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World Economic ForumJanuary 2009
Global Risks 2009A Global Risk Network Report
COMMITTED TO IMPROVING THE STATE
OF THE WORLD
A World Economic Forum Report in collaboration with CitigroupMarsh & McLennan Companies (MMC) Swiss ReWharton School Risk CenterZurich Financial Services
The World Economic Forum is an independentinternational organization committed to improvingthe state of the world by engaging leaders in part-nerships to shape global, regional and industryagendas.
Incorporated as a foundation in 1971, and basedin Geneva, Switzerland, the World EconomicForum is impartial and not-for-profit; it is tied to nopolitical, partisan or national interests.(www.weforum.org)
This work was prepared by the Global Risk Network of the World Economic Forum.
World Economic Forum91-93 route de la CapiteCH-1223 Cologny/GenevaSwitzerlandTel.: +41 (0)22 869 1212Fax: +41 (0)22 786 2744E-mail: [email protected]
© 2009 World Economic ForumAll rights reserved.No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system.
ISBN: 92-95044-15-0978-92-95044-15-9REF: 060109
The information in this report, or on which this report is based, has been obtained from sources thatthe authors believe to be reliable and accurate. However, it has not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness ofany information obtained from third parties. In addition, the statements in this report may provide current expectations of future events based on certain assumptions and include any statement thatdoes not directly relate to a historical fact or a current fact. These statements involve known andunknown risks, uncertainties and other factors which are not exhaustive. The companies contributingto this report operate in a continually changing environment and new risks emerge continually.Readers are cautioned not to place undue reliance on these statements. The companies contributingto this report undertake no obligation to publicly revise or update any statements, whether as a resultof new information, future events or otherwise and they shall in no event be liable for any loss or damage arising in connection with the use of the information in this report.
Figure 1: Global Risks Landscape 2009: Likelihood with Severity by Economic Loss
Likelihood
below 1% 1-5% 5-10% 10-20% above 20%
2-10
bill
ion
10-5
0 bi
llion
50-2
50 b
illio
n25
0 bi
llion
-1 tr
illio
nm
ore
than
1 tr
illio
n
Seve
rity
(in U
S$)
Based on an the assessment of risks over a 10 year time horizon by the Global Risk Network
Key: Boxes indicate change since last year’s assessment
New risk for 2009
DecreasedIncreased
Stable Likelihood Severity
34
36
35
29
30
31
32
33
20
21
22
23
24
25
26
27 28 12
13
14
15
16
1718
19
11
1
3
4
5
89
10
2 67
Source: World Economic Forum 2009
ECONOMIC1 Food price volatility2 Oil and gas price spike3 Major fall in US$4 Slowing Chinese economy (6%)5 Fiscal crises6 Asset price collapse7 Retrenchment from globalization (developed)8 Retrenchment from globalization (emerging)9 Regulation cost10 Underinvestment in infrastructure
GEOPOLITICAL11 International terrorism12 Collapse of NPT13 US/Iran conflict14 US/DPRK conflict15 Afghanistan instability16 Transnational crime and corruption17 Israel-Palestine conflict18 Violence in Iraq19 Global governance gaps
ENVIRONMENTAL20 Extreme climate change related weather21 Droughts and desertification22 Loss of freshwater23 NatCat: Cyclone24 NatCat: Earthquake25 NatCat: Inland flooding26 NatCat: Coastal flooding27 Air pollution28 Biodiversity loss
SOCIETAL29 Pandemic30 Infectious disease31 Chronic disease32 Liability regimes33 Migration
TECHNOLOGICAL34 CII breakdown35 Emergence of nanotechnology risks36 Data fraud/loss
Danny Quah, Professor of Economics, London School ofEconomics and Political Science, United KingdomGeoff Riddell, Member, Group Executive Committee andChief Executive Officer, Global Corporate Business, ZurichFinancial Services, SwitzerlandVanessa Rossi, Senior Research Fellow, InternationalEconomics Programme, Chatham House, United KingdomMelinda Roth, Head of the Integrated Risk ManagementTeam, World Bank, USATamer Saka, Chief Risk Officer, Haci Ömer Sabanci HoldingAS, TurkeyArmen Sarkissian, President and Founder, Eurasia HouseInternational, United KingdomAnthony Scaramucci, Managing Partner, Skybridge Capital,USACuneyt Sezgin, Board Member, Garanti Bank, TurkeyDaniel Shapiro, Director, Harvard International NegotiationInitiative, Harvard Law School, USADennis Snower, President, Kiel Institute for the WorldEconomy, GermanyAndreas Spiegel, Vice-President, Senior Climate ChangeAdvisor, Swiss Re, SwitzerlandRory Stear, Executive Chairman, Freeplay Energy Plc, UnitedKingdomRolf Tanner, Director, Head of Political and Sustainability RiskManagement, Swiss Re, SwitzerlandAlper Ugural, Chief Risk Officer, Dogus Group, TurkeySinan Ülgen, Chairman, Centre for Economic and ForeignPolicy Studies (EDAM), TurkeyGündüz Ulusoy, Faculty Member, Faculty of Engineering andNatural Sciences, Sabanci University, TurkeyOya Unlü Kizil, Director, Corporate Communications, KoçHolding AS, TurkeyLevent Veziroglu, Executive Vice-President (EVP), Office ofthe Chairman, Dogus Group, TurkeySuna S. Vidinli, Chief Communications Officer, Calik HoldingAS, TurkeyDiego Visconti, International Chairman, Accenture, ItalyBob Ward, Director, Public Policy, Risk ManagementSolutions, United KingdomMark Weaser, Chief Investment Officer, Modern TerminalsLtd, Hong Kong SARMartin Weymann, Vice-President, Senior Risk Manager,Swiss Re, SwitzerlandCarolyn Williams, Development Manager, The Institute of RiskManagement, United KingdomPatricia Wouters, Director, UNESCO Centre for Water Law,Policy and Science, University of Dundee, United KingdomSelcuk Yorgancioglu, Executive Director, Abraaj Capital,United Arab EmiratesLinda Yueh, Fellow in Economics, University of Oxford,United KingdomSimon Zadek, Chief Executive, AccountAbility, UnitedKingdom
Internal reviewers
A particular note of thanks to Miguel Perez, Manager IssueMonitoring, Strategic Insight Team, for his input andguidance on the Global Risks Perception Survey
In addition, the project team expresses its gratitude to thefollowing colleagues from the World Economic Forum fortheir excellent advice and support throughout the project:
Jennifer Blanke, Director, Senior Economist, Head of theGlobal Competitiveness NetworkMatthias Catón, Knowledge Manager, Global AgendaCouncil; Global Leadership FellowBrindusa Fidanza, Senior Project Manager, EnvironmentalInitiatives; Global Leadership FellowChristoph Frei, Senior Director, Head of Energy IndustriesLena Hagelstein, Programme Manager; GlobalLeadership FellowRandall Krantz, Associate Director, Environmental InitiativesJohanna Lanitis, Project Associate, Energy TeamCarina Larsfälten, Associate Director, Governments andStakeholdersSylvia Lee, Associate Director, Environmental Initiatives;Global Leadership FellowOksana Myshlovska, Knowledge Manager, GlobalAgenda Council; Global Leadership FellowMartin Nägele, Knowledge Manager, Global AgendaCouncil; Global Leadership FellowGareth Shepherd, Associate Director, InvestorsCommunity; Global Leadership FellowFabienne Stassen Fleming, Head of Knowledge Capture,Global Agenda CouncilsDominic Waughray, Senior Director, Head ofEnvironmental Initiatives
3|G
lobalR
isks2009
Preface
4
Executive
Sum
mary
5
1.The
GlobalR
isksLandscape
20096
2.The
FinancialCrisis
andG
lobalRisks
9
3.R
esourceC
hallenges,Sustainability
andC
ompetition
16
4.G
lobalGovernance:a
Key
toG
lobalStability
andS
ustainability21
Appendix
1:TheR
iskA
ssessment
andR
iskB
arometer
27
Appendix
2:GlobalR
isksR
eport:Process
andD
efinition32
Contributors
andA
cknowledgem
ents33
Contents
Co
nclusion
26
Preface
4| G
lobal R
isks 2009
2009 will be a year of learning the lessons of the financial
crisis; a year where its reach in term
s of time and scope
becomes m
ore evident; a year that calls for a newfinancial architecture to be shaped. A
t the same tim
e, itw
ill be a year that will test the resolve and w
illingness ofw
orld leaders to collaborate and take action to move
beyond this crisis. The global risks landscape is acrow
ded one and the window
of opportunity we have to
address some of the largest challenges of our tim
e isnarrow
.
Global R
isks 2009looks at the risks, econom
ic and other,that could em
erge as the financial crisis continues tounfold. The report considers the im
plications of a suddendrop in C
hina’s growth to 6%
or below; deteriorating
fiscal positions;and further asset price falls. Given the
vulnerable state of the global economy, and as
deleveraging continues across the financial system,
further shocks could have severe and far-reachingconsequences. The degree to w
hich the world has lost
confidence in its institutions and systems is serious.
Without confidence w
e could face a protracted andpotentially calam
itous, downw
ard spiral. Governm
ents,central banks and regulators m
ust avert this but must
also avoid inadvertently sowing the seeds of future crises.
They need to restore confidence at all levels; toconsum
ers and house-owners, to investors,and in and
among financial institutions. This crisis exposed the
weaknesses of governance system
s. Good governance
and leadership will help rebuild confidence, enable
alignment across regions and industries,and encourage
collaboration.
With w
orld attention focused on the imm
ediate economic
challenges, thisreport also w
arns against losing sight of
longer term risks. N
ow is the tim
e for leaders to lookahead. R
isks related to climate change, unresolved
resource issues and potentially more defensive and
protectionist stances by states could lead to a conflationof these global risks w
ith significant societal andeconom
ic costs. Again, better governance at corporate,
country and global level is necessary to provide thefram
eworks for stable international relations, and for
states and corporations to create greater certainty andtrust. S
uccessful mitigation of global risks w
ill only bepossible once confidence in global governanceinstitutions is restored, starting by ensuring that they areadapted to today’s challenges and revising their m
andateand pow
ers accordingly. They must be able to function in
a proactive and coordinated fashion, fosteringcooperation across all regions, industries and stakeholdergroups.
Global R
isks 2009builds on the insight and experience of
the Forum’s unparalleled netw
ork of political and businessleaders, experts and academ
ics. We are grateful for the
continued comm
itment of our partners on this report:
Citigroup, M
arsh &M
cLennan Com
panies (MM
C), S
wiss
Re, The W
harton School R
isk Center and Zurich Financial
Services. This report takes a long-term
approach to risk,looking ten years ahead, w
hile not forgetting thatdecision-m
akers must respond to the crisis
today with
the consequences that carries for their countries andenterprises. A
bove all, Global R
isks 2009provides a
framew
ork for leaders to think about risk and how the
risks that they face in the shortterm
in their region andbusiness link to the longer
term risks, w
ith globalim
plications. While the m
itigation of the risks consideredhere w
ill demand leadership, com
mitm
ent and resourcesacross all stakeholder groups, they m
ay also yieldopportunities and strengthen the ties betw
een differentparts of the w
orld. 2008 has proven the extent to which
the world is subject to global risks; let 2009 be the year
where the w
orld finds a comm
on agenda to beginm
itigating their impact.
Klaus S
chwab
Founder and Executive C
hairman
World E
conomic Forum
Executive Sum
mary
5| G
lobal R
isks 2009
2008 was an historic year. Financial disruptions triggered
by declining house prices in the US
grew into a global
credit crisis of systemic proportions. B
y the second halfof the year, m
ost advanced economies had entered a
recession. The downturn spilled over into em
ergingm
arkets,increasing the likelihood of a global contractionin 2009. A
lthough the world has seen several financial
crises, this one differs in two respects. First, it has
demonstrated just how
tightly interconnectedglobalization has m
ade the world and its system
s.S
econd, this crisis was driven by developed econom
iesusing unprecedented levels of debt and leveragethroughout the financial system
. Thus, risks that hadbeen identified in the past tw
o editions of this report – therisk of a global m
eltdown in asset prices (2007) and the
widespread m
ispricing of risk and the potentialim
plications of systemic financial risk (2008) – have
materialized w
ith huge consequences.
