IMPROVING THE STATE OF THE WORLD Global Risks 2010Global Risks 2010 | 3 Preface 4 Executive Summary 5 1. The Global Risks Landscape 2010 7 2. Fiscal Crises and Unemployment 14 3. Underinvestment

World Economic ForumJanuary 2010

Global Risks 2010A Global Risk Network Report

COMMITTED TO

IMPROVING THE STATE

OF THE WORLD

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

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

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ISBN: 92-95044-31-2978-92-95044-31-9

REF: 201209

The information in this report, or on which this report is based, has been obtained from sources that the authors believe tobe reliable and accurate. However, it has not been independently verified and no representation or warranty, express orimplied, is made as to the accuracy or completeness of any 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 anystatement that does not directly relate to a historical fact or a current fact. These statements involve known and unknownrisks, uncertainties and other factors which are not exhaustive. The companies contributing to this report operate in a continually changing environment and new risks emerge continually. Readers are cautioned not to place undue reliance onthese statements. The companies contributing to this report undertake no obligation to publicly revise or update any statements, whether as a result of new information, future events or otherwise and they shall in no event be liable for anyloss or damage arising in connection with the use of the information in this report.

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Global_Risks_couv_Mise en page 1 11.01.10 11:04 Page1



COMMITTED TO

IMPROVING THE STATE

OF THE WORLD





ISBN: 92-95044-31-2978-92-95044-31-9

REF: 201209





Source: World Economic Forum 2010

Likelihood (%) Severity (Billion US$) Domain

Economics Geopolitics Environment Society Technology

1 5 10 20 10 50 250 1000

IraqIraq

Afghanistan instabilityAfghanistan instability

Slowing Chinese economy (<6%)Slowing Chinese economy (<6%)

Major fall in the US$Major fall in the US$

Asset price collapseAsset price collapse

Retrenchment from globalization (emerging)Retrenchment from globalization (emerging)

Retrenchment from globalization (developed)Retrenchment from globalization (developed)

Burden of regulationBurden of regulation

Food price volatilityFood price volatility

Droughts and desertification Droughts and desertification

Water scarcityWater scarcity

Biodiversity lossBiodiversity loss

Extreme weatherExtreme weather

Infectious diseaseInfectious disease

PandemicsPandemics

MigrationMigration

Underinvestment in infrastructureUnderinvestment in infrastructure

NatCat: EarthquakeNatCat: Earthquake

Chronic diseaseChronic disease

Air pollutionAir pollution

Nanoparticle toxicityNanoparticle toxicity

CII breakdownCII breakdown

Data fraud / lossData fraud / loss

Liability regimesLiability regimes

Global governance gapsGlobal governance gaps

Fiscal crisesFiscal crises

Transnational crime and corruptionTransnational crime and corruption

North KoreaNorth Korea

Oil price spikesOil price spikes

International terrorismInternational terrorism

Nuclear proliferationNuclear proliferation

Israel – PalestineIsrael – Palestine

IranIran

NatCat: Coastal floodingNatCat: Coastal flooding

NatCat: Inland floodingNatCat: Inland flooding

NatCat: CycloneNatCat: Cyclone

Iraq

Afghanistan instability

Slowing Chinese economy (<6%)

Major fall in the US$

Asset price collapse

Retrenchment from globalization (emerging)

Retrenchment from globalization (developed)

Burden of regulation

Food price volatility

Droughts and desertification

Water scarcity

Biodiversity loss

Extreme weather

Infectious disease

Pandemics

Migration

Underinvestment in infrastructure

NatCat: Earthquake

Chronic disease

Air pollution

Nanoparticle toxicity

CII breakdown

Data fraud / loss

Liability regimes

Global governance gaps

Fiscal crises

Transnational crime and corruption

North Korea

Oil price spikes

International terrorism

Nuclear proliferation

Israel – Palestine

Iran

NatCat: Coastal flooding

NatCat: Inland flooding

NatCat: Cyclone

Risks Interconnection Map (RIM) 2010Figure 14

Lines: line thickness denotes the strength of interconnectionsProximity: the closer risks are to one another, the more highly interconnected they are

Michael P. O’Donnell, Editor-in-Chief American Journalof Health Promotion, USAVikram Patel, Professor of International Mental Health,Sangath, IndiaScott Ratzan, Vice-President, Global Health,Government Affairs and Policy, Johnson & Johnson,USA K. Srinath Reddy, President, Public Health Foundationof India (PHFI), India

Expert Consultation at the ECOSOC High-LevelSegment of the 2009 Annual Ministerial Review,Geneva, July 2009Fiona Adshead, Director Chronic DiseasesProgrammes, World Health Organization (WHO),SwitzerlandDouglas Bettcher, Director, Tobacco Free Initiative,World Health Organization (WHO), SwitzerlandFrancesco Branca, Director Nutrition for Health andDevelopment, World Health Organization (WHO),SwitzerlandJames Hospedales, Coordinator Chronic diseases,Pan American Health Organization (PAHO),Washington DC, USAJanet Voute, Partnership Advisor, World HealthOrganization (WHO), Switzerland

Global Agenda Council on Chronic Diseases &Malnutrition, 2008-2009John Clymer, President, Partnership For Prevention,USA Sharon Fonn, Head, School of Public Health,University of the Witwatersrand, South Africa Stig K. Pramming, Managing Director, Oxford HealthAlliance, United Kingdom Pekka Puska, Director-General, National Institute forHealth and Welfare (THL), FinlandRicardo Uauy, President, International Union ofNutritional Sciences, Chile Derek Yach, Vice-President, Global Health Policy,PepsiCo, USA

Biodiversity and Global RisksWe would like to express particular thanks to the fol-lowing for their valuable input and support:

Pavan Sukhdev, Study Leader, TEEB and ProjectLeader, Green Economy, United Nations EnvironmentProgramme - World Conservation Monitoring Centre(UNEP-WCMC), United KingdomJoshua Bishop, Chief Economist, International Unionfor Conservation of Nature (IUCN), Switzerland(Member GAC on Ecosystems & Biodiversity Loss)Georgina Langdale, Communications, TEEB CentralOffice, GermanyJason Shellaby, Research Analyst, Global AgendaCouncils Team, World Economic Forum

For their collaboration and thought leadership on therelated report: Global Risks Briefing: Biodiversity,January 2010, we would like to acknowledge:Will Evison, Senior Associate, Sustainability andClimate Change; PricewaterhouseCoopers, UnitedKingdomChris Knight, Assistant Director, Sustainability andClimate Change, PricewaterhouseCoopers, UnitedKingdomSophie Lambin, Director of Global ThoughtLeadership, PricewaterhouseCoopers, UnitedKingdom

Figure 1: Global Risks Landscape 2010: Likelihood with Severity by Economic Loss

Likelihood

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

2-10

bill

ion

10-5

0 b

illio

n50

-250

bill

ion

250

bill

ion-

1 tr

illio

nm

ore

than

1 t

rillio

n

Sev

erity

(in

US

$)

34

36

35

2930

31

32

33

2021

22

23

24

2526

27 28 12

1314 1516

17

18

19

11

1

3

4

5

8 9

10

2 67



Global Risks 2010 | 3

Preface 4

Executive Summary 5

1. The Global Risks Landscape 2010 7

2. Fiscal Crises and Unemployment 14

3. Underinvestment in Infrastructure 18

4. Chronic Diseases 24

5. Risks to Keep on the Radar 27– Transnational crime and corruption 27– Biodiversity loss 29– Critical information systems and cyber-vulnerability 31

6. Managing Global Risks: Understanding Systemic Vulnerabilities 33– Developing a holistic approach to risk management at the country level 33– How corporations can apply the findings of Global Risks 2010 34

Conclusion 36

Appendix 1: Processes and Definitions 37

Appendix 2: Global Risks Barometer 2010 38

Contributors and Acknowledgements 46

Contents

Global_Risks_Report_2010_6Jan_Global_Risks_2010 12.01.10 13:06 Page3

Preface

4 | Global Risks 2010

Forty years ago, the inaugural Meeting of what wouldlater become the World Economic Forum AnnualMeeting was held in Davos. At this historic milestonein the life of the organization comes the fifth edition ofthe Forum’s Global Risks Report, Global Risks 2010.Throughout its previous editions, this report hasoutlined some of the top issues most likely to come tothe fore of the global risks landscape and stressed theneed for a multistakeholder approach to addressthem. Global risks do not manifest themselves inisolation, neither geographically nor in time. Thisfundamental premise of the Forum’s work on risks hasbecome particularly pertinent since the onset of thefinancial crisis. As Global Risks 2010 highlights, we arein a world with unprecedented levels ofinterconnectedness between all areas of risk.

At this critical juncture, the need to redressimbalances, change incentives and improve globalunderstanding and cooperation remains the toppriority if future challenges are to be met with the rightsolutions and sufficient levels of preparedness. Globalgovernance gaps already featured prominently inGlobal Risks 2009 and 2010 will be no different; theyare part of a series of issues highlighted in this report,which due to their endemic and systemic nature canonly be addressed by a fundamental overhaul ofcurrent values and behaviours. The effects of theserisks will not only be felt over the coming year but willalso influence decision-making well into the newdecade. Inherent to these problems is the fact thatthey concern stakeholders from all spheres andregions across the world – the multistakeholderaspect of global risks, which renders it more difficult tomanage them.

Through its analysis of the interconnectednessbetween risks, Global Risks 2010 again emphasizesthe need for more effective global governancestructures to unlock the resolution of many of theissues highlighted in this report. However, to succeed,these structures will need to be supported by leaderswilling to reconcile often diverging agenda and able toaddress the long-term structural issues at hand aswell as the immediate problems. They will also need toconsider the direct and indirect social implications oftheir policies. Legitimacy, accountability, clarity,concerted action: these are the keywords of efficientglobal risk management and effective globalgovernance. The World Economic Forum has longpromoted thinking about how these goals can beachieved, through reports such as this, and itsactivities and initiatives.

This fifth edition, Global Risks 2010, has been madepossible through the valuable insights of experts fromthe Forum’s Global Risk Network and Global AgendaCouncils, together with the continued support of ourpartners: Citi, Marsh & McLennan Companies (MMC),Swiss Re, The Wharton School Risk Center andZurich Financial Services. By consulting this group ofexperts and academics across the world throughoutthe year and relaying their findings in this annualreport, Global Risks 2010 seeks to provide politicaland business leaders with a framework for furtherdiscussion of a risk landscape that is ever morecomplex and urges a consideration of the longer term,global implications of risks in areas beyond theirimmediate focus. These risks must be addressedcollectively so opportunities can be found in theircomplexity.

Klaus SchwabFounder and Executive ChairmanWorld Economic Forum


Executive Summary


After the shock to the global financial system andworld economy in 2008, 2009 was a year of appraisaland adjustment. The risk landscape that this report hasexplored over the past five editions has in fact changedremarkably little. What has changed dramatically is thelevel of recognition that global risks, like the world, arenow tightly interconnected and shocks andvulnerabilities are truly global, even if impact andresponse can still differ at the “local” level. Thisrecognition is illustrated by the increased number ofinterlinkages on the 2010 Risks Interconnection Map(RIM)1.

Cross-cutting themesThree themes provide the backdrop for discussion inthis report. As the first chapter discusses, the increasein interconnections among risks means a higher levelof systemic risk than ever before. Thus, there is agreater need for an integrated and more systemicapproach to risk management and response by thepublic and private sectors alike. Second, while suddenshocks can have a huge impact, be they seriousgeopolitical incidents, terrorist attacks or naturalcatastrophes, the biggest risks facing the world todaymay be from slow failures or creeping risks.Because these failures and risks emerge over a longperiod of time, their potentially enormous impact andlong-term implications can be vastly underestimated.These are risks linked to big shifts that are recognizedand which will roll out over many years, even decades.For example, global population growth, ageing and theensuing rise in consumption have implications forresources, climate change, health and fiscal policy. Theemergence of multiple poles of economic andgeopolitical influence is another shift. At the same timetwo nations, China and the US, will probably play adetermining role through their choice of saving andinvestment paths. Finally, the third theme picks up thediscussion of global governance gaps from lastyear’s report. In light of ongoing short-term pressureson governments, business and individuals, can thenecessary reform of global governance be achievedacross the range of issues where it is required?Improved coordination on macro-prudentialsupervision, effective climate and energy policies, andnew mechanisms to protect resources and security areall key to reducing vulnerability and risk. The next yearswill test the political will, vision and willingness ofgovernments, business and individuals alike to maketough choices and manage the challenges ahead.

Risks in focusThis year’s report explores a set of risks that share apotential for wider systemic impact and are stronglylinked to a number of significant, long-term trends.First, there are those which feature highly on the GlobalRisks Landscape and which predated the recessionbut have been exacerbated by its impact throughgreater resources constraints or short-term thinking.These include: • Fiscal crises and the social and politicalimplications of high unemployment

• Underinvestment in infrastructure, both new andexisting, and its consequences for growth, resourcescarcity and climate change adaptation

• Chronic diseases and their impact on bothadvanced economies and developing countries

The report also notes how concerns over further assetbubbles remain strong, as indicated by the Global RiskNetwork Partner’s assessment for the Global RisksLandscape.

The other risks discussed in this report are equallysystemic in nature and also require better globalgovernance but they currently feature less prominentlyon the Global Risks Landscape. The report raisesthese risks to understand if there is an “awarenessgap” around these areas and suggests that theyshould not be forgotten in the focus on an integratedand longer term view of risks. These risks include:transnational crime and corruption; biodiversityloss; and cyber-vulnerability.

None of these risks feature in the upper right-handquadrant of the Global Risks Landscape, but they areall connected to a range of other risks more likely tooccur and with greater severity over the next 10 years.Thus, their impact will be truly global and cross-industry, and will affect individuals as they willbusinesses or governments.

The 2010 Global Risks Landscape is as crowded asever. This report does not aim to cover all of the riskstracked by the Forum’s Global Risk Network. Thelandscape offers a view of where each risk lies relativeto others. Indeed, the core set of risks behind thereport are not exhaustive: it has evolved and willcontinue to be refined and adjusted as new issuesemerge on the 10-year horizon. Some risks are notaddressed in this edition, not because they are lessimportant but because of the constraints of length andthe need for focus. In particular, though cognizant of

1 An interactive version of the Risks Interconnection Map (RIM) is available at www.weforum.org/globalrisks



their weight, the discussion in this year’s report onlytouches on a few of the many geopolitical risks on thelandscape. Afghanistan featured highly in discussionsthroughout the year, with concerns that the level ofinstability in the country poses a threat for its ownpopulation and the troubling events that are unfoldingin neighbouring Pakistan. As discussed in last year’sreport, though many of the geopolitical risks identifiedby the Global Risk Network may appear intractableand limited in their geographic reach, in reality eachhas an impact in terms of human suffering and theburden on development and growth. Each of thesecan be a source of wider regional instability or evenbroader conflict.

Decision-making in an interconnected worldThe objective of the work of the Global Risk Networkis to raise awareness of the level of interconnectionsamong risks and the global impact of thoseinterconnections. The report offers a framework fordecision-makers to look at risks in an integratedmanner and to provide an impetus to differentstakeholders to focus on ways to manage systemicrisks more effectively. The events of the past two yearshave shown how costly slow failures can be whenthey erupt in systems. The lessons learned werenumerous but must be remembered and acted on inother areas, not only in the sphere of finance andeconomics. Much discussion has rightly centred onbehaviour change and governance, but both arehighly dependent on political and individual will andthe choices acted on by decision-makers. Forbehaviour to evolve, a concerted effort is needed toprovide the right mix of information, incentives andinstitutions; to stretch people’s time horizons andmake them understand exactly what is at risk. All ofthis requires a longer term approach than usuallydictated by electoral cycles or indeed financialreporting and executive tenure. The Forum is drivingsome of the thinking on how to work towards long-term solutions, while managing the immediatechallenges. Its Global Redesign Initiative has this goalat its core: it leverages the Forum’s convening powerto focus the minds of all stakeholders on new modelsof governance to manage complexity and risks toglobal growth and well-being. Equally, by taking the10-year perspective and exploring interconnections,experts who contribute to the work of the Global RiskNetwork focus on the context in which strategies andpolicies are formed and the decisions taken toanticipate and manage, rather than merely reacting torisks.


1. The Global Risks Landscape 2010


The rationale behind the 2010 highlighted risksThe choice of risks to focus on in the annual report isdriven by several factors. The more highly interlinkedthe risk, the more its impact and severity is amplified,so its level of interconnectedness on the RisksInterconnection Map (RIM) and its position on theGlobal Risks Landscape are important. Hence, usingthese criteria and the input from roundtables with theGlobal Risk Network throughout the year, the followingrisks were selected as the focus of discussion in thisreport: Fiscal Crises, Underinvestment inInfrastructure and Chronic Diseases.

These risks are covered through the lens of thethemes that emerged from these different sources insociety and the global economy over the next 10years: systemic and creeping risks; global shifts; andthe tension between the need for effective globalgovernance and collective commitment to riskmanagement and adaptation, with the often pressingand divergent priorities on regional, national andcorporate agenda.

Fiscal crisesIn response to the financial crisis, many countries areat risk of overextending unsustainable levels of debt,which, in turn, will exert strong upwards pressures onreal interest rates. In the final instance, unsustainabledebt levels could lead to full-fledged sovereign debtcrises.

Underinvestment in infrastructureMultiple studies across the world repeatedlyhighlighted that vast segments of our water, energy ortransport infrastructure are structurally deficient orfunctionally obsolete, requiring considerable annualinvestments to avoid catastrophic failure.

Chronic diseasesAs a consequence of profound socio-demographicaltransitions among large sections of the worldpopulation, changing physical and dietary habits,chronic diseases including cancer, diabetes, cardio-vascular and chronic respiratory disease arecontinuing to spread rapidly throughout the developedand developing world, driving up health costs whilereducing productivity and economic growth.

