VERA – Forward Visions on the European Research Area

VERA is funded by the European Union's FP7 programme for research,
technological development and demonstration under grant agreement no 290705

Global Risks 2012

Code: E01

Primary project information

Lead: World Economic Forum
Additional project partners: Risk Response network, March & McLennan Companies, Swiss Reinsurance Company, Wharton Center for Risk Management (University of Pennsylvania), Zurich Financial Sercives
Type of activity: FLA/ Survey
Date conducted: 2011
Date of Publication: 2012
Duration: 1 YEAR
Summary: Economic imbalances and social inequality risk reversing the gains of globalization, warns the World Economic Forum in its report Global Risks 2012. These are the findings of a survey of 469 experts and industry leaders, indicating a shift of concern from environmental risks to socioeconomic risks compared to a year ago. Respondents worry that further economic shocks and social upheaval could roll back the progress globalization has brought, and feel that the world’s institutions are ill-equipped to cope with today’s interconnected, rapidly evolving risks. The findings of the survey fed into an analysis of three major risk cases: Seeds of Dystopia; Unsafe Safeguards and the Dark Side of Connectivity. The report analyses the top 10 risks in five categories - economic, environmental, geopolitical, societal and technological - and also highlights "X Factor" risks, the wild card threats which warrant more research, including a volcanic winter, cyber neotribalism and epigenetics, the risk that the way we live could have harmful, inheritable effects on our genes. Key crisis management lessons from Japan’s earthquake, tsunami and nuclear disasters are highlighted in a special chapter. (p. 10)
Financed by: World Economic Forum
Budget: N/A
Research area/market/industry/sector: Economy, Security
Main report (full title): Global Risks 2012 Seventh Edition

GRAND CHALLENGES

Economic Challenges: Major systemic financial failure; Chronic fiscal imbalance; severe income disparity; extreme volatility in energy and agriculture prices; recurring liquidity crises; unforeseen negative consequences of regulation; unmanageable inflation or deflation; Chronic labor market imbalances; prolonged infrastructure neglect; hard landing on an emerging economy
Economic Challenges Shortlist: Major financial system failure; Cronic fiscal imbalance; Severe income disparities; Extreme volatility in energy and agriculture prices; Recurring liquidity crises; Unforeseen negative consequences of regulation; Unmanagable inflation or deflation; Chronic labour market imbalances; Prolonged infrastructure neglect
Geopolitical Challenges: Diffusion of weapons of mass destruction, global governance failure, terrorism, critical fragile states, failure of diplomatic conflict resolution, pervasive entrenched corruption, militarization of space, entrenched organized crime, widespread illicit trade
Geopolitical Challenges Shortlist: Diffusion of weapons of mass destruction; Terrorism; Fragile states; Failure of diplomatic conflict resolution; Pervasive entrenched corruption; Militarisation of space; Entrenched organised crime; Widespread illicit trade
Societal Challenges: Water supply crises; Food shortage crises; Unsustainable population growth; Backlash against globalization; Ineffective drug policies; Vulnerability to pandemics; Rising religious fanatism; Mismanagement of population ageing; Unmanaged migration; Rising rates of chronic diseases
Societal Challenges Shortlist: Water supply crises; Food shortage crises; Unsustainable population growth; Backlash against globalization; Ineffective drug policies; Vulnerability to pandemics; Rising religious fanatism; Mismanagement of population ageing; Unmanaged migration; Rising rates of chronic diseases;
Technical Challenges: Critical system failure; Cyber attack; Mineral resource supply vulnerability; Massive incident of data fraud or theft; Proliferation of orbital debris; Massive digital misinformation; Unintended consequences of new life science technologies; Unintended consequences of climate change mitigation; Unintended consequences of nanotechnology; Failure of intellectual property regime
Technical Challenges Shortlist: Critical system failure; Cyber attack; Mineral resource supply vulnerability;Massive incident of data fraud or theft; Proliferation of orbital debris; Massive digital misinformation; Unintended consequences of new life science technologies; Unintended consequences of climate change mitigation; Unintended consequences of nanotechnology; Failure of intellectual property regime;

