beound or improving resource e fciency and managing

trade-o s between energy, water and ood production.However, at the global and regional levels there are ewinitiatives to raise awareness, share leading practicesand motivate consumers in an integrated approach.

Table 4 shows a non-exhaustive list o some o thedirect and indirect impacts stemming rom this nexus.

Risks in focus 3: The water-food-energy nexus

Table 1

Impacts of risks related to the water-food-energy nexus (non-exhaustive)



• Stagnation in economic development

• Political unrest

• Cost o emergency ood relie

• Signifcantly reduced agricultural yields

• Threats to energy security

• Increased social costs linked toemployment and income loss asagriculture is negatively e ected

• National security risks/con ict overnatural resources


• Increased levels o hunger and poverty

• Increased environmental degradation

• Severe ood and water shortages• Social unrest

• Food price spikes

• Migration pressures

• Irreparably damaged water sources

• Loss o livelihoods

Impact on business • Export constraints

• Increased resource prices

• Commodity price volatility as shortagesripple through global markets

• Energy and water restrictions

• Lost investment opportunities

Table 4






Figure 1 System diagram for risks associated with the water-food-energy nexusFigure 8


Major trends anduncertainties Agriculture is the dominant water user, consumingmore than 70% o total global water demand.Industrially produced meat is especially water-intensive, requiring up to 20,000 litres o water toproduce a kilogram, compared to approximately 1,200litres to produce a kilogram o grain. Both populationgrowth and increasing meat consumption in emergingeconomies will there ore have a tremendous impact onresource needs.

As Figure 9 shows, over the next 10 years, the worldpopulation is expected to rise rom the current 6.83billion to approximately 7.7 billion, with most o thegrowth in emerging economies. The United NationsFood and Agriculture Organization (FAO) projects a50% increase in demand or ood by 2030, and theInternational Food Policy Research Instituted (IFRI)expects a 30% increase in demand or water, withother estimates rising to over 40%. The International

Energy Agency (IEA) orecasts that the world economywill demand at least 40% more energy by 2030;producing this energy will draw heavily on reshwaterresources. For such increased demand or water, oodand energy to be realized, signifcant and perhapsradical changes in water use will be required as well asnew sources or ood and energy production exploited.

For ood production, supply-related challenges may limitthe ability o armers to meet growth in demand. Already,major grain-producing areas – in China, India and theUnited States, or example – depend on unsustainablemining o groundwater. In some regions, such asNorth A rica and Australia, climate-related changes o precipitation have already critically reduced the levelso reshwater supply. In northeast China, one o thecountry’s main grain-producing regions, climate changecould increase drought losses by over 50% by 2030.10

Climate change is likely to be exacerbated by meetingthe growing demand or energy. Over 75% o theglobal increase in energy use rom 2007-2030 isexpected to be met through ossil uels, especiallycoal, and an estimated 77% o the power stationsrequired to meet demand are yet to be built.

10The Economics of Climate Adaptation (ECA) Working Group (2009) Shaping Climate Resilient Development: A Framework for Decision-Making




Figure 1 World Population 1960-2050Figure 9

Source: World Economic Forum Water Initiative, edited by D. Waughray (2010). Water Security: The Water-Food-Energy-Climate Nexus,based on United Nations Population Division, UN-DESA, UN Revision 2008

Developed countriesDeveloping countries

10

9

8

7

6

5

4

32

1

0

1 0 0 0 m

i l l i o n p e o p

l e

1 9 6 5

1 9 7 0

1 9 7 5

1 9 8 0

1 9 8 5

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

2 0 1 0

2 0 1 5

2 0 2 0

2 0 2 5

2 0 3 0

2 0 3 5

2 0 4 0

2 0 4 5

2 0 5 0






Levers andtrade-offsRecognizing trade-offs in the water-food-energy nexus Tough trade-o s will increasingly be needed betweenenergy, ood and water in terms o resource allocationand planning. The key challenge is to incorporate thecomplex interconnections o this nexus o risks intoresponse strategies that are integrated and take intoaccount the many relevant stakeholders. The Forumis working on such an approach with its innovativeinitiative WRG Phase 2, run in partnership with theWater Resources Group (See page 33: The Forum’sWater Initiative: Focusing on the Water-Food-Energy Nexus) .

Unintended consequences abound. For example,because o policy incentives designed to reducevehicle emissions, by 2030 the IEA predicts that atleast 5% o global road transport will be poweredby bio uel – over 3.2 million barrels per day.However, producing those uels could consumebetween 20-100% o the total quantity o water nowused worldwide or agriculture. This is clearly anunsustainable trade-o . Another example is shale gasextraction, which promises access to new reserves o

ossil uels, but is highly water-intensive and may posea risk to water quality.

Few governments are developing energy policy witha goal o not only enabling economic growth andreducing carbon emissions, but also ensuring watere fciency; the nature o this nexus, however, meanspursuing multiple goals will become a necessity. Trade-o s between the three resources, as well as trade-o s between users in the orm o resource rationing,will become an increasingly important issue, as willmanaging these trade-o s through a combination o market mechanisms and regulation.

However, beware o alse dichotomies. It is notnecessary to trade biodiversity or economic growth,

or example. Such trade-o s exist primarily whenpolicy-makers and resource-users act in a short-term, reactive and hurried ashion. To avoid theseunnecessary trade-o s and tackle the necessaryones, the Forum has identifed a number o responsestrategies or urther exploration.

Integrated and multistakeholderresource planning The challenges associated with managing trade-o s o ood, energy and water resources rest withgovernments. Experts argue that meeting thosechallenges is undermined by the existence o separate administrative structures and policies oragriculture, water, energy and urban planning. Thedevelopment o high-level commissions that cut acrossgovernment departments, stakeholders and countryrepresentatives could improve public-sector-ledgovernance, planning and in ormation ows. A recent example o a regionally- ocused, integratedapproach is the Mekong River Commission’sStrategicEnvironmental Assessment . This document examinesthe cumulative risks and opportunities o hydropowerprojects in fve separate countries. It explicitlyconsiders the links between energy generation, wateravailability and ood production, including second-andthird-order impacts to ecosystems, social systems andeconomic development over a 15 year perspective.

The Forum’s New Vision or Agriculture initiative,which is now being piloted through national-level

partnerships in Tanzania and Vietnam, has developeda ramework or multi-stakeholder collaboration toaccelerate sustainable agricultural growth. In thismodel, the government’s national agriculture strategyprovides the ramework or ocusing expertise andinvestments rom diverse stakeholders to acceleratesustainable agricultural growth, thus multiplying e ortsand reducing risk or all involved.




Regionally-focused infrastructuredevelopmentMultistakeholder coordination on regional in rastructureinvestment could signifcantly enhance resiliencewith regard to ood, water and energy security. Forexample, by investing in regional electricity grids, Gul Cooperation Council countries increased the reliabilityo their power supply. Experience shows that countrieswith adequate levels o in rastructure, coupled withinstitutions which ensure that the scarcity value o water is re ected, can be extraordinarily adaptive.11

Market-led resource pricingResource pricing has a large role to play in managingdemand or ood, water and energy. Prices are keptartifcially low by government subsidies or otherregulation in many countries, thereby increasingdemand. However, even i they were allowed torise through market mechanisms, prices would notaccount or many o the negative externalities createdby water, ood and energy consumption. Both thecost o local impacts (such as the long-run socialand environmental costs o resource exploitation)and global impacts (such as contribution to climatechange through carbon emissions) should ideally beincluded in resource pricing. Without accurate pricingto re ect the ull cost o resource use, it is likely thatunsustainable decisions regarding resource use willcontinue.