A note on three other key risksWhile not explored in depth in this edition, “assetprice collapse”, “China’s growth falling to lessthan 6%” and “Afghanistan” featured highly on the

Global Risks Landscape. All are referred to in thefollowing chapters and indeed Global Risks 2008discussed asset price collapse and its implications forsystemic financial risk. The role of China is referred tothrough several sections of this report and will remainto the fore of the Global Risk Network’s dialogue overthe coming year and beyond.

Asset price collapseThe last edition of this report discussed the longerterm implications of the financial crisis, exploring thetight interconnections among economic and resource-related risks. The fact that the risk of an asset pricecollapse remains the strongest risk on the landscapeon the severity and likelihood axes illustrates thecontinuing uncertainty about the resilience of theglobal economy and the effectiveness of fiscal andmonetary responses, governance and regulation.Concerns abound about the decline in the dollar andlow interest rates fuelling another bubble, this timeliquidity rather than debt-driven. Experts are alsoworried about a lag in the impact of the recession in anumber of areas. The level of corporate bankruptcies,particularly among small and medium size enterprisesremains high. Credit card default rates, which arehighly correlated with unemployment, are already athistoric levels. The current unemployment rate of morethan 10% in the US is considerably higher than the6.5% unemployment rate that most credit cardlending models assume. Finally, though residentialhouse prices have fallen considerably in those marketsconsidered to have been the most overheated,concerns persist about commercial real estate. Asillustrated by the events in Dubai in December 2009,debt loads remain high; as refinancing needs arise,which are only expected to peak between 2011 and2013, further shocks could emerge.

China’s growth falling to 6% or less China appears to have successfully navigated thefinancial crisis and global recession. However, much ofthe domestic impulses derive from high credit growth,which entails an increased risk of misallocation ofcapital and renewed bubbles in financial asset pricesand real estate. These can always carry the risk of asharp and potentially recessionary correction. A loss inChina’s growth momentum could adversely affectglobal capital and commodity markets. The Chinesegovernment faces a number of challenges: the needto increase domestic demand to counter the loss inexports and the need to maintain a stable renminbigiven China’s vast accumulation of foreign reserves.

These pages should be read with the front inside and back flaps open for an overview ofthe related charts



The implications of a fall in China’s growth would beparticularly acute for its trading partners if it shouldhappen before the global economy is on a moreresilient path.

AfghanistanThough geopolitical risks were not the focus of thisyear’s report, among those tracked by the Global RiskNetwork, including Iran and Israel-PalestinianTerritories, Afghanistan emerged highest on the GlobalRisks Landscape. It is also linked to nearly all theother geopolitical risks and several economic risks onthe RIM. Moreover, Afghanistan’s instability cannot bedissociated from rising concerns over the situation inPakistan. The border between the two countries hasbecome a hotspot.

The instability in the region is already a source ofsuffering for the local population. Their plight iscompounded by the stress that rapid populationgrowth and the impact of climate change are placingon resources, in particular water. Afghanistan’spopulation (currently 28 million) is expected toincrease by over 30% in less than 10 years. Pakistan’spopulation is set to reach 225 million within a decade(from 41 million at independence in 1949). The WorldBank has warned that population growth is alreadycausing water stress and could soon result in outrightscarcity. The social and economic consequences ofthis should be as much a focus for the internationalcommunity as the geopolitical implications.

The Risks Interconnection Map 2010 (RIM)

The 2010 Risks Interconnection Map (RIM) (Figure 14,inside back cover) shows the results of the 2010Global Risks Expert Perception Survey, which theWorld Economic Forum runs every year to surveyexperts in several disciplines2 all over the world ontheir perception of risk interdependencies andrelations.

Governance gapsGlobal governance gaps remain high on the GlobalRisks Landscape and are the most significant sourceof risk in terms of interconnectedness, meaning thatindependent from the expert’s background the risk ofgovernance gaps has been selected most of the timeas a top connection and highly related to other risks.This shows that experts have identified weak orinadequate institutions or agreements in almost all ofthe risks covered. However, it also raises a red flag in

terms of expectations as to which fields and concreteissues global governance bodies should take stepsand get involved. Thus, the Forum is examining wherethe biggest gaps in governance are and how thesegaps might be addressed with the tools and thinkingof the 21st century.

Global governance’s relation with geopolitical risks hasnot changed from 2009. Economic and environmentalrisks are the areas where there has been a markedincrease in the perception of interdependencies. Thissuggests that the recession and the CopenhagenClimate Conference 2009 call for collaboration havehad an impact on heightening awareness, developinginsights and understanding risk interrelations, whichhas been translated in our survey in the form of moreand stronger connections with this particular risk. Italso reinforces the message of the Global Risks 2009report of how crucial it is to focus on globalgovernance not as an end in itself but as a means toaddress many critical global risks over the comingyears.

Retrenchment from globalizationThroughout the year and across different countries,experts from the Global Risk Network have convenedto reflect on and debate the outlook for the GlobalRisks Landscape over the coming years. On severaloccasions, experts have expressed concern that it ishighly likely the next economic cycle will be politicallymore unstable once the global economy emergesfrom the current crisis. Despite a significant drop inglobal trade and investment flows, these are nowrecovering and the expected backlash to globalizationhas not materialized, trade disputes have notincreased and the rise of the G20 has been welcomedas recognition that a wider group of countries has arole to play on the global stage. However, should therecovery progress without a concomitant improvementin employment, the risk of “retrenchment fromglobalization” (in both developed and emergingcountries) could emerge more strongly. Risingprotectionism, coupled with the macroeconomicinstability and social unrest due to risingunemployment, adds pressure to the global outlook.Some elements of recent stimulus packages could beread as protectionist measures, discouraging cross-border investment flows. A sustainable recovery willrequire healthy flows of trade, investment and peopleand any moves to counter these should be watchedwith caution.

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



It is important to take into account that retrenchmentfrom globalization goes beyond protectionisteconomic policies. A political or social backlash toglobalization generating high levels of socialturbulence or destabilizing a government is alsoincorporated in this risk. A major retrenchment comingfrom areas other than economic policy, such associetal attitudes toward multilateralism, will haveequally damaging consequences on growth anddevelopment worldwide.

As global governance institutions and the remodellingof multilateralism become a channel to adjust tocurrent challenges, national interests mustcorrespond, support and adhere to global governanceorganizations and agreements. Given the

unprecedented levels of interconnectedness, globalleaders from all spheres need to find a commonplatform to debate and push forward reforms andpolicies to ensure a sustainable global economy.

Increasing interconnectedness: systemic risks,systemic responsesOne of the major conclusions from the analysis of theresults of the 2010 Global Risks Expert PerceptionSurvey which drives the RIM (Figure 14, inside backcover)3 is the marked increase in interconnectednessamong the risks covered by the Global Risk Network(see inside front cover for the risk descriptions). Riskinterdependency has always been at the core of ouranalysis but, particularly this year, it seems to havegained even more attention and generated strong


Global governance gaps interconnectionsFigure 2


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



interest among experts of different disciplines. Thisyear’s survey shows that both the number andstrength of interconnections among risks haveincreased notably. This upsurge can be interpreted asan indication of success in terms of improving theawareness, discussion and, in some cases,understanding of systemic risks.

In Global Risks 2008, systemic financial risk wasdescribed as a system-wide financial crisis typicallyaccompanied by a sharp decline in asset values andeconomic activity and an abrupt loss of liquidity.During the last 18 months, there has been asignificant amount of debate about the systemicnature of the financial crisis, its unintendedconsequences, and the appropriate strategies andpolicies which will create more resilient systems. Thecrisis unveiled fundamental questions about our abilityto manage systemic failures. Systemic risks areinherent to every system, not only the financialindustry. However, the universal scope of the financialcrisis has raised awareness of interconnections andrevealed the importance of thinking differently aboutthe risk landscape, highlighting the key premise of theForum’s Global Risks work: global risks do notmanifest themselves in isolation.

Since the Bretton Woods agreements in 1944, it is thefirst time where global leaders around the worldagreed on the urgent need to reform the globalfinancial system. However, real political will isnecessary to muster cooperation adapted to today’sreality and challenges. The response andmanagement of the current crisis must also besystemic and global and it goes beyond financialmarket interventions. The increasing relevance of theG20 reflects the greater role that many emergingmarket countries are playing and a step towardshealthier international cooperation and coordination.

The financial crisis and ensuing recession uncoveredmajor weaknesses and revealed just howinterdependent the world has become. A majorimprovement of our insights into theseinterdependencies is essential to tackle the origins ofthe crisis and to avoid repetition in the future. Effectiveregulation will part be part of the solution. Systemsneed a certain level of flexibility to adapt to changingenvironments. Global decision-makers and regulatorsneed to provide an adequate degree of freedom, whileensuring that regulation is effective in reducing risksthrough the necessary oversight and safeguards.

In the Global Risks Landscape 2010 (Figure 1, insidefront cover), economic risks continue to feature ashaving the highest estimated potential severity ofeconomic loss. This illustrates that the world economyis still in intensive care and that concerns remainabout the adequacy of its global governance andmeasures taken at the national level. The prominenceof the G20 as the group responding to the financialcrisis represents a first step towards a better andmore coordinated international policy-making process.Still, its efficacy has not been sufficient to fullygalvanize leaders into taking action to push majorreforms in global governance bodies and more effortneeds to be devoted to this.

A definition of systemic riskA systemic risk is the potential loss or damageto an entire system as contrasted with the lossto a single unit of that system. Systemic risksare exacerbated by interdependencies amongthe units often because of weak links in thesystem. These risks can be triggered bysudden events or built up over time with theimpact often being large and possiblycatastrophic.



Source: Zurich Financial Services 2010

The risks of a global governance gap and retrenchment from globalizationFigure 3

As a consequence of the financial crisis and the fallout from the global recession, the risks of a widening globalgovernance gap and retrenchment from globalization feature prominently in the global risks map. Introduced inlast year’s report, the “global governance gap” is seen as likely and severe going into 2010, as in 2009, andthere is a similar high overall assessment for the risk of a retrenchment from globalization.

Given the importance of both risks, the question remains how they affect individual countries. To do so we firsttranslated the high-level definition of global risks into individual country risk metrics. To assess the globalgovernance gap, we measured the degree in which countries participate in existing institutions of globalgovernance, such as bodies governing trade, finance, environment, anti-terrorism, health and humanitarianactivities. Likewise, to assess the risk of a retrenchment from globalization, we measured a country’s involvementmainly, but not exclusively, in global trade and capital flows. Using an approach based on game theory, weassumed that countries staying on the sideline will eventually be sanctioned by the global community.Consequently, they are more exposed to these risks.



The risk of not addressing slow moving shifts The Global Risk Network experts agreed in events andworkshops throughout the year that predicting thenext crisis is a risk in itself. However, there are large-scale, slow-moving shifts already underway for whichcurrent levels of preparedness are insufficient andwhose implications could have far-reaching and highlycostly consequences. Independently of what shapethe global recovery will take, we might have expectedthat the “quake” in the fundamentals would lead to asignificant behavioural change and systemic overhaulof norms and practices. This shift has not yetmaterialized, partially because signs of recovery camerelatively fast in some areas and behavioural changestake time. It is slow in part because humans gravitateto what they know and postpone dealing with whatthey see as future risks. The result of maintaining thestatus quo and not pursuing major changes at anindividual, business and government level is not anoption any longer.

Today’s challenges emerged in part from a lack ofunderstanding of risk interconnectedness in the past.The slow-moving shifts seen today will be harmful inthe next decade if we ignore their magnitude and thescope of their consequences. Some, such as chronicdiseases might continue at their current pace. Others,such as underinvestment in energy infrastructure or ITsecurity, might reach a tipping point and provoke asudden shock. From our taxonomy of risks, we canidentify some slow-moving shifts with a noteworthypotential effect globally. These big shifts are not new,neither in our taxonomy nor in the global debate. Butin the midst of the economic turbulence, it is ofutmost importance that they are addressed by themany policy and corporate decisions, as theirmaterialization could be a catalyst for anothersystemic crisis. The worst case scenario ofoverlapping economic recessions with politicalinstability and social turbulence, triggered byuntenable fiscal deficits and unsustainable governmentdebt burdens, might not, after all, be impossible.

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

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

In its first year, the Global Risks 2006 Report identified current and emerging risks, and looked at the linksbetween them and implications over a 10-year time horizon. Global Risks 2007 focused on the fundamentaldisconnect between risk and mitigation, emphasizing that exercises in risk assessment are futile if they do notencourage action on the part of decision-makers. In 2008, a full section was devoted to dealing with theglobalization of risk and rising interconnectedness as a series of risk issues, such as the financial crisis andconcerns over the long-term security of food supply, focused attention on the fragility of the global economy.Last year’s report warned against losing sight of longer term risks in the face of overwhelming short-termchallenges.

A retrospective of the Global Risks Report



As a reminder, the report is released in January of each year, based on analysis conducted in the third and fourthquarters of the previous year. The key risks and focus of each year’s report are summarized in Figure 4 below.

As Figure 4 highlights, though the number of risks it examines have evolved over the last five years, there areseveral issues that have remained constant. Concerns about fiscal crises have featured since the outset, as didconcerns about overinflated levels of asset prices and indebtedness. The latter shifted to a concern about assetprice collapse in January 2008, before the full impact of the financial crisis hit. Infrastructure was a focus in 2006,only to reappear in this year’s report, perhaps a sign that long-term thinking is seen as critical given the events ofthe past years. Finally, the implication of a decline in China’s growth has been a constant since the first edition ofthe report. Thus far, this risk has not materialized but it is clearly one that would have considerable implications forChina and also for the global economy.

Key risks and themes from the Global Risks reports over the past five yearsFigure 4

2006

• Assetprices/indebtedness

• Chinese growthslowing to < 6%

• Fiscal crises• Oil price

spikes/supplyshocks

• US current accountdeficit/fall in US$

• Critical

2007




spikes/supplyshocks

• US current accountdeficit/fall in US$

2008




spikes/supplyshocks

• Rising and volatilefood prices

• An abrupt, major fallin the value of theUS$

2009

• Asset price collapse• Chinese growth

slowing to < 6%• Fiscal crises• Global governance

gaps• Chronic diseases• Increase resource-

related risk (water,land and energy)

2010

• Further falls in assetprices


• Fiscal crises• Global governance

gaps• Chronic diseases• Underinvestment in

infrastructureinfrastructure


2. Fiscal Crises and Unemployment

The financial crisis triggered a broader and deepercrisis of confidence among business, investors andconsumers. Central banks intervened withunprecedented measures to ensure liquidity andprevent systemic collapse. In response to the ensuingglobal recession, governments intervened in manycountries with record stimulus packages to boostdemand. Though their intervention proved vital,governments now need to avoid becoming the maincause of the next crisis.

Government debt has reached historical levels forpeace time in a number of advanced economies.Though necessary at the time, the costs of theirinterventions, combined with the long-standing burdenof pensions and health spending, have left severalmajor economies in a historically weak fiscal positionwith mounting debt. Collectively, G20 budget deficitsnow stand at 7.9% of their combined GDP4.

With a few exceptions, the larger advancedeconomies have been the most affected by fiscalcrises. According to the IMF, by 2014, the averagedebt-to-GDP ratio of advanced economies that aremembers of the G20 is expected to climb from the2007 pre-crisis level of 78% to 118%. In sharpcontrast, emerging economies, with smallergovernments and lower exposure to the bankingcrisis, kept their fiscal houses in order. According tothe same IMF analysis, between 2007 and 2014 theaverage debt-to-GDP ratio of emerging countries thatare members of the G20 will never exceed 40%. Foronce, and in contrast to the 1980s and 1990s,emerging economies are not causal to a global fiscalcrisis.

Governments, in the US and the United Kingdom inparticular, are now faced with a set of tough choices,all with consequences for future global risks. The mostpressing is how to time a gradual and crediblewithdrawal of fiscal stimulus so that the recovery issustained but not so late that fiscal deficits causefears of sovereign debt deterioration and a flight tosafety that could drain their economies of capital andconfidence. Governments need to develop sound exitstrategies and communicate them clearly to reassureinvestors and taxpayers.

The implications for social systems: a new socialcontract for the 21st century?

The difficulties posed by the combination of weakfiscal positions and long-term pressures from currentsocial spending trajectories are considerable. Agenerational approach that also accounts for the fiscalburden facing current and future generations(accounting mainly for social security and government-supported healthcare) reveals huge fiscal gaps.According to one estimate5, the United States alonehas to reckon with a gap of US$ 66 trillion, a figuremore than five times current GDP and almost doublethe US national wealth. Similar outsized generationaldebt-to-GDP ratios are obtained for many otheradvanced economies.

Intergenerational accounting makes it clear that abusiness as usual approach to fiscal policy isunsustainable. Advanced economies in particular mustface the difficult task of reforming their social securitysystems. Many current models for health, pensions,education and unemployment protection weredesigned to meet the needs of populations in growingeconomies with comparatively short life expectancies.This has changed dramatically. Today, people livelonger, and the share of retired people that will have tobe supported by the working population in pay-as-you-go social security schemes keeps increasing,placing huge strains on the costs and efficacy ofsocial systems. Although some systems appear to bemore effective, in particular those of Scandinavia,none are designed to meet future needs and the fiscalburden they represent was already becominguntenable before the crisis. The costs of social safetynets will have to be better shared among thepopulation and the expectations of people in terms ofhealth and pensions will have to be realigned. Thismay require politicians to implement unpopulardecisions at a time when voters are suffering from thehardship of high unemployment caused by the globalrecession.


4 International Monetary Fund, The State of Public Finances Cross-Country Fiscal Monitor: November 20095 Laurence J. Kotlikoff, Is the US bankrupt? Federal Reserve Bank of St. Louis Review, July/August 2006



Unemployment: the long shadow of thedownturnUnemployment has risen dramatically over the past 18months, across all sectors. Unemployment amongOECD member countries alone has increased by 25.5million since the start of the crisis and some estimatessuggest that globally the increase could total over 50million in 2010. Jobs are not created as quickly asthey are lost and any protracted period of highunemployment will have adverse effect onconsumption. Moreover, OECD studies show that a1% increase in unemployment increases public debtby up to 3% of GDP over 10 years.