The fo
cus of the rep
ort
This year’s report focuses on the effects of the globalfinancial crisis and its im
plications for those risks thatcam
e to the fore of the Global R
isk Netw
ork assessment
for 2009. They include: a sudden further drop in China’s
growth to 6%
or below; deteriorating fiscal positions;
further asset price falls;increasing resource-related risksdue to clim
ate change;and the failure of globalgovernance to m
itigate global risks. The highlyinterconnected nature of these risks m
eans that theirim
pact is truly global. The economic outlook for 2009 is a
grim one for m
ost economies; m
arkets remain volatile,
liquidity has not returned, unemploym
ent is rising,andconsum
er and business confidence has fallen to recordlow
s. In this climate, risks becom
e even more potent in
their impact and, as discussed in previous reports, the
tendency towards panic and short-term
responses arem
ore pronounced. This report explores the dangers ofm
anaging out of this crisis, without considering the
broader, long-term consequences of today’s decisions. It
also stresses the need for a determined, global focus on
balancing the response to the imm
ediate challenges with
a concerted effort to mitigate longer
term risks, not least
those relating to climate change and resources.
The report also considers the impact of the financial crisis
and economic environm
ent on a few risks introduced for
the first time in 2008 and others that the G
lobal Risk
Netw
ork has tracked for several years. Many of these are
particularly pertinent to the current environment. Linking
to the discussion on the response to the financial crisis,the risk of over-regulation and lack of a coordinatedapproach to regulation at a global level m
akes its firstappearance in the assessm
ent. The same is true of
underinvestment in infrastructure, a risk that is highly
interconnected with a num
ber of economic,
environmental and societal risks. In term
s of botheconom
ic impact and loss of life, health risks, including
chronic and infectious diseases, as well as the ongoing
risk of a major pandem
ic, continue to dominate.
Conflicts, in particular intra-state conflict, and terrorism
continue to mar the lives of m
illions worldw
ide and theireffects reach far beyond the costs to the populations theydirectly touch.
Global R
isks 2009offers an assessm
ent of how the focus
risks interconnect with others and how
they may evolve
over time. It also raises m
any questions about the risk ofignoring other potential crises w
hen dealing with a current
one.The events of 2008 underscored the importance of
two m
ajor ideas behind the work of the G
lobal Risk
Netw
ork: global risks can only be understood when
explored in the context of their interlinkages with other
risks and no one group acting alone can mitigate them
effectively.These aspects of global risks are also why
they pose such a challenge for policy-makers and
business leaders alike. How
ever, as they try to resolvethis situation as quickly as possible, leaders m
ust bem
indful of the long-term im
plications of today’s decisions.
1. The Global R
isks Landscape 2009
6| G
lobal R
isks 2009
Ho
w the g
lob
al risksland
scape has evo
lved since
last yearThe follow
ing risks came to the fore in the assessm
entfor 2009, both in term
s of likelihood and severity and thedegree to w
hich they are “pivotal” risks, i.e. that they areat the nexus of m
any risks.
Deterio
rating fiscal p
ositio
nsThe deterioration of fiscal balances in several m
ajor G8
countries and other economies w
as judged asincreasing in both likelihood and severity. From
theinterconnections m
ap it can be seen that this risk islinked to a num
ber of other central economic, societal
and economic risks:retrenchm
ent from globalization, a
fall in the US
dollar, further asset price declines, the riseof chronic diseases and underinvestm
ent in publicinfrastructure.
Node size:denotes severity, N
ode colours:red – economics; dark green – geopolitics; light green – environm
ental; purple – technology; blue – society
Lines:line thickness denotes the strength of the interlinkage. The direction of a thicker line segment indicates w
hen one risk is the stronger in the relationship.
Proxim
ity:the map show
s risks that are tightly interlinked to many other risks as closer to one another.
China hard
landing
Though the most recent W
orld Bank forecast (N
ovember
2008) suggests China w
ill still achieve growth of 7.5%
in2009, given the im
portance of China in term
s of itspotential to be a source of global grow
th and given itsm
assive net-creditor position mainly w
ith respect to theU
S, a slow
down to 6%
or below in C
hina’s growth rate
would have significant im
pact on the already weak
global economy. This risk is highly connected to a fall in
the US
dollar, to energy and food price risks, and tohealth risks.
Asset p
rice collap
seThough the effects of sharply declining asset prices arealready playing out, the assessm
ent continues to placethis risk as very high on both the likelihood and severityscale across different asset classes and regions. M
any
Source: W
orld Econom
ic Forum 2009
Figure 2: R
isks Interconnectio
n Map
(RIM
) 2009
These p
ages sho
uld b
e read w
ith the front insid
e flap o
pen fo
r an overview
of all charts
7| G
lobal R
isks 2009
experts expect the decline in asset prices to continueover the com
ing months as the financial crisis unw
indsfurther and the recession leads to bankruptcies andcredit defaults.
Reso
urce challenges
Linking several of the risks on the assessment, including
climate change-related w
eather events and decliningw
ater quality and availability as well as energy, these
longer term risks have rem
ained almost constant since
the last assessment. N
early half of the world’s population
already live in high water stressed areas and the links to
food security, geopolitical and health risks are strong. Inthis report, the linkage betw
een energy, water and land
is discussed more fully.
Glo
bal g
overnance g
aps
Introduced for the first time in the 2009 assessm
ent,experts and G
lobal Risk N
etwork m
embers deem
ed theabsence or lack of effective and inclusive governance onglobal issues such as financial stability, trade, clim
atechange, w
ater and security as a source of risk in and of
itself. The assessment places this gap as highly likely
and severe in its impact. A
s the interconnections map
shows, w
eak global governance sits at a central positionbetw
een geopolitical, economic and environm
ental risks.
A no
te on health-related
risksThough not discussed extensively in this report, chronicdisease, infectious disease and pandem
ics all remain
high on the assessment, particularly in term
s of potentialseverity in econom
icand loss of life indices. C
hronicdisease, in particular, is not only prom
inent in theassessm
ent but is also central on the interconnectionsm
ap, linking strongly to food prices and infectiousdisease but also to C
hina’s growth and fiscal crises.
According to the W
orld Health O
rganization (WH
O),
chronic diseases (including heart disease, stroke, cancer,chronic respiratory disease and diabetes) are currentlythe cause of 60%
of deaths annually worldw
ide, ofw
hich 80% occur in low
- and middle-incom
e countries.H
ealth spending already represents a significant burdenon public spending, w
hich will increase as fiscal
positions deteriorate and budgets come under pressure.
Likelihood
below 1%
1-5%5-10%
10-20%above 20%
1,600-8,000 8,000-40,000 40,000-200,000 200,000-1,000,000 >1,000,000
Severity (number of deaths)
3435
29
30
31
33
20
21
22
23
24
25
26
11
12
1314
15
16
17
18
19
1
10
Figure 3: G
lob
al Risks Land
scape 2009: Likeliho
od
with S
everity by N
umb
er of D
eaths
Source: W
orld E
conomic Forum
2009
Please see insid
e flap for key
8| G
lobal R
isks 2009* For a note on the tool behind this chart please see A
ppendix 2
Co
untry expo
sure to g
lob
al risksA
s the Risk Interconnections M
ap (RIM
) offers an overview of linkages, a com
plementary approach is to consider
theram
ifications of these interactions at regional and country level. The chart below is derived from
a model looking at
the global risk exposure of 160 countries*. The model uses 24 of the global risks that are assessed in this report.
Below
, country exposures to economic risks (on an increasing scale, from
low to high), w
hich can change rapidly, aredepicted on the horizontal axis. E
xposures to more slow
-moving environm
ental, geopolitical, health and technologicalrisks are displayed vertically (also on an increasing scale, low
to high).
Looking at different clusters, the chart underscores regional clusters and outliers. It reveals a fairly high level ofcohesion w
ith respect to economic risks am
ong European countries. In contrast, the variation in risk exposures is far
larger along the domain that includes geopolitical, environm
ental, health and technological risks. A closer analysis of
the individual risks (not shown here) suggests that drivers for dispersion in E
urope are mainly geopolitical and, to a
lesser degree, environmental risks, w
ith particularly high exposures to geopolitical risks in countries of the former
Soviet U
nion.
The picture for Asia is reversed. A
sian countries are much m
ore diverse with respect to their exposures to econom
icrisks, but com
paratively tightly clustered – however at a higher m
edian risk level – when it com
es to the geopoliticaland environm
ental risk dimensions.
African countries form
, in general, a comparatively tight cluster w
ith respect to environmental, geopolitical, health and
technological risks dimensions. N
ote that their median exposure is low
er than that for Asian countries, and also that
Africa is not quite as strongly exposed to econom
ic risks as is Asia. Though this chart should only be taken as a tool
to explore possible risk exposure, it does suggest that certain regions and countries have the potential to reduce theiroverall risk exposure along one or the other axis.
Figure 4: E
xpo
sure of 160 C
ountries to
24 Glo
bal R
isks
Sou
rce: Zu
rich Fin
ancial Services, 2008
ZW
SN
CD
ET
SD
LY
CN
IN
ID
SG
HK
QA
SA
TM
IQ AF
PK
KW
NZ
AL
UK
ISL
SE
FI
GE
NO
CH
AT
US
CA
BR
0.0
0.2
0.4
0.6
0.8
1.00.00.2
0.40.6
0.81.0
Econom
ic risks
Geopolitical, Environmental, Health, Technical risks
Africa
Asia
Australia P
acific E
urope N
Am
erica S
Am
erica
Asian countries
African countries
European countries
2.The
FinancialCrisis
andG
lobalRisks
1Pension
andhealthcare
reformis
examined
ina
recentW
orldE
conomic
Forumstudy
entitledFinancing
Dem
ographicS
hifts:TheFuture
ofPensions
andH
ealthcarein
aR
apidlyA
geingW
orld:Scenarios
to2030,W
orldE
conomic
Forum,2008.
Acrisis
inan
interconnected
wo
rldO
verthe
past18
months,a
crisisthat
beganin
asm
allsegm
entofthe
US
housingm
arketevolved
intoa
globalcredit
crisisofsystem
icproportions.A
fterthe
demise
ofLehm
anB
rothersand
thenear-collapse
ofAIG
inS
eptember
2008,creditm
arketsbecam
edysfunctional
andcapitalflow
sthat
hadalready
slowed
groundto
ahalt.A
sglobalbanks
continuedto
reduceleverage,the
impact
ofthecrisis
beganto
engulfhouseholdsand
businessesaround
thew
orld.By
theend
of2008,most
advancedeconom
iesw
eresim
ultaneouslyin
recessionfor
thefirst
time
sinceW
orldW
arII,reducing
growth
prospectsin
emerging
markets
dueto
lower
demand
forexport
goods.As
aconsequence,globalgrow
this
expectedto
remain
belowpotentialin
2009and
2010.
Thespeed
atw
hichthese
eventsunfolded
was
unprecedented.InG
lobalRisks
2008,“panic”w
asidentified
asan
element
oftheanatom
yofa
systemic
financialcrisisthat
inthis
caseexacerbated
pressureon
assetprices
andinduced
contagioneffects
tothe
restof
thefinancialsystem
andaround
theglobe.In
thissense,
2008served
asa
reminder
ofhowthe
world
andits
risksare
highlyinterconnected.C
ontagionnot
onlyarises
throughlinkages
intrade
andfinance,but
alsothrough
theoften
complex
interactionofrisks
thatincreases
uncertaintyand
rendersdecisions
more
difficult(see
Figure2,page
6).
Increasedsho
rt-termeco
nom
icrisks
andfo
cuso
nthe
long
termA
sdiscussed
inthe
lasttw
oglobalrisks
reports,thecollapse
ofassetprices
marked
onlythe
beginningofa
complex
chainofevents
thatexposed
numerous
systemic
vulnerabilitiesand
triggeredother
risksand
potentiallyadverse
developments.The
salientrisks
likelyto
affectthe
globaleconomy
through2009
include:
•D
eteriorating
fiscalpo
sitions.The
US
,United
Kingdom
,France,Italy,Spain
andA
ustraliaare
allalready
runninghigh
deficits.Massive
government
spendingin
supportoffinancialinstitutions
andgrow
thare
threateningto
worsen
fiscalpositionsthat
arealready
precariousin
many
countries.Theconvergence
ofthisdecline
with
risinghealth
andpension
costsin
industrializedeconom
iesdue
todem
ographictrends
willplace
furtherfiscalpressure
ongovernm
ents 1.