However raising the price o water has signifcantand negative social impacts in many regions. Toaccount or these, market mechanisms must bemanaged progressively so as not to endanger socialstability by disadvantaging poor consumers; thehuman cost o higher resource prices should berecognized by stakeholders and solved with care ulplanning. Further, increased resource prices willinevitably impact economic growth, as higher pricesare passed on to consumers. Experts suggest thatdespite such challenges, e orts to create properly-costed systems are critical to the uture sustainabilityo global prosperity, as the cost o severe shortagesbecause o irreparable damage to water and oodsources would ar exceed the costs incurred throughproactive resource management. In regions such asthe Middle East and North A rica, market prices mayalso attract private investment in in rastructure that canbetter preserve the scarce resources currently beingdepleted.

Community-level empowermentand implementationExperts argued that policies which aim to manage ood,energy or water resources are in many cases well-designed; many o the barriers to sustainable resourceuse relate to implementation. As an example, lack o sanitary acilities impacts water security through thecontamination o local water sources. However it maynot be enough simply to build sanitation acilities withoutalso addressing social norms on open de ecation; toensure that such acilities are used requires implementingcultural shi ts as well in rastructure investment.Overcoming such barriers means engaging, empoweringand incentivizing local actors at the community level toensure that those actually using core resources are alsothe guardians o their sustainable consumption.

Technological and nancialinnovation for managing the nexusFurther research and investment in trans ormativetechnologies and risk management tools that addressthe nexus as a whole are needed. Ensuring that such

tools are locally appropriate and broadly adopted is keyto their success. Many e fciency improvements requirenew operational management models and accessto in ormation. Innovations such as synthetic proteinmanu acturing, drip irrigation, and hybridization o cropsto make them salt resistant could potentially maintain

ood security while simultaneously achieving waterand energy e fciency, but require investment or bothdevelopment and implementation.

Innovative fnancial risk management initiatives alsolook promising, such as the development o “sa etynet” payments or Vietnamese rice armers i yields allbelow expected levels due to pests, diseases or weather

events such as droughts, oods and typhoons. In thepast, damages to agriculture due to weather or pestshave resulted in losses o up to 5% o Vietnamese GDP;thanks to multi-stakeholder collaboration betweenagricultural banks, insurers and the national government,this scheme addresses multiple risks to help ensure oodsecurity on a national level, protecting the livelihoodso armers and thus increasing the overall resilience o

ood production in the country. However, most o theseinstruments remain ocused on a particular target suchas yield or weather risk, and as such do not addressregional risk management across sectors, or the ultimaterisk o ood supply. The interconnected nature o thechallenge suggests that urther work in integratingtechnical and fnancial solutions is needed.

11 In southeast Australia, for example, a 70% reduction in water availability has had big effects on the composition of agriculture, but little impact on the overall economic value of agriculture.






The Forum’s Water Initiative:

Focusing on the Water-Food-Energy Nexus

The World Economic Forum has partnered with the Water Resources Group (“WRG”) on an innovativeinitiative under the guidance o the Global Agenda Council on Water Security. This initiative, known as WRGPhase 2, will engage governments who wish to work progressively on a water sector re orm strategy; andthen provide a supporting public-private approach. The initiative will ollow the ACT process – undertaking

Analysis to help Convene and build Coalitions to develop Transformational policies, programmes,

projects and partnerships – aimed to create “proo points” that such a coordinated plat orm approach canwork. There are two main steps to this process:

• Step 1: Initial diagnostic . The initiative will create a comprehensive act base on the national watersupply and demand balance to 2030 and the economic implications o the options available toaddress any gaps;

• Step 2: Country-level work . When invited by the government, the initiative will o er multidisciplinarysupport through a public-private advisory plat orm. This will help the government shape and testconcepts and governance processes that seek to close identifed uture water volume gaps; toimprove water resource management in a river basin, country or region; and to build this in ormnational into regional water adaptation planning.

The outcome o the WRG Phase 2 will be avalidated and unique public-private model and a nancedglobal platform that can support governments who wish to catalyze change in their water sectors.

An example o this initiative in action is theForum’s ongoing work in Jordan , supported by the JordanianMinistry o Planning and International Cooperation, and the Ministry o Water and Irrigation. Step one isunderway, involving deep analysis and building cost-curves to understand the gaps between water supplyand demand, and developing prioritized recommendations and sector strategies. Step two will build onrecent work with theJordan Business Alliance on Water , a collaboration catalysed at the 2009 WorldEconomic Forum on the Middle East and involving the Jordanian government, Jordan Chamber o Industry, American Chamber o Commerce, USAID and GTZ.

A special ocus o the initiative is to build awareness and better understanding o thewater-food-energy-climate nexus . This nexus represents the most important global dimension o the water crisis in terms o managing economic growth and other impacts connected to water scarcity. TheGlobal Agenda Council

on Water Security is a key supporter o the initiative, and will help the Forum develop deeper and moreocused analysis o issues related to the water- ood-energy nexus and the associated risks to growth.

The WRG Phase 2 initiative aims to contribute a range o expert briefng documents into the Forum’sRisk Response Network as well as to relevant Government o fcials and other stakeholders acing thechallenges o the water- ood-energy nexus.

For more in ormation on this initiative, please see http://www.we orum.org/water



Risks to watch




Some risks in the global risk landscape saw low levelso confdence or strongly varying expert views as tolikelihood and impact. For these very reasons, suchrisks may surprise or overwhelm us, and they havebeen designated as “risks to watch”.

Cyber security Awareness is growing that the real world is vulnerableto security threats rom the virtual world, but thecomplexity o “cyber security” issues is still not wellunderstood and its risks could be underestimated.

Cyber security encompasses online data andinformation security and critical informationinfrastructure breakdown , and ranges rom pettyonline the t by disen ranchised youths to government-led provocations with potentially catastrophicconsequences.

Four distinct global risk-related activities stand out:

• Cyber theft has become a growing industry with along tail, particularly in countries where economicdisparity has recently been combined with accessto global communication technologies. Actors inthis feld range rom entrepreneurial individuals toshell corporations built with the hope o economicgains o set by acceptable risks. Interestingly, someassessments indicate that cyber thieves experiencea substantially lower eeling o guilt than is apparentin other criminal activities.

• Cyber espionage , whether by the private orpublic sector, has brought the age-old practice o intelligence-gathering into a new era. Particularlyinsidious, as has repeatedly been shown in thepast two decades, is the use o such techniquesnot only by countries generally understood asenemies but also by riendly allies.

• Cyber war is little understood by the general publicand has stirred controversy among civilian and

military leaders. While an open war in cyber space ispossible, experts indicate that the interplay betweencyber war and physical war poses a more likely risk

or society, with aggression online not only servingbut also potentially provoking conventional attacks.

• Cyber terrorism is perhaps even less understoodand is uelling concerns over the openness o the Internet, security and privacy. Many havein erred a high risk o cyber terrorist attacks

rom terrorist organizations’ extensive use o theInternet in recent years or doctrinal, recruitment,and operational communication purposes as wellas some occurrences o cyber the t. However,these practices do not in themselves indicate anycapacity or large-scale cyber terrorist attacks,and it should be noted that terrorist use o theInternet equally allows law en orcement agenciesto gather valuable intelligence.