Summary of relevant aspects

Connecting fields: interconnected with each other are: global governance failure, critical system failure, unsustainable population growth, rising greenhouse gas emissions, chronic fiscal imbalance, severe income disparity, extreme volatility in energy and agriculture prices, unforseen negative consequences of regulations, major systemic financial failure; these interconnected fields span the scope in which all other GCs of this report fit in.
Aspects of RTI Governance: Resiliency in Complex Systems May Come from Redundancy
When employees and customers of car manufacturers in Detroit saw news of the Japan tsunami, most would not have expected it to affect them personally. However, it soon became apparent that these manufacturers source parts from various companies, which in turn source microchip controllers from a company called Renesas. The plant where Renesas produces many of those chips, north of Tokyo, had been heavily damaged by the earthquake. With no alternative suppliers of automotive microcontroller chips, car production temporarily shut down. The report uses the example of the Fukushima disaster to illustrate that in RTI lean structure are not always the key to success but building redundancy is at times more requested to sustain growth. The Development Bank of Japan became the first in the world to offer more advantageous borrowing terms to companies that took steps to increase resilience in case of an emergency. This policy offers one indication that risk recognition may be improving. The bank screens 18 metrics on business continuity, preparedness and mitigation before deciding on loan premiums (see Figure 24). (p.32)
Other Aspects of Governance: Multipolarity without Multilateralism- In such a world, we are unlikely to see an overarching, comprehensive, unitary approach to global governance. Current trends suggest that global governance in 2025 will be a patchwork of overlapping, often ad hoc and fragmented efforts, with shifting coalitions of member nations, international organizations, social movements, NGOs, philanthropic foundations, and companies. This fragmentation of interests and actors will further erode prospects for the United Nations to strengthen consensus among its members for effective multilateral action—particularly within the current or an expanded Security Council—or for sustaining broader reforms of the UN system.
This multipolarity is also unlikely to include a single dominant nation-state with the overwhelming power and legitimacy to act as the agent of institutional overhaul. (See below for discussion of the role of the US.) Most of th pressing transnational problems— including climate change, regulation of globalized financial markets, migration, failing states, crime networks, etc.—are unlikely to be effectively resolved by the actions of individual nation-states. The need for effective global governance will increase faster than existing mechanisms can respond. Leaders will pursue alternative approaches to solving transnational problems—with new institutions, or more likely, many informal groupings. Recent trends suggest that existing multilateral institutions—which are large and cumbersome—will have difficulty adapting quickly enough to undertake new missions, accommodate changing memberships, and obtain necessary resources. NGOs and philanthropist foundations— concentrating on specific issues—increasingly will be a part of the landscape but are likely to be limited in their ability to effect change in the absence of concerted efforts by multilateral institutions or governments. Quests for greater inclusiveness—to reflect the emergence of newer powers—may make it harder for international organizations to tackle transnational challenges. Respect for the dissenting views of member nations will continue to shape the agenda of organizations and limit the kinds of solutions possible. Large and enlarging organizations—from the UN General Assembly to NATO and the EU—may find the challenges to be particularly difficult. There is unlikely to be any effort to “zero base” the international organizational structure such that some organizations go away or are reinvented. (p.82) ... Issue groups likely will help develop and diffuse standards and regulations for various realms, including information technology (IT), regulatory regimes, and management of the “new post-industrial economy.” For some kinds of issues, the networks likely will provide the basis for agreement among nation-states. With the groundwork done in informal contexts, nation-states will be able to adopt problem-solving measures, gaining legitimacy and sometimes taking credit for initiatives, while avoiding the stigma of solutions being imposed by external international organizations. (p.85)
Surprising Issues: yearly updated, priorities of the last years are compared to the 2012 results; water supply cises and food shortage crises are among the top 3 global risks in terms of impact but were not predominant the years before (p.12); methodologically very interesting!
Background information: main funding agencies – the Academy of Finland and the Finnish Funding Agency for Technology and Innovation (Tekes) – to carry