•A
furthersig
nificantred
uction
inC
hina’sg
row
th.The
declinein
exportdem
andhas
ledto
asubstantial
reductionin
China’s
overalleconomic
growth,
increasingconsiderably
therisk
ofahard
landingthat
would
stressthe
financialsystemand
couldgenerate
socialtensionsw
ithinC
hinaand
beyondas
othereconom
iesface
similar
declines.Over
recentyears,
China
builtup
nearlyU
S$
2,000billion
inforeign
reservesto
preventthe
renminbiappreciating.A
lthoughstarting
mid-2007
China
beganto
allowa
moderate
appreciation,thetrend
reversedtow
ardsthe
endof
2008w
iththe
rapidrise
oftheU
Sdollar
relativeto
most
othercurrencies.
•C
ontinued
dep
reciation
of
assetp
rices.Although
globalequitym
arketshave
declinedon
averageby
more
than50%
ina
veryshort
time,the
viciouscircle
between
fallingasset
values,write-dow
nsand
attendantpressure
onthe
capitalpositionoffinancial
institutionsand
continueddeleveraging
appearsto
beunbroken.This
viciouscircle
isnow
affectingm
anufacturing,servicesand
householdsaround
thew
orldand
thecredit
crunchhas
generateda
substantialweakening
ofeconomic
activityand
growing
creditlosses.
•D
eflation
replaces
inflation
asa
keyco
ncern.In
GlobalR
isks2008,the
impact
ofhighenergy
andfood
pricesin
combination
with
rapidcredit
growth
were
stronglylinked
toconcerns
aboutinflation.A
yearlater,uncertainty
inthe
financialsector,fallingasset
prices,poorcredit
conditions,weak
demand
andrising
unemploym
entcould
createa
deflationaryspiral.
How
ever,theshort-term
riskofdeflation
must
beseen
inthe
contextofa
long-terminflation
riskcaused
bythe
largem
onetarystim
ulusin
pursuitoffinancialand
economic
stabilityand
therisk
posedby
thegrow
ingpublic
debt.Econom
ichistory
islittered
with
periodsduring
which
governments
reducedtheir
debtburden
throughinflation.
9|G
lobalR
isks2009
10| G
lobal R
isks 2009* For a note on the tool behind this chart please see A
ppendix2
Co
untry Exp
osure to
Asset B
ubb
les and E
cono
mic R
isksB
efore the current global downturn, it w
as often claimed that em
erging markets had decoupled from
advancedeconom
ies. It is clear, however, that w
ith respect to cyclical changes, emerging and advanced econom
ies continue tobe closely correlated; a fact that m
ay have been masked by years w
ithout sharp recessions.
Developing and em
erging market countries are tightly clustered w
ith respect to economic and asset bubble risks but
to different degrees. African countries, for exam
ple, have relatively fewer financial and real assets, and thus low
erexposure to asset bubbles. E
ven their overall exposure to economic risks is sm
all, reflecting in part their laggingintegration into global m
arkets.
In contrast, East A
sia shows high exposures to econom
ic and asset bubble risks; in fact, their overall exposure is verysim
ilar to Japan and the US
. Most A
sian economies are heavily exposed to a hard landing in C
hina. Asia is also
subject to risks related to the price of oil, dollar fluctuations and a retrenchment from
globalization, with the latter
being especially acute for the small and open econom
ies of Hong K
ong SA
R and S
ingapore.
Figure 5: C
ountry E
xpo
sure to A
sset Bub
bles and
Eco
nom
ic Risks
Sou
rce: Zu
rich Fin
ancial Services, 2008
SO
LR
DZ
NG
ZA
PK
JPTH
SG
VN
HK
KR
CN
UZ
AF
LT
NO
US
BO
EC
PY VE
CO
AR
BR
CL
PE
0.0
0.2
0.4
0.6
0.8
1.0
0.00.2
0.40.6
0.81.0
Econom
ic risks
Asset bubble risk
Africa
Asia
Australia P
acific E
urope N
&C
Am
erica S
Am
erica
Eastern E
uropean
East A
sian W
estern European
Africa
11| G
lobal R
isks 2009
Bew
are of unintend
ed co
nsequences
The risks associated with a decline in C
hina’s growth,
deteriorating fiscal positions and deflation illustrate theneed for forw
ard-looking policies. While it is essential for
leaders to respond forcefully to the current financialm
arket instability and the risk of a global recession, theym
ust also be mindful of the im
plications that today’sdecisions have in the long term
. Risks related to
underinvestment in infrastructure, for exam
ple, or thedegradation of natural resources and clim
ate change,m
ay be low in the short term
, but these risks andassociated losses increase in a longer tim
e horizon.
Policy-m
akers must also consider the unintended
consequences arising from regulation and governm
entinterventions. M
arket participants always react to
incentives and one can argue that the growth of
unregulated and highly leveraged investment vehicles w
asin som
e part due to market participants’ activities
designed to avoid regulation that they perceived asonerous. Indeed, this regulatory arbitrage added to theopacity that m
ade it difficult to spot the extent of thew
eaknesses in the system. H
ence, future financial market
regulation must strike a fine balance betw
een fostering anenvironm
ent conducive to innovation and reducing therisk of system
ic failure. This calls inter alia for regulatorym
easures that reduce pro-cyclicality and assignaccountability to reduce incentives for excessive risktaking that can have disastrous results.
Governm
ent interventions in support of the financial andm
anufacturing sectors carry the risk of rewarding failure
or propping up inefficient corporations and industries.There is also an inherent risk of creating uneven playingfields for com
panies excluded from access to
government funds. This tends to im
pede competition
among locally and globally active corporations, w
hich will
ultimately hurt consum
ers. If interventions are necessary,then governm
ents should develop exit strategies bysetting firm
milestones for their duration and clear
conditions for the industries concerned.
Imp
roving
risk manag
ement
The credit crisis has revealed glaring gaps in riskm
anagement. B
anks, for example, learned at their peril
that the underestimation of liquidity had created severe
systemic risk. M
oreover, there was a significant lack of
clarity about the extent of risk exposure in each part ofthe system
and financial organizations were not proactive
enough in seeking out that information.
How
ever, identifying and understanding individual risks isnot enough. R
isk managem
ent must also account for
interlinkages and remote possibilities. Low
-probability,high-severity events, such as the terrorist attacks of 9/11,the A
sia tsunami of 2004 and the current global credit
crisis do happen. All of these events w
ere consideredoutside the norm
al distribution of experience and allim
posed high human and econom
ic costs, which affect
people, regions and industries that are often quite farrem
oved from the epicentre of the catastrophe.
But this should be no reason for paralysis. R
iskm
anagement that considers extrem
e events, employs
stress testing and calibrates quantitative approaches with
informed qualitative judgm
ents can make a difference.
Today’s arsenal of tools is impressive. B
ut models have
their limits and decision-m
akers need to be mindful of the
assumptions, sensitivities and lim
itations of the models
used in the analysis and anticipation of risk, and of theirow
n inherent biases.
12|G
lobalR
isks2009
Hum
anrisk
perceptionand
behaviourhave
beenscrutinized
byeconom
ists,psychologistsand
neuroscientistsin
recentyears.A
sa
more
recentinterdisciplinary
subject,behaviouraleconomics
isstill
developingand
itspolicy
implications
areonly
beginningto
beunderstood.H
owever,basic
elements
arecom
ingm
oreclearly
intofocus.R
iskperception
isone
suchelem
ent.When
facedw
ithrisks,hum
ansoften
respondin
ways
thatare
deeplyrooted
intheir
physiologicalandneurologicalm
ake-up.Fear,doubt,fightor
flightare
allem
otionsand
responsesthat
limit
ourcapacity
forrationaldecision-m
aking.Fearofloss
isan
example
ofone
typeofrisk
behaviour.Inm
anydifferent
experiments,
researchhas
foundthat
peopleexhibit
lossaversion
byavoiding
short-termexpenditures,even
thoughthey
couldactually
resultin
significantlong-term
gains.More
specifically,peopleoften
miss
anopportunity
tom
itigaterisks
bynot
actingw
itha
long-termperspective
andby
nottaking
interdependenciesinto
account.
An
examp
lefro
md
isasterm
itigatio
nD
isasterpreparedness
andresponse
planningis
agood
example
ofhowpeople
failtotake
sufficientaction
eventhough
theyknow
theyare
exposedto
aserious
risk.P
ropertyow
ners,lenders,investorsand
government
agenciesoften
ignorew
orst-casescenarios
anddo
notinvest
adequatelyin
infrastructureor
enforceregulations
designedto
reducethe
riskofcatastrophes
andaccidents.
How
canone
explainthis
behaviour?P
artofthe
responseis
thatpeople
rarelylook
atprobability
estimates
inchoosing
between
alternativesand
tendto
ignorerisks
with
perceivedlikelihoods
fallingbelow
some
thresholdofconcern.For
instance,despitethe
firstterrorist
attackagainst
theW
orldTrade
Center
in1993
which
costinsurers
severalhundredm
illiondollars,
terrorismrisk
continuedto
beincluded
asan
unnamed
perilinm
ostU
Scom
mercialinsurance
policies.When
the9/11
attacksoccurred,insurers
andreinsurers
fromallover
thew
orldhad
topay
US
$35
billionofinsured
losses.
Thereis
anotherreason
why
many
peopledo
notact
untilaftera
crisishas
occurred.Individualsand
corporationshave
shorttim
ehorizons
when
planningfor
thefuture
sothey
may
notfully
weigh
thelong-term
benefitsofinvesting
todayin
lossreduction
measures
thatcould
benefitthem
inthe
future.Theupfront
costsofm
itigationloom
disproportionatelylarge
relativeto
thedelayed
expectedbenefits
overtim
e.Applied
tobusinesses,short-term
horizonscan
translateinto
aN
IMTO
Fperspective
(Not
inM
yTerm
ofOffice).In
otherw
ords,ifam
ajorcrisis
occurseveryone
hopesit
isnot
ontheir
watch.
Overco
ming
myo
pia:thinking
aheadO
new
ayto
overcome
thebehaviouralbiases
causedby
myopia
andm
isperceptionofrisk
isto
changethe
decisiontim
efram
ein
which
riskinform
ationis
presented.Forexam
ple,recentresearch
2show
sthe
importance
ofreframing
theprobability
dimension
sothat
peoplepay
attentionto
theconsequences
ofanevent.R
atherthan
specifyingthat
thechance
ofadisaster
occurringnext
yearis
greaterthan
1in
100,experts
couldindicate
thatthe
chancesofa
disasteroccurring
inthe
next25
yearsexceeds
1in
5.Thesetw
oprobabilities
areidenticalexcept
thatthe
time
horizonhas
beenstretched
toobtain
thelatter
figure.Em
piricalstudies
haveshow
nthat
peopleare
much
more
likelyto
overcome
theirrisk
misperception
andto
considerundertaking
protectivem
easuresw
henthey
focuson
aprobability
ofgreaterthan
1in
5over
25years
ratherthan
1in
100next
yearbecause
thelon
gertim
ehorizon
isabove
theirthreshold
levelofconcern.
So
howm
ightthis
conceptbe
appliedto
encouragelong-term
thinking?O
neproposalin
thecontext
ofcatastrophe
riskfinancing
isto
move
fromthe
usualone-year
contractstow
ardsthe
development
oflongerterm
contracts.Sim
ilarstrategies
may
alsobe
appropriateto
encouragelonger
termthinking
inother
areas.Forexam
ple,thestandard
annualbonussystem
implem
entedby
many
organizationscould
bem
odifiedso
thata
more
significantportion
ofmanagers’
remuneration
packagesare
contingenton
multi-year
performance
ratherthan
onjust
thepast
12m
onths.This
might
inducem
anagersto
considerm
oresystem
aticallythe
potentialconsequencesoftheir
imm
ediateactions
inthe
longrun
andto
paym
oreattention
tow
orst-casescenarios
ratherthan
hopingthat
theyw
illnotoccur
bythe
endofthe
currentyear.