In addition to these intentional or malevolent risks, arange o risks relate to design aws in “smart” systemsconnected to the Internet. Data gathered or onebenign purpose may be spread to other networks withunintended consequences, potentially leading to newmachine-to-machine threats.

Further contributing to con usion about cybersecurity’s landscape is the constant innovation in eacho the above felds and potential new connectionsamong them. Nevertheless, understanding the rangeo negative consequences is central to managing

e ective risk response. The pervasiveness o theInternet and importance o related technologies toeveryday li e and business means that should a majordisruption occur, it is likely to have high impact globally.

Risks to watch




Demographic challenges andopportunities: population “clusterbombs”, global graying anddemographic dividendsDemographic change has major implicationsthroughout the world, ranging rom political instabilityin ragile states to enjoyment o a “demographicdividend” in emerging economies to fscal crises inadvanced economies. The most signifcant changes –which vary considerably by country – involve the rateo population growth, evolution o the age structureand the pace o urbanization. In addition to theire ects on national income, shi ts in these demographicindicators can have power ul implications or globalincome, economic inequality, environmental quality,social stability and migration.

Ageing populations in many advanced economiesadd to fscal stress as the ratio o the workingage population to the elderly alls. Many emergingeconomies are also experiencing rapidly ageingpopulations as longevity increases, creating a new seto development challenges in the absence o adequatefnancing solutions.

For certain developing countries, the populationsize and growth rate are creating intense and risingpressure on resources, public institutions and socialstability. In countries where rapid population growthis combined with weak institutions, lack o economicopportunties, ragile ecosystems, gender inequalityand severe urban crowding, the potential or largenumbers o disa ected youth engaging in resource-based con ict is a real risk. The Forum’s Global Agenda Council on Population Growth has identifed14 countries encompassing 450 million peoplewhere high population growth is combined withwater and other resource stresses. Such “populationcluster bombs” could send myriad shock waves toneighbouring countries and regions.

One example is Niger. With every woman having, onaverage, upwards o seven children, Niger’s populationhas gone rom 3 million in 1960 to 16 million todayand is projected to almost quadruple to 58 millionin 2050. However, population growth has alreadyoutstipped the country’s ability to produce ood. In thelast decade, Niger has experienced several episodeso severe ood insecurity and amine,including a aminethat a ected almost hal the population in 2010.In addition, decreasing soil productivity and a highvulnerability to the e ects o climate change mean thatNiger’s ability to urther increase ood production willbecome even more strained. Already there are signs o increased inter-ethnic con ict over scarce resources.Implications could be elt more widely, especially sinceNiger has one o the most important uranium mines in A rica.

Emerging economies that have reduced ertility ratesare experiencing a “demographic dividend” as smaller

amily size means ewer dependents or each workingadult and greater investment in each child. Realizingthis potenial requires the development o so-called“21st century skills”12 among young people, and asupporting institutional environment with an emphasison sectors and policies that improve employmentprospects and the operation o fnancial markets.

As well as national ownership, a strong global voice isneeded to help address population issues. To this end,the World Economic Forum’s Global Agenda Councilon Population Growth has called on the United NationsPopulation Fund (UNFPA) to rea frm the world’sinterest in global and national demographic dynamics,including rates o population growth, to reassert itsleadership in the population and development arena,to rebalance its port olio o activities and to subject itsactivities to periodic external review.

12 21st century skills as viewed by experts include: good living and career skills related to global citizenship, civic responsibility, ethics,environmental awareness, health literacy, cross-cultural sensitivity and leadership. It also includes workforce readiness skills pertainingto creativity, innovation, entrepreneurship, critical thinking, communication, collaboration, ICT and media literacy. In addition, it includes basic skills in math, science, reading, geography and history.

Risks to watch




Resource securityBeyond the ood-energy-water nexus addressedabove, this cluster o risks involvesextremecommodity price volatility and extreme energyprice volatility . It is a relatively uncontroversialassertion that demand or natural resources willincrease in the medium term because o a combinationo population growth and projected increases inper-capita consumption. But there is uncertaintyas to whether supply can keep pace. This leadssome experts to argue that, in the long-term, theworld should expect at best, sustained increases incommodity prices, and at worst, shortages o keyresources.

Empirically, entrepreneurs have responded toincreased prices in the short-term with technologicaland process innovations that have lowered prices inthe long-term. When adjusted or in ation, the priceo most commodities actually declined rom 1950 to2000 despite rapidly rising overall demand. Someexperts, such as the late Julian Simon, have arguedthat such declines are likely to continue.13

However there are two types o supply-side scarcity:as well as the “so t” temporary limits driven byinadequate past investment in production, there arethe “hard”, natural limits o a resource’s availability.Such hard resource limits lead a number o expertsto doubt whether technology and innovation cancontinue to increase the supply o core commoditiesat the required rate implied by population andeconomic growth in the long-term. They argue thatthe contribution o technological advancement toincreased supply is slowing; that certain resources –such as water – have no easy substitutes; and thatthe unprecedented growth experienced in emergingeconomies in recent years might outpace theinvestment required to meet demand.

Externalities also play a role in price increases: asthe most accessible sources o commodities areexhausted, the technical and environmental challengesto their extraction are likely to rise, increasing costseither directly or through regulatory responses.

Sustained increases in commodity prices andshortages o key resources would have a negativeimpact on global economic growth. Further, shouldresulting price rises in fnished goods be trans erredto consumers, the poorest will likely be worst hit,increasing economic disparity and the interconnectedrisks that this implies.

Increases in resource e fciency can help mitigate thissituation. Behavioural changes on the part o bothconsumers and businesses can reduce demand.Removing perverse incentives or the ine fcient useo some resources – hydrocarbon subsidies andunderpriced water – can support these changes.Stronger rules on the stewardship o common, trans-border resources – such as water or fsheries – mayhelp prevent a generalization o the “tragedy o thecommons”. And continued investment in technologiesand in rastructure that increase the e fciency o resource extraction, distribution and use is alsonecessary.

In the long-term, a model o truly sustainableconsumption where private sector business modelsadopt resource limits as a driver o business innovation– as advocated by the Forum’s Driving SustainableConsumption Initiative –, could shi t this current seto risks to an opportunity or renewed growth andcompetitive advantage.

13

Julian Simon, The Ultimate Resource, 1981.

Risks to watch




Risks to watch

Retrenchment from globalization As the power and capacity o the United States tolead diminishes, emerging economies are amassingincreasing political, economic and military power. Akey question in determining the scale and scope o retrenchment from globalization will be the extent towhich emerging economies will be ready to embraceleadership or de ending the open international systemthat acilitated their rise in the frst place.

In many advanced economies strengtheningpolitical orces either directly or indirectly advocateretrenchment rom globalization. Economic di fcultiesmean policy-makers are increasingly tempted toresort to protectionist measures and anti-globalizationrhetoric. Some o the stimulus packages adoptedduring the fnancial crisis already entailed elements o protectionism. Countries with growing current accountdefcits will almost certainly continue to seek short-term adjustments through protectionist or other trade-restricting measures.

Unemployment and unequal wealth distributionwithin both advanced and emerging countries alsodisen ranchises large parts o societies rom thebenefts o globalization. This may result in socio-political unrest and general socio-economic backlashagainst globalization. There are early signs o thisrisk in the rise o extremist parties in Europe (at bothextremes o the political spectrum) and in the US (teaparty) coupling arguments o economic nationalismwith anti-immigration rhetoric. Similar sentiments arebeing heard in some emerging economies, such as inNorth A rica.