Scenarios

Scenario 1: Seeds of Dystopia
Dystopia, the opposite of a utopia, describes a place where life is full of hardship and devoid of hope. Analysis of linkages across various global risks reveals a constellation of fiscal, demographic and societal risks signalling a dystopian future for much of humanity. The interplay among these risks could result in a world where a large youth population contends with chronic, high levels of unemployment, while concurrently, the largest population of retirees in history becomes dependent upon already heavily indebted governments. Both young and old could face an income gap, as well as a skills gap so wide as to threaten social and political stability. This case underscores the danger that could arise if declining economic conditions jeopardize the social contracts between states and citizens. In the absence of viable alternatives, this could precipitate a downward spiral of the global economy fuelled by protectionism, nationalism and populism. (p.10)
Scenario 2: How Safe are our Safeguards?
As the world grows increasingly complex and interdependent, the capacity to manage the systems that underpin our prosperity and safety is diminishing. The constellation of risks arising from emerging technologies, financial interdependence, resource depletion and climate change exposes the weak and brittle nature of existing safeguards – the policies, norms, regulations or institutions which serve as a protective system. Our safeguards may no longer be fit to manage vital resources and ensure orderly markets and public safety. The interdependence and complexity inherent in globalization require engaging a wider group of stakeholders to establish more adaptable safeguards which could improve effective and timely responses to emerging risks. (p.10)
Scenario 3: The Dark Side of Connectivity
The impacts of crime, terrorism and war in the virtual world have yet to equal that of the physical world, but there is fear that this could change. Hyperconnectivity is a reality. With over five billion mobile phones coupled with internet connectivity and cloud-based applications, daily life is more vulnerable to cyber threats and digital disruptions. The related constellation of global risks in this case highlights that incentives are misaligned with respect to managing this global challenge. Online security is now considered a public good, implying an urgent need to encourage greater private sector engagement to reduce the vulnerability of key information technology systems. While significant material and human resources were required in the past to exercise political or economic influence on a global scale, borders have become permeable as power shifts from the physical to the virtual world. A healthy digital space is needed to ensure stability in the world economy and balance of power. (p.11)
Actions/solutions implied: Risk and Responsibility in a Hyperconnected World Project: This is further explored in the case on the Dark Side of Connectivity in this report. Cyber security is not a problem that any one organization, private or public, can solve alone, as many aspects can be analysed in economic terms as negative externalities, coordination failures or instances of game theory’s Prisoner’s Dilemma. Initial insights highlighted that cyber security solutions exist, but human behaviour is frequently a key weakness: while best practices are led at the executive level, an understanding of the risk lies at the board level. Providing executives with information and tools to understand and mitigate the vulnerabilities within their organizations presented itself as one way to create immediate impact. In addition to improving the resilience of organizations, good “cyber hygiene” simultaneously contributes to the security of the overall environment. To reduce the overall levels of residual risk in the global value chain, a critical mass needs to be achieved. As with immunizing a population, 100% coverage is not required, but immunization levels must be sufficient to isolate outbreaks and disrupt the spread of disease. The Risk and Responsibility in a Hyperconnected World project is developing tactics to move toward this critical mass. (p.46)

Risks in Depth: Supply Chain and Transport Initiative::: Organizations are constantly assessing their own supply chains and transport networks, as well as their capability to respond quickly to unexpected disruptions. Most of these are managed at the local level; however, the nature of global systemic disruptions means there are limits to any one organization’s ability to fully address vulnerabilities on its own. Better multi-stakeholder models are required to plan for contingencies and build greater systemic resilience that ill insulate against shocks to the system, no matter where they originate. In particular, public-private engagement in collaborative risk assessment, as well as greater sharing of data around threats and vulnerabilities, could move the public policy conversation from prescriptive regulatory approaches to a more focused collaboration on solving for emerging eats and vulnerabilities. The concept of “anticipatory governance” could be applied to challenges in regulating global supply chains. This approach could avoid repeating some of the unmanageable post-9/11 prescriptive responses, such as 100% cargo inspection regimes. Regional multi-stakeholder task forces could take collaborative action regarding regional differences in risk exposure, economic mix and regulation requirements. Such coordination could improve the compatibility of risk management efforts, improve sharing of response plans and intelligence, strengthen risk measurement and understanding, and facilitate the development of mechanisms to allow the movement of people and goods during a disruption – particularly those most critically needed by society. (p. 41)

Decision-makers need to improve understanding of incentives that will improve collaboration in response to global risks
- Trust, or lack of trust, is perceived to be a crucial factor in how risks may manifest themselves. In particular, this refers to confidence, or lack thereof, in leaders, in the systems which ensure public safety and in the tools of communication that are revolutionizing how we share and digest information
- Communication and information sharing on risks must be improved by introducing greater transparency about uncertainty and conveying it to the public in a meaningful way. The Forum is also exploring the development of a real-time risk barometer as a dynamic tool to track shifting perceptions of likelihood and impact of global risks.
Who benefits from the actions taken?: industry executive board members; IT security experts; transport and logistics experts; supply chain experts; World Economic Forum’s Risk Response Network

Meta information

Time horizon: 2012 (unspecific)
Methods: Survey, Interviews
Target Group: Policy makers, members of the World Economic Forum
Objectives: Raise the awareness of policiy makers to focus on certain global risks and their effects on the global economy; these global risks are further explored in the report
Countries covered: Spain
ERA actors/stakeholders mentioned: Risk Response network, March & McLennan Companies, Swiss Reinsurance Company, Wharton Center for Risk Management (University of Pennsylvania), Zurich Financial Sercives; Klaus Schwab is Executive Chairman of the World Economic Forum; W. Lee Howell, Managing Director, Member of the Managing Board
Geographic scope:

Entry Details

Rapporteur: Susanne Giesecke
Rapporteur's organization: AIT
Entry Date: 26.07.2012