Furthermore,given
theinterconnectedness
ofthew
orldtoday,actions
takenin
onepart
ofthew
orldcan
haveripple
effectsthousands
ofmiles
away
andm
onthsand
yearsafter
thesedecisions
havebeen
made.Innovative
strategiesw
illbecrucialto
helpbusinesses
andindividuals
focuson
thelong
termand
tom
ovebeyond
“itcannot
happento
us”to
“what
ifitoccurs”
–a
mentality
bettersuited
tothe
currentclim
ateof
interdependentglobalrisks.
The
Imp
lications
of
Risk
Myo
pia
andM
ispercep
tion
2How
ardKunreuther
“Protective
Decisions:Fear
orPrudence”
inWharton
onMaking
Decisions
(Stephen
J.Hoch
andHow
ardC.K
unreuthered),W
iley2001
http://opim.wharton.upenn.edu/risk/dow
nloads/01-41-HK.pdf
13| G
lobal R
isks 2009
2008 saw com
modity prices fall sharply from
historichighs. The price of crude oil (W
TI) declined from a peak
of US
$ 147 a barrel in mid-July 2008 to below
US
$50 in
Decem
ber2008. O
ther comm
odities experienced similar
declines. Betw
een March 2008 and A
ugust 2008, steelfell by 68%
, wheat by 67%
and ethylene by 50%.This
boom and bust further highlighted just how
exposedm
any economies and industries are to the im
pact ofcom
modity prices. P
roducing nations have seen theirgrow
th prospects deteriorate, increasing theirvulnerability to other risks. From
a corporate perspective,it underlined the need for new
approaches to managing
both price levels and volatility patterns.
Heavy com
modity users are now
facing a new paradigm
where reduced prices but higher volatility is not
necessarily giving the expected economic benefit. A
newphenom
enon has emerged w
hereby reduced price levelsshould support increased industrial activity;how
ever, thehigher price volatility adds m
ore uncertainty and,therefore, potentially reduces econom
ic activity. While,
until recently,comm
odity/raw m
aterial users had tom
anage margin com
pression as a consequence ofincreasing com
modity prices, the pressure has now
shifted to the supply side. Producers are now
sufferingfrom
both a drop in comm
odity prices and reduceddem
and. Both m
arket situations impose particular
managem
ent challenges beyond pure financial hedgingfor both the dem
and and supply side. Throughout thehigh price period, businesses found it difficult to securesupply, achieve price certainty and, ultim
ately, pass theincreased costs on to custom
ers. The prospect for 2009m
eans that heavy comm
odity users are seeking to adaptto a new
context and to reflect the lower price/higher
volatility situation in their comm
odity risk managem
entapproach.
Corporate com
modity risk m
anagement clearly needs to
be more responsive to changing price levels and higher
than expected volatility. For most com
modity users this
means a fundam
ental reassessment of their hedging
objectives over a longer period of time; the incorporation
of uncertainty in price and volatility forecasts; a betterunderstanding of exposures;and finding a m
oresophisticated w
ay of assessing the range of hedgingtools and approaches available to m
anage thecashflow
/earnings volatility. In other sectors, such asenergy and m
etals, these tools are already an integralpart of industry best practice but previously less-exposed sectors, such as chem
icals and fast-moving
consumers goods, are now
looking at these tools.
The aim is to have a clear understanding of net
exposure, which is often a com
bination of a number of
transactions including foreign exchange components.
Com
modity price risk m
anagement tools involve a range
of financial instruments, physical contracts and the
pricing mechanism
for the sales contract. For a number
of comm
odities, proxy hedges (using a hedging with a
different comm
odity than the underlying exposure) aredeployed due to the lack of liquid hedging m
arkets. Inthese circum
stances, the basis risk needs to bequantified and m
onitored.
In making these hedging decisions, com
panies are usinga num
ber of metrics and sophisticated optim
ization toolsthat allow
companies to determ
ine their risk appetite andevaluate hedging strategies accordingly. H
owever, to
implem
ent these approaches companies need to
improve the transparency of their exposures and include
a cross section of functions such as procurement, sales,
treasury and controlling to ensure alignment and
coordination of actions.
Hed
ging
Co
mm
od
ities Risk: Lesso
ns Learned
Figure 6: C
om
mo
dity P
rice Vo
latility
Source: D
atastream, graph courtesy of O
liver Wym
an (MM
C)
0
100
200
300
400
500
600
700
800
900
100020032004
20052006
20072008
Crude O
ilN
atural Gas
Coal
Steel
Alum
inium
Alu A
lloy C
opperLead
Nickel
Tin Zinc
Price change (%)
14| G
lobal R
isks 2009
Ad
dressing
go
vernance gap
s and avo
iding
regulato
ry overreactio
nThe financial crisis has underscored the need for policyresponses that account for the global nature of crises. Ithas revealed the lim
its of the current financialarchitecture, show
n the inadequacy of early warning
systems, and exposed deficiencies in the coordination
among policy-m
akers, regulators and supervisors. At
national level, the financial crisis also exposed the limits of
supervision that is geared only to local entities andneglects the system
ic implications of financial institutions
with global reach. There can be little doubt that global
governance and the institutions charged to develop thefram
eworks and carry out such governance should be
strengthened.
How
ever, this is easier said than done. The historicdevelopm
ent of different legal systems, to point to just
one difficulty, virtually ensures that regulatory authority will
continue to reside primarily w
ith national bodies. Hence,
the financial architecture of the near future should focuson setting broad standards for coordination andcooperation am
ong regulators that improve the
surveillance of economic and financial activities and
support the implem
entation of corrective measures.
Regulation can help create a clim
ate of confidence,stability and certainty that prom
otes innovation, growth
and competitiveness. H
owever,poorly designed or
implem
ented regulation can also drive up the cost ofdoing business, operate as a barrier to trade and capitalflow
s or simply shift risk into less regulated parts of the
system. O
ne extreme, but plausible,scenario that should
be considered is a regulatory overreaction to the recentcrisis w
hich increases transaction and compliance costs
while ultim
ately proving ineffective in the face of the “next”crisis
3. Policy-m
akers and regulators must be careful to
weigh the costs and consequences of regulatory shifts to
ensure that they produce a net benefit in terms of both
system efficiency and stability. From
the corporateperspective, the current uncertainty about the extent ofthe changes that m
ay happen over 2009 is difficult tom
anage. The changes need to be measured but to
reduce uncertainty they must be com
municated sw
iftly toallow
business to track them across their m
arkets andtake the necessary actions.
The “5i” framew
ork based on insight, information,
incentives, investment and institutions discussed in
Global R
isks 2007can also be applied to analyse the
global credit crisis. It can help us to identify the risks,assess their interaction and design m
itigation activities.
•Insig
ht: Financial innovation appeared to increase thefinancial system
’s efficiency by spreading risks to aw
ide spectrum of m
arket participants. How
ever, thefailure to cut through the opaqueness of m
anystructured products and assess the m
ultilayeredleverage pyram
id created systemic risk. H
ence,forw
ard-looking risk managem
ent must identify
interlinkages and account for low probability/high
severity events.
•Info
rmatio
n: Financial m
arkets must alw
ays copew
ith imperfect inform
ation and moral hazard.
Transparency is the antidote to remedy deficiencies
arising from the asym
metric distribution of inform
ation.The grow
th of the credit bubble can be partly tracedback to the fact that investors w
ere in the dark aboutthe m
agnitude of liabilities accumulated in structured
investment vehicles due to their com
plexity and thatthey w
ere not covered by the consolidated reportingof banks and broker-dealer institutions.
•Incentives: M
arket participants respond to economic
incentives. The separation of risk origination and riskow
nership within the originate-to-distribute (O
TD)
business model introduced by banks over the last 30
years led to a lack in due diligence and accountability.
•Investm
ent: Financial markets depend on structures
that support the flow of inform
ation and the timely
settlement of trades. C
redit default swaps, for
example, w
ere and continue to be traded over thecounter only and the settlem
ent of contracts used totake w
eeks (now days). H
ence, creating a centralclearing facility for credit derivatives and enabling themto be traded on regulated exchanges w
ould helpim
prove the market structure and reduce both
settlement and system
ic risk.
•Institutio
ns: The global credit crisis demonstrated a
major governance gap and the need to im
proveprudential oversight and regulation. Financial m
arketstability is a public good,and globalized financialm
arkets require a globally coordinated effort to createand m
aintain this public good. The financialarchitecture of the future m
ust have an element that
transcends national borders. To ensure success itsinstitutions should include broad representation in rule-m
aking bodies, macro prudential surveillance and
have agreed procedures for systematic enforcem
ent.
The G
lob
al Risks 5i Fram
ewo
rk Ap
plied
to the C
redit C
risis
3This topic is discussed in greater depth in the World Econom
ic Foum W
orld Scenarios S
eries report The New
FinancialA
rchitecture: Scenarios to 2020, W
orld Economic Forum
2009
15| G
lobal R
isks 2009
Geo
po
litical risks and o
il dep
endency
By focusing on the geopolitical dim
ension (comprising risks of terrorism
, interstate wars, state failure and transnational
crime) and oil price risk, the follow
ing graph illustrates the interaction between tw
o classes of risks that are usuallyconsidered to be S
iamese tw
ins. Three points emerge.
•First, oil-producing and oil-consum
ing countries form tw
o very distinct and separate clusters.•
Second, oil producers are exposed to geopolitical risks in varying degrees, w
ith Norw
ay on the low end and Iraq on
the high end of that particular risk spectrum. M
exico and Great B
ritain, although oil producers too, are set apartand m
uch closer to the oil-consuming countries of E
urope.•
Third, it is worthw
hile noting that Hong K
ong SA
R and S
ingapore are both clustered with the E
uropean countriesinstead of w
ith their geographic neighbours in East A
sia. They demonstrate a low
er exposure to geopolitical risk,w
hile maintaining a relatively high exposure to a rising oil price.
The analysis points to broad scope for collective action. High oil dependency exposes consum
er countries indirectlyto geopolitical risk. A
dvanced economies in particular are show
n to have a powerful incentive to reduce their oil
consumption not only for environm
ental reasons (to cut carbon emissions), but also for reduction of their indirect
exposure to geopolitical risk.
Figure 7: G
eop
olitical risks and
oil d
epend
ency
Sou
rce: Zu
rich Fin
ancial Services, 2008
CD
NG
AO
SO
EG
LY
SG
HK
SA
IQIR
KZ
KW
QA
AE
CN
TWTH IN
RU
NO
SI
IS
NZ
LUFI
SE IT
UK
HR
SP
FR
MX
0.0
0.2
0.4
0.6
0.8
1.00.00.2
0.40.6
0.81.0
Risk of oil price rise
Geopolitical risks
Africa
Asia
Australia P
acificE
uropeN
&C
Am
ericaS
Am
erica
East A
sian consumers
Oil producers
European
consumers
3. Resource C
hallenges, Sustainability and C
ompetition
16| G
lobal R
isks 2009
Dem
og
raphics, reso
urces and clim
ate change
Despite a slow
down in the rate of global population
growth,the w
orld’s population is still growing and
expected to peak at 9 billion people in 2050, up from6.6 billion in 2006. The past decades have seenurbanization accelerate to the point w
here over half thew
orld’s population now live in cities, a trend that is
expected to continue. These shifts are placing greaterpressure on resources and are contributing directly andindirectly to the rising em
issions linked to climate change
and the resulting consequences for the environment.
More intensive agricultural m
ethods, greaterindustrialization and grow
ing energy needs, urbanizationand rising incom
es in emerging econom
ies are alreadysources of pressure on w
ater resources. Globally,
agriculture accounts for 69% of all renew
able water
consumption, industry for 23%
and domestic use for
8%. The push to im
prove agricultural productivity in anum
ber of countries will drive w
ater consumption higher.
The flipside is that the focus on increasing agricultural
production,through what is often referred to as a
“second green revolution”, could also be used as anopportunity to introduce m
ore water-efficient irrigation
techniques and drought-resistant crops that require lessw
ater. Nonetheless, as the global population grow
s, andw
ater demand increases, the interest in fertile, w
ater-richland w
ill rise. This will be com
pounded by shifting rainfalland drought patterns due to clim
ate change. Farmers
from E
urope to South-E
ast Asia and A
ustralia arealready having to m
anage their crops and water
differently as droughts are prolonged, or monsoons are
heavier but shorter in duration.