While experts regard ull retrenchment romglobalization as a low-probability scenario, evenmarginal restrictions to global movements o goods,people and ideas could lead to economic loss as gainso trade and the benefts o global division o labourdecrease. Such restrictions could simultaneouslyexacerbate other risks by limiting opportunities orcountries to spread risks and share resources acrossborders.

Weapons of mass destruction There is no argument about the high potential impacto weapons of mass destruction (WMD) but a broadrange o assessments do surround the likelihood o WMD materializing as a global risk. The chemical,biological, radiological, and nuclear (CBRN) risk couldoccur in two ways. One is through terrorist attacks. Theother is through geopolitical con ict. Both are a ectedby global governance ailures. While WMD covers arange o weapons o varying concern, the key WMD riskis elt by most experts to be that o nuclear proli eration,both among states and non-state actors, closely

ollowed by the potential use o biological weapons.

Regimes to restrict the spread o WMD have provensurprisingly e ective, particularly in conjunction with thehigh capital and political costs associated with nuclearweapons in particular. The norm o non-use o nuclearweapons, in addition, has become well established.Contrary to widespread ears in the 1960s, only ahand ul o states currently carry nuclear arsenals. Somestates such as South A rica and Libya have even goneso ar as to renounce their nuclear ambitions altogether.More recently, the May 2010 Nuclear Non-Proli eration Treaty (NPT) Review Con erence was broadly viewed asa marginal success, despite its shortcomings.

Nonetheless, the dynamics o the nuclear status quoare unstable. While the expansion o nuclear-poweredelectricity generation does not pose a weaponsproli eration risk per se, it is still likely to raise concernsregarding dual-use technologies, thereby highlightingimper ections in global energy governance. In parallel,delay in the ratifcation o the New START Treatyrisks undermining the “reset” in relations betweenthe Russian Federation and the United States andweakening the impetus o non-proli eration and armsreduction – as do recurring worries regarding NorthKorea’s nuclear status and the uncertainties surroundingIran’s intentions on the matter. Meanwhile, technologicalbarriers to manu acturing and delivering WMD havebeen alling, and illegal trans ers o technology haveoccurred repeatedly, including in the nuclear realm.

According to some experts, the risk o acquisitiono WMD materials by non-state actors – and theirwillingness to use such tools – is considerable andcould increase. While a ully- edged nuclear programmeis ar beyond the capacity o any non-state actor, muchnuclear material remains insecure. Perhaps even moresignifcantly, the Forum’s community o experts arguesthat the use by terrorists o improvised radiologicaldevices, the sabotage o commercial chemical plantsand/or supply chains, and the possible occurrence o small-scale biological attacks rank high among risks towatch in the CBRN feld.



Conclusion


As the di erent chapters o this report have shown,addressing global risks requires new capacities interms o risk analysis as well as ormal and in ormalrisk response mechanisms at the global level. Threekey eatures stand out to defne the requirements o these capacities:

• First, interconnections between risks require usto better understand the systems behind risks aswell as the risk context. It is no longer su fcient tosimply assess operational risks in the corporatecontext or national security challenges in thegovernment context. Identi ying the central nodesin risk interconnections is a crucial element o riskresponse. Analyses such as the one providedin this report that ocus on risk interconnectionsthere ore play an important role at ocusing thedebate on risk response.

• Second, with global risks playing out both atthe global and national levels and di erentstakeholders being a ected in di erent ways,the world aces a signifcant challenge incoordinating national and global responses. Bydefnition, none o the risks discussed in thisreport can be addressed by a single actor alone;we there ore need to continue e orts to createa common ramework or assessing risks in amultistakeholder, collaborative environment.

• Third, while in an increasingly turbulent globalenvironment there is the temptation to always

ocus on the most recent risk event, it isimportant to take a long-term perspective to riskassessment and response. Many global riskscould emerge over decades rather than months oryears; this is one reason why this report maintainsa ten-year outlook. Long-term commitment isrequired to ensure that the e ectiveness o theresponse matches the magnitude o global risks.

As such, addressing the two central risks in thisreport – economic disparity and global governancefailures – could go a long way towards improving boththe e ectiveness o risk response and overall resilienceat the global level. Both risks have strong impact onthe three important clusters highlighted by this year’srisk perception survey. While many o the longer-termdevelopments and e ects o global risks are di fcultto anticipate with a reasonable degree o certainty,investments in these central risks are certain to havepositive e ects on overall risk resilience.

However even with the best analysis, we can neveranticipate or prepare or all risks. In an increasinglyconnected world, there is a plethora o risks thatare beyond the planning and assessment capacitieso decision-makers and risk experts alike. To beprepared or these uture challenges and to continueto seize opportunities in rapidly changing strategicenvironments, organizations and decision-makersmust continue to invest in our ability to adapt andlearn, thereby building more resilient systems. Wehope that the Forum’s Risk Response Network willmake a tangible and valuable contribution towardsachieving this goal.





De ning globalrisksFor a threat to be considered a “global risk ” itmust have global geographic scope, cross-industryrelevance, uncertainty as to how and when it willoccur, high levels o economic and/or social impact,and it must require a multistakeholder approach to riskresponse.

• Global Scope: Risks that a ect no less than threeworld regions on at least two di erent continents.While these risks may have regional or even localorigin, their impact potentially can be elt globally.

• Cross-Industry Relevance: Risks that a ect threeor more industries.

• Uncertainty: Uncertainty about how the riskmani ests itsel within 10 years combined withuncertainty about the magnitude o its impact(assessed in terms o likelihood and severity).

• Economic Impact: The risk has the potential tocause economic damage o US$ 10 billion ormore.

• Multistakeholder Approach: The complexity o therisk requires a multistakeholder approach or itsmitigation. The risks are classifed in fve domains:economic, geopolitical, environmental, societaland technological risks.

Further, risks are not all equal. The 2010 report dealswith two main types o risks:

• “Creeping” or “chronic global risks ” that mani estas long-term drains on economic or social activitybut do not occur as major, time-bound events (inhealth, chronic disease is in this category);

• “Acute” or “event-driven global risks ” that havean identifable onset when they occur (pandemics

all in this category).

We defne “resilience ” as the ability o a system toreorganize under change and deliver its core unctioncontinually, despite the impact o external or internallygenerated risks.

Appendix 1:De nitions and methodology




Global risk reportmethodology andsources The insights portrayed inGlobal Risks 2011, SixthEdition are based on:

World Economic Forum Global Risks Survey2010: The Global Risks Survey seeks the opinion o experts,business leaders and policy-makers on a selectiono global risks tracked by the World EconomicForum. This is a perception survey which receivedapproximately 580 valid responses across the 37global risks in fve risk categories. Respondents wereasked to assess risk likelihood and impact over a tenyear time horizon (2010-2020) and also provided theirlevel o confdence in their answers. Respondentsalso assessed risk interconnections by choosing upto six other risks they judged were related in some

way to the risk being assessed. Respondents alsohad the option to add data on the dominant type o interconnection between risks. Data were analysedusing a range o statistical techniques, both descriptiveand analytical. For more in ormation on the ull risk set,please see our interactive website at:http://www.we orum.org/globalrisks2011.