Though the rise may have been sharper in advancedeconomies, it should not be forgotten thatunemployment is a global problem and that, evenbefore the global recession, unemployment rates inNorth Africa, the Middle East and sub-Saharan Africastood at 10.3%, 9.4% and 7.9% respectively in 2008according to figures from the International LabourOrganization (ILO). Even in India, with a healthy growthrate, the official unemployment rate stood at 7.2% in2008. Population growth and the economic climatecould push the numbers of poor to above the 1.4


Fiscal crises interconnections Figure 5



billion estimated by the World Bank (WorldDevelopment Indicators 2009). Poverty isconcentrated in sub-Saharan Africa and South Asia,which are regions most prone to the effects of climatechange, natural catastrophes and global health issues.This leaves almost one-quarter of the world’spopulation in a highly vulnerable position.

A cyclical response and structural shiftThe sudden rise in jobless figures seen in developedeconomies in 2009 was in part cyclical, as a responseto the decline in demand and these jobs shouldtherefore return, albeit slowly, as demand increases.However, the crisis also hastened structural changes.Certain industries, such as the automobile sector,were already in decline in regions where labour costsmade them uncompetitive. In other industries, airlinesor pharmaceuticals for example, consolidation andnew business models mean an overall decrease in thenumbers employed. The question will be how tocompensate for these structural changes as growthreturns.

Unemployment in the Eurozone is expected to reach11% in 2010. Some countries, such as Germany,seem to have fared relatively better thus far, throughmoves to shorten working hours, rather than cuttingjobs and to maintain people in employment, if onlypart-time. Most reports suggest that unemploymentwill fall faster in the US than in Europe. The differenceis attributable to the flexibility in US labour marketsbut, even with this, the US will be affected bywidespread plant closures and continuingbankruptcies among small and medium sizeenterprises (SMEs). One risk is that this crisis leaves alegacy of underemployment, where people areconstrained to accept part-time jobs or jobs that donot require their level of skills. US Department ofLabour statistics show that there are 9 million workersin part-time employment who are seeking full-timejobs. Unemployment can become entrenched asworkers lose skills or find themselves with the wrongskills to take advantage of new jobs when they arrive.

Widespread job losses have an immediate and directeffect on economies, but also on individuals andsocieties. One factor, common to both the developedand developing world, is that unemployment has adisproportionately large impact on youth. Young

workers under 25 make up the greatest share of theunemployed in many regions and they have beenparticularly hit by the job losses and poor prospects inadvanced economies. Studies suggest that the effectsof unemployment or poor job opportunities early on inthe working life have consequences for earning powerand development over the rest of an individual’scareer.

As debate about necessary reforms continues in theUS and Europe, it should be noted that according tothe International Labour Organization (ILO) only 20%of the world has what the ILO terms “adequate” socialprotection, only 50% of the world has any coverage atall and in developing countries that figure falls to lessthan 10% of their population. While advancedcountries focus on reforming their social securitysystems, perhaps this is an opportune moment for aglobal dialogue on how to design health and pensionsystems that are sustainable and can support growthand development in all parts of the world.

Migration and unemploymentOne of the less prominent risks on the landscapeconcerns poor labour and migration policies, and alack of cooperation at a global level, which meetsneither the needs of donor or recipient countries.Though the arrival of immigrants can spark debate insome recipient countries, global migration flows areactually not that large. The International Organizationfor Migration (IOM) estimates the number of migrantsin the world at 193 million, or approximately 3% of theglobal population. In periods of high employment,migrants are often a welcome source of labour but asunemployment rises, so do pressures on politicians to“protect” jobs. As mentioned in the previous chapterof this report, there is a risk that in response to publicand sometimes populist pressures, governmentsintroduce measures to curtail immigration. However,these policies are double-edged. In the short term,they clearly affect migrants and their home economiesas remittances fall. There can also be unintendedconsequences of the policies, resulting in the rise ofillegal migration and black and grey market activity. Inthe longer term, if the measures remain in place theycan accentuate problems around skill shortages,which will no doubt re-emerge once jobs return.Migration policies need to be long term and cannotwork in isolation. Better dialogue and coordination is




needed between recipient and donor countries.Recommendations from the Forum’s Global AgendaCouncil on Economic Growth and Developmenthighlighted the importance of migration andsuggested a focus on policies such as encouragingthe return of educated diaspora as a tool fordevelopment or making the ability of countries toattract immigrants a badge of success.

The twin challenge of global imbalancesSustainable growth in the global economy isinextricably tied to sustainable fiscal balances acrossthe world. Large macroeconomic imbalances countamong the contributing causes of the current financialcrisis. A number of advanced economies were, as awhole, saving less than they were investing. Forexample, China's gross savings rate is nearly 60% ofnational income, an exceptionally high rate, particularlyin contrast with the low rate of about 12% recorded inthe US. The low national savings rate explains why theUS has become dependent on capital inflows, withforeigners financing almost one third of USinvestments in recent years. These savings gaps,which materialized in current account deficits, werefinanced to a large extent through capital inflows fromemerging economies, predominantly countries inSouth-East Asia with excess savings. In the long run,macroeconomic imbalances must be reduced. Thisrequires a difficult rebalancing during which emergingeconomies must boost domestic spending (which willreduce excess savings), while advanced economies inturn should boost savings. At the heart of thisrebalancing should be a credible path towards fiscalstability that balances the obligations of current andfuture generations.


3. Underinvestment in Infrastructure

Global Risks 2009 noted the importance of spendingdecisions as governments launched fiscal stimuluspackages to boost growth and create jobs.Infrastructure investment choices are key at any timebut they are particularly critical, if the dual challenge ofpopulation growth and climate change is to be met, infive areas: agriculture, energy, water, transportationand climate change adaptation.

The Global Risks Expert Perception Survey 2010 datashows underinvestment in infrastructure as one of themost highly interconnected risks on the RIM (seeFigure 14, inside back flap). The strongest links are to

fiscal crises, oil prices and natural catastrophes, but italso links to health issues, including infectiousdiseases as well as chronic diseases, and to foodprice volatility. The World Bank has put globalinfrastructure investment needs at US$ 35 trillion overthe next 20 years. In the US alone, the AmericanSociety of Civil Engineers rated US criticalinfrastructure as a “D” (where “A” is the highest grade)in 2009 and estimated that US$ 2.2 trillion wasnecessary over the next five years. The US spendsapproximately 2.4% of GDP per annum oninfrastructure, compared with approximately 15% ofGDP on health. Underinvestment infrastructure is not



Underinvestment in infrastructure and interconnected risksFigure 6




just a risk to existing structures in the developedworld, if it is not addressed it is also a barrier togrowth and development in the developing world aswell.

New and existing infrastructure is critical toresilienceThe last decade has seen the rise of the public-privatepartnership model for large infrastructure projects,many of which are needed in countries where thepolitical and governance environment are far fromideal or even stable. Traditionally, the state is seen asthe driver of major infrastructure projects, such asroad, rail, energy and water grids. The initialinvestment is made by governments, with privateenterprise running the delivery and service aspectsthrough licensing or other long-term agreements.However, as discussed earlier in this report, manygovernments must manage the critical maintenanceand renewal of existing infrastructure, as well as new,large-scale projects in energy, transportation andurbanization, in the face of widening fiscal deficits andgrowing debt.

For other countries, including many emerging markets,the barriers may not be weak fiscal positions butrather concerns about political stability andgovernance structures to protect investments. Manycountries richly endowed with natural resources, suchas energy, metals, or agricultural crops, have becometargeted by other countries for inward infrastructureinvestments in return for access to resources. Theproblem is that these infrastructure investments canbe blinkered and “resource-centric”, and might notserve the country as a whole. But this problem mustrest largely with the producer nation’s government,which is ultimately responsible for creating linkages toa wider plan for development. Examples of a narrowerview of infrastructure development can be found fromSouth America to Africa, where villages withoutrunning water and electricity sit next to busy highwaysferrying goods to and from state-of-the-art portfacilities. The risk of local unrest is high, but thegreater risk is the depleted potential for long-termdevelopment and greater economic well-being for thewider population.

To address infrastructure needs with a vision for asustainable, resource efficient approach to projects isone of the challenges of both emerging market anddeveloped world countries. Given the financial,political, environmental and even societal risksinvolved in infrastructure projects, there is a need toestablish best practices, to share know-how andenabling technologies, and to find innovative ways tofinance development while managing risks.

International finance and development institutionshave long been working on multistakeholderapproaches, but these efforts will have to be steppedup. One area under discussion as part of theproposals coming from the Forum’s Global AgendaCouncils is that new models might be found toencourage large institutional investors, who have alonger term investment horizon, such as pensionfunds or sovereign wealth funds, to invest ininfrastructure projects. As an area linked to so manyrisks and one that can ultimately amplify or dampenthe impact of a range of other global risks, the timehas come to step up the dialogue and thinking toachieve the necessary level of infrastructureinvestment in an economically and environmentallysustainable manner.

Agriculture: the infrastructure necessary for foodsecurity and sustainable growthDespite an increasingly urban global population, 75%of the world’s poor continue to live in rural areas. Asthis report discussed in 2007, food security is drivenby a number of factors but all are highly interlinkedand infrastructure is at the nexus of many of thesefactors. A still growing global population that is movingto a more protein intensive diet engenders not onlygreater overall demand for food but also greaterdemand for the water and energy needed to produceand transport that food. Few countries have themechanisms in place to manage their future needs interms of infrastructure and health planning based onavailable water for the population. For example, a2009 report on water by the Forum6, estimated thatby 2030 there will be a 40% shortfall between theamount of water India requires to meet its own energyand food production needs and the water available todo so.

If agricultural productivity is to have any chance ofincreasing to meet the demands of 9 billion people by2050, a second Green Revolution will have to happen.Indeed, in Africa the first green revolution is still to takeplace. But there are also huge gains to be made frominvestment in better storage and transportationsystems, thus minimizing waste and maximizing theamount of food reaching consumers. The impact ofinvestment in these facilities could make a significantcontribution to reducing some of the volatility in foodprices. In addition to storage and transport, two otherareas of infrastructure related to agriculture are key:water and energy. Agriculture accounts for 70% of thedraws on water and as the effects of climate changemean that many areas become drier or more prone toextreme weather, improved water efficiency becomesvital. Improving water capture and irrigation would bean investment not only in productivity but in

6 “The Bubble Is Close to Bursting”, World Economic Forum 2009

www.weforum.org/en/initiatives/water/


sustainable resource management. Investment inenergy infrastructure is also a priority in rural areas indeveloping countries and must be part of a broaderenergy strategy. Farmers can be doubly hit by rising orvolatile energy prices through input and transportationcosts, but energy prices also link to the input side,with gas prices in particular affecting nitrate-basedfertilizers.

Infrastructure investment alone will not be sufficient,but it will be a necessary accompaniment toinvestment in other areas and to improved marketstructures at the national and international level.Challenges in this area are manifold. Some of themost productive land in the world is in areas of highinstability and where major infrastructure projectsrequire governments, international institutions and aidagencies to be innovative in the way risk is shared ifthey are to attract the substantial private investmentnecessary. Farms in much of the world are small,insufficiently productive and very labour intensive. Aspopulations become more urban, there is a risk thatlabour and know-how are lost. As discussed in GlobalRisks 2009, and mentioned earlier in this chapter,there is a risk of “land grabbing”, as nations try tosecure their food supply by investing directly intoagricultural land in other countries.

The infrastructure necessary to support sustainableagricultural production will not just pay off in terms ofproviding food to the more than 1 billion people whowent hungry in 2009, but it will also help drivedevelopment in rural areas. The UN Food andAgriculture Organization (FAO) and World FoodProgramme predict that the food crisis of 2008, whichled to riots and political turmoil in several countries,will be repeated over the coming decades. What isclear is that current levels of investment in agricultureare not enough to drive the 70% increase in foodproduction necessary to feed an expected populationof 9.1 billion by 2050. During the last period of fiscalcrises in the 1980s and 1990s, agriculture sufferedfrom reduced investment that was never restored.Poor returns, uncertainty and distorting subsidiesmade investment less profitable. In the face of risingunemployment and reduced consumer spending inthe advanced economies and a record number ofpeople suffering from hunger globally, governmentsand international institutions now need to think longterm, and create the mechanisms and environment toencourage investment in infrastructure and leveragethat investment for growth and stability.

Infrastructure and energy securityWhile the recession caused global energy use to fall in2009 for the first time since 1981, the long-term trendfor energy consumption is still upwards. The maindemand will continue to be for fossil fuels. Thedemand for oil will be primarily driven by the transportsector. Coal and gas will be the main fuels needed tomeet the growing demand for electricity, and most ofthat demand will be in China, developing Asiancountries and the Middle East.

As energy demand fell over 2009, so did energyinvestment because of the tighter credit environment.The International Energy Agency (IEA) estimates thatinvestments in oil and gas projects were cut by 19%from 2008 to 2009. Investment in renewables fell evenmore. Without government fiscal packages,investment in renewables would have fallen by 30%but even with them, they fell 20%. Underinvestment inenergy infrastructure touches on a number of keythemes of this report (see the box on energy securitypage 21). The demand for energy will rise as theglobal population grows and with it consumption.Current energy policies, based on fossil fuels, lookincreasingly untenable given what they would producein terms of CO2 and greenhouse gas concentrations.Energy security has long been used to describe theneed for a stable and guaranteed supply: in the 21stcentury it may need to be redefined as meaningstable, guaranteed and carbon neutral.

The links to the financial crisis and to fiscal crises alsohave a direct impact on underinvestment in energyinfrastructure. First, a lag in investment may mean thatas demand returns there will be a shortfall in capacitythat could lead to supply constraints in the mediumterm, thus oil price spikes and higher price volatility.Any major disruption to supply or rise in prices overthe next years could slow the recovery and set backgrowth. Second, a huge amount of energyinfrastructure investment, estimated at almost half ofthe total US$ 1.1 trillion per annum by the IEA, isneeded to meet the rapidly rising demand fromdeveloping countries. Rural areas in Africa, India andother parts of Asia are in particular need of reliableenergy production and supply to support theirdevelopment.Third, aside from the enormous and pressing need forpublic and private finance for energy infrastructure, theover-arching need is for this money to be spentstrategically. The stimulus packages proposed byseveral governments targeted investment intorenewable energy to reduce long-term dependency onfossil fuels but equally to reduce CO2 emissions. Low-carbon investments, investments in more energyefficient infrastructure and in carbon capture andstorage will all be part of the arsenal needed tomitigate climate change. 20 | Global Risks 2010



Energy companies faced significant challenges as a result of the global economic slowdown in 2009, many ofwhich will play out in 2010 and beyond. With demand growth uncertain, credit constrained and balance sheetsstretched, there was a tendency for companies to prioritize short-term consolidation over longer term investmentneeds. In other words, the overall shortage of capital and decisions to pay off debt resulted in the postponementof major infrastructure outlays. It also meant a reluctance to exploit reserves that were economically non-viable atcurrent oil prices, and a withdrawal from renewables portfolios with weaker or less reliable economics.

Impact on energy security 2010-2015Long lead times in the sector mean that decisions made now could have a number of negative consequencesacross the different dimensions of global energy security. These include:

• Slower expansion of upstream activities and supply side constraints. An increasing percentage of oilconcessions will be won by well-capitalized national oil companies. In addition, should there be a swiftrebound in demand pressure on existing transportation infrastructure could lead to a tightening gas supplymarket.

• Sudden leaps in energy prices. Inevitably a high proportion of the likely rises will be passed on toconsumers, domestic and business alike.

• The failure of energy infrastructure to meet demand. Investment delays will increase the likelihood ofreliability issues with ageing plants, grids and networks in developed countries. Much-needed projects indeveloping countries, which will bring about greater access to energy resources, will not be initiated.

• Weaker performance in emissions reduction programmes. Delays in upgrading generation assets indeveloped countries will also result in an inability to achieve CO2 efficiencies. Any slowdown on renewablesinvestments will mean that certain countries/regions will fail to meet ambitious uptake targets and goals forincreasing supply diversity.

• Resource nationalization. International access to new energy sources might be restricted.

What governments can doThe energy sector stimulus packages announced in 2009 (see Figure 7 below) are an important contribution tothe situation, despite the relatively low levels of funds distributed, only 15% to date, and concern in somequarters that the sums involved are not sufficient to bring about a sustainable and reliable energy future. Giventhe long-term nature of the industry, companies considering major strategic commitments need an enduringpolicy framework with appropriate parameters and incentives that can bring some predictability to their planning.This means clear direction at the international level on climate policy and trade issues, and robust long-termstrategies from national governments regarding infrastructure renewal to enhance security of supply, reliabilityand the reduction of carbon emissions.

Key stimulus packages for the energy sector, 2009-2011Figure 7

Country/region Amount Key foci

USChinaJapanSouth KoreaSpainGermanyAustraliaUKFrance

US$ 66.6 billionUS$ 46.8 billionUS$ 8.0 billionUS$ 7.7 billionUS$ 7.6 billionUS$ 3.7 billionUS$ 3.4 billionUS$ 2.7 billionUS$ 2.4 billion

• Clean energy generation• Energy efficiency• Grid development

Source: New Energy Finance (2009)

What energy companies can doTo position themselves competitively for the next few years, energy companies need to address a number ofissues in their planning. They should consider how best to adjust the mix of assets, businesses or sources ofsupply in ways that both reduce exposure to price volatility and political instability, and enhance their capacity torespond to toughening policy requirements. In doing so, they should establish how to optimize their strategicinvestment capacity on a risk-return basis and ensure that their approach to debt/leverage reduction does notsignificantly impair their ability to achieve strategic growth.