Co
mp
etition fo
r land and
water
This demand on, and for, fertile land for food production
and associated water resources is prom
pting some
countries to take action to secure access to water both
within and beyond their borders. C
ountries such asS
audi Arabia and C
hina have already made significant
investments in infrastructure and agricultural productivity
to access land for food supplies in Kazakhstan and
Figure 8: W
ater: at the Nexus o
f Many R
isks
Source: W
orld Econom
ic Forum 2009
17| G
lobal R
isks 2009
Mozam
bique respectively. These agreements m
ay be thefirst of m
any, where countries and corporations lock
intheir access to arable land and w
ater supply to fulfil astrategic need or for w
hich they see a future market.
China’s arable land availability is decreasing due to soil
erosion, pollution and urbanization. Given its very lim
itedfresh w
ater resources,Saudi A
rabia has strategicallychosen to use its w
ater resources for household ratherthan agricultural use. In N
ovember 2008, S
outh Korea
announced that it had taken a 99-year lease on half thearable land in M
adagascar in return for employing local
labour and building road and storage infrastructure.
Private com
panies have also entered this arena, inparticular for w
ater. Water has becom
e an alternativeasset class. P
rivate companies in the U
S and Turkey
have already begun to operate or explore the possibilityof pipelines transporting w
ater over longdistances to
service demand in w
ater-poor areas. Hedge funds have
purchased rights to glaciers in Scandinavia.
Reso
urce risks and instab
ilityW
hat do these new arrangem
ents mean for international
relations? The past few years have seen a num
ber ofagreem
ents between resource-rich, cash-poor countries
with cash-rich, high-grow
th nations. Often tied to
infrastructure and capacity building, these agreements
provide benefits in the shortterm
but may prove
unsustainable over the longterm
in terms of
environmental and societal considerations. Land rights
are already a frequent source of tension between people
and state,and among political factions. O
ver time, as
the effects of climate change on both w
ater and landavailability becom
e apparent, the rising demand for food
and the pressures on land use for industrial andresidential purposes could trigger intra-state or eveninterstate tensions as sovereignty or contractual issuesarise.
The linked
dem
and fo
r energy and
water
While the focus on w
ater for biofuels captured publicattention, w
ater is in fact crucial to a range ofconventional and alternative energy and pow
ergeneration solutions. The com
bination of a need to meet
longerterm
increases in energy demand and to find
“cleaner” alternatives to oil and coal may in fact drive us
towards m
ore water-intensive energy paths. W
ater isused in the extraction of oil and coal m
ining,in refining,
for biofuels,in power plants for cooling, for therm
al-electric form
s of electricity generation and in nuclearpow
er plants. The water used in these processes is not
necessarily wasted, m
any are closed loop systems but it
is required in large quantities and in some cases it is
returned to natural water areas at a higher tem
peraturew
hich can cause pollution from algae and dam
age tom
arine life.
Dem
and for energy and water are tightly interrelated,
with w
ater critical to energy generation and supply andw
ater supply dependent upon energy for pumping,
treatment, distribution, heating and w
aste treatment. O
naverage, 50%
of the costs associated with w
ater supplyare related to energy. A
ccording to a 2008 OE
CD
report,just 2.8 billion people (44%
of the world’s population)
currently live in high water stress areas but this w
ill riseto 3.9 billion by 2030 (50%
the global population) ifbetter w
ater policies are not implem
ented. Energy
demand is also set to rise according to the International
Energy A
gency’s latest World Energy O
utlookestim
ates,and global dem
and will increase by 45%
, with 30%
ofthis rise com
ing from coal-fired plants.
Investing to
mitig
ate climate chang
e risksThe current financial crisis underlines how
important it is
to see risks in the context of a wider system
and tounderstand w
here vulnerabilities lie. Now
is anopportune tim
e for industries and governments to
consider the risks related to resources and climate
change,and what they could im
ply for them in the
future. At the national level, governm
ents should beconsidering policies that encourage efficient resourcem
anagement, especially for energy and w
ater and thatprom
ote investment in this direction. G
overnments m
ustbe long
term in their thinking about how
their regulatoryregim
es need to develop and how they should invest in
infrastructure, which w
ill be one of the key areas when it
comes to long-term
sustainable resource managem
ent.
Sustainab
le resource m
anagem
ent andinfrastructure investm
entA
s this report examines in the section on the financial
crisis and global risks, governments in both developed
and developing economies are facing tighter fiscal
conditions due to the economic dow
nturn. Likewise, the
financial crisis has dramatically reduced confidence and
made access to capital difficult. The U
S alone requires
18| G
lobal R
isks 2009
an estimated U
S$
1.3 trillion in investment to address
ageing infrastructure: the Environm
ental Protection
Agency says there is a gap of betw
een US
$300 billion
and US
$500 billion alone for w
aste water infrastructure.
In Novem
ber 2008, China announced a U
S$
586 billionpackage, m
ost of which w
ill go into infrastructure overthe next tw
o years. Over recent years, C
hina’sinfrastructure spending has averaged 9%
of its GD
P.India’s public spending on infrastructure has historicallyrepresented 3.5%
of GD
P;it plans to increase this
amount to 8%
in 2012. Worldw
ide it is estimated that
the global economy needs about U
S$
5 trillion forinfrastructure over the next five years alone – rangingfrom
transport networks to sanitation and pow
er – justto m
aintain the quality of the existing infrastructurenetw
ork and meet rising dem
and.
Today’s infrastructure investment choices are key, as
they represent a huge opportunity to spend on projectsthat w
ill result in better, long-term resource m
anagement
– from technology and plant choices to reduce
emissions and w
aste, to transport and buildingdevelopm
ent that will be m
ore energy and land efficient.A
lack of investment now
or investment in unsustainable
areas will result in further costs through clim
ate change,poor living conditions in crow
ded cities and, ultimately,
will be a drag on future grow
th. Governm
ents will need
to spend effectively but they will also need to im
plement
policies that encourage investors to understand the risksand take a long-term
view.
Figure 9: Infrastructure: A
n Investment in R
isk Mitig
ation
Source: W
orld Econom
ic Forum 2009
19| G
lobal R
isks 2009
2009 is a critical year for international climate change
issues. By year-end the countries at the C
openhagenconference, w
hich is a follow-up to the U
nited Nations
Framew
ork Convention on C
limate C
hange (UN
FCC
C)
Kyoto P
rotocol, must agree to a new
protocol to ensurethat international efforts to reduce global greenhouse gasem
issions continue beyond 2012. Recent studies
indicate climate change is occurring faster than
expected. Without resolute action w
e could faceirreversible changes to the clim
ate. There is pressure onthe discussions in C
openhagen to produce a concreteresult – a fram
ework far m
ore comprehensive, long term
and ambitious than the K
yoto Protocol, ironically at a
time w
hen the world econom
y is entering a major
economic slow
down.
The four cornerstone issues that the 2009 climate
negotiations need to address are discussed below:
1.A
long
-term g
lob
al go
al for em
ission red
uction
There is a need for an agreed global goal for emission
reductions by 2050 in the range of 50-80%, com
paredto 1990 levels. G
reenhouse gas emissions are an
expression of the market’s econom
ic failure toadequately value a public good – the clim
ate. To solvethis m
arket failure a combination of state-defined
conditions, caps, incentives and standards will be
necessary to give emissions a price and to rew
ardem
ission reduction measures.
2.E
nhanced natio
nal/international actio
n on
mitig
ation
Leaders from developed countries w
ill be under pressureto provide clear targets, m
ilestones and a strategy as tohow
the world econom
y can progress to a low carbon
future. All countries signing the U
NFC
CC
will need to
comm
it to a level of carbon emissions by a specific date.
Developing nations m
ust be a part of the solution, co-operating w
ith meeting the targets, but also allow
ed toachieve their econom
ic development goals.
3.E
nhanced actio
n on ad
aptatio
nIf em
issions continue to rise at the rate of the past 30years, atm
ospheric concentrations will increase to
700ppm or m
ore, corresponding to global averagetem
peratures of +6°C
or more by 2050
(Intergovernmental P
anel on Clim
ate Change (IP
CC
)2007 4th report; W
orld Energy O
utlook, InternationalE
nergy Agency 2008). E
ven if we stopped em
ittinggreenhouse gases altogether, the effects of globalw
arming are now
unavoidable. For these reasons,societies w
ill need to adapt to the unavoidableconsequences of clim
ate change.
Importantly, it is developing nations w
ho face the worst
consequences because they are more vulnerable to the
physical effects of climate change than developed
nations, due to their limited institutional fram
eworks and
financial adaptive capacities: •
In Africa alone, 75-250 m
illion people will be
exposed to water stress by 2020 (IP
CC
4 threport).
The area suitable for agriculture will decrease and
reductions in yields could amount to 50%
by 2020. •
Towards the end of the 21st century, projected sea-
level rise and storms w
ill affect low-lying coastal
areas with large populations potentially triggering
migration of people.
•W
eather-related disasters disproportionately affectthe agricultural sector in least developed countries(subsistence farm
ing) where m
ost farmers have only
limited access to financial m
eans such as micro-
credit and insurance solutions.
4.E
nhanced actio
n on techno
log
y develo
pm
entand
transferThe U
NFC
CC
estimates that 85%
of the capital requiredfor low
carbon investments needs to com
e from private
sources. Adjusting public policies to stim
ulate privateinvestm
ents, technology development and adaptation in
developing countries will be vital. A
major deal flow
ofprojects in both today’s realisable low
carbontechnologies and tom
orrow’s technologies (e.g. carbon
capture and storage, next generation photo-voltaics andbiofuels) w
ill be required. Financial and projectdevelopm
ent expertise from the international private
sector will need to partner w
ith governments and
multilateral developm
ent banks.
The R
oad
to C
op
enhagen: A
n Up
date
Figure 10: T
he Co
st of N
atural Catastro
phes
Source: S
wiss R
e, Econom
ic Research &
Consulting
0 50
100
150
200
250
Insu
redTo
tal
20052000
19951990
19851980
19751970
Natural catastrophe losses in U
S$ billion at 2007 prices
20| G
lobal R
isks 2009
In 2008, national energy security was challenged from
many different directions. Infrastructure has been
damaged by extrem
e weather events, for exam
pleduring tropical storm
Gustav in the G
ulf of Mexico.
Countries such as France and S
lovenia have had toclose nuclear plants for safety reasons. C
limate policies
have toughened, oil and gas prices have been highlyvolatile,and geopolitical tensions have led to thetem
porary closure of gas pipelines and heightenedresource nationalism
. The approval and delivery of newpow
er plants have faced lengthy delays in many
countries and large-scale mergers and acquisitions
among leading industry players have increased cross-
border ownership. The value of global energy-related
mergers and acquisitions betw
een May 2007 and the
last quarter of 2008 amounted to approxim
ately US
$500 billion.
Policy-m
akers and industry players are struggling toassess the m
any investment options open to them
in thelight of grow
ing energy demand, com
mitm
ents to reducecarbon em
issions, deteriorating infrastructure and thedepletion of fossil fuel resources. The scale of investm
entis high (according to the IM
F’s World Econom
ic Outlook,
between 2007 and 2030 the new
expenditure requiredto update and expand global energy infrastructure aloneam
ounts to US
$26.3 trillion), the tim
efram
es are longand the technological choices require significant trade-offs. D
ecisions can be piecemeal and often lack the
coherence, vision and follow-through that give
confidence to all parties.
In this context it is helpful to conceptualize energysecurity as having four objectives:
•A
utono
my: energy supply that is w
ithin the control ofa country and is not vulnerable to disruption byexternal agents
•R
eliability: energy distribution that is safe and secure
in both the short and long term and m
eets demand
without interruption
•A
fford
ability: energy prices that are com
mensurate
with the buying pow
er of domestic and business
consumers – at the sam
e time this objective is,
however, often difficult to achieve in a m
annerconsistent w
ith the final objective•
Sustainab
ility: energy use that is sufficient to supporta high quality of life but does not dam
age theenvironm
ent to an unacceptable degree
This framew
ork is useful for decision-makers not only to
analyse how their existing infrastructure and renew
alplans m
atch up against the different objectives but alsoto understand w
here their principal exposures lie. This isthe basis for a long-term
strategy that not only providesfor a supply m
ix appropriate to national circumstances
but also policies that will im
prove productivity throughincreased energy efficiency and dem
and reduction.S
uch a strategy will also need to anticipate the
systematic disruption that m
ight be caused byinnovations such as the introduction of distributedgeneration or the rapid uptake of plug-in electricvehicles.