Note: the starting point or this report is a riskperception survey. An important point to note is howrisks are perceived is not equivalent to the actualexposure aced by stakeholders. While drawingon perception data or insights into global risks, theForum’s Global Risks reports explicitly look to combat

perception biases, by taking a 10 year perspective,encouraging experts to engage in debate andchallenge their own assumptions, and by specifcally

ocusing on risk interconnectedness and the trade-o sinvolved in risk response. Finally, by highlighting howexperts perceive risks, the Forum aims to improvemultistakeholder awareness regarding both well-known and less-understood risks in the hope that riskresponse will be served.

Workshops and discussions with leadingexperts:Eighteen workshops and numerous individualdiscussions with the Forum’s community o riskexperts provided valuable context and insight intothe survey data and orm the basis or much o theanalysis in this report. Please see acknowledgements

or details o the experts involved.

Collaboration with the Forum’s Risk Partners:

The Forum benefted greatly rom data, expertiseand guidance rom our our risk partners: Marsh &McLennan Companies, Swiss Reinsurance Company,Wharton Center or Risk Management, University o Pennsylvania and Zurich Financial Services.

Outcomes o the Network o Global AgendaCouncils:Comprising over 1,000 o the world’s leading expertsacross 72 key topics in the global arena, the Forum’sNetwork o Global Agenda Councils serves as anadvisory board to the Forum and other interestedparties, such as governments and internationalorganizations. Input into this report rom the councilsincluded survey data rom the Global Agenda CouncilSurvey 2010 (600 respondents), data and insightdrawn rom council reports and proposals, the use o transcripts rom council calls, output rom the Summitson the Global Agenda and individual contributions bycouncil members.

Desk research and internal expert review: The World Economic Forum’s internal resourcesconducted an extensive research process. In addition,

internal expert reviews were provided by 30 WorldEconomic Forum topic experts.

Appendix 1:De nitions and methodology




The Global RisksLandscape 2011Global Risks 2011, Sixth Edition draws on the insightso 580 expert respondents to the Forum’s Global RisksSurvey across stakeholder groups and regions. Thesurvey measured the perception o risk likelihood, riskimpact and risk interconnections rom 2010 to 2020

or 37 global risks. A visualization o the results o thissurvey can be seen at the beginning o the report. Therisks set is based on previous Global Risks reportsas well as input rom the Network o Global AgendaCouncils and the Forum’s risk partners to re ect theevolving risk context.

The Global Risks Landscape 2011 (Figure 1) revealsthat respondents in general perceive event-drivenrisks as having higher impact than risks that are morechronic in nature and more distributed over time. This is a well-known bias in risk perception: there isa tendency to discount the impact o risks which arelong-term and amiliar, and the tendency to in ate theimpact o risks which involve extreme “shocks”, suchas fscal crises and geopolitical con ict.

There are three interesting exceptions to thisobservation. First, the risk o climate change ; thoughdefned explicitly as chronic in nature, ranked highestwhen likelihood and impact are combined. Twoother “chronic” risks are seen as particularly likelyand o high impact:economic disparity and globalgovernance failures .

The global risks perceived as having the highestcombined impact and likelihood among thoseassessed appear in Table 5 below.

For more in ormation on the Global Risks Landscape

2011, please go to:http://www.we orum.org/globalrisks2011

Appendix 2:Survey data overview 2011

Figure 1 Top 10 risks by likelihood andimpact combined

Table 5

Ranking Likelihood x Impact

1 Climate change

2 Fiscal crises

3 Economic disparity

4 Global governance ailures

5 Storms and cyclones

6 Extreme energy price volatility

7 Geopolitical con ict

8 Corruption

9 Flooding

10 Water securitySource: World Economic Forum




RisksInterconnectionMap 2011 A key eature o the Forum’s Global Risks Survey is itsassessment o risk interconnections. Table 6 showsthe top 10 risks in terms o average strength o theseinterconnections. The Risks Interconnection Map

(RIM) 2011 (Figure 2), which provides a visualization o perceived interconnections and their strengths, can beound on the inside cover o this report and is urther

explored onhttp://www.we orum.org/globalrisks2011.

The data indicate that the most interconnected risksare economic disparity and global governancefailures . This makes them central to the visualizationo risk interconnections. It also makes them central toour understanding o global risk as it implies that theyare particularly important in shaping the contemporary

risk context, creating or exacerbating other global risksand inhibiting e ective response. As such they arediscussed separately.

Interestingly, the distribution o their interconnectionsdi ers substantially. Global governance ailuresdirectly impact a large number o other risks, and areperceived predominantly as an in uencer o other risks.Economic disparity, on the other hand, has strongerinterconnections with a smaller set o risks and there ismore evidence o perceived eedback loop dynamics.

Further analysis o interconnections revealed three

distinct clusters, which are analysed in the Risks inFocus section below. One cluster consists o globalimbalances and currency volatility, asset-pricecollapse and scal crises . The second cluster linksillicit trade, organized crime, corruption , and fragilestates . A third cluster linksclimate change withwater security, food security and extreme energyprice volatility .

Risks were defned by category, and it is interesting toobserve that societal risks were the most in uential onrisks in other categories. While much media attentionis paid to geopolitical and economic risk, social risksmay in act be o greater systemic concern.

Figure 1 Top 10 risks in terms of average strengthof interconnections

Table 6



Ranking Interconnection

1 Economic disparity

2 Global governance ailures

3 Geopolitical con ict

4 Fragile states

5 Corruption

6 Food security

7 Regulatory ailures

8 Climate change

9 Fiscal crises

10 Asset price collapse




Differences in riskperception amongrespondents The Forum’s survey data show that perceptions on the37 global risks assessed in the survey vary signifcantlyby stakeholder group and geography. Respondentstend to worry more about risks which are traditionally

viewed as being in “their” domain: businesses indicatethe highest level o concern about economic riskswhile governments and international organizationstend to perceive societal risks as the most concerning. Table 7 shows the major di erences in perceptionacross stakeholders and geographic groupings.

Respondents rom the BRIC countries tended ingeneral to rate risks as lower in both likelihoodand impact than those rom OECD countries. Thisis surprising in that BRIC countries are at least asexposed to the downside o global risks as OECDcountries, and or some risks, such as climate change,exposures may be ar greater. The explanation maylie in a greater com ort with risk-taking in ast-growingeconomies.

Economic disparities were viewed as similarlyimportant by all types o stakeholders and acrossall geographies. Both North Americans and Asiansconsidered environmental risks to be o the greatestaggregate concern while in Europe, societal risks ratedthe highest.

Stakeholder and geographic differences in risk perception from the Global Risks SurveyTable 7



Respondent: Governments Business Academia InternationalOrganizations

North America

Europe Asia

Most concernedabout:

Societal risks Economic risks Environmentalrisks

Societal risks Environmentalrisks

Societal risks Environmentalrisks

Perception relativeto other groups:

Climate change(likelihood> others)

Fragile states(impact> others)

Geopolitical con ict(> academia,business)

Illicit trade,organized crime,

ragile states(> others)

Fiscal crises(impact> Int. Org)

Slowing Chineseeconomy(impact> Int. Org)

Consumer pricevolatility(> academia)

Terrorism(likelihood> gov’ts)

Food security(impact< others)

Climate change(impact> business)

Fragile states(likelihood> others)

Biodiversity loss(> others)

Climate change(likelihood> others)

Climate change(impact> business)

Fragile states(likelihood> others)

Illicit trade,organized crimeand ragile states(> others)

Food security(likelihood> others)

Global imbalances(> Europe)

Regulatory ailures(> Asia)

Consumer pricevolatility(impact> Asia)

Retrenchment romglobalization(> Europe)

Terrorism (> Asia)

Critical in ormationin rastructurebreakdown(> others)

Regulatory ailures(> Asia)

Consumer pricevolatility (impact> Asia)


Terrorism (> Asia)

Critical in ormationin rastructurebreakdown(> others)

Global governanceailures (> Asia)

Demographicchallenges(> North America)

Global imbalances(> Europe)


Consumer pricevolatility (likelihood> NorthAmerica




Outliers in the risk landscape or urther re ection

Four risks are broadly perceived to be “outliers” in the Global Risks’ 2011 landscape, either because o high levels o uncertainty about their assessment or because the attributes o these risks are only nowbecoming visible. These risks are considered here because under certain circumstances they could moverapidly to the centre o the risk landscape.