Energy security and investment: walking the tightrope between national policyimperatives and economics



Infrastructure and climate change adaptation Despite declining budget resources, and in addition tothe investment needed in the area of energy,governments must urgently take steps to address theunavoidable consequences of climate change. Denserurban development in coastal areas (15 of the world’s20 megacities are coastal), lax planning that allowedproperty development on natural flood plains or higherdependency on crops in increasingly drought-exposedareas are just some examples of the type of risks thatcannot be avoided but where adaptation strategiescan be adopted. But which strategies? TheEconomics of Climate Adaptation (ECA) WorkingGroup7 has created a framework for evaluating thealternatives that governments might consider. TheECA Working Group was formed to explore howcountries can become economically more resilient inthe face of climate change. By estimating a location’stotal climate risk – calculated by combining existingclimate risks, climate change and the value of futureeconomic development – and using a cost-benefitanalysis to create a list of location-specific measuresto adapt to the identified risk, the working group wasable to evaluate current and potential costs of climate

change and how to respond to them. A scenario-based approach was used to manage the level ofuncertainty inherent in judging future climate patternsand assessing different conditions in which acommunity would need to respond.

This approach was applied to eight regions in bothdeveloped and developing countries (China, India,Samoa, Guyana, United States, Mali, United Kingdomand Tanzania) representing a wide range of climatehazards, economic implications and developmentstages. The overall findings, in the ECA report ShapingClimate-Resilient Development, showed that easilyidentifiable and cost-effective measures – such asimproved drainage, sea barriers and improved buildingregulations, among many others – could reducepotential economic losses from climate change.Indeed, most could deliver economic benefits that faroutweigh their costs, as adaptation measures onaverage cost less than 50% of the economic lossavoided. This confirmed the link between using a riskmanagement approach to adapting to climate changeand the broader goal of supporting long-term regionaleconomic development.

7 The Economics of Climate Change Adaptation Working Group is a partnership between the Global Environmental Facility, McKinsey & Company, SwissRe,

the Rockefeller Foundation, ClimateWorks Foundation and the European Commission, and Standard Chartered Bank. www.swissre.com/climatechange

Source: The Economics of Climate Change Adaptation Working Group, 2009

Cost Effective Measures for Climate Change AdaptationFigure 8



As services provided by critical infrastructure become ever more embedded in wider systems, it becomesincreasingly important to maintain their integrity and resilience. For example, financial systems and emergencyservices are highly dependent on telecommunication operations, which are highly reliant on electricity. And, evenwithin a given industry, a critical network is made of multiple interdependent pieces which often rely on therobustness of the weakest link in the network. Companies and governments need to be aware of theseinterconnections when they build and manage these systems.

Some recent examples and possible scenariosThe large-scale August 2003 power failures in the north-east of the US and in Canada, which deprived morethan 50 million North Americans of electricity, was triggered by the failure of a utility in Ohio. A disease originatingin one region of the globe can readily spread to other areas through transportation networks, as was the casewith the rapid spread of SARS in 2003 or with swine flu in 2009. The meltdown of a nuclear reactor in onecountry can lead to massive radioactive contamination hundreds of miles away, as illustrated by the Chernobylnuclear plant disaster in 1986. Looking ahead, a major terrorist attack that closed a port such as Rotterdam,Hong Kong or Los Angeles for weeks would have severe economic consequences on world trade because itwould inflict major disruptions in complex just-in-time supply chains that comprise the global economy.

Private efficiency, public vulnerabilityThese examples illustrate the existence of important interdependencies between people and organizations,hundreds if not thousands of miles apart, through the malfunctioning of technical infrastructure that we use anddepend upon today. If the organization is a firm, there is a need to balance the additional private costs tooperate more safely that might negatively affect the firm’s bottom line with the benefits of reduced global risks;that is the trade-off between private efficiency and public vulnerability. The reluctance of private firms toundertake these measures unless they know others have followed suit is a source of market failure.

Addressing systemic risk in critical infrastructure

Looking for solutionsA challenge for policy-makers and business leaders is to provide the right regulations or incentives to investadequately in security.

• Third party inspections and well-enforced regulations might be necessary to ensure that infrastructure iswell designed and maintained over time. In countries where the large majority of infrastructure is operated bythe private sector, regulations might be inspired by industry best practices since most of the knowledge andresources will be found there.

• Building global coordination and reaction capacity. Since these risks arise within interdependentnetworks, effective solutions usually demand looking beyond an individual firm to its operating units. Thesesolutions might involve well-enforced regulations or coordinating efforts across divisions in a firm, across asupply chain, across operators of a given type of infrastructure, and across countries in the form of treaties orglobal compacts. Sometimes top decision-makers in the public and private sectors can join forces to decreasecollective risk: this was done successfully under the leadership of research institutions serving as a neutralparty in the aftermath of the anthrax crisis in 2001 through the development of a global reaction capacityplatform between postal operators of over 20 countries. The same framework could now be applied to manyother critical services.

• Thinking long-term return on investment. A major challenge with security of critical services is thetendency to be myopic and to seek short-term reward. Energy companies are now considering proposals toencourage consumers and businesses to invest in more efficient energy efficient measures by incurring theupfront costs, which will be paid back over time by the user of the appliance through the savings they achievein lower electricity bills. The market for building brand new infrastructure and replacing ageing ones is huge inAsia, Africa, Europe and the Americas. Investment decisions made today will thus have a determinant impactfor years to come. There is an opportunity here to make critical infrastructure not only more secure, but alsogreener.


4. Chronic Diseases

Though the worldwide spread of H1N1 brought theimplications of a global pandemic to the fore again,another global health risk unfortunately illustrates theneed to address ongoing slow failures. As both theGlobal Risks Landscape and the RIM show, chronicdiseases (or non-communicable diseases (NCD)),including: heart disease, stroke, diabetes, somechronic lung conditions and preventable cancers) arestrongly connected to a number of other global risks:fiscal crises; underinvestment in infrastructure; food,water and energy security. The cost of treating chronicdiseases has risen globally, as have associated ratesof morbidity and mortality, driven by demographicchanges and dietary shifts, causing some to call it a“silent” pandemic.

Though linked to the rise in obesity associated withdeveloped nations, low- and middle-income countriesaccount for 80% of all deaths from chronic diseasesglobally. These conditions are the leading cause ofdeath worldwide with the exception of sub-SaharanAfrica and, unfortunately, chronic disease mortalitieswill overtake those of infectious diseases in that regionas well by 2030. Out of the 35 million people whodied from chronic diseases in 2005, one-half wereunder 70 and one-half were women. Over the nextdecade, if not addressed effectively, chronic diseaseswill increase by 27% in Africa, 25% in the Middle Eastand 21% in Asia and Pacific, accounting for 75% of alldeaths globally.



Chronic diseases and interconnected risksFigure 9




A problem neither the developed nor thedeveloping world can affordDeclining development assistance has already led to asignificant reduction of public spending on health inmany countries. When funds are limited, governmentstend to focus on basic health services, in line with theUnited Nation’s Millennium Development Goals(MDGs), at the expense of the prevention andtreatment of chronic diseases. Most developingcountries, with the exception of several sub-SaharanAfrican nations, will experience a historic shift over thenext decades. Deaths from infectious diseases;maternal and perinatal conditions; and nutritionaldeficiencies combined are projected to decline by 3%over the next 10 years. However, over the sameperiod, deaths due to chronic diseases are projectedto increase by 71%. In countries plagued by povertyand social divides, failure to protect populations frombasic and preventable health risks brakes economicdevelopment and threatens social well-being andstability. The fact that chronic diseases are not part ofthe mainstream global health and developmentagenda and that these are outside of the remit of thetime-bound, outcome-based targets of the MDGsshows that more long-term and integrated planning isneeded to address health risks.

Chronic diseases and food security: tacklingmalnutrition and poor nutrition holisticallyAs the crisis of 2008 showed, food price spikes andvolatility affect consumption patterns of poorpopulations rapidly and can result in increasedexposure to NCD risk. Poorer populations can sufferfrom malnutrition and can also sufferdisproportionately from poor nutrition linked to chronicdiseases. Climate change in combination with waterand energy scarcity further adversely affect foodsecurity, creating a vicious cycle. Although poverty hastraditionally been associated with underweightbecause of poor diet, research has revealed aparadox in the US, which is unfortunately now alsobeing observed in developing countries: low incomeand obesity can coexist in the same population. TheUN Food and Agriculture Organization and WorldFood Programme are starting to look at this problem.Future policies for nations with poor and low-incomepopulations who are most exposed to food pricevolatility and shortages must aim not only to addressbasic food needs but should also look at the quality ofnutrition, embedding health in food securitydiscussions.

Spending less for moreHealthcare spending in many developed economiesalready represents a huge fiscal burden. With sharplydeteriorating fiscal positions, higher unemploymentand ageing populations, developed economies will feelthe costs and social impact of chronic diseases evenmore over the coming years. Total health spending in

the US accounts for 15% of GDP. A third of thisspending on health is for obesity-related chronicdiseases. In other developed countries, this figure isbetween 2% and 3.5%. As pressures on publicfinances and health insurance costs mount, chronicdisease risks exemplify how much more cost effectiveit would be for health institutions, governments andbusinesses to focus on prevention rather thantreatment. Evidence suggests that a modest reductionin the prevalence of certain chronic disease riskfactors, such as tobacco and alcohol consumption,and healthier diets, could result in substantial healthgains and cost savings. For instance, a Norwegianstudy estimated that savings of US$ 188 million couldbe made by lowering the population blood pressurelevel by a 2 mm Hg reduction in salt intake. ACanadian study estimated that a 10% reduction in theprevalence of physical inactivity could reduce directhealthcare expenditures by Can$ 150 million(approximately US$ 124 million) in a year.

Information and innovation are key to preventionIn several countries, the application of existingknowledge has led to major improvements in the lifeexpectancy and quality of life of middle aged andolder people. For example, through campaigns toraise awareness and better education of prevention,heart disease death rates have fallen by up to 70% inthe last three decades in Australia, Canada, the UnitedKingdom and the United States. Middle-incomecountries, such as Poland, have also been able tomake substantial improvements in recent years byinforming the population of the benefits of good dietand exercise. From 1970 to 2000, the World HealthOrganization has estimated that 14 millioncardiovascular disease deaths were averted in theUnited States alone. The United Kingdom saved 3million lives during the same period. Given theinexorable rise in health costs as populations age,governments need to rethink their health systems tomake them more effective. New models of healthfinancing, mixing public and individual contributions,will need to create incentives for greater emphasis onprevention, and this will undoubtedly go far beyondthe traditional approach to health systems in both thedeveloped and developing world.

The risk for businessOne-half of those who die from chronic diseases arein their productive years and so the social costs andeconomic consequences in terms of lost productivityare considerable. This fact, coupled with risinghealthcare costs to employers, has made the privatesector aware of this problem, in particular becausemany of these costs are preventable. In the US, theavoidable indirect impact of chronic diseases, due forexample to productivity losses, is four times as high asthe direct costs of healthcare coverage.


The WHO estimates that between 2005 and 2015income loss could rise to as much as US$ 558 billionin China, US$ 237 billion in India, US$ 303 million inRussia and US$ 33 billion in the United Kingdom.Brazil, Russia, India and China currently lose morethan 20 million productive life-years annually to chronicdiseases, and that number is expected to grow 65%by 2030. The losses in productivity associated withthose diseases, through disability, unplannedabsences and increased accidents, are as much as400% more than the cost of treatment. It is now wellestablished that workable solutions exist to prevent40-50% of these diseases and their negative impacton business and the economy at large in bothdeveloped and developing countries.

The private sector can contribute significantly to thefight against NCDs by informing and supportingactions to tackle the lifestyle-related risks, tobaccoand alcohol use, unhealthy diet and lack of physicalactivity among employees and customers.

Not only is it important for good global citizenship butthere is also a strong business case. By focusing onresponsible food marketing to children, reducingtrans-fatty acids and salt, and providing simple, clearand consistent food labels, significant gains can beachieved at the population level. The WHO hasrecently announced the “Chan Commitments”, agroundbreaking set of voluntary commitments by nineof the largest food and beverage manufacturers toshift to healthier options.

The democratization of health information, growth inself-care technology, increased level of socialinteraction through social media and liberation of theWeb through mobile platforms are shifting worldwideattitudes and can support person-centred health.Mobilization of social forces and people outside ofhealth systems is critical as it is clear that chronicdiseases are affecting social and economic capitalglobally.


Global support for international governance• The World Health Organization, as the lead technical agency in health, must garner necessary resources and

cross-sector political will to implement the Global Action Plan for Non Communicable Diseases, 2008-2015. Itmust work in partnership with all relevant multilateral and bilateral agencies to provide coordinated andconsolidated guidance to implement plans, policies and programmes.

• The 22 development partners, who presently spend less than 1% of the US$ 22 billion on chronic diseases,must now be more proactive in their support of individual country requests for assistance to address chronicdiseases.

• Ongoing work on negotiated agreements for the reduction of salt in processed food and the work of theConference of Parties in giving shape to the terms of the Framework Convention on Tobacco Control and theforthcoming WHO Alcohol Strategy should be supported by the development partners, countries and industry.

National and global incentives• Countries should mount a serious public policy response to this threat. Measures should be instituted to

support the control of tobacco and alcohol use, and to provide strong incentives for the production andavailability of healthy foods (e.g., shift towards healthy agriculture policies).

• The food industry should work collaboratively towards reshaping the industry to introduce new products withbetter nutritional value and make healthy options, affordable and available. They should focus on responsiblefood marketing to children, reducing trans-fatty acids and salt and provide simple, clear and consistent foodlabels. Incentives at national and global levels to support this shifting should be developed simultaneously.

• Stimuli and incentives for employers from private and public sectors should be put in place to support furtherimplementation of workplace health.

• Countries must prepare for changing patterns in the volume and composition of service delivery and demandsfor patient education and long-term pharmaceutical use in view of the changed disease trends.

A yardstick to measure progress• A global mechanism should be developed to map and track chronic diseases, set benchmarks and track

trends of solution implementation and its impact on disease burden. A “health and well-being footprint”could serve as yardstick to indicate progress that governments, public and private sector producers andservice providers, and individuals achieve on health. Such measurement should be embedded as well as partof the Millennium Development Goals review process.

Chronic Diseases: Mitigating measures recommended by the Global AgendaCouncil of the World Economic Forum on Chronic Diseases


5. Risks to Keep on the Radar


This section considers a selection of risks that mightnot feature prominently on the Global RisksLandscape but that are highly interconnected andreflect the potential for systemic risks and failures. Thethemes of this year’s report also links the need forbetter governance and, in particular, institutions andmechanisms to share information and for long-termthinking as to their impact. These are not emergingrisks but all demand greater attention of leaders andgreater collaboration on solutions.

To highlight the need to integrate these risks more intothinking on systemic threats and vulnerabilities, theyare examined through the lens of the Global RiskNetwork’s “5i” framework. The 5i framework refers toinsight, information, incentives, investment andinstitutions. Looking at each of these risks, using thissimple approach, can help assess risks and thegovernance and other gaps that need to beaddressed to better manage them in a collective andeffective manner.

Transnational crime and corruption:endemic risks

The economic and social costs of transnationalcrime and corruptionIf there is one area of global risk that epitomizes howthe power of globalization can be misused, it istransnational crime and corruption. Some expertsestimate that global organized crime and illicit tradeaccounts for 10% of global GDP. Transnational crimeand corruption is highly interconnected with many ofthe global risks across the spectrum, ranging fromgeopolitical risks such as terrorism, instability inAfghanistan and nuclear proliferation, to biodiversityloss, and risks to critical information infrastructure. Inthe health sector, counterfeited drugs representalmost 10% of the worldwide pharmaceuticalsmarket, equivalent to US$ 35 billion in revenues,causing millions of deaths each year.

Global business exposureWorld Bank estimates from 2006 show that over US$1 trillion is paid in bribes each year, acting like a directtax on doing business while severely undermininglegitimate competition and innovation. Meanwhile,many studies show that every form of illicit trade islinked to the legitimate economy. Both humantrafficking and forced labour, for instance, have widelypenetrated the legitimate economy. Through theirincreasingly complex supply chains and vastdistribution networks, corporations are more exposedto problems such as counterfeiting, intellectualproperty infringement and corruption at all levels.Businesses need to engage with other stakeholders,

if they are to beat what is fast becoming their biggestcompetitor, as well as better educate theircustomers. As value chains lengthen and becomemore complex, multinational corporations needinformation and must have better oversight of whothey are linked to further up and down the chain.

Partnering Against CorruptionThe World Economic Forum’s Partnering AgainstCorruption Initiative (PACI) created a multinational taskforce of participating companies from all over theworld, adopting benchmark “Business Principles” thataddress ethical conduct regarding bribes, facilitationpayments, political and charitable contributions, aswell as gifts and sponsorships. Since its formation in2003, more than 140 companies from all industrysectors have signed on to the PACI and, in so doing,they have agreed to maintain a zero-tolerance policytowards bribery and corruption and to implement abroad-based anti-corruption programme to guide thebehaviour of their employees.

The Global Risks 5i Framework applied totransnational crime and corruption

Insight: Crime and corruption thrive on the increasingcomplexity and opacity of supply chains and globalmarkets. While various actors and institutions havevisibility into segments of the chain, most often theylack the complete overview of the chain andinteractions within it. Forward-looking riskmanagement must therefore identify theseinterlinkages and account for the entire sequence ofexchanges from the source to the distribution to endcustomers, identifying the trading routes andfacilitators connecting each step.

Information: More information needs to besystematically shared among international institutionsand national agencies and bodies to maintainoversight and match transactions with the instigatorsand intermediaries involved. Improving traceability andtransparency would help both business and end-consumers make informed decisions. The UNConvention against Corruption, which has beensigned by 140 countries and ratified by 136, providesmechanisms for information sharing and reporting,which could be used to engage leaders in proactivemeasures against corruption.

Incentives: Crime and corruption prosper wheneverthe expected returns of proceeds far exceed any realor perceived barriers to abide by the stipulated rulesand regulations. Minimum and guaranteed wagescould reduce some of the incentives for crime andcorruption in many countries, while lower expected


returns for exchanged counterfeit or other illegalgoods coupled with enforced transnational regulationwould decrease incentives to enter the black market.