Effective governance arrangem
ents as well as strategic
vision are critical to underpinning decisions at both theplanning and im
plementation stages. P
olicy-makers and
other energy system players should therefore address
the following questions:
1.Does our energy policy fully dovetail w
ith our climate
policy in terms of its goals and m
easures?2.A
re our regulatory and investment incentives strong
enough to drive the development of optim
al supplysolutions, grid infrastructure renew
al, energy efficiencym
easures adoption and new technology
development?
3.Is there a need to streamline national regulations,
harmonize international law
s and strengthen bilateraltrading agreem
ents? 4.D
oes our engagement w
ith the different stakeholdergroups enable us to deploy their different strengths toturn the optim
al energy solutions into reality?
Energ
y Security: R
econciling
Gro
wth and
Sustainab
ility in FutureInfrastructure Investm
ent
4. Global G
overnance: a Key to G
lobal Stability
and Sustainability
21| G
lobal R
isks 2009
The financial crisis exposed fundamental flaw
s in globalgovernance. In an historic m
eeting of countriesrepresenting 90%
of world G
DP, the G
20 summ
it held inN
ovember 2008 discussed w
ays to coordinate aresponse and the need for a global, collaborative solutionto the financial crisis. Indeed, as governm
ents andcorporations face the im
mediate challenge of rekindling
growth, there is a risk that other challenges such as
climate change, food security, poverty reduction,and
failing and unstable states are pushed down the agenda,
perhaps increasing the severity of these risks in the longrun. P
ersistent governance gaps in many of these issues
will only serve to exacerbate the related risks.
Where are the g
aps?
Whether in the econom
ic or security arena, most of the
multilateral institutions that operate today w
ere created inthe period follow
ing World W
ar II. Their mandates and
capacities were not designed for the highly
interconnected, multi-polar and, in m
any ways, m
oreopen w
orld of today. Econom
ic and demographic shifts
have not been reflected in either their governance ordecision-m
aking structures. Equally, the shift in the roles
between the public and private sectors has not been fully
taken on board. Global risks know
no borders and globalsolutions are also beyond the realm
of any onegovernm
ent. Indeed, they will require not only
intergovernmental collaboration but also public-private
collaboration. Again, existing governance structures w
erenot built to capitalize on the com
bined strengths ofgovernm
ent, business and civil society.
Ad
dressing
glo
bal risks thro
ugh b
etter go
vernanceA
t the World E
conomic Forum
’s inaugural Sum
mit on the
Global A
genda in Dubai in N
ovember 2008, the G
lobalA
genda Council (G
AC
) on Global G
overnance made
some recom
mendations as to how
to addressgovernance gaps. They included: fostering greatercom
mitm
ent and new leadership on global issues;
developing framew
orks to draw on expertise and to
generate debate and awareness; m
arrying publicauthority and regulatory capacity w
ith incentives for theprivate sector to innovate; reform
ing existing institutions,specifically reform
ing the UN
Security C
ouncil; exploringnew
mechanism
s to provide necessary resources.
Looking at the global risks tracked by the Global R
iskN
etwork for the past five years w
ith theserecom
mendations in m
ind provides a gauge of how m
uchm
ore can be done to improve governance. O
n climate
change and resources, the picture is mixed. O
n the onehand, the Intergovernm
ental Panel on C
limate C
hange
has advanced dialogue by encouraging debate among
the scientific comm
unity resulting in improved aw
arenessand a greater com
mon understanding. O
n the otherhand, the K
yoto Protocol proved ineffective not only
because key governments failed to engage but also
because it was unable to offer a fram
ework
encompassing incentives and adaptation.
Where better and m
ore innovative governance has shown
results is in the area of global health risks. For HIV
/AID
Streatm
ent, The Global Fund, a U
N-backed public-private
structure has succeeded in making antiretroviral drugs
more easily available to populations at risk. The W
HO
hasdeveloped an effective m
onitoring and information
network for pandem
ics that operates globally.The risk ofinfectious disease rem
ains high but these examples
illustrate that new form
s of governance can be effectiveeven for som
e of the most borderless and tenacious of
global risks.
On w
ater-related risks however, there is currently little
oversight and shared understanding among governm
entsand business about not only environm
ental and securitybut also econom
ic implications. In the absence of
framew
orks that offer a comm
on base for national andregional dialogue and action around w
ater pricing,sustainability and infrastructure, w
ater-related risks may
go unaddressed. As discussed in the previous section,
water scarcity and quality are highly connected to energy,
food and health risks. As a global good and
a global risk,w
ater is perhaps an issue most in need of global
governance for mitigation.
Better g
overnance to
avoid
retrenchment
The spread of the financial crisis and the resulting globaldow
nturn has increased the risk of retrenchment from
globalization in developed and especially in developingeconom
ies (as illustrated in Figure 11).
Over the past several decades, globalization has m
eantcountries and businesses building econom
ic and societalties across the w
orld, opening new m
arkets,providingservices, generating em
ployment and reducing poverty.
This mom
entum has raised hundreds of m
illions ofpeople out of poverty but m
ore progress is needed. Aglobal dow
nturn will undoubtedly place greater pressures
on many econom
ies, developed and developing,butretrenchm
ent, in the form of econom
ic protectionism or
unwillingness to engage on clim
ate change, resource orsecurity issues, could create even greater pressures. N
owseem
s like an appropriate time address governance gaps
and thus provide framew
orks offering greater certainty to
22| G
lobal R
isks 2009
both governments and business and that w
ill enablesolutions that w
ill benefit all.
Clim
ate change, natural catastro
phes and
geo
po
litical riskN
inety per cent of all natural catastrophes are related tow
eather and severe weather incidents have been on the
rise over the past decade. Many of the catastrophes,
flash floods, droughts and tropical storms affect
developing countries far more than developed countries.
The losses, both of life and earnings, that thesepopulations experience due to natural catastrophes, arecom
pounded by the fact that insurance penetration is lowin em
erging markets. Thus their recovery is m
ore difficult.
How
ever, even before the financial crisis, emerging
economies w
ere reluctant to accept the trade-offbetw
een economic grow
th and the costs of containingclim
ate change effects. Now
that economic grow
th isslow
ing, the risk is that this trade-off becomes even less
acceptable. Developing nations in the regions that are
likely to suffer the most from
climate change m
ay not onlysee their grow
th and development im
paired, they may
also have to manage rising tensions w
ith neighbouringstates as pollution levels and pressure on naturalresources rise. O
nce again, only globally coordinated andnationally supported efforts w
ill be effective to addressthe challenges related to clim
ate change, them
anagement of scarce resources and geopolitical
tensions.
Figure 11: T
he Risk o
f Pro
tectionism
in Em
erging
Markets
Source: W
orld Econom
ic Forum 2009
Node size:denotes severity
Node colours: red – econom
ics; dark green – geopolitics; light green – environmental; purple – technology; blue – society
Lines:line thickness denotes the strength of the interlinkage. The direction of a thicker line segment indicates w
hen one risk is the stronger in the relationship.
Proxim
ity:the map show
s risks that are tightly interlinked to many other risks as closer to one another.
23| G
lobal R
isks 2009
During 2008, the W
orld Econom
ic Forum form
ed 68G
lobal Agenda C
ouncils (GA
Cs) for the express purpose
of bringing experts and leaders together to capturestate-of-the-art know
ledge and propose solutions for them
ost crucial issues facing the world today. The G
lobalA
genda Council (G
AC
) on Mitigation of N
atural Disasters
focuses on strategies for reducing losses from events
that can have catastrophic global impacts. This C
ounciland a num
ber of other GA
Cs agreed that there is a need
to develop innovative long-term strategies for coping
with m
yopic behaviour by decision-makers and dealing
with an increasingly interconnected w
orld. They suggestthe follow
ing principles for thinking about naturalcatastrophes that lend them
selves to other areas of risk,such as a technical accident or m
ajor terrorist attack:
Princip
le 1.Appreciate the im
portance of assessingrisks and characterizing uncertainties surrounding suchassessm
ents
Princip
le 2.Recognize the interdependencies
associated with risks and the dynam
ic uncertainties thatresult from
these interdependencies
Princip
le 3.Understand behavioural biases and
heuristics used by decision-makers, such as
misperceptions of probability, m
yopia and “the disasterw
on’t happen to me” attitude in developing risk
managem
ent strategies
Princip
le 4.Appreciate the long-term
impact of
disasters on a area’s or country’s economy, politics,
culture and society
Princip
le 5.Implem
ent risk-based pricing of economic
goods exposed to natural catastrophes and createresiliency by considering m
easures that prevent andm
itigate the risks of natural disasters and their social andeconom
ic impacts
Princip
le 6.Deal w
ith trans-boundary risks bydeveloping strategies that transcend political boundaries
Princip
le 7.Consider inequalities w
ith respect to thedistribution and effects of natural disasters. W
herepossible, cooperative agreem
ents should be facilitatedso that those w
ith few resources are assisted by those
with a greater capacity to help
Princip
le 8.Develop organizational leadership that is
prepared to anticipate the risks of large-scale naturaldisasters and m
obilize the organization in the imm
ediatew
ake of a calamity
Mitig
ating the E
ffects of N
atural Disasters
24| G
lobal R
isks 2009
The Russo-G
eorgian conflict during the summ
er of 2008w
as a reminder of how
geopolitical events and securityconsiderations can suddenly expose a diverse set ofrisks and interrelations, and how
little effect existingsecurity institutions have. The conflict strained R
ussia’srelations w
ith Europe and its neighbours in C
entral Asia,
raising the issue of energy security and dependence.These concerns have been com
pounded by even more
recent events as Russia again cut off the gas supply to
Ukraine as 2009 began.
To the fore among the geopolitical risks tracked by the
Global R
isk Netw
ork over the past five years are theIsrael-P
alestine tensions, Iraq and Afghanistan. A
s thisreport w
as going to press, Ham
as, having called an endto a six-m
onth cease fire, was sending rockets into Israel
and Israeli troops had entered Gaza follow
ing a week-
long campaign of airstrikes. W
hile the situation on theground in Iraq m
ay have improved slightly, civilians and
military personnel continue to be the target of terrorist
and insurgents attacks. Because of this,reconstruction,
which is so necessary to restoring social order and
economic opportunity for the population, is advancing
painfully slowly. In A
fghanistan, despite NATO
’s ongoingpresence, the level of violence rem
ains high and thesituation along the A
fghan-Pakistan border is a source of
instability throughout the region and beyond. Indiasuffered a m
ajor terrorist event in Mum
bai. Though,previous attacks have been equally severe in the term
s
of fatalities, the nature of this attack and the targets may
signal the new direction for terrorism
on thesubcontinent. G
iven this and the potential for instability inP
akistan, with its troubled borders w
ith Afghanistan and
India, the world m
ust remain on the alert about events in
this region, dominated by tw
o nuclear powers and, if
necessary,ready to act in an aligned manner.
In Latin Am
erica, problems of violence, corruption and
political instability continue to plague parts of thecontinent and uncertainty abounds on theconsequences of the political directions that have beentaken by several countries. O
n the African continent,
Som
alia, Sudan and Zim
babwe have the unenviable
distinction of being the states “most at risk of failure” as
they fill the top three positions of Foreign Policy’s
FailedS
tates Index. And recent events in the D
emocratic
Republic of C
ongo have resurrected the complications
between tribal and national boundaries.
Though periodic incidents bring these situations to thefore from
time to tim
e, thew
orld does have to bear thehum
an and economic losses from
enduring conflicts.Though
they can be considered as “local” in nature theyappear
on the risk landscape with a relatively high
degree of potential severity. Their persistent non-resolution m
eans that there is a permanent risk that
they spill over, causing greater loss of life and evendestabilizing other countries. These conflicts can affectregions far beyond their borders
throughterrorism
,sudden m
ovements of refugees, ongoing illegal
migration and direct m
ilitary conflict.