First,space security – the risk o economic damage and geopolitical tension rom insu fcient regulation o commercial and military activity beyond the earth’s atmosphere. This was the least amiliar risk o the set,with respondents displaying very low levels o confdence in their responses because o a lack o technicalknowledge or readily plausible scenarios. This led a number o experts to suggest this risk was beingsystematically underestimated. The Forum’s Global Agenda Council on Space Security is undertaking workin this area.

The robustness o the Chinese economy since the global fnancial crisis means aslowing Chineseeconomy was this year perceived to be one o the least likely o the 37 global risks, a signifcant change

rom previous years. However, the potential impact is high, with Chinese growth currently uelling asignifcant proportion o the world’s economic activity. A Chinese slowdown might also precipitate socialinstability domestically, leading to political instability that could threaten the entire region.

Ocean governance is another outlier, ranking low in both likelihood and impact despite expert opinionthat places the decline o fsh stocks and disputes over marine territories as highly likely and o very highimpact.

A fnal outlier isthreats from new technologies – unintended consequences or human, animal or plantli e rom the release o agents into the biosphere created by genetic engineering, synthetic biology ornanotechnology. Stakeholders rated this threat as o low impact and likelihood. However while expertsinterviewed concurred that numerous regulatory authorities in this area lower the risk’s likelihood, it wasbeing underestimated in terms o impact.





The ocus o this report is on improving understandingo global risks, rather than analysing optimal riskresponse strategies– that is le t to the ongoingdiscussions in the Forum’s Risk Response Networkand beyond.

Nevertheless, a generic ramework or risk responseis help ul when contemplating risk. Figure 10 depictsfve broad, non-exclusive strategies that might beemployed by a government, corporation or individualto reduce overall risk exposure.

The frst and most obvious option is to seek to avoidthe risk wherever possible. The second option is tomitigate the risk directly – to attempt to reduce theimpact or likelihood o the risk at source. For example,a corporation acing climate change-related risks couldlobby internationally to reduce carbon emissions.

The third option is to adapt to the risk by preparing orits occurrence. Here, a corporation may strengthenbuildings or prepare emergency response plans.Homeowners residing in ood-prone areas couldelevate their structures or collaborate to put drainagesystems in place.

The ourth option involves trans erring risk. Forindividuals and companies, risk could be trans erredto a third party such as an insurer, or through moresophisticated hedging strategies (see below). Theequivalent rom a systemic perspective is to di use therisk, such that the second and third-order impacts arereduced. For example, ensure that the collapse o asingle bank does not cause the collapse o interbanklending.

These options can all reduce the resulting impact o the risk on an organization or system. But the fnal stepis also critically important – it involves accepting theresidual risk, such that the organization or individualis well aware o the potential impact and can holdreserves or make other provisions to deal with thepossible consequences.

Appendix 3:Common global risk response strategies

Figure 1 Generic risk response strategiesFigure 10

Source: Adapted from Cleary & Malleret’s “Resilience to Risk” and, Vernon L Grose’s “Managing Risk”




Catastrophe fnancing: the use o alternative risk trans er instruments

The most common orm o risk trans er, insurance, shi ts exposure to insurers in a exchange or a premium.However this depends on insurers being able to proftably pool and absorb a range o risks throughdiversifcation over time and geography. This is becoming more di fcult as disasters are increasinglyregionally and temporally concentrated, thanks in part to development in hazard-prone areas. O the 25most costly insured catastrophes in the past 40 years, two-thirds have occurred since 2001.

The World Economic Forum’s Global Agenda Council on the Mitigation o Natural Disasters produced ananalysis* o new orms o risk trans er which involve shi ting parts o catastrophe risk exposure directly tofnancial markets. Alternative risk trans er (ART) instruments o er innovative fnancial solutions to meet thegrowing needs o fnancial coverage o catastrophic risks and permit investors to play a more direct role inthat sphere.

One example o such instruments is acatastrophe bond which enables a company, internationalorganization or a government to issue bonds to protect them against predefned risks. Over 160 “catbonds” have been issued to date around the world to protect against pandemics, terrorism and naturaldisasters. Another promising fnancial innovation is weather-index basedmicro-insurance or subsistence

armers in countries where traditional insurance is unavailable or una ordable.

With proper regulation and transparency, such alternative risk trans er instruments can provide additionalcapital and o er new ways to hedge catastrophe risks, protect individuals and reduce the systemic impacto uture disasters.

* Michel-Kerjan, Erwann “Hedging Against Tomorrow’s Catastrophes”, inLearning from Catastrophes ,Kunreuther and Useem (Eds), Wharton School Publishing, 2010

Appendix 3:Common global risk response strategies




Interactive website The Forum has prepared a series o interactiveresources related to Global Risks 2011, Sixth Edition . This includes an online version o this report, a dataexplorer showing the results o the Global RisksSurvey, videos, interviews, quotes, data narratives andan interactive version o the global risks barometer.Please go to http://www.we orum.org/globalrisks2011 to explore this material.

The global risksbarometer The global risks barometer assesses the in uencing

actors, global impact and risk perceptions o the 37 risks in the fve risk categories: economic,geopolitical, societal, environmental and technologicalat a global level. InGlobal Risks 2011, Sixth Edition ,the in uencing actors and global impact have beengenerated and refned though the 18 workshops withexperts in each risk category. The risk perceptioncharacteristics, which include key interconnections,likelihood, severity, and variation in perception and

confdence level are data extracted rom the GlobalRisks Survey 2010.

The barometer is designed to trigger discussions onglobal risks at multiple levels: at anindividual risklevel to understand the actors that in uence the riskand its consequences described as global impact, inrelationship with thehighly interconnected risks tounderstand the directionality and the eedback loopwith other risks, and at asystemic level as it has beenillustrated in the Global Risk Landscape.

The barometer is a living document or severalreasons. First, the risks that have been captured ata global level do not necessarily play out at a locallevel in a similar manner hence there is a need or

urther discussion. Second, the risk characteristicsevolve as the world moves on. Lastly, there are manyinterpretations on how the risks may be in uenced andimpacted; hence there is a broader need to continuallyimprove the work.

The ull list o barometers, as illustrated in a dashboardormat below (fgure 11), is available at the World

Economic Forum’s interactive website:http://www.we orum.org/globalrisks2011.Readers are encouraged to provide constructivecontribution to urther elaborate this living documentthat will eed into uture Global Risks reports.