Investment: Efforts to restructure and improve bothnational and global collaboration efforts on crime andcorruption will call for resources to improve thesharing of information, tracking and connectingagencies with different areas of responsibility, includingcustoms agencies, law enforcement organs, as wellas industry and trade agencies. Greater funding isrequired for existing measures to combat corruption,such as country visits with peer reviewers from othercountries and improved reporting.

Institutions: The rise of transnational crime andcorruption illustrates a major governance gap and theneed to improve global oversight and regulation.Nation states have difficulty apprehending criminalsthat operate out of their jurisdiction, while excessiveattention and resources are often applied to certainhighly visible illegal activities, ignoring the largerpicture and connections among many forms of illicitactivity. The role of current international organizationsis often limited by jurisdiction as well as theunwillingness of their members to share informationand collaborate on a global basis. Combating illicittrade calls for stronger global focus on theprovenance, trading routes, facilitators and means of



Transnational crime and corruption and interconnected risksFigure 10




distribution to end customers. Such oversightarchitecture of the future must include an elementthat transcends national borders and ensures broadrepresentation in rule making with agreed and rapidprocedures for systematic enforcement. In all of these areas, a driving factor for the successof institutional measures will be political will andaction at national level and the active engagement ofexisting and emerging business efforts to mitigatethese risks.

Biodiversity loss: the systemicimplications of ecosystem risk

Rules governing biodiversity and ecosystems and theirservices (i.e. the benefits people receive such as food,freshwater, timber, protection from natural hazards,erosion pharmaceutical ingredients and recreation)have been largely excluded from global decision-making processes. As a result, approximately 60% ofthe earth’s recognized ecosystem services have beendegraded in the last 50 years. Since 1900, over 50%of wetlands has been lost; the global forest area hasshrunk by 40% over the past 300 years; and by someestimates the rate of species extinction is thought tobe up to 1,000 times more rapid than the natural rateof extinction. Annual economic losses due todeforestation and land degradation alone wereestimated at US$ 2 to US$ 4.5 trillion, the equivalentof between 3.3% and 7.5% of global GDP in 20088.

The consequences of these ongoing losses will notonly affect businesses dealing directly with naturalresources, but will also touch the supply chains andgrowth objectives of most industry sectors in thedeveloped and developing world. Through their naturalcarbon sequestration and storage function, forestscan mitigate against the effects of climate change.Biodiversity and ecosystems services are inextricablylinked with freshwater provision, sustainableagricultural production and climate. They are alsolinked to food security, migration and political stability,as the habitats and livelihoods of some of the world’spoorest populations are directly affected bybiodiversity loss. The foreseeable path of populationgrowth and consumption trends bode ill forbiodiversity. Land and the fauna and flora that live on itare under threat from more intensive agriculturalneeds, from residential and commercial development,waste and pollutants, and from climate change.

Costing the earth: pricing biodiversity lossAs with many areas of systemic risk, the complexity ofthe interconnections renders it difficult to get a fullpicture of the costs and implications for biodiversity.The Economics of Ecosystems and Biodiversity, orTEEB, report, is a major project to address this

problem. It is a comprehensive effort to design andpresent metrics that account for natural capital and togive them credibility through consensus andstandardization. From this basis, TEEB focuses on thecost of inaction weighed against the cost-benefit ofinvestments in protection and adaptation. The interimreport, released in May 2008, already highlightedsome of the costs of inaction.

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

The Global Risks 5i Framework applied tobiodiversity loss

Insight: While the links between population growth,climate change and energy are understood,biodiversity loss has been seen as a “local” issue.There is a need to raise awareness of the systemicnature of biodiversity loss for it to be an integral part ofpolicy-making and business strategy. The UnitedNation’s sponsored “Year of Biodiversity” in 2010 willincrease media and public understanding, butdecision-makers should already include it in theirthinking.

Information: The Economics of Ecosystems andBiodiversity is already influencing policy and economicagendas with the release of a Climate Issues Updateand a report for policy-makers in the autumn of 2009.In the summer of 2010, TEEB will release a reportaimed specifically at the business sector. Thesereports will help address information gaps, improvemeasurability and, it is hoped, lead the way for moreinformation sharing on this risk and its linkages toother risks.

The business impact of biodiversity lossIn conjunction with the World EconomicForum’s Global Agenda Council on Ecosystemsand Biodiversity and PricewaterhouseCoopers,the Global Risk Network has produced a shortbriefing on this topic: copies and an onlineversion can be found at:www.weforum.org/en/initiatives/globalrisk/index.htm

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


Incentives: Building an effective baseline throughcost-benefit analysis will support the creation of betterpolicies and trade and finance mechanisms that willencourage private sector investment in “greener”technologies, industry methods and product designand manufacture.

Investment: As discussed in earlier sections,infrastructure investment choices could play adetermining role in the prevention and/or managementof a series of risks. Private capital must be a part ofthe solution, together with public policy reforms and

public investment, to ensure that biodiversityconservation and restoration is profitable.

Institutions: Though only covering one aspect ofecoservices, the REDD+ (Reducing Emissions fromDeforestation and Forest Degradation) initiative, whichintroduces the concept of payments for ecosystemservices to link incentives and funding could serve asan example to design future governance mechanismsnecessary for other ecosystem services and theaccelerating threats to biological diversity.



Biodiversity loss and interconnected risksFigure 11




Critical Information Systemsand Cybervulnerability

Modern industrial societies are highly dependent on alimited number of utilities that provide electricity,water, oil and gas. In the past, the informationsystems controlling the infrastructure underlying theseutilities typically consisted of closed, completelyprivate networks managed from a single controlcentre, with only limited attention given toauthentication or encryption issues. These proprietarynetworks, however, were expensive to run while theopen, Internet Protocol-based networking standardsoffered substantial cost-saving prospects, which ledengineers to connect the control systems to theInternet across utilities and other industry sectorsaround the globe over the last decade. With theemergence of cloud computing, a new era ofcomplexity and risk is opening up. By its very nature,cloud computing will make risks more diffuse and,thus, their management more difficult. Cloudcomputing is a new system, but it will link tonumerous existing, critical systems. In many ways itcould be comparable to the financial system, globalbut with relatively little international oversight, andcritical to the functioning of economies and societies.Cloud computing can bring many opportunities but inthe absence of adapted models of governance andregulation it could also bring a new degree ofvulnerability and systemic risk.

The convergence of closed and open industrialcontrol systems, however, has created systemicvulnerabilities that are still very much off the radar,judging from the outcome of the Global RisksPerception Survey 2010, which revealed that mostexperts perceive the risk of a potential breakdown of“Critical Information Infrastructure” (CII), as well as ofdata fraud/loss, as comparatively low – both in termsof likelihood and severity. Moreover, these two riskswere assessed as being among the leastinterconnected risks, which is somewhat surprisinggiven that IT systems increasingly represent thefoundation of practically every service, transaction,communication and exchange required for the steadyfunctioning of the global economy, security andindividual well-being.

The increasing complexity and rapid development ofdynamic systems and networks, the sophistication ofchanging threats and the presence of intrinsicvulnerabilities present demanding challenges to theinformation society. As network systems grow largerand ever more interconnected, the risk includes largesystem failures due to human error or lack of effectivegovernance of digital assets. Technological, societaland economic incentives therefore need to becomealigned to reduce the rapidly increasing risks of

cybercrime, data fraud/loss, and CII system failure.This is particularly important at a time when a seriousincident could have a severe impact and astechnological systems represent a decisive factor forgrowth and development.

Confidence and security in critical information andcommunication systems are vital for building aninclusive, secure and global information society, and ashift in the way we think about data is urgentlyneeded. Countries need to start the dialogue onglobal cybersecurity and stability by addressinginternational cooperation. Above all, governmentsand businesses need to recognize the extent towhich information and communications technology(ICT) is inextricably interlinked with other complexsystems, from finance and power generation tocommunications and safety controls.

The Global Risks 5i Framework applied to cyberrisk

Insight: As the Internet and CII move from 1.0 to 2.0and beyond, more content from multiple and variedsources will be housed together on the customer orend-user side, creating a highly complex environmentfor security governance and protection. The degree towhich ICT systems are increasingly embedded in vitalsystems and services, from finance to transportationand energy, heightens the level of systemic risk andthe potential for a cascade of failures with severeeconomic and social impact. Greater analysis andunderstanding is needed about potential weak linksand possible mitigation strategies.

Information: Increasingly complex supply chainshave led to a situation where the intellectual propertydevelopers and owners, software platform vendors,network operators and application vendors all end uptrying to offload the risks and liabilities on each other,while the end-users have little power, knowledge orinformation over the risk to which they are exposingthemselves. This has to be countered by bettereducation and increased awareness of existing andemerging information technology-related risks amongall stakeholders. Policy-makers, in particular shouldconsider how cyber risks should be factored into otherissues, such as energy security, communication andpower networks, including operational continuity atcorporate, community and national level.

Incentives: As new and existing technologies areapplied to critical systems, ranging from smart grids tocloud computing, the appropriate regulatoryframeworks and incentives have to be implemented toensure that the required security technologies areintegrated from the outset, rather than as anafterthought.


Investment: The infrastructure investments underlyingemerging technologies need to be secure by default –not as an option. Furthermore, providing for a rapid,effective, transnational law enforcement mechanismwill require resource commitments by both the publicand private sectors, as will the sharing and compilingof threat and incident information among governmentand industry entities.

Institutions: Institutional prevention andpreparedness should include a global repository ofmalware and security breach notification. A centralclearinghouse would help ensure that all reported

breaches can be located by the press, investors,researchers and sector regulators, with futurelaws/guidelines setting minimum standards fornotification. Such a framework of universally acceptedrules and standards is required to provide a globallyaccepted definition of a cybercrime and to criminalizeoffences. At the moment, a patchwork of nationallegislations prevents effective tracking, tracing andprosecution of criminals who operate globally, whileeffective security-oriented partnerships betweengovernment and industry have been difficult toestablish.



Critical Information Infrastructure breakdown and interconnected risksFigure 12



6. Managing Global Risks: UnderstandingSystemic Vulnerabilities





1 5 10 20 10 50 250 1000

IraqIraq














PandemicsPandemics

MigrationMigration

















IranIran




Iraq










Water scarcity

Biodiversity loss

Extreme weather

Infectious disease

Pandemics

Migration


NatCat: Earthquake

Chronic disease

Air pollution


CII breakdown

Data fraud / loss

Liability regimes


Fiscal crises


North Korea

Oil price spikes




Iran



NatCat: Cyclone


Developing a Holistic Approach to RiskManagement at Country Level

The financial crisis of 2008 and ensuing globalrecession in 2009 served as a further reminder thatcountries need to establish integrated approaches torisk management. Instead of focusing on company-level risks alone, governments are taking stepstowards establishing bodies that would monitorsystemic risks to avoid a reoccurrence of the crisis.Adopting such an integrated approach to riskmanagement, including beyond economic andfinancial threats, could take it to the next level.Governments could coordinate their agencies with aprioritized national risk landscape and liaise withcounterparts abroad in a more systematic andproactive manner.

The concept of the Country Risk Officer (CRO) wasintroduced in Global Risks 2007 and elaborated in thesubsequent editions of the publication. Given themultiplicity of risks that a country faces, from naturalcatastrophes or pandemic scares to terrorist attacks,there is a strong case to be made for the creation of asingle point of contact and coordination for theresponses to such risk events. The role, which couldbe performed by an individual or a committee, wouldalso be responsible for analysing and quantifying risks,prioritizing mitigation measures and implementingprogrammes to adapt to the threats that these riskspresent.


Recent events have proven why a country shouldhave overview of the risks it faces not only within itsborders but also at the international level. Here too, acountry risk officer would be in a position to liaise withcolleagues in other countries and create a riskmonitoring network that could serve as part of anearly warning system for severe risks. The samefacilities and network could be used to share anddevelop common frameworks to track issues and lookfor weak signals and emerging risks. The Country RiskOfficer (CRO) would complement the kinds of macro-prudential supervision that countries are currentlydiscussing, helping towards making those nationsmore resilient to financial shocks and future crises.

Given the still fragile economic environment and thepressures on national budgets, it is more importantthan ever that a country considers what can be doneto prevent, where possible, extraneous shocks or atleast to be able to manage and finance theirimplications. One example already operating is in thearea of finance for disaster risk. Financing can bearranged after the event by redirecting funds from thebudget, by borrowing or by increasing taxes. Or fundscan be secured in advance through tools such asparametric or index-based insurance. A recentsuccessful example of how governments can do thisis the “Multi-Cat” (multiple catastrophes) transactionthat the Mexican government signed with the WorldBank. Working together with Swiss Re, the WorldBank has developed a programme that enablesgovernments to transfer the burden of economic costsfrom natural catastrophes to the capital markets.

By including such pre-event funding instruments in theoverall disaster risk financing mix, countries could bein a position to reduce their financial exposure tonatural catastrophe risk and reduce the potentialburden for government budgets in the case of a majorevent. Here too a CRO could play an important role,taking a holistic approach to risk before events occurand ultimately reducing the risk burden to society. Notonly can this help a nation financially, but it would alsohave an important function in reassuring thepopulation, its neighbours and its investors that acountry is appropriately prepared for a disaster.

How corporations can apply thefindings of Global Risks 2010

Global Risks 2010 provides a framework forcompanies to develop insights into systemic risks inthe mid- to long-term planning horizon. In general,corporations face challenges in obtaining, interpretingand applying information about systemic or“emerging” risks. The report enables corporations to:

• Test assumptions in underlying strategic plans andcapital investments

• Understand and monitor the complex and changinginterrelationships between systemic risks

• Identify emerging opportunities within the emergingtrends or events

Corporations must continuously make decisionsbased on long-term perspectives to secure profitablegrowth. These include strategic decisions relating tonew market entry, mergers, acquisitions anddivestitures, joint ventures and partnerships, andcapital investments. Today most corporations, large orsmall, are participating in the global economy andtheir decisions are taken against an ever-changingbackdrop of influences that are external to theorganization itself – macroeconomic factors, regulatorychange, geopolitical upheaval, technological andproduct innovation, and sustainability issues. Tosucceed in this complex environment, corporationsmust develop processes to understand how theseuncertain events might impact their organizations andsupply chains, current competitors, potential newmarket entrants and the governments in thejurisdictions in which they operate.

Taking the long-term viewExternal and emerging risks pose challenges to mostrisk assessment and risk management programmesfor a number of reasons. Typically, risk is considered interms of “impact and likelihood” based on internalconsensus, often involving very little external or expertinput. Corporate risk assessments rarely consider atime frame beyond two to three years, or explicitlyexamine the long-term volatility introduced by risks tostrategies with a five to 10 year execution horizon.Decision-making is further skewed by necessary focuson the reporting of short-term results and known orrecent risks affecting the current period.

A portfolio of decisions to deal with uncertaintyFurther, research shows that relatively few companieseffectively apply tools, such as scenario analysis, oreffectively integrate risk data into long-term strategicplanning. Historically, management would providebusiness units with prescribed scenarios and thebusiness units would calibrate responses for eachscenario. Today, the scenarios are more varied andthe range of uncertainty within a scenario markedlyincreased. To respond, management must adjust theplanning process to ensure it explicitly factors in thisincreased uncertainty. Indeed, strategy setting mustbe viewed as the optimization of a portfolio ofdecisions based on a set of scenarios that reflectuncertainty.




Opportunities in complexityGlobal Risks 2010 emphasizes that theinterconnections among risks can help managementteams challenge themselves to develop a more robustscenarios. The report’s tools, such as the Global RisksBarometer and Risk Interconnections Map (RIM)highlight the trends and connections betweenemerging risks and underlying drivers in risk volatility.Taken together, these insights can help broaden thescope of trends that are considered and helpmanagement question the long-term underpinningsand assumptions about their supply chains and thecompetitive landscape.

As noted above, corporations must assess how risksmight directly or indirectly affect the organization as aparticipant in a globally competitive marketplace andas a member of a global supply chain. Thisinformation must be factored into planning scenarios.The report’s focus on the changing risk landscape canalso be used to identify emerging opportunities inmarkets or sources that could provide the corporationwith a competitive edge.

It has become a truism to note that all corporationsnow operate in a global economy. Reports, such asthe Global Risks reports, provide corporatemanagement with valuable long-term, external insightsinto the events that might impact the success ofstrategic plans, the performance of the overall supplychain and the emerging opportunities embedded in acomplex, interconnected global economy.


As suggested in this report, although theinterconnected view of global risks adds greatercomplexity to decision-making, it is vital in developingeffective strategies to manage risks. Theseinterconnections do not always reflect a direct causalrelationship, as risks are often linked indirectly throughcommon impacts or mitigation trade-offs. For many ofthe global risks discussed in this report, the ownershipof these risks remains fragmented and unclear, and itis often difficult to identify actors willing and able totake ownership. This, coupled with the complexity ofinterdependencies, is perhaps why so many of theseissues remain endemic and systemic in nature,although their existence and potential impact isknown. Global Risks 2008 already warned that shoulda systemic financial risk lead to a serious deteriorationin the world economy, the impetus for collaborativemitigation might falter as leaders’ attention turned tomore immediate concerns; the same is true for manyother so-called “creeping risks”. Thus far, theresponse to the global impact of the financial crisisand ensuing downturn has been a willingness tocooperate on common strategies and more effectiveglobal governance to address global risks. The nextmonths and years will put that willingness to test.