An O
verview o
f the Geo
po
litical Landscap
e
25| G
lobal R
isks 2009
In Global R
isks 2008, principles of country riskm
anagement and the concept of a C
ountry Risk O
fficer,first introduced in 2007, w
ere explored. Many of the
challenges facing international governance are similar:
broad range of risks, divergent incentives, multiple
stakeholders and limited resources. H
owever, at a
country and international level, clear, transparentinform
ation and an integrated, comprehensive risk
assessment are essential.
Countries are subject to a m
yriad of risks includingnatural catastrophes, food safety, pandem
ics andterrorism
. Their governments are charged w
ith theresponsibility of m
aintaining critical infrastructureconsisting of w
ater, energy, transportation andcom
munication w
hile preserving lives and economic
livelihoods under increasing budgetary pressure. Despite
differences in organizational structures and risk priorities,there are tw
o principles highlighted in Global R
isks 2008
that governments have applied in practice: integrated,
comprehensive, long-term
risk assessment and
transparent, clear comm
unication to all stakeholders.W
hether through a comm
ittee of an existing body or anew
ly formed international institution, a com
prehensivefram
ework of risk assessm
ent, carefully evaluating
interconnectivity and interdependency, and clearcom
munication w
ith all stakeholders should be coreprinciples for risk m
anagement on a global scale.
Country R
isk Officers could serve as the focal point of
comm
unication between countries and w
ith internationalbodies for risks of a global nature.
Integrated
, com
prehensive fram
ewo
rk: As an
example, the governm
ent of Singapore has instituted a
“Whole of G
overnment –
Integrated Risk M
anagement”
(WO
G-IR
M) fram
ework to evaluate and prioritize risks in
a holistic manner and to help identify cross agency risks
that may have fallen through gaps in the system
. As part
of the Risk A
ssessment and H
orizon programm
e,S
ingapore has even constructed scenarios for energy,food security and clim
ate change illustrating the long-term
, comprehensive nature of their risk m
anagement
framew
ork.
Transparent d
ata and clear co
mm
unication o
f risksto
all stakehold
ers: Japan’s relatively small territory
(378,000 square km) suffered 20%
of the world’s
earthquakes between 1996 and 2005. S
eventy-five percent of Japan’s assets are concentrated in flood proneareas. The C
entral Disaster M
anagement C
ouncil(C
DM
C) of Japan is an inter-m
inisterial body establishedto form
ulate and promote a com
prehensive nationalstrategy for these and other risks. D
ata from the Japan
Metereological S
ociety and local governments,funnelled
through the CD
MC
,is used to clearly comm
unicate risksand response to its constituents. In addition, Japanprovides various risk m
aps to stakeholders as a riskm
itigation measure.
Better R
isk Manag
ement thro
ugh B
etter Go
vernance:W
hat Can W
e Learn from
Best P
ractices in Co
untry Risk M
anagem
ent?
Conclusion
26| G
lobal R
isks 2009
The areas of risk detailed in this report are inextricablylinked. W
hile they will influence decisions and grow
thover 2009, they also have longer term
effects whose
exact shape and reach may not be clear for several
years. For this reason, it is crucial for decision-makers to
take a step back and consider a bigger, broader pictureof the entire landscape of risks that extends both in tim
eand in space, even w
hen they are under pressure toresolve m
ore imm
ediate problems. The risk landscape
explored here offers a framew
ork for further discussionthat can be used by business leaders, risk experts andpolicy-m
akers in their thinking about risk and mitigation.
As this report points out, global risks can only be
effectively addressed if there is a comm
onunderstanding and a w
illingness to engage in dialogueand action w
ith multiple stakeholders internationally
across countries, industries and business sectors.
Previous editions of the G
lobal Risk report proposed the
creation of international coalitions of the willing or the
institution of a Country R
isk Officer as possible
approaches to building effective cross-border mitigation
strategies for global risks. At the local, corporate and
even national level, a great deal of work is being done on
mitigation, but building aw
areness around this work and
scaling it up with the appropriate exchange of
information, expertise, governance and m
anagement
structures – either within existing institutions or in new
ones – requires a coordinated and concerted approach.W
ithout this effort, ownership of risks w
ill remain
fragmented and the challenges posed by increasing
levels of interconnectedness will dam
pen prospects ofsuccessful collaboration.
Throughout 2009, the Global R
isk Netw
ork will continue
to work w
ith its partners to leverage its unique platformand netw
orks, explore existing and new m
itigationpossibilities and extend aw
areness of global risks usingthe fram
ework defined in the G
lobal Risks report as a
basis for discussion. To this end, it will draw
upon theW
orld Econom
ic Forum’s expertise in public-private
partnerships on global issues such as the environment
and health, as well as in com
petitiveness and scenariobuilding. The G
lobal Risk N
etwork w
ill also exploresynergies w
ith the Forum’s G
lobal Agenda C
ouncils anduse the Forum
’s regional platforms to im
prove itsunderstanding of the geographic distribution of globalrisks, and explore how
different countries tackle risk atthe corporate and institutional level. W
ith the question ofglobal governance very m
uch to the fore of world affairs,
it will be im
portant to highlight that risk managem
ent isas im
portant for governments as it is for businesses, and
that both of these stakeholders have much to learn from
each other in this area.
Appendix 1: The R
isk Assessm
entand R
isk Barom
eter
27| G
lobal R
isks 2009
The 36 risks were assessed in term
s of their likelihood and their severity. In addressing likelihood, actuarial principles were applied w
heresufficient data existed, though for certain risks only qualitative assessm
ents based on expert opinion are possible. In assessing severity,tw
o indices were considered: destruction of assets/econom
ic damage and hum
an lives lost. Both of these latter indices w
ere used,resulting in separate analysis of risks by the tw
o types of severity, though for some risks the lives lost criteria w
as deemed inapplicable. It
should also be noted that although some risks by definition evolve over a longer term
(e.g. climate change) and others could happen in
the near term (e.g. oil price shock), the likelihood of all risks w
as evaluated with a 10-year tim
e horizon.
The Global R
isks “barometer” below
shows how
the qualitative 2009 assessment (com
pleted in October 2008) of the likelihood and
severity of each risk compares w
ith the 2008 assessment.
Key:
same assessm
ent as last year
increase
d
ecrease
new risk
not ap
plicab
le for this risk
#E
conomic R
isksLikelihood
SeverityU
S$
SeverityN
o. ofD
eaths
1Food price volatility
Food prices peaked in mid-2008. E
xpectations are that food pricesm
ay be more volatile over the com
ing years.
2O
il and gas price spike
In the short term, slow
ing global demand and fears of a further drop
in global growth m
eans the outlook for price spikes over the next 12m
onths is unlikely despite the OP
EC
in production in Decem
ber2008. The long-term
trend is for rising demand and a potential return
to tighter conditions.
3M
ajor fall in US
$
Experts consider that the dollar could com
e under pressure asinvestors reflect on the long-term
impact of current m
onetaryexpansion, high fiscal deficits and the continuing fragility of the U
Sfinancial system
.
4S
lowing C
hinese economy (6%
)
Though China’s dom
estic market could help com
pensate for its lossof exports due to recession in the U
S and other m
arkets, thegovernm
ent will need to encourage private spending to boost
domestic consum
ption.
5Fiscal crises
Dem
ographic factors (ageing societies) are responsible for largeuncovered liabilities in social security and public healthcaresystem
s. The pressure on fiscal systems w
ill be exacerbated bycurrent bailout packages and fiscal program
mes to jum
p-startgrow
th.
28| G
lobal R
isks 2009
#E
conomic R
isksLikelihood
SeverityU
S$
SeverityN
o. ofD
eaths
6A
sset price collapse
Although prices for m
any assets (housing, equities, andcorporate bonds) have declined dram
atically, there is continuedscope for further losses over a broad class of assets in the shortterm
.
7R
etrenchment from
globalization (developed)
The outlook is stable but some retrenchm
ent is likely if governments
revert to protectionist strategies in an effort to protect jobs asunem
ployment rises. C
ross-border private investment m
ay alsodecrease until investor confidence returns.
8R
etrenchment from
globalization (emerging)
Experts considered that the risk of m
ore inward-looking
economic policies in em
erging economies could also increase in
reaction to the current financial turmoil.
9R
egulation cost
This risk was included in the assessm
ent for the first time for 2009.
10U
nderinvestment in infrastructure
This risk was included in the assessm
ent for the first time for 2009
#G
eopolitical R
isksLikelihood
SeverityU
S$
SeverityN
o. ofD
eaths
11International terrorism
The perceived risk has decreased overall internationally but the riskrem
ains relatively high in several countries such as Iraq, Afghanistan,
Pakistan and S
omalia.
12C
ollapse of NP
T
Though the controversial US
-India nuclear deal was signed in 2008
and no progress was m
ade on the Iranian programm
e, the outlook isfor neither im
provement nor deterioration com
pared to 2008.
13U
S/Iran conflict
With a new
US
administration entering office, the risk is perceived as
less likely
14U
S/D
PR
K conflict
With a new
US
administration entering office, the risk is perceived as
less likely.
29| G
lobal R
isks 2009
#G
eopolitical R
isksLikelihood
SeverityU
S$
SeverityN
o. ofD
eaths
15A
fghanistan instability
Experts judged that a degree of progress had been m
ade but thatthe severity rem
ains constant in cost and loss of life terms.
16Transnational crim
e and corruption
Corruption continues to cost over U
S$ 1 trillion annually.
Transnational crime rem
ains endemic and related to a num
ber ofother global risks.
17Israel-P
alestine conflict
The likelihood of increased tensions is neither greater or less than in2008. N
ote that this assessment w
as completed in O
ctober 2008.
18V
iolence in Iraq
The likelihood of more violence has decreased slightly relative to
2008 but the costs and loss of life remain constant.
19G
lobal governance gaps
This risk was included in the assessm
ent for the first time for 2009.
#E
nvironmental R
isksLikelihood
SeverityU
S$
SeverityN
o. ofD
eaths
20E
xtreme clim
ate change-related weather
As the effects of clim
ate change have begun to manifest them
selvesin w
eather events, this risk remains constant year on year but given
that many of these incidents affect developing regions the num
ber ofdeaths is likely to rise.
21D
roughts and desertification reduces agricultural yields
As the incidence of drought has risen, production has shifted w
herepossible to less drought-prone areas or to m
ore drought-resistantcrops. N
onetheless, desertification remains a risk to incom
es andhealth in vulnerable regions.
22Loss of freshw
ater
Greater aw
areness and education and improved sanitation is slightly
reducing the number of deaths but overall this risk is constant in
terms of likelihood and severity.
23N
atural catastrophe: cyclone
Improved building standards and better w
arning information have to
contributed to reducing loss of life from cyclones but the risk rem
ainsconstant for relevant areas.
30| G
lobal R
isks 2009
#E
nvironmental R
isksLikelihood
SeverityU
S$
SeverityN
o. ofD
eaths
24N
atural catastrophe: earthquake
The threat of earthquakes remains the sam
e as they are driven bygeophysics. Im
proved building standards and response mechanism
sare slightly reducing their im
pact.
25N
atural catastrophe: inland flooding
This risk rose over previous years, primarily due to flood plain
development and an expected increase in clim
ate change-relatedw
eather events but remains constant from
2008 to 2009.
26N
atural catastrophe: coastal flooding
This risk was included in the assessm
ent for the first time for 2009.
27A
ir pollution
This risk was included in the assessm
ent for the first time for 2009.
28B
iodiversity loss
This risk was included in the assessm
ent for the first time for 2009.
#S
ocietal Risks
LikelihoodS
everityU
S$
SeverityN
o. ofD
eaths
29P
andemic
Work continues on aw
areness and coordination among different
agencies but the risk is constant, as is uncertainty about the natureof a potential outbreak.
30Infectious disease
Though infection rates for some diseases are stabilizing in som
eregions, e.g. H
IV/A
IDS
in sub-Saharan A
frica, overall the risk remains
constant and severe in terms of loss of life.
31C
hronic disease
The incidence of chronic disease is rising across both the developedand developing w
orld. Medical advances and aw
areness can reducethe risk severity but chronic disease is still the m
ain cause of deathw
orldwide.