Appendix 4:Guide to online global risks 2011 resources

Figure 1

Figure 1

Sharp increase and volatility in the prices of nancial assets including mortgages, asset-backed securities and debt instruments

Sharp increase and volatility in prices of real assets(commercial and private real estate)

Excessivecapital ows to emerging markets , inducing asset pricebubbles

New arbitrage opportunities , causing currency carry tradesrom low-to high-interest rate countries

Changes in central bank policy frameworks which allocate moreweight to overall fnancial stability rather than just price stability

Policy shi ts encouragingdomestic consumption and creatingurtherproductive investment opportunities in emerging economies

Greater transparency and stronger nancial regulation regardingsurveillance, capital and liquidity ratios, risk retention and counterpartyrisk management in over-the-counter derivative markets

Reversals of global economicgrowth as collapse in asset pricesundermines consumer confdenceand the allocative e fciency o thefnancial system (the current fnancialcrisis reduced world output byroughly 2% and contracted advancedeconomies by roughly 4%).

Possible collapse of bankingsystems as investors lose trust infnancial markets and governanceinstitutions.

Perceived impactin Billion US $

Drivers and indicators Global impact

Asset pricecollapse

A collapse o real and fnancial asset prices leads to the destruction o wealth, deleveraging, reduced householdspending and impaired aggregate demand.

Perceived likelihoodto occur in the next ten years

low med high

Figure 1 Example of barometer “Asset Price Collapse”Figure 11




Cleary, S. and Thierry Malleret (2006).Resilience to Risk

Cottarelli C. and Andrea Schaechter (2010).“Long-Term Trends in Public Finances in the G-7 Economies”, IMF Staff Position Note SPN/10/13

Economics o Climate Adaptation (ECA) Working Group (2009).Shaping Climate Resilient Development: AFramework for Decision-Making

Gokhale, J. (2009).“Measuring the Unfunded Obligations of European Countries”, National Centre for Policy Analysis(NCPA) Policy Report No. 319

Grose, V. (1987). Managing Risk

International Monetary Fund (2009).“Fiscal Implications of the Global Economic and Financial Crisis”, IMF Staff Position Note SPN/09/13

International Monetary Fund (2010).“United States: Selected Issues Paper”, IMF Country Report No. 10/248

Kotliko , L. (2010).“A Hidden Fiscal Crisis?”, Finance and Development, September 2010

Kunreuther and Useem (2010).Learning from Catastrophes

Mekong River Commission (2010).Strategic Environmental Assessment

OECD (2008).Growing Unequal? Income Distribution and Poverty in OECD Countries

Reinhart, C. M. and Kenneth S. Rogo (2010).“Growth in a Time of Debt”, NBER Working Paper No. 15639

Simon, J. (1981).The Ultimate Resource

Transparency International, International Chamber o Commerce, UN Global Compact and World Economic Forum(2008).Clean Business is Good Business: The Case against Corruption

World Economic Forum (2010).Financial Development Report 2010

World Economic Forum (2010).Global Redesign Initiative

World Economic Forum (2009).The Future of the Global Financial System: A Near-Term Outlook and Long-TermScenarios.

World Economic Forum (2010).The Middle East and North Africa at Risk 2010

World Economic Forum Water Initiative, edited by D. Waughray (2010).Water Security: The Water-Food-Energy-Climate Nexus

References and further reading




Global Risks 2011, Sixth Edition synthesizes theideas and contributions o many individuals throughworkshops, interviews, group calls and research. Theproject team thanks everyone who took the challengeto think hard about global risks or their time, energyand insights. Without their courage, dedication,guidance and support, we would not have been ableto success ully develop this report.

Global Risks 2011, Sixth Edition PartnersMarsh & McLennan Companies

Swiss Reinsurance CompanyWharton Center or Risk Management, University o Pennsylvania

Zurich Financial Services

With special thanks to the ollowing representativeso the global risk partners or their contribution to theproject team (in alphabetical order by last name):

Anwarul Hasan, Swiss Reinsurance Company

Daniel Ho mann, Zurich Financial Services

Erwann Michel-Kerjan, The Wharton School,University o PennsylvaniaLucy Nottingham, Oliver Wyman (Marsh &McLennan Companies)

Gregory Renand, Zurich Financial Services

Alex Wittenberg, Oliver Wyman (Marsh & McLennanCompanies)

Lisa Wyssbrod, Swiss Reinsurance Company

And to the Steering Board orGlobal Risks 2011,Sixth Edition

John Drzik, Oliver Wyman (Marsh & McLennanCompanies)Robert Greenhill, World Economic Forum

Howard Kunreuther, The Wharton School, Universityo Pennsylvania

Axel Lehman, Zurich Financial Services

Raj Singh, Swiss Reinsurance Company

The project team would also like to thankall thebusiness, public sector, academic and civil societyleaders who participated in our interviews andworkshops (in alphabetical order by last name withtheir a fliation at the time o participation):

Abdulkhaleq Abdulla, UAE University

Isabella Aboderin, The Ox ord Institute o Ageing

Kathrin Amacker, Novartis AG

Peter Anderson, Faculty o Health, Medicine and Li eSciences, University o Maastricht

Daniel Andris, Swiss Reinsurance CompanyRaymond Baker, Global Financial Integrity

Beatrice Baldinger Pirotta, Swiss ReinsuranceCompany

Judith Banister, Javelin Investments

Braz Baracuhy, Permanent Mission o Brazil inGeneva

Jane Barratt, International Federation on Ageing (IFA)

Katinka Barysch, Centre or European Re orm (CER)

Esther Baur, Swiss Reinsurance Company

John Beard, World Health Organization (WHO)

Bernard Belk, Swiss Reinsurance Company

Simon Biggs, University o Melbourne

Marcel F. Bischo , World Demographic and AgeingForum

David E. Bloom, Harvard School o Public Health

Antoine Bommier, ETH Zurich

Ian Bremmer, Eurasia Group

David Bresch, Swiss Reinsurance Company

John Briscoe, Harvard UniversitySharon Brown-Hruska, NERA (Marsh & McLennanCompanies)

Sharan Burrow, International Trade UnionCon ederation (ITUC)

Robert Cailliau, European Organization or NuclearResearch (CERN)

Richard Caplan, University o Ox ord

Irene Casanova, World Economic Forum

Monce Cheikh-Rouhou, HEC School o Management

Acknowledgements




Jonathan Cohn, Oliver Wyman (Marsh & McLennanCompanies)

Andrew Crockett, JPMorgan Chase International

Audrey Kurth Cronin, U.S. National War College

Richard Danziger, International Organization orMigration (IOM)

Michael Denton, Oliver Wyman (Marsh & McLennanCompanies)

Xiaoxin Ding, Marsh (Marsh & McLennanCompanies)

Steve Dobbs, Fluor CorporationPeter Draper, The South A rican Institute o International A airs (SAIIA)

Michael Drexler, Barclays PLC

Evan Feigenbaum, Eurasia Group

Stephen E. Flynn, Council on Foreign Relations

David Frediani, Marsh & McLennan Companies

Astrid Frey, Swiss Reinsurance Company

Robert Friedman, Bloomberg News

Bruno Gehrig, UBS AGBekele Geleta, International Federation o Red Crossand Red Crescent Societies (IFRC)

David Gordon, Eurasia Group

Hans Groth, Pfzer Inc.