Thus, this fifth edition of Global Risks highlights that anumber of open questions remain and many of thepriorities flagged in earlier editions are stillunaddressed. This report is envisioned as part of anongoing dialogue between different stakeholdersaimed at understanding a complex, interconnectedrisks landscape. It suggests how some of thesechallenges might be addressed and by extensionenhance global resilience to risk. To this end, theGlobal Risk Network has worked closely with theForum’s Global Agenda Councils (GACs). At theirannual Summit on the Global Agenda, the GlobalAgenda Councils offered some overarchingrecommendations for more effective management ofsystemic risks and vulnerabilities. They emphasizedthat these would need to be applied globally and thatmore effective forms of governance would be centralto their efficacy. These recommendations, which echomany of those made in past Global Risks reports,were that institutions and governments collaborate to:

• Take a long-term approach to global riskidentification, analysis, tracking and mitigation

• Use frameworks that reflect risk interconnectionsrather than silo approaches

• Address the need for more robust data on key risksand trends to be collected and shared in acoordinated manner

Conclusion


• Conduct cost-benefit analysis on risk solutions toimprove fund allocation and better understand thelong-term benefits of investment choices

• Track emerging risks and educate leaders and thepublic about real, rather than perceived threats

• Communicate clearly and consistently about thenature of threats and about strategies to manageand mitigate them

• Understand the influence of behavioural aspects ofrisk perception

A call came from many of the councils for action onthese proposals to be taken by a new umbrellamechanism or body, a “Global System Risk andVulnerability Facility” which could work with existinggroups to take up these proposals. Leaders nowrecognize that the world is inadequately equipped todeal with global risks. The context in which decision-making processes happen has shifted radically fromone where the immediate prevailed to one where along-term perspective is vital. To fight systemic criseseffectively we need systemic risk management. Thisreport is a reminder of the urgency for action atindividual, corporate, national and supra-nationallevels. “Going back to business as usual” is no longeran option. Behaviour needs to change at all levels:individual, corporate, political, if new, more forward-looking models and mechanisms for globalgovernance are to be truly effective in managing therisks the world faces.


Appendix 1: Processes and Definitions


How global risks are definedThe criteria for global risks have been set as follows:

Global Scope: To be considered global, a risk shouldhave the potential to affect no less than three worldregions on at least two different continents. Whilethese risks may have regional or even local origin, theirimpact can potentially be felt globally.Cross-Industry Relevance: The risk has to affectthree or more industries.Uncertainty: There is uncertainty about how the riskmanifests itself within 10 years combined withuncertainty about the magnitude of its impact(assessed in terms of likelihood and severity). Economic Impact: The risk has the potential tocause economic damage of US$ 10 billion or more.Multistakeholder Approach: The complexity of therisk both in terms of its effects and its drivers, as wellas its interlinkages with other risks, requires amultistakeholder approach for its mitigation. The risksare classified in five domains: economic, geopolitical,environmental, societal and technological risks.

The Risks Interconnection Map (RIM) and GlobalRisks Experts Perception SurveyOne of the highlights of the Global Risks report is theanalysis of the interconnectedness between globalrisks (see Figure 14). By detailing these links, thereport aims to increase awareness and understandingof the interlinkages among risk issues and what thisimplies for decisions on risk management andmitigation.

The data used to build the Risk Interconnections Map(RIM, see Figure 14) is drawn from two sources:

1. The connections and strengths are developedusing data from the Global Risks ExpertsPerception Survey 2010. This Web-based surveywas completed over the third quarter of 2009 byover 200 experts, business leaders and policy-makers from the Forum’s and the Report partners’networks, as well as members of the Forum’sGlobal Agenda Councils. The survey assesseshow respondents perceive a selection of globalrisks tracked by the Global Risk Network (seeabove section “How global risks are defined”). Foreach risk respondents are asked to select 3 otherrisks from the taxonomy of global risks that theyconsider are the most connected to the risk inquestion. The aim is not to determine causalrelationships among the risks or to identify driversand consequences, but rather to determine thenumber and strength of interconnections betweendifferent risks.

2. The nodes on the RIM represent the sameassessment data for severity and likelihood as inthe Global Risks Landscape and the Global RisksBarometer, which are drawn from qualitativeassessment that represents the aggregate views ofexperts from the partners involved in this Report. Agreater node size indicates a higher likelihood (%),while a thicker node circumference shows a higherseverity (US$). Each line represents a connectionto another risk, while their thickness indicates thestrength of the relationship between them.

The Global Risks LandscapeThe visualisation of risk on the landscape places risksby severity of impact (measured in US$) on the verticalaxis and the likelihood of occurrence on the horizontalaxis over a 10-year time horizon. The numericalassessment of these categories of risks is createdthrough qualitative assessment by the partners of thereport. The risks which appear in the upper right-handcorner are those with the highest impact and highestlikelihood and are the focus of the narrative of thisreport.

A note on the regional map of risk exposureproduced by Zurich Financial Services (Figure 4)

The analysis is based on a methodology and data setdeveloped by Zurich Financial Services. Themethodology is broadly comparable to statisticalcluster analysis that partitions a data set into subsets(or clusters) with the data in each subset (cluster)sharing common characteristics – in this case thecharacteristics are risks. Countries with similar risksare close neighbours on the risk map; they formclusters. In contrast, countries that are dissimilar withrespect to their risk characteristics are displayedcomparatively far apart from each other.

The data set covers 158 countries and more than 30global risks. The risks are grouped in five risk classes:economic, environmental, health, geopolitical andtechnological risks. Data are drawn from establishedand reliable public sources and incorporated into themodel using metrics developed by Zurich FinancialServices for a spectrum of risk ranging from low tohigh.


Food price volatilityRising and volatile prices affect poorconsumers globally (those whose consumptionbasket is more than 50% food)

+ Commodity price fluctuations as a function of the global business cycle+ Commodity price fluctuations as a function of deteriorating climate conditions+ Government price ceilings on food prices, leading to reallocation of production and food shortages in the future+/- Input prices, typically related to fossil fuel prices+/- Regional climate variation remains the largest driver of seasonal price volatility- Progress in and access to agricultural technologies allowing for enhanced yields- Proliferation of policy frameworks to foster investments in agriculture and rural development- Implementation of social safety nets specifically targeted to benefit vulnerable societies

Oil price spikesSharp and/or sustained oil price increasesplace further economic pressures on highly oil-dependent industries and consumers, as wellas raising geopolitical tensions

+ Expected growth rates in key emerging markets+ Extreme weather patterns+ Geopolitical tensions+ Factors driving potential terrorist events- Investments in exploration and production capacity- Economic and political stability in oil-producing countries- Ability of OPEC to establish price floors - Implementation of high energy-efficient, low-carbon technologies- Clear and consistent biofuels policy development

Major fall in the US dollarAn abrupt, major fall in the value of the USdollar with impact throughout the globaleconomic and financial system

+ Redirection of investments by major US dollar reserve-holding countries+/- Monetary policy differentials in the US and its major trading partners+/- Attractiveness of the US as destination for international portfolio flows+/- Relative growth differentials between the US and its major trading partners

Slowing Chinese economySudden reduction in China’s growth to 6% orless

+ Excess ex-ante savings over-investments in China+/- Chinese government’s ability to stabilize domestic demand in the wake of loss in export momentum+/- Ability of Chinese government to maintain stable renminbi in the wake of high foreign reserve accumulation+/- Ability of Chinese government to maintain political stability in the wake of sizeable loss in growth momentum

Fiscal crisesOverstretch of fiscal positions generatesunsustainable levels of debt, rising interestrates, inflationary pressures and sovereigndebt crises

+ Short-run developments in fiscal positions due to cyclical deterioration, automatic stabilizers and stimulusprogrammes

+ Rising interest rates+ Demographic developments; mainly ageing populations in advanced economies +/- Clarity around the timing and stages of exit strategies+/- Changes in entitlement programmes- Reform of social systems- Persistently high rates of inflation

Asset price collapseA collapse of real and financial assets inadvanced and emerging market economiesleads to the destruction of wealth,deleveraging, reduced household spendingand demand

+ Sharp increase in financial asset prices+ Sharp increase in prices of real assets (commercial and private real estate, commodities)+ Increased volatility in financial asset prices- Changes in central banks’ policy frameworks modifying price stability goals and giving more weight to overallfinancial stability

Retrenchment from globalization(developed)Multiple developed economies adoptpolicies that create barriers to flows ofgoods, capital and labour and fail toengage with multilateral governancestructures to address global challenges

+ New trade barriers (implicit and explicit through tariffs and subsidies) erected+ Increase in anti-dumping suits+ Increased hurdles to cross-border labour migration+ Failure of Doha trade negotiations+ Consequences of regulatory reforms constraining capital flows+/- Change in outsourcing and offshoring patterns of multinational corporations+ Populist parties gaining ground in elections or coming to power in developed nations

Retrenchment from globalization(emerging)Multiple emerging economies adopt policiesthat create barriers to flows of goods,capital and labour and fail to engage withmultilateral governance structures toaddress global challenges

+ New trade barriers (implicit and explicit through tariffs and subsidies) erected+ Increase in anti-dumping suits+ Increased hurdles to cross-border labour migration+ Failure of Doha trade negotiations+ Measures to close domestic markets to capital inflows and foreign direct investments+ Populist parties gain ground in elections or come to power in developing nations

Burden of regulationIf not balanced, regulation can haveunintended consequences for industrystructures and market competition,distorting the allocation of capital andconstraining investment and the power toinnovate

+ Measures to tighten financial sector regulation+ Government intervention in support of weak corporations in finance and manufacturing+ Changes in rules and red tape governing various industries

Underinvestment in infrastructureFailure to invest in physical or intangibleinfrastructure hinders growth anddevelopment and results in major

+ Constraints on fiscal budgets and need to cut infrastructure spending+ Regulatory interventions that impair efficacy of the financial system+ Reports about attempted attacks on, and outright failures of, critical information infrastructure andpower grids

+ Difficulties for the private sector to raise financing or secure guarantees for large projects

Risk Description Drivers and developments to watch

Appendix 2: Global Risks Barometer 2010

Economic Risks


Rising food prices affect mostly landless and the poorest in disadvantaged regionsThere is clear evidence in some crops that small producers enter and exit the sector in cycles in response to marketprices, exacerbating price volatilityMalnutrition and health consequences in the poorest segments of global societySocial unrest and riots

According to the International Energy Agency (IEA), a sustained US$ 10/barrel increase in the price of oil could lowergrowth of global GDP by 0.5 percentage points (pct pts) in the subsequent yearDepending on the oil-sensitivity of growth, the adverse impact is substantially higher in emerging market and developingcountries; the first-year loss of growth could be 0.8 pct pts in Asia and up to 1.6 pct pts in highly indebted developingcountriesIn addition to adverse impacts for growth effects, substantially higher oil prices generate current account surpluses inproducing countries, which may exacerbate global macroeconomic imbalances and fuel financial market turbulence

=

+ Redirection of investments by major US dollar reserve-holding countries+/- Monetary policy differentials in the US and its major trading partners+/- Attractiveness of the US as destination for international portfolio flows+/- Relative growth differentials between the US and its major trading partners

Adverse impact on the stability of the US financial markets and force the Federal Reserve to raise interest rates indefence of the dollar to levels not commensurate with growth An abrupt decline in the US dollar relative to the currencies of major US trading partners would affect an alreadyweakened financial system and a weak global economy

= =

+ Excess ex-ante savings over-investments in China+/- Chinese government’s ability to stabilize domestic demand in the wake of loss in export momentum+/- Ability of Chinese government to maintain stable renminbi in the wake of high foreign reserve accumulation+/- Ability of Chinese government to maintain political stability in the wake of sizeable loss in growth momentum

China’s economy is firmly linked to the global economy and to the global capital markets; it is a large importer ofcommoditiesThe country’s reserves are invested abroad (predominantly in US government bonds)China has developed a strong presence on the African continent through direct investments and development aid A loss in China’s growth momentum could adversely affect global capital and commodity markets

= =

+ Short-run developments in fiscal positions due to cyclical deterioration, automatic stabilizers and stimulusprogrammes

+ Rising interest rates+ Demographic developments; mainly ageing populations in advanced economies +/- Clarity around the timing and stages of exit strategies+/- Changes in entitlement programmes- Reform of social systems- Persistently high rates of inflation

According to an IMF baseline scenario, government debt-to-GDP ratios for the G20 countries will increase from 63% in2007 to 85% by 2014. In advanced G20 countries, the increase will be even more pronounced, from 78% to 114%The marked deterioration is likely to exert strong upward pressure on real interest rates; according to IMF estimates, anaggregate deterioration in the global debt-to-GDP ratio of 10 percentage points may raise global interest rates by 40basis points In highly indebted economies, spreads on government bonds may rise significantly, exacerbating the risk of sovereigndebt crises

+ Sharp increase in financial asset prices+ Sharp increase in prices of real assets (commercial and private real estate, commodities)+ Increased volatility in financial asset prices- Changes in central banks’ policy frameworks modifying price stability goals and giving more weight to overallfinancial stability

Recent experience and long-term studies underscore the devastating impact the collapse of real and financialassets can have on the real economy (in terms of lost output) and the financial system (in terms of loss inallocative efficiency)The current financial crisis led to a global recession with a loss in world output of 1.5% and a contraction inadvanced economies of roughly 3.5%Future asset price collapses may cause similar outcomes depending on sectors involved and their geographiclocation

= =

+ New trade barriers (implicit and explicit through tariffs and subsidies) erected+ Increase in anti-dumping suits+ Increased hurdles to cross-border labour migration+ Failure of Doha trade negotiations+ Consequences of regulatory reforms constraining capital flows+/- Change in outsourcing and offshoring patterns of multinational corporations+ Populist parties gaining ground in elections or coming to power in developed nations

2009 saw sharp decline in global trade, mostly due to the global recession; however, the World Bank alsoobserved an underlying increase in protectionist measures Similarly, proposed financial market regulation may have the unintended consequence of stifling capital marketgrowth and innovation leading to substantial adverse welfare effects and lower growth rates of potential output

=

+ New trade barriers (implicit and explicit through tariffs and subsidies) erected+ Increase in anti-dumping suits+ Increased hurdles to cross-border labour migration+ Failure of Doha trade negotiations+ Measures to close domestic markets to capital inflows and foreign direct investments+ Populist parties gain ground in elections or come to power in developing nations

A retrenchment from globalization would cut off emerging market countries from the benefits of globalization,such as access to global capital markets, intellectual know-how and best practices disseminated through thepresence of globally active corporationsWhile these benefits are difficult to quantify, a retrenchment would clearly set both emerging and advancedeconomies on a lower growth trajectory of potential output

= =

+ Measures to tighten financial sector regulation+ Government intervention in support of weak corporations in finance and manufacturing+ Changes in rules and red tape governing various industries

Balanced regulation undoubtedly benefits a majority of stakeholders but increases the cost of doing businessA recent study by Deloitte done for the FSA on the financial sector suggests the total global incremental burdenof regulation would fall into a range from US$ 100 billion to US$ 500 billion

=

+ Constraints on fiscal budgets and need to cut infrastructure spending+ Regulatory interventions that impair efficacy of the financial system+ Reports about attempted attacks on, and outright failures of, critical information infrastructure andpower grids

+ Difficulties for the private sector to raise financing or secure guarantees for large projects

The American Society of Civil Engineers puts US infrastructure needs at about US$ 2.2 trillion over a time spanof five years, which would require annual investments of about 3% of GDP. The impact of catastrophic failure would be a multiple of annual investments

Drivers and developments to watch Global impact Likelihood Severity

Key: = Same assessment as last year� Increased� DecreasedPlus signs (+) denote drivers increasing risk; minus signs (-) denote drivers that reduce risk


International terrorismInternational terrorists continue to mountsizeable attacks, causing significant economicand human losses and exacerbatingretrenchment from globalization

+ Instability on the Indian sub-continent, particularly Indo-Pakistani relations but also indigenous movements suchas Naxalites

+ Level of political radicalization from the economic crisis + Weak governance in parts of Africa provides alternative retreat positions to Afghanistan and Pakistan+/- Whether security gains are sustainable and lasting after US withdrawal from Iraq- New and credible peace efforts in Israel/Middle East- The West’s pressure on the terrorists’ sanctuaries in Afghanistan and the Horn of Africa+ Other marginalized groups such as ETA remain active

Nuclear proliferationMultiple states pursue nuclear armament, withassociated increase in geopolitical tensions

+ Iran’s nuclear ambitions, particularly whether it will test a nuclear device or seek de facto nuclear status with thecapability to develop a nuclear device on short notice

+ rising demand for nuclear energy capacity as an alternative to fossil fuels may lead to more countries developingnuclear capacity

+/- North Korea’s cooperation on nuclear disarmament+ Difficulty in enforcing NPT, even among signatories +/- Whether Brazil sticks to the promises and agreements of a nuclear weapons-free South America

IranIran's nuclear programme and its role in theMiddle East increases instability and tensionsregionally and internationally

+ If Iran develops and tests a nuclear weapon, the regional power balance would be threatened+ Israel-Iran tensions+ Confrontation between Iran and Western powers would impact oil supply+/- Internal instability within the country could lead to more hard-line stance by the Iranian leadership or regimechange

+/- Shifting power and influence of Russia and China

North KoreaNorth Korea becomes increasingly unstableand unpredictable, causing domestic sufferingand heightening tensions regionally andinternationally

+/- Regime stability and power transition in North Korea+/- Level of support by China and, to a lesser extent, Russia of North Korea- Inter-Korean relations and rapprochement - Control, inspection and verification activities on disarmament

Afghanistan instabilityNation-building in Afghanistan fails, providinghaven for international terrorist groups andtriggering increasing instability in Pakistan

+ Taliban seems to be emerging stronger than before, which means more fighting, loss of life and destruction ofproperty

+ Divide among the civilian population with conflicting patronage could lead to civil unrest and more internal fighting+ Destabilizing elements in neighbouring Pakistan and Iran could perpetuate instability post-Allied forces withdrawal- Corruption and weak governance and national institutions

Transnational crime and corruptionPenetration of organized crime in the globaleconomy increases significantly over a 10-yearperiod, weakening state authority, worseningthe investment climate and slowing growth

+ Harsh economic conditions linked to increased illicit activity and corruption+/- tighter regulatory environment across services and products- Greater information sharing and collaboration across different jurisdictions and security, trade and financial agencies

Israel-PalestineWorsening Israel-Palestinian conflict claimsthousands of lives over a 10-year period, andexacerbates geopolitical tensions andeconomic decline throughout the region