31|G
lobalR
isks2009
##SS
ociocietal
etalRisk
Riskss
LLikelihoodikelihood
SSevereverityityU
S$
US
$SS
everityeverityNN
o.o.ofof
Deaths
Deaths
32Liability
regimes
Experts
sawthe
riskofU
S-style
liabilityregim
esspreading
toother
countriesas
increasing.
33M
igration
Thisrisk
was
includedin
theassessm
entfor
thefirst
time
for2009.
##TTechnechnolological
ogicalRRisksisks
LikelihoodLikelihood
Sever
SeverityityU
S$
US
$SS
everityeverityNN
o.o.ofof
Deaths
Deaths
34C
riticalInformation
Infrastructure(C
II)breakdown
Abalance
between
vulnerabilitydue
toincreased
interconnectivityand
systemdependency
andim
provedsecurity
mean
thatexperts
judgedthis
riskas
stable.
35E
mergence
ofnanotechnologyrisks
As
thestudy
anduse
ofnanotechnologyand
materials
progresses,uncertainty
remains
aboutthe
potentialrisksinvolved.
36D
atafraud/loss
Thisrisk
was
includedin
theassessm
entfor
thefirst
time
for2009.
Appendix
2:G
lobalRisks
Report:
Process
andD
efinition
32|G
lobalR
isks2009
The
Risks
Interconnectio
nsM
ap(R
IM)
andp
erceptio
nsurvey
Aprim
aryobjective
oftheG
lobalRisk
Netw
orkis
toincrease
awareness
andunderstanding
oftheinterlinkages
among
risksand
thecom
plexitythis
implies
fordecisions
aboutrisk
managem
entand
mitigation.The
dataused
tobuild
theR
iskInterconnections
Map
(RIM
)(see
Figure2)is
drawn
fromtw
osources.The
connectionsand
strengthsare
developedusing
datafrom
theG
lobalRisks
Perception
Survey.This
Web-based
surveyw
ascom
pletedby
over120
riskexperts
andm
embers
oftheForum
’sG
lobalAgenda
Councils.The
nodeson
theR
IMrepresent
thesam
eassessm
entdata
for“severity”
asthe
barometer.The
thicknessofthe
linesconnecting
therisks
representthe
strengthofthe
relationshipbetw
eenthem
.Where
thefirst
partofa
lineem
anatingfrom
onerisk
isthicker
itindicates
thatrisk
asthe
dominant
one.
Ano
teo
nthe
regio
nalriskm
aps
pro
duced
by
Zurich
FinancialServices
Theanalysis
isbased
ona
methodology
anddata
setdeveloped
byZurich
FinancialServices.The
methodology
isbroadly
comparable
tostatisticalcluster
analysisthat
partitionsa
dataset
intosubsets
(orclusters)w
iththe
propertythat
thedata
ineach
subset(cluster)share
comm
oncharacteristics
–in
thiscase
thecharacteristics
arerisks.C
ountriesw
ithsim
ilarrisks
areclose
neighbourson
therisk
map;they
formclusters.In
contrast,countriesthat
aredissim
ilarw
ithrespect
totheir
risksare
displayedcom
parativelyfar
apartfrom
eachother;they
arenot
partofa
cluster.
Thedata
setcovers
160countries;the
24globalrisks
aregrouped
infive
riskclasses:econom
ic,environmental,
health,geopoliticalandtechnologicalrisks.H
arddata
isdraw
nfrom
establishedpublic
sourcesand
incorporatedinto
them
odelusingparam
etersfor
highto
lowrisk
developedby
ZurichFinancialS
ervices.Thedata
usedto
determine
theinterconnections
among
therisks
isdraw
nfrom
thequalitative
assessment
dataon
thoseinterconnections
establishedfor
GlobalR
isks2008.
The
criteriaused
tod
efineg
lob
alrisks
Thecriteria
forglobalrisks
havebeen
setas
follows:
Glo
balS
cop
e:Tobe
consideredglobal,a
riskshould
havethe
potentialtoaffect
(includingboth
primary
andsecondary
impact)at
leastthree
world
regionson
atleast
two
differentcontinents.W
hilethese
risksm
ayhave
regionaloreven
localorigin,theirim
pactcan
potentiallybe
feltglobally.
Cro
ss-Industry
Relevance:The
riskhas
toaffect
threeor
more
industries(including
bothprim
aryand
secondaryim
pact).
Uncertainty:There
isuncertainty
abouthow
therisk
manifests
itselfwithin
10years
combined
with
uncertaintyabout
them
agnitudeofits
impact
(assessedin
terms
oflikelihood
andseverity).
Eco
nom
icIm
pact:The
riskhas
thepotentialto
causeeconom
icdam
ageofaround
US
$10
billion.
Pub
licIm
pact:The
riskhas
thepotentialto
causem
ajorhum
ansuffering
andto
triggerconsiderable
publicpressure
andglobalpolicy
responses.
Multistakeho
lder
Ap
pro
ach:The
complexity
oftherisk
bothin
terms
ofitseffects
andits
driversas
wellas
itsinterlinkages
with
otherrisks
requirea
multistakeholder
approachfor
itsm
itigation.
The
Glo
balR
iskN
etwo
rkTo
refineits
understandingofrisk,the
GlobalR
iskN
etwork
conducteda
seriesofw
orkshops,interviews
andm
eetingsthroughout
2008and
expandedits
work
bothglobally
andon
aregionalbasis.This
includedthe
publicationofthree
regionalreports,A
frica@R
isk,Europe@
Risk
andIndia@
Risk,as
wellas
atopicalreport
onem
ergingm
arketsand
high-growth
companies,G
lobal
Grow
th@R
isk.
Overall,the
GlobalR
iskN
etwork
identifiedthis
yeara
totalof36specific
risksto
theinternationalcom
munity
overthe
next10
years,usingan
updatedtaxonom
y(com
paredw
ith31
risksfeatured
inthe
2008taxonom
y).R
isksthat
were
previouslyaggregated
forvarious
purposeshave
beendisaggregated
throughoutthis
reportfor
consistencyand
improved
comparability
yearon
year.A
number
ofriskson
theprevious
year’slist
havebeen
removed
orrephrased
becausethey
failedto
meet
thecriteria
oftherevised
methodology,w
hilethe
2009list
alsofeatures
eightnew
additions.
Contributors
andA
cknowledgem
ents
33|G
lobalR
isks2009
Thisreport
was
preparedby
theG
lobalRisk
Netw
orkofthe
World
Econom
icForum
inconjunction
with
itspartners.
Glo
balR
iskN
etwo
rk
IreneC
asanova,Associate
Director,G
lobalRisk
Netw
orkV
iktoriaIvarsson,P
rojectM
anager,GlobalR
isksR
eportS
téphaneO
ertel,Associate
Director,G
lobalRisk
Netw
orkFiona
Paua,S
eniorD
irector,Head
ofGlobalA
gendaC
ounciland
Strategic
InsightTeam
sP
earlSam
andari,TeamC
oordinator,Strategic
InsightTeam
sS
heanaTam
bourgi,Director,H
eadofthe
GlobalR
iskN
etwork;E
ditor,G
lobalRisks
2009
Glo
balR
isksR
epo
rtP
artners
Citigroup,
US
AJohn
Ingraham,M
anagingD
irector,Head
ofRisk
Aggregation,C
itigroup
Marsh
&M
cLennanC
ompanies
(MM
C)
Sara
Dixter,M
anager,Oliver
Wym
an(M
MC
),United
Kingdom
JohnD
rzik,President
andC
hiefExecutive
Officer,O
liverW
yman
Group,M
MC
,US
AD
avidFrediani,S
eniorV
ice-President,Internationaland
Client
Developm
ent,MM
C,U
SA
JohnJ.M
erkovsky,Managing
Director,M
arshR
iskC
onsulting,MM
C,U
SA
Roland
Rechtsteiner,P
artner,Oliver
Wym
an(M
MC
),S
witzerland
Alex
Wittenberg,P
artner,Oliver
Wym
an(M
MC
),US
A
Sw
issR
eA
nwarulH
asan,Vice-P
resident,Risk
Managem
ent,Sw
issR
e,Sw
itzerlandK
urtK
arl,Senior
Vice-P
resident,Head
ofEconom
icR
esearch&
Consulting,S
wiss
Re
Am
ericanH
oldingC
orp.,U
SA
RajS
ingh,ChiefR
iskO
fficer,Mem
berofthe
Executive
Board,S
wiss
Re,S
witzerland
TeriTaylor,Director,H
eadofE
merging
Risk
Managem
ent,S
wiss
Re,S
witzerland
LisaW
yssbrod,Director,S
eniorIssue
andP
artnershipM
anager,Sw
issR
e,Sw
itzerland
TheW
hartonS
chool,U
niversityofP
ennsylvania,U
SA
Witold
J.Henisz,A
ssociateP
rofessorofM
anagement
How
ardK
unreuther,Cecilia
YenK
ooP
rofessor;Co-D
irector,R
iskM
anagement
andD
ecisionP
rocessesC
enterE
rwann
Michel-K
erjan,Managing
Director,C
enterfor
Risk
Managem
entand
Decision
Processes,W
hartonS
chool,U
niversityofP
ennsylvania
ZurichFinancialS
ervices,S
witzerland
Roland
Cochard,R
esearchA
ssistant,Risk
Assessm
entR
oom
DanielM
.Hofm
ann,Group
ChiefE
conomist
Kerry
Karageorgis,D
evelopment
Director,R
iskA
ssessment
Room
AxelP.Lehm
ann,ChiefR
iskO
fficer,Mem
berofthe
Group
Executive
Com
mittee
Sam
uelSchenker,R
esearchA
ssistant,Risk
Assessm
entR
oom
Exp
ertW
orksho
ps
Over
thepast
year,theG
lobalRisk
Netw
orkhas
engagedw
itha
wider
groupofexperts
inw
orkshopsand
meetings
heldin
New
York,London,Dalian,D
elhiandZurich.These
workshops,along
with
therisk
assessment
processand
meetings
inN
igeria,Kenya,S
outhA
frica,China,Turkey
andIndia,have
providedbroad
expertiseand
invaluableinsight
forthis
report.Theyare
anintegralpart
oftheG
lobalRisk
Netw
ork’sm
andateto
fosterand
supportm
ultistakeholderdialogues
toim
proveunderstanding
ofglobalrisksand
toincrease
thepossibilities
forrisk
mitigation.
We
would
liketo
thankallofthose
who
contributedfor
theirtim
eand
aboveallfor
theirinsights:
Ahm
etA
karli,Executive
Director,G
oldman
Sachs
International,United
Kingdom
Efkan
Ala,U
ndersecretaryofthe
Prim
eM
inistryofTurkey
Towfiq
M.A
l-Bastaki,A
ssistantG
eneralManager,R
iskM
anagement
&C
ompliance
Division,S
hamilB
ankof
Bahrain,B
ahrainLaura
Alfaro,A
ssociateP
rofessor,Harvard
Business
School,
US
AB
errakA
lkan,Editor,C
hairman’s
Office,D
ogusG
roup,TurkeyR
ossA
nderson,Professor
ofSecurity
Engineering,U
niversityofC
ambridge,U
nitedK
ingdomY
ilmaz
Argüden,C
hairman,A
RG
EC
onsulting,TurkeyA
ttilaA
skar,President,K
oçU
niversity,TurkeyC
urtisB
aron,Director,B
usinessC
ontinuity,Europe,
Information
Technology,Credit
Suisse
Securities
(Europe)Ltd,
United
Kingdom
Guy
Battle,O
riginatorand
Founder,Dcarbon8,U
nitedK
ingdomE
stherB
aur,Director,H
eadIssue
Managem
ent,Sw
issR
e,S
witzerland
Erik
Berglöf,C
hiefEconom
ist,European
Bank
forR
econstructionand
Developm
ent(E
BR
D),London
Kip
Berkley-H
erring,Group
Risk
Manager,B
TP
lc,United
Kingdom
Sim
onB
iggs,Director,Institute
ofGerontology,K
ing’sC
ollegeLondon,U
nitedK
ingdomJaim
ede
Bourbon
Parm
e,Head,C
risisR
esponseO
perations,Ministry
ofForeignA
ffairs,Netherlands
Philippe
Brahin,D
irector,Head
ofGroup
Regulatory
Affairs,
Sw
issR
e,Sw
itzerlandIan
Brem
mer,P
resident,Eurasia
Group,U
SA