Lyric Hughes Hale, China Online

Harry Harding, University o Virginia

Sarah Harper, The Ox ord Institute o Ageing

David Harrison, NERA (Marsh & McLennanCompanies)

Katy Hartley, The Philips Center or Health & Well-being

Sven Ho mann, Advokatur Ho mann

James F. Hoge, Foreign A airs Magazine

Roman Hohl, Swiss Reinsurance Company

Thomas Holzheu, Swiss Reinsurance Company

Pervez Hoodbhoy, Department o Physics, Quaid-i- Azam University

Dalmer Hoskins, U.S. Social Security Administration

Irene Hoskins, International Federation on Ageing(IFA)

Jo L. Husbands, The National Academy o Sciences

Martin Indyk, The Brookings Institution

Ral Jacob, European Commission

Emmanuel Jimenez, The World Bank

Richard Jolly, Institute o Development Studies

Robert Kagan, Carnegie Endowment orInternational Peace

Alexandre Kalache, The New York Academy o Medicine (NYAM)

Kurt Karl, Swiss Reinsurance CompanyDaniel Kau mann, The Brookings Institution

Frederick Kempe, The Atlantic Council o the UnitedStates

Ilona Kickbusch, World Demographic and AgeingForum

Robert Korizek, Swiss Reinsurance Company

Upmanu Lall, Department o Earth andEnvironmental Engineering, Columbia University

Axel Lehmann, Zurich Financial Services

Rosemary Leith, World Wide Web Foundation Veronica Loke, Swiss Reinsurance Company

Ariela Lowenstein, Center or Research and Studyo Aging

Jacques Marcovitch, Universidade de São Paulo

Teruaki Masumoto, Tokyo Electric Power Company(TEPCO)

Andreas C. Meier, World Demographic & AgeingForum

Johanna Mendelson Forman, The Center orStrategic and International Studies (CSIS)

John Merkovsky, Marsh (Marsh & McLennanCompanies)

Jean-Pierre Michel, Geneva Medical School andUniversity Hospitals

Colin Milner, International Council on Active Ageing(ICAA)

Ernst Mohr, University o St Gallen

Nader Mousavizadeh, Ox ord Analytica Ltd

Rainer Münz, Erste Group Bank AG

Kevin X. Murphy, J.E. Austin Associates Inc. (JAA)

Christoph Nabholz, Swiss Reinsurance Company

Acknowledgements




Edward Newburn, AARP

Herbert Oberhaensli, Nestlé

Michael Oborne, Organisation or Economic Co-operation and Development (OECD)

Stuart Orr, Freshwater, WWF - World Wide Fund orNature

Hubert Österle, Institute o In ormation Management

Rick Perdian, Swiss Reinsurance Company

Roland Rechtsteiner, Oliver Wyman (Marsh &McLennan Companies)

Barbara Ridpath, International Centre or FinancialRegulation

Ashutosh Riswadkar, Zurich Financial Services

Daniel Ryan, Swiss Reinsurance Company

Ross Schaap, Eurasia Group

Reto Schnarwiler, Swiss Reinsurance Company

Reto Schneider, Swiss Reinsurance Company

Stephan Schreckenberg, Swiss ReinsuranceCompany

Ikram ul-Majeed Sehgal, Pathfnder G4SDinesh Shah, Swiss Reinsurance Company

Louise Shelley, George Mason University

Alexandre Sidorenko, United Nations

Steven Simske, Hewlett-Packard Company

Matt Singleton, Swiss Reinsurance Company

Amy Smithson, James Martin Center orNonproli eration Studies, Monterey Institute o International Studies

Al onso Sousa-Poza, World Demographic and

Ageing Forum Andreas Spiegel, Swiss Reinsurance Company

Ursula M. Staudinger, Jacobs University Bremen

Michael Szoenyi, Zurich Financial Services

Sheana Tambourgi, World Economic Forum

Rol Tanner, Swiss Reinsurance Company

Jonathan Tepperman, Eurasia Group

Bruno Tertrais, Fondation pour la RechercheStratégique (FRS)

Torben Thomsen, Swiss Reinsurance Company

Paul Twomey, Argo Pacifc, Australia

Wang Feng, The Brookings Institution

Sean West, Eurasia Group

Martin Weymann, Swiss Reinsurance Company

Urs Widmer, Swiss Reinsurance Company

Barrie Wilkinson, Oliver Wyman (Marsh & McLennanCompanies)

Angela Wilkinson, Smith School o Enterprise andthe Environment (SSEE)

Clark B. Winter Jr, SK Capital PartnersSimon Woodward, Swiss Reinsurance Company

Michele Wucker, World Policy Institute

Kaspar Zellweger, Swiss Reinsurance Company

Hania Zlotnik, United Nations

We also would like to thank all thepeople whoparticipated in the Global Risks Survey 2010 .

Acknowledgements




In addition, the project team expresses its gratitude tothe ollowing colleagues rom theWorld EconomicForum or their advice and support throughout theproject:

Stephanie BadawiJenni er Blanke

Lisa Dreier* (ex o fcio)Margareta Drzeniek Hanouz

Anne-Sophie Duprat

Miroslav DusekDiana El-Azar

Richard ElliottMartina Gmür

Antonio Human

Viktoria IvarssonDanil Kerimi

Ramya KrishnaswamyRodol o Lara Torres

Rim Lemsyeh

Cathy LiPatrick McGee

Liana Melchenko Alex Mung

Nathalie de Preux

Michael PedersenMiguel Perez

Michele PetochiSerena Pozza

Pengcheng Qu

Florian RamsegerFlorian Reber

Carissa SahliMasao Takahashi

Samantha Tonkin

Akira TsuchiyaDominic Waughray

Li Zhang

Founder and Executive ChairmanKlaus Schwab

Managing DirectorsRobert Greenhill

Lee Howell

Adrian Monck

Gilbert Probst

Jean-Pierre Rosso* (ex o fcio)

Richard Samans

Kevin Steinberg* (ex o fcio)

Alois Zwinggi

Acknowledgements

* Employed by the World Economic Forum USA




Project team

The Global Risks 2011, Sixth Edition team includes the ollowing individuals rom the World Economic Forum(in alphabetical order):

Andrew Bishop, Project Associate, Strategic Risk Foresight, Risk Response Network

Nicholas Davis, Associate Director, Deputy Head o Strategic Risk Foresight, Risk Response Network,Co-Editor,Global Risks 2011, Sixth Edition

Céline Devouassoux, Team Coordinator, Strategic Risk Foresight, Risk Response Network

Elaine Dezenski, Senior Director, Head o Risk Initiatives, Risk Response Network

Kristel Van der Elst, Director, Head o Strategic Risk Foresight, Risk Response Network, Co-Editor,Global Risks 2011, Sixth Edition

Chiemi Hayashi, Associate Director, Deputy Head o Risks in Depth, Risk Response NetworkStephan Mergenthaler, Project Manager & Global Leadership Fellow, Strategic Risk Foresight,Risk Response Network

Stéphane Oertel, Associate Director, Strategic Risk Foresight, Risk Response Network

Writer:Charles Emmerson

Editor:Nancy Tranchet, Associate Director, Editing, World Economic Forum

Publication, design and layout:Kamal Kimaoui, Associate Director, Production and Design, World Economic Forum

Yoren Geromin, Designer, Kissing Kourami

Visualisation and digital content:Scott David, In ormation Design Consultant

Michael Hanley, Editorial Director, Communications, World Economic Forum

James MacKinnon, 50 ProductionsMoritz Ste aner, Freelance In ormation Visualizer



The World Economic Forum is an independentinternational organization committed to improving thestate of the world by engaging business, political,academic and other leaders of society to shape global,

regional and industry agendas.

Incorporated as a not-for-pro t foundation in 1971 andheadquartered in Geneva, Switzerland, the Forum is

tied to no political, partisan or national interests(www.weforum.org)

davos world economic forum 2011 -global risks

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