+/- Willingness of parties to reach a consensus on key issues such as settlements and Jerusalem+ US diplomatic efforts could have significant impact on the peace process and tangible outcomes- Level of international support and pressure for new peace efforts- Increased influence of hard-line or religious groups on either side- Regime stability and governance in Palestinian Territories- Influence of Iran through its support for militants

IraqStabilization efforts in Iraq fail, violence andterrorism proliferate, resulting in loss of lifeand further destabilization of the region

+/- A timetable for a withdrawal of US and Allied forces +/- The level of sectarian violence between Shia, Sunni groups+/- The level of autonomy and secession of the Kurdish territories- Improved capacity of the Iraqi security apparatus+ Involvement of Iran and other neighbours

Global governance gapsWeak or inadequate global institutions andagreements, and competingnational/political interests impede necessarycollaboration on global risks

+ Various governments are working at national level to reform national regulations; however, agreement atinternational level seems to be remote

+ It will take time for a new standards and governance system to come into effect+ Significant gap in standards and governance among three major regions: Asia, Europe and US+ Delay in new international governance set-up- G20 now established, marking a shift from the “G8+” approach


Geopolitical Risks


+ Instability on the Indian sub-continent, particularly Indo-Pakistani relations but also indigenous movements suchas Naxalites

+ Level of political radicalization from the economic crisis + Weak governance in parts of Africa provides alternative retreat positions to Afghanistan and Pakistan+/- Whether security gains are sustainable and lasting after US withdrawal from Iraq- New and credible peace efforts in Israel/Middle East- The West’s pressure on the terrorists’ sanctuaries in Afghanistan and the Horn of Africa+ Other marginalized groups such as ETA remain active

Al-Qaeda and its affiliates remain active. Sporadic terrorist attacks by these and other groups remain a threat in multiplecountries2009 saw a significant rise of attacks in PakistanDiplomatic and military escalations can both result from and drive some of these incidentsTravel, local commerce and tourism are affected in regions where fears of terrorism run high

=

+ Iran’s nuclear ambitions, particularly whether it will test a nuclear device or seek de facto nuclear status with thecapability to develop a nuclear device on short notice

+ rising demand for nuclear energy capacity as an alternative to fossil fuels may lead to more countries developingnuclear capacity

+/- North Korea’s cooperation on nuclear disarmament+ Difficulty in enforcing NPT, even among signatories +/- Whether Brazil sticks to the promises and agreements of a nuclear weapons-free South America

Potential for greater diplomatic tensions or even conflict among states in efforts to prevent access to nuclear capacityIncreased need for spending on intelligence and surveillanceBreakdown of regional trade and drag on development

= =

+ If Iran develops and tests a nuclear weapon, the regional power balance would be threatened+ Israel-Iran tensions+ Confrontation between Iran and Western powers would impact oil supply+/- Internal instability within the country could lead to more hard-line stance by the Iranian leadership or regimechange

+/- Shifting power and influence of Russia and China

Economic loss and difficulties for the Iranian population as a result of embargo and sanctionsDisruption in oil supply to the rest of the word if there is further confrontation between Iran and Western powersLoss of life if the countries engage in warLink to extremism and terrorism

= =

+/- Regime stability and power transition in North Korea+/- Level of support by China and, to a lesser extent, Russia of North Korea- Inter-Korean relations and rapprochement - Control, inspection and verification activities on disarmament

Less expenditure on arms and more focus on trade on the Korean PeninsulaIf regime comes down, exodus of North Koreans to neighbouring countriesEconomic strain on South Korea and the region due to handling fallout from a collapsing North

=

+ Taliban seems to be emerging stronger than before, which means more fighting, loss of life and destruction ofproperty

+ Divide among the civilian population with conflicting patronage could lead to civil unrest and more internal fighting+ Destabilizing elements in neighbouring Pakistan and Iran could perpetuate instability post-Allied forces withdrawal- Corruption and weak governance and national institutions

More regional instability, including PakistanExploding economic and political costs in the West to continue military campaignOther neighbouring countries/powers becoming embroiled in conflictLoss of life and sufferingLink to extremism and terrorism

+ Harsh economic conditions linked to increased illicit activity and corruption+/- tighter regulatory environment across services and products- Greater information sharing and collaboration across different jurisdictions and security, trade and financial agencies

Economic loss and significant burden on business and individualsDrag on growth in developing countries

= =

+/- Willingness of parties to reach a consensus on key issues such as settlements and Jerusalem+ US diplomatic efforts could have significant impact on the peace process and tangible outcomes- Level of international support and pressure for new peace efforts- Increased influence of hard-line or religious groups on either side- Regime stability and governance in Palestinian Territories- Influence of Iran through its support for militants

Loss of life and suffering Absence of any economic development in the Palestinian regions Drag on growth and development in the wider region Link to terrorism and extremism

= =

+/- A timetable for a withdrawal of US and Allied forces +/- The level of sectarian violence between Shia, Sunni groups+/- The level of autonomy and secession of the Kurdish territories- Improved capacity of the Iraqi security apparatus+ Involvement of Iran and other neighbours

Loss of life and suffering Regional instabilityDestruction of infrastructure in IraqLink to terrorism and extremism

+ Various governments are working at national level to reform national regulations; however, agreement atinternational level seems to be remote

+ It will take time for a new standards and governance system to come into effect+ Significant gap in standards and governance among three major regions: Asia, Europe and US+ Delay in new international governance set-up- G20 now established, marking a shift from the “G8+” approach

Economic inefficiency due to tariffs and barriersIncreased likelihood of systemic risksRegulatory arbitrage opportunity

=




Extreme weatherIncreasing severity of extreme weatherevents due to climate change results ingreater damage to the environment,infrastructure and property, displacedpopulations and loss of life

+ Current global emission path + Population growth and/or economic development in risky regions (e.g. coastal cities)+/- Impact of current economic environment on commitments to long term climate change mitigation activity+/- Outcome of COP15 conference in Copenhagen and commitment of government on CO2 emission

reductions goals- Implementation of mitigation measures by government - Adaptation measures by government and participations of NGOs and private industry- Investment on renewable and green infrastructure projects- Technological developments in improving energy efficiency- Public-Private-Partnership on policies, data sharing, methodology, and risk management practices- Data gathering on changing climatic conditions and vulnerability of assets and life in exposed parts of the world

Droughts and desertificationIncreased frequency and severity ofheatwaves and droughts and the spread ofdesertification significantly reduceagricultural yields around the world anddisplace populations

+ Population growth and resource-intensive consumption patterns+ Changing weather cycles due to climate change+ Soil erosion+ Affected size of the population and region as percentage of GDP- International, national and regional policies and rules on deforestation- Reforestation drive supported by PPP- Adaptation measures in the form of insurance and reinsurance- Comprehensive policy measures for long-term prevention and adaptation - Use of technology to increase crop yield/water usage ratios

Water scarcityDeclining quality and quantity of water leadsto water shortages, increased health risks,conflict and population displacement

+ Population growth and resource-intensive consumption patterns+ Changing rainfall patterns+ Increase of water use in generation of energy- International policies and governance on water use for irrigation and drinking- Bilateral agreements for sharing water resources and reservoirs spanning across country borders- More efficient distribution channels and efficient use of the available water resources

NatCat: CycloneAn extreme tropical storm hits an economiccentre or a densely populated area

+ Population growth and density in cyclone-prone areas+ Significant changes in climatic conditions and sea temperature+ Changing weather cycles+ Under-investment in critical infrastructure, e.g. in resilient electricity grids+/- Global emission development path - Improvements in building codes and construction are being outweighed by asset value and population concentrationin coastal areas- PPP in adaptation and rehabilitation measures of the population- Willingness and preparedness to take proactive steps in the event of impending storm activity

NatCat: EarthquakeA strong earthquake hits an economic centreor densely populated area such as Tokyo, LosAngeles, San Francisco, Beijing or Mumbai

+ Population growth and density in earthquake-prone locations- New technology and methodology for more sensitive detection and early warning systems- Effectiveness and efficiency of crisis management capabilities in affected areas (mitigation plans andexecution efficiency)- New design and technology for more resilient infrastructure and buildings in earthquake-prone regions

NatCat: Inland floodingExtreme inland flooding of the Mississippi,Yangtze, Thames or Rhine rivers, for example,causes direct economic and human lossesand serious disruption downstream

+ Population growth and density in areas prone to inland flooding- Further investment in infrastructure for drainage and control of inland flooding- Systematic and long-term plans to move people and property from danger zones- Pre- and post-flood preparedness (early warning systems and evacuation plans)- Insurance for potential damages+/- Changing rainfall patterns

NatCat: Coastal floodingRising sea levels, coastal flooding and erosionaffect property and infrastructure and displacepeople and economic activity

+ Population growth and density in coastal areas- New technology and collaboration on early detection and warning systems - Evacuation plans - Insurance and rehabilitation plans- Data sharing and international cooperation on flood protection+/- Global emission path+ Trend and speed of landlocked ice melting

Air pollutionPoor air quality leads to increased incidence ofacute respiratory diseases and allergies,reducing productivity and increasing healthcosts

- National regulations on pollution controls- Regional policies and directives on pollution control measures+ Over-reliance on fossil fuels for energy production to meet forecast demand- Improved technology for energy use and waste treatment+ Long-term health impacts and increased health costs+/- New US administration willingness to act on environmental issues- Implementation of anti-pollution technologies

Biodiversity lossDegradation of biodiversity results in severelydepleted stocks of resources in fishery, forestryand other bio-services with potentiallyirreversible consequences for the environment

+ Population growth and resource-intensive consumption patterns+ Over-fishing (oceans, lakes and rivers)- International agreement on GHG emissions- Active national plans on adaptation measures and protection of biodiversity- Legal and economic support to less-developed nations/communities for the preservation of biodiversity- International, national and local awareness on the issue - Introduction of geo-engineering- Protection of rain forests and high biodiversity regions (e.g. wetlands and swamps)- Global agreement on forestation/deforestation


Environmental Risks


+ Current global emission path + Population growth and/or economic development in risky regions (e.g. coastal cities)+/- Impact of current economic environment on commitments to long term climate change mitigation activity+/- Outcome of COP15 conference in Copenhagen and commitment of government on CO2 emission

reductions goals- Implementation of mitigation measures by government - Adaptation measures by government and participations of NGOs and private industry- Investment on renewable and green infrastructure projects- Technological developments in improving energy efficiency- Public-Private-Partnership on policies, data sharing, methodology, and risk management practices- Data gathering on changing climatic conditions and vulnerability of assets and life in exposed parts of the world

Damage to infrastructure and loss of propertyLoss of life Migration of human population Irreversible change in environmentEffect on biodiversity

+ Population growth and resource-intensive consumption patterns+ Changing weather cycles due to climate change+ Soil erosion+ Affected size of the population and region as percentage of GDP- International, national and regional policies and rules on deforestation- Reforestation drive supported by PPP- Adaptation measures in the form of insurance and reinsurance- Comprehensive policy measures for long-term prevention and adaptation - Use of technology to increase crop yield/water usage ratios

Increase in economic lossesInefficient use of land resourcesChange in weather patternsMigration of human populations Concentration of populations in regions with access to waterCompetition for scarce resourcesBiodiversity lossFurther damage to the environment

+ Population growth and resource-intensive consumption patterns+ Changing rainfall patterns+ Increase of water use in generation of energy- International policies and governance on water use for irrigation and drinking- Bilateral agreements for sharing water resources and reservoirs spanning across country borders- More efficient distribution channels and efficient use of the available water resources

Increase cost of water exploitation and transportationIncreased cost of water consumptionConflict over water Decrease in drinking water quality and spread of diseasesExtreme scarcity of drinking water in some parts of the world

+ Population growth and density in cyclone-prone areas+ Significant changes in climatic conditions and sea temperature+ Changing weather cycles+ Under-investment in critical infrastructure, e.g. in resilient electricity grids+/- Global emission development path - Improvements in building codes and construction are being outweighed by asset value and population concentrationin coastal areas- PPP in adaptation and rehabilitation measures of the population- Willingness and preparedness to take proactive steps in the event of impending storm activity

Economic losses and loss of lifeMigration and resettlement of populationIncreased vulnerability of ageing infrastructureInvestment in rebuilding the infrastructure

=

+ Population growth and density in earthquake-prone locations- New technology and methodology for more sensitive detection and early warning systems- Effectiveness and efficiency of crisis management capabilities in affected areas (mitigation plans andexecution efficiency)- New design and technology for more resilient infrastructure and buildings in earthquake-prone regions

Tremendous economic loss and loss of lifeDestruction of infrastructureDisplacement and rehabilitation of peopleInfrastructure losses

=

+ Population growth and density in areas prone to inland flooding- Further investment in infrastructure for drainage and control of inland flooding- Systematic and long-term plans to move people and property from danger zones- Pre- and post-flood preparedness (early warning systems and evacuation plans)- Insurance for potential damages+/- Changing rainfall patterns

Economic loss and loss of life Destruction of infrastructureDisplacement and rehabilitation of peopleInfrastructure losses

+ Population growth and density in coastal areas- New technology and collaboration on early detection and warning systems - Evacuation plans - Insurance and rehabilitation plans- Data sharing and international cooperation on flood protection+/- Global emission path+ Trend and speed of landlocked ice melting

Economic loss and loss of life Destruction of infrastructureDisplacement and rehabilitation of peopleInfrastructure losses

- National regulations on pollution controls- Regional policies and directives on pollution control measures+ Over-reliance on fossil fuels for energy production to meet forecast demand- Improved technology for energy use and waste treatment+ Long-term health impacts and increased health costs+/- New US administration willingness to act on environmental issues- Implementation of anti-pollution technologies

Increased health costsDecrease in productivityLoss of life

=

+ Population growth and resource-intensive consumption patterns+ Over-fishing (oceans, lakes and rivers)- International agreement on GHG emissions- Active national plans on adaptation measures and protection of biodiversity- Legal and economic support to less-developed nations/communities for the preservation of biodiversity- International, national and local awareness on the issue - Introduction of geo-engineering- Protection of rain forests and high biodiversity regions (e.g. wetlands and swamps)- Global agreement on forestation/deforestation

Extinction of flora and faunaChanges in habitatIrreversible damage to environment through deforestation and ecological imbalanceReduction in agricultural and fishery yieldsMigration




PandemicsA lack of preparedness to respond to apandemic of a highly infectious disease at theinternational, state or corporate levelsexacerbates loss of life and results in thebreakdown of essential systems (ICT, power,supply chains)

+ International awareness on the pandemic and its impact+ Transmission ability of the new viral strains (viral evolutionary rule)- Effective monitoring and communication of virus activity+ Emergence of H1N1 and new strains of the virus- Coordination of public and private resources in mitigation planning- Coordination of response and mitigation by different countries- Availability of vaccine for specific disease (H1N1)- Supply-chain preparedness and cooperation- Emergency communication, transportation and treatment infrastructure

Infectious diseasesThe incidence and patterns of known (e.g. TB,malaria, cholera, HIV/AIDS) and new infectiousdiseases shift to new regions and populationsegments

- International coordination in dealing with these diseases- Availability of vaccine and treatment drugs at affordable prices- Development of generic treatment drugs made available to poor populations- Policy and legal support at international and national levels- Incentives for pharma industry regarding patent rights - Public health policies and education

Chronic diseasesChronic diseases (cardiovascular, cancer,diabetes and chronic respiratory disease)spread rapidly throughout the developed anddeveloping world, driving up health costs andreducing productivity and economic growth

- Awareness about the importance of a healthy diet and physical activity- New scientific data on causal links- Advances in diagnostics, drug development and therapeutics- Improved understanding of genetic factors and precise treatment mechanisms+ Health and insurance costs+/- Linkage to productivity and economic development

Liability regimesThe spread of US-style liability regimes toother jurisdictions reduces personalaccountability and loss sharing, and globalinsurance capacity, undermining investmentand growth.

+/- EU regulation on how to deal with collective redress and burden of proof+ Activism of consumer protection groups and emergence of new consumer protection laws+ Formation of legal cells working on commission basis

MigrationIn the absence of adapted socio-economicpolicies (e.g. labour policies) in both donor andrecipient countries, migration (including illegal)triggers social tensions and nationalisticmovements

+ Increasing parochialism, especially given current economic conditions and development in coming years+ Internal, regional and international conflicts- Pre-emptive social measures to deal with economic issues- Equitable sharing of resources and infrastructure by all- Fair trade measures through WTO, IMF, etc., and effective governance framework- An international migration framework taking into account the economic hardships of poor countries on onehand and ageing populations on the other


Societal Risks

Technological RisksCII breakdownSusceptibility of CII to attacks or systemfailures creates domino effect, shutting downIT-dependent applications in power, water,transport, banking and finance, andemergency management.

+/- New technology hardware and software development- Data and information sharing among governments and between government and private institutions- Acceptance of the concept of infrastructure sharing in emergency situations- Legal framework to penalize offenders- Resilience of institutions- Detection of events and BCM effectiveness + Space weather disturbances

Nanoparticle toxicityStudies reveal health impairment due toexposure to widely-used nanoparticles (paint,cosmetics, healthcare). Primary impacts onpublic health, secondary impacts oninvestment in a range of nanotechnologies

- More scientific evidence establishing the cause and effect chain- Legal obligation of the producers to label the negative effects of product usage+ Increase in nano-material and technology use- Public demand for labelling+/- Protection for nano-material and technology use

Data fraud/lossMajor accidental loss of data or fraud triggersbacklash against the organization/bodyholding that data and broader loss ofconfidence in data sharing and accumulation

- Development of best practices for data security- Legal framework to penalize culprits- Information sharing among governments and private firms regarding loss events+ Penetration of Internet, especially user-generated content- Stronger perception of data fraud as a compliance issue (in public discussion)


+ International awareness on the pandemic and its impact+ Transmission ability of the new viral strains (viral evolutionary rule)- Effective monitoring and communication of virus activity+ Emergence of H1N1 and new strains of the virus- Coordination of public and private resources in mitigation planning- Coordination of response and mitigation by different countries- Availability of vaccine for specific disease (H1N1)- Supply-chain preparedness and cooperation- Emergency communication, transportation and treatment infrastructure

Loss of lifeTremendous burden on critical resources and servicesPerhaps long-term impact of vaccination if not thoroughly testedLoss of productivity and economic loss

- International coordination in dealing with these diseases- Availability of vaccine and treatment drugs at affordable prices- Development of generic treatment drugs made available to poor populations- Policy and legal support at international and national levels- Incentives for pharma industry regarding patent rights - Public health policies and education

Loss of lifeLoss of productivityExtra burden on the healthcare systemRe-emergence of drug-resistant bacteria and other pathogensMigration of the diseases to other regions through travel and contacts

- Awareness about the importance of a healthy diet and physical activity- New scientific data on causal links- Advances in diagnostics, drug development and therapeutics- Improved understanding of genetic factors and precise treatment mechanisms+ Health and insurance costs+/- Linkage to productivity and economic development

Increase in death rates due to these diseasesLoss of productivityIncreased healthcare costsDecreased productivity and quality of life

=

+/- EU regulation on how to deal with collective redress and burden of proof+ Activism of consumer protection groups and emergence of new consumer protection laws+ Formation of legal cells working on commission basis

Increased legal costs, which will eventually be borne by consumers and/or taxpayersShifting of business to other countries where liability regimes are less stringent

=

+ Increasing parochialism, especially given current economic conditions and development in coming years+ Internal, regional and international conflicts- Pre-emptive social measures to deal with economic issues- Equitable sharing of resources and infrastructure by all- Fair trade measures through WTO, IMF, etc., and effective governance framework- An international migration framework taking into account the economic hardships of poor countries on onehand and ageing populations on the other

Suffering of people and destruction of resources in forced migrationsIn case of conflict, more retaliatory measures against and barriers to movement of resources and peopleSocietal impacts as/if migrant workers return to home countriesLoss of remittances from diaspora


+/- New technology hardware and software development- Data and information sharing among governments and between government and private institutions- Acceptance of the concept of infrastructure sharing in emergency situations- Legal framework to penalize offenders- Resilience of institutions- Detection of events and BCM effectiveness + Space weather disturbances

Potentially severe disruption to critical services and systems (communications, energy and financial)Disruption of business servicesDisruption of critical government servicesLoss of trust in systems and technologyDirect and indirect economic losses

- More scientific evidence establishing the cause and effect chain- Legal obligation of the producers to label the negative effects of product usage+ Increase in nano-material and technology use- Public demand for labelling+/- Protection for nano-material and technology use

Long-term impact on health and healthcare systemsProduct recallsPlethora of court cases on product liabilityChange in technical and chemical design of nanotechnology and nanochemicalsInsurance claims

=

- Development of best practices for data security- Legal framework to penalize culprits- Information sharing among governments and private firms regarding loss events+ Penetration of Internet, especially user-generated content- Stronger perception of data fraud as a compliance issue (in public discussion)

Loss of trust in the data systemsStandardization of protocols and technology for data storage and transmissionAcceptance of breach of privacy as people share more and more private information through social networking platformsNegative image impact on organizations processing mass data (telecoms, utilities, transportation, governmentalorganizations)



Contributors and Acknowledgements


This report was prepared by the Global Risk Networkof the World Economic Forum in conjunction with itspartners.

Global Risk Network, World Economic Forum Irene Casanova, Associate Director, Global RiskNetworkViktoria Ivarsson, Senior Project Manager, GlobalRisks ReportStéphane Oertel, Associate Director, Global RiskNetworkCarissa Sahli, Team Coordinator, Strategic InsightTeamsSheana Tambourgi, Director, Head of the Global RiskNetwork; Editor, Global Risks 2010

Global Risks Report Partners : Core Team

CitiJohn Ingraham, Managing Director, Risk Architecture,and Head, Risk Aggregation, Citi, USA

Marsh & McLennan Companies (MMC)Alina Lantsberg, Oliver Wyman (MMC), USALucy Nottingham, Oliver Wyman (MMC), USARoland Rechtsteiner, Partner, Oliver Wyman,SwitzerlandChristine Salerno, Director, Corporate SocialResponsibility, Marsh & McLennan Companies (MMC),USAAlex Wittenberg, Partner, Oliver Wyman (MMC), USA

Swiss ReEsther Baur, Director, Head Issue Management &Messages, Swiss Re, SwitzerlandDavid Bresch, Director, Head Sustainability &Emerging Risk Management, Swiss Re, SwitzerlandAnwarul Hasan, Vice-President, Senior Risk Manager,Swiss Re, SwitzerlandKurt Karl, Senior Vice-President, Head of EconomicResearch & Consulting, Swiss Re America HoldingCorp., USAReto Schneider, Director, Head of Emerging RiskManagement, Swiss Re, SwitzerlandRaj Singh, Chief Risk Officer, Member of the ExecutiveBoard, Swiss Re, SwitzerlandLisa Wyssbrod, Director, Senior Issue and PartnershipManager, Swiss Re, Switzerland

The Wharton School, University of Pennsylvania, USAHoward Kunreuther, Cecilia Yen Koo Professor ofDecision Sciences and Public Policy, The WhartonSchool, University of Pennsylvania, USA Erwann Michel-Kerjan, Managing Director, Center forRisk Management and Decision Processes, TheWharton School, University of Pennsylvania, USA

Zurich Financial Services, SwitzerlandDaniel M. Hofmann, Group Chief Economist, ZurichFinancial Services, SwitzerlandKerry Karageorgis, Development Director Global RiskAssessment, Zurich Financial Services, Switzerland Axel P. Lehmann, Chief Risk Officer, Member of theGroup Executive Committee, Zurich FinancialServices, SwitzerlandSamuel Schenker, Research Assistant Global RiskAssessment, Zurich Financial Services, SwitzerlandMichael Szoenyi, Leader Natural Hazards WorkingGroup, Zurich Financial Services, Switzerland Ashutosh Riswadkar, Director Liability Line ofBusiness, Zurich Financial Services, Switzerland

Expert inputOver the past year, the Global Risk Network hasengaged with an extended group of experts inworkshops and meetings held in Copenhagen, Dalian,London, New Delhi, New York, Tokyo, Washington DCand Zurich. Thanks to the wide range of expertise andinvaluable insights provided through these workshops,the Global Risk Network continues to supportmultistakeholder dialogue to improve theunderstanding of global risks.

We would like to thank all of those who contributedfor their time and, above all, their insights:

Giles Archibald, Client Service Group Leader, Mercer(MMC), United KingdomTom Armitage, Vice-President, SeniorCommunications Consultant, Swiss Re, SwitzerlandShumeet Banerji, Chief Executive Officer, Booz &Company, United KingdomKai Bender, Partner, Oliver Wyman (MMC), GermanyAnn Bernstein, Executive Director, Centre forDevelopment and Enterprise (CDE), South AfricaIan Bremmer, President, Eurasia Group, USAAlessio Brown, Head of Reforming the Welfare SocietyResearch Area, Executive Director Global EconomicSymposium (GES), Kiel Institute for the WorldEconomy, GermanyChris Bunting, Secretary-General, International RiskGovernance Council (IRGC), SwitzerlandMatthew Burrows, Director of Analysis and ProductionStaff, National Intelligence Council (NIC), USA Rakesh Chaudhry, Professor of StrategicManagement, IILM Institute for Higher Education, IndiaGraciela Chichilnisky, Professor of Economics,Columbia University, USASean Cleary, Chairman, Strategic Concepts, SouthAfrica



Uri Dadush, Senior Associate and Director,International Economics Programme, CarnegieEndowment for International Peace, USAMichael Denton, Partner, Oliver Wyman (MMC), USAPatrick Dixon, Director and Chief Executive Officer,Global Change, United Kingdom Daniel Drezner, Professor of International Politics,Fletcher School of Law and Diplomacy, USAJohn Drzik, CEO, Oliver Wyman (MMC), USA Rajeev Dubey, Deputy Editor, Businessworld, IndiaThomas Easton, Asia Business Editor, The Economist,Hong Kong SARThomas Epprecht, Director, Risk Expert, Swiss Re,SwitzerlandWilly Fill, Director, Business Continuity Manager, SwissRe, SwitzerlandRaymond Fisman, Professor of Economics andFinance, Columbia Business School, USAHelmut Fluhrer, Chief Executive Officer, MeteoSystems AG, SwitzerlandRobert Fox, Partner, Oliver Wyman (MMC), USA Georges Galey, Vice-President, Senior UnderwriterProperty, Swiss Re, SwitzerlandSusan Glasser, Executive Editor, Foreign PolicyMagazine, USABoris Galonske, Partner, Oliver Wyman (MMC),Switzerland Alan W. Hall, Global Policy Coordinator, Global WaterPartnership (GWP), SwedenGideon Henderson, Professor, 21st Century School,University of Oxford, United Kingdom Satoru Hiraga, Representative Director, Marsh BrokerJapan, Inc., JapanRoman Hohl, Director, Head Agriculture Australasiaand Corporates, Swiss Re, SwitzerlandBlake Hounshell, Managing Editor, Foreign PolicyMagazine, USASteve Howard, Chief Executive Officer, The ClimateGroup, United KingdomJosé Miguel Insulza, Secretary-General, Organizationof American States (OAS), USAYoko Ishikura, Professor, Graduate School ofInternational Corporate Strategy, HitotsubashiUniversity, JapanHastings (Hasty) Johnson, Vice Chairman and ChiefFinancial Officer, Hines, USAParag Khanna, Director, Global Governance Initiativeand Senior Research Fellow, American StrategyProgram, New American Foundation, USAAtul Khosla, Partner, Oliver Wyman, (MMC) IndiaBram A. de Klerk, Group General Manager, SasolLimited, South AfricaRobert Kopech, Partner, Oliver Wyman (MMC), USAand Adjunct Assistant Professor of International andPublic Affairs, School of International and PublicAffairs, Columbia University, USA

Kiyoshi Kurokawa, Professor, National GraduateInstitute for Policy Studies (GRIPS), JapanCharles D. Lake, Chairman and Representative, Aflac,JapanSophie Lambin, Director, Global Thought Leadership,PricewaterhouseCoopers, United Kingdom Bernice Lee, Research Director, Energy, Environmentand Resource Governance, The Royal Institute ofInternational Affairs, Chatham House, United KingdomAnn Li, Vice President, New York City EconomicDevelopment Corporation, USACheng Li, Director of Research and Senior Fellow,Foreign Policy, John L. Thornton China Center,Brookings Institution, USAC. V. Madhukar, Director, PRS Legislative Research,IndiaDon Mango, Managing Director, Guy Carpenter(MMC), USA Trevor Mapplebeck, Partner, Oliver Wyman (MMC),CanadaJohn Merkovsky, Global Leader, Marsh RiskConsulting Practice (MMC), USAMasahiko Metoki, General Manager for InternationalStrategy and Corporate Planning, Japan Post ServiceCo. Ltd, JapanLuis Moreno, President, Inter-American DevelopmentBank, USADavid Nadler, Vice Chairman, Marsh & McLennanCompanies (MMC), USA Moíses Naím, Editor-in-Chief, Foreign PolicyMagazine, USAJeanne Ng, Director, Group Environmental Affairs, CLPHoldings, Hong Kong SARHerbert Oberhänsli, Head, Economic and InternationalRelations, Nestlé, SwitzerlandSandeep Parekh, Visiting Associate Faculty, IndianInstitute of Management Ahmedabad, IndiaRichard T. Pascale, Associate Fellow, Saïd BusinessSchool, University of Oxford, United KingdomMinxin Pei, Tom and Margot Pritzker ‘72 Professor ofGovernment and Director, Keck Center forInternational and Strategic Studies, ClaremontMcKenna College, USA Aaron Pereira, Co-Founder, CanadaHelps andVartana, United KingdomJim Pierce, Managing Director, Marsh (MMC), USA Morten Poulsen-Hansen, Global Risk Project Manager,Group Finance & Operations, Risk Management,Vestas Wind Systems A/S, DenmarkKenneth Prewitt, Carnegie Professor of Public Affairs,School of International and Public Affairs (SIPA),Columbia University, USA Vanessa Rossi, Senior Research Fellow, InternationalEconomics Programme, Chatham House, UnitedKingdom


Michael J. Roux, Chairman, Roux International,AustraliaKarl Sauvant, Special Adviser, UN Millennium Project;Executive Director, Columbia Program on InternationalInvestment, Columbia University, USAOrville H. Schell, Director, Center of US-ChinaRelations, Asia Society, USAStephen H. Schneider, Melvin & Joan Lane Professorfor Interdisciplinary Environmental Studies, WoodsUniversity, USAAndreas Schraft, Managing Director, HeadCatastrophe Perils & Treaty Centre, Swiss Re,SwitzerlandDavid Skilling, Associate Principal, McKinsey &Company, SingaporeKapil Sibal, Minister of Human Resource Developmentof IndiaAndrew Sorkin, Chief Reporter and Editor, Mergersand Acquisitions, The New York Times, USA Andreas Spiegel, Vice-President, Senior ClimateChange Advisor, Swiss Re, SwitzerlandRolf Tanner, Director, Head Political & SustainabilityRisk Management, Swiss Re, SwitzerlandSteven M. Tebbe, Vice-President, EnvironmentalAffairs, NetJets Europe, PortugalGillian Tett, Assistant Editor, Markets, The FinancialTimes, United KingdomDavid Tuckett, Professor, Psychoanalysis Unit,Research Department of Clinical , Educational andHealth Psychology, University College London, UnitedKingdomShailendra Vyakarnam, Director, Centre forEntrepreneurial Learning, University of Cambridge,United KingdomPeter Walsh, Partner, Oliver Wyman (MMC), USAMichael Weissel, Partner, Oliver Wyman (MMC), USA Geoffrey West, President and Distinguished Professor,Santa Fe Institute, USA Martin Weymann, Vice-President, Senior RiskManager, Swiss Re, Switzerland Urs Widmer, Vice-President, Senior Medical Officer,Swiss Re, SwitzerlandLinda Yueh, Fellow in Economics, University of Oxford,United KingdomSimon Zadek, Chief Executive, AccountAbility, UnitedKingdomErnesto Zedillo Ponce de Leon, Director, Yale Centerfor the Study of Globalization, Yale University, USAKaspar Zellweger, Vice-President, Senior RiskManager, Swiss Re, Switzerland

Internal ReviewersJennifer Blanke, Director, Head of the GlobalCompetitiveness Network, World Economic ForumRobert Greenhill, Chief Business Officer, WorldEconomic Forum

Adrian Monck, Managing Director, Communicationsand Media Relations, World Economic ForumRichard Samans, Managing Director, World EconomicForumAndré Schneider, Managing Director and ChiefOperating Officer, World Economic ForumKristel Van der Elst, Director, Head of ScenarioPlanning, World Economic ForumDominic Waughrey, Senior Director, Head ofEnvironmental Initiatives, World Economic Forum

Online visualization development for the RiskInterconnections Map (RIM)Moritz Stefaner, Research Assistant on the MACEProject, Potsdam University of Applied Sciences;Freelance Information Visualizer

We would like to recognize Miguel Perez, NominationManager, Global Leadership Fellow, World EconomicForum, for his valuable collaboration on the GlobalRisks Perception Survey and visualization project.

Members of the Global Agenda Councils onChronic Disease & Conditions

We would particularly like to thank the followingpeople for their valuable assistance and input on thesection on chronic diseases in this report:

Sania Nishtar, Founding President, Heartfile, Pakistan Ala Alwan, Assistant Director-General,Noncommunicable Diseases and Mental Health, WorldHealth Organization (WHO), SwitzerlandEva Jané-Llopis, Head, Chronic diseases andWellness, World Economic Forum, SwitzerlandPeter Anderson, Regional Editor, Europe, Drug andAlcohol Review, NetherlandsGustavo Averbuj, Chief Executive Officer, Ketchum,ArgentinaCary Cooper, Professor of Organisational Psychologyand Health, Lancaster University Management School(LUMS), United KingdomOliver Harrison, Director, Public Health and HealthPolicy, Government of Abu Dhabi, United ArabEmiratesHelen Herrman, Secretary for Publications, WorldPsychiatric Association, AustraliaMartin RJ Knapp, Director, Personal Social ServicesResearch Unit, London School of Economics andPolitical Science, United KingdomPaul Litchfield, Chief Medical Officer and Head, Healthand Safety, BT, United KingdomRachel Nugent, Deputy Director, Global Health, Centerfor Global Development, USA






1 5 10 20 10 50 250 1000

IraqIraq














PandemicsPandemics

MigrationMigration

















IranIran




Iraq










Water scarcity

Biodiversity loss

Extreme weather

Infectious disease

Pandemics

Migration


NatCat: Earthquake

Chronic disease

Air pollution


CII breakdown

Data fraud / loss

Liability regimes


Fiscal crises


North Korea

Oil price spikes




Iran



NatCat: Cyclone










Likelihood

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

2-10

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22

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24

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27 28 12

1314 1516

17

18

19

11

1

3

4

5

8 9

10

2 67






1 5 10 20 10 50 250 1000

IraqIraq














PandemicsPandemics

MigrationMigration

















IranIran




Iraq










Water scarcity

Biodiversity loss

Extreme weather

Infectious disease

Pandemics

Migration


NatCat: Earthquake

Chronic disease

Air pollution


CII breakdown

Data fraud / loss

Liability regimes


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North Korea

Oil price spikes




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NatCat: Cyclone










Likelihood

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

2-10

bill

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22

23

24

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27 28 12

1314 1516

17

18

19

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1

3

4

5

8 9

10

2 67





COMMITTED TO

IMPROVING THE STATE

OF THE WORLD





ISBN: 92-95044-31-2978-92-95044-31-9

REF: 201209





Documents

IMPROVING THE STATE OF THE WORLD Global Risks 2010Global Risks 2010 | 3 Preface 4 Executive Summary 5 1. The Global Risks Landscape 2010 7 2. Fiscal Crises and Unemployment 14 3. Underinvestment