Thursday, January 13, 2011

Economy: Grave Global Risks Call for Extensive Reforms

By Richard Johnson
Courtesy IDN-InDepth NewsAnalysis


LONDON (IDN) - The world is confronted with a rather difficult but for sure not a hopeless situation, says the World Economic Forum's 'Global Risks 2011' casting a close look at the global financial crisis and its devastating impact significantly on some of the developed economies.

The report launched on January 12 states: The financial crisis has drained the world's capacity for dealing with shocks. The frequency and severity of risks to global stability have amplified, while the ability of global governance systems to deal with them has not.

The report refers to the United States' National Intelligence Council and the European Union's Institute for Security Studies which recently concluded that current governance frameworks will be unable to keep pace with looming global challenges unless extensive reforms are implemented.

"Increasingly, emerging economies feel that unfairly they have insufficient influence in international institutions as they are currently designed. Yet there is uncertainty over the ability and willingness of rising powers to shoulder a greater share of global responsibilities, as well as reluctance on the part of established powers to recognize the limits of their own power," says the report

Robert Greenhill, Managing Director and Chief Business Officer at the World Economic Forum said: "Twentieth century systems are failing to manage 21st century risks; we need new networked systems to identify and address global risks before they become global crises."

The report finds that economic disparity and global governance failures are shaping the evolution of many other global risks, and inhibit the governments' capacity to respond to them. "The interconnectedness and complexity of issues mean that unintended consequences abound, and traditional risk response mechanisms often simply shift risk to other stakeholders or parts of society."

Using a combination of quantitative and qualitative survey methodologies, Global Risks 2011 co-edited by Kristel Van der Elst and Nicholas Davis points to three key clusters of risk that are creating significant liabilities for the coming decade.

There are, for example macroeconomic risks. The report argues that the global financial crisis was built on longer term structural weaknesses in the global economy. Macroeconomic imbalances, fiscal crises in the developed economies, massive unfunded social liabilities and weak financial markets together form a complex nexus of economic risk.

Crisis-induced indebtedness has reduced the capacity to handle further shocks to critically low levels, it says.

UNSUSTAINABLE

Expanding on the theme, Daniel M. Hofmann, Chief Economist, Zurich Financial Services Group ('Zurich'), said: "Current fiscal policies are unsustainable in most industrialized economies. In the absence of far-reaching structural corrections, there will be a high risk of sovereign defaults."

Christian Mumenthaler, Chief Marketing Officer, Reinsurance and Member of the Executive Committee, Swiss Re, Switzerland, added: "Long-term unfunded liabilities created by ageing populations mean that fiscal pressures will continue to grow. It is only through true public-private partnerships that we can ensure that the related financial challenges are addressed and that increased longevity remains an entirely positive trend for society."

The illegal economy is the second key cluster of risk. Global Risks 2011 finds that greater numbers of failed and fragile states, increasing levels of illicit trade, organized crime and corruption form a nexus of criminal risk.

A networked world, governance failures and economic disparity create opportunities for illegality to flourish. In 2009, the value of illicit trade around the globe was estimated at US$ 1.3 trillion and growing. These risks, while creating huge costs for legitimate economic activities weaken states, threaten development opportunities, undermine the rule of law and keep countries trapped in cycles of poverty and instability, say the report. It calls for effective international cooperation.

The third risk, according to the study, comprises of resource limits to growth. The world faces hard limits at the most basic level in terms of water, food and energy. Rising populations and consumption and climate change drive this challenge, while interconnections between these issues make response difficult.

In fact, most interventions only create new and worse problems, or shift risk across the nexus. Shortages of core resources will only create more conflict between the social groups, nations and industries that need them, cautions the report.

John Drzik, President and Chief Executive Officer, Oliver Wyman Group (Marsh & McLennan Companies) said: "Demand for food, water and energy resources is growing by double digits. Yet chronic fiscal deficits are threatening investments in infrastructure crucial to improving availability and access to them. The resulting shortages threaten global prosperity."

THREE CLUSTERS OF RISKS

In addition to these three clusters of risk, Global Risks 2011 identifies five emerging risks to watch:

- Cybersecurity: the new frontier for controlling information, from hackers and massive service failures to the little-understood possibility of cyberwarfare between nation states.

- High population growth: in fragile, resource-constrained countries, population growth may result in "population cluster bombs", increased violence and state collapse.

- Resource scarcity: limits on commodities, water and energy put stringent limits on growth and create conflict hotspots.

- Retrenchment from globalization: as economic inequality grows, a populist backlash against globalization could fracture economic and political integration.

- Nuclear and biological weapons threats are of renewed concern in a fragile world.

Against this backdrop, said a media release, the World Economic Forum will launch a new Risk Response Network at the World Economic Forum Annual Meeting 2011, Davos, Switzerland, taking place from January 26 to 30.

"The network will bring a new approach to addressing the complexity of risk that leaders are facing and enable them to capture the upside of those risks," the media release said.

Howard Kunreuther, Co-Director of the Wharton Risk Management and Decision Processes Center, said, "If business leaders and decision-makers can overcome the behavioral biases towards immediate, short-term solutions and switch to longer term thinking, then they will have made significant progress in adopting an attitude suited to the mitigation of increasingly complex and interlinked global risks."

Published in cooperation with Marsh & McLennan Companies, Swiss Reinsurance Company, the Wharton Center for Risk Management and Zurich, Global Risks 2011 draws on the insights of 580 expert respondents to the Forum’s Global Risks Survey 2010 across stakeholder groups and regions, measuring perceptions of risk likelihood, impact and interconnections for 37 global risks over a 10-year time horizon.

The results of this survey are included in the report. Global Risks 2011 also provides insights on a number of emerging risks and outliers to this year’s global risk landscape that could spring a surprise in the future.

POSITIVE NOTE

The Global Risks 2011 does not discuss the impact of the financial crisis on the emerging economies in developing lands. However the World Bank did so and struck a positive note in September 2009.

In a book titled 'The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World', the World Bank said that almost half of global growth was at that time coming from developing countries. "As a group, it is projected that their economic size will surpass that of their developed peers in 2015," it added.

“Developing countries have come to the global economy’s rescue,” said Otaviano Canuto, World Bank Vice President for Poverty Reduction and Economic Management (PREM), and co-editor of the book. “They are the new locomotives of growth which will move global growth forward while high-income countries remain stagnant.”

According to the publication, growth in developing countries was estimated to reach 6.1 percent in 2010, 5.9 percent in 2011, and 6.1 percent in 2012, while corresponding figures are 2.3 percent, 2.4 percent, and 2.6 percent for high-income countries.

These diverging growth prospects continue in the medium term, said the publication, adding that five factors account for it: faster technological learning, larger middle- classes, more South-South commercial integration, high commodity prices, and healthier balance sheets that will allow borrowing for infrastructure investment.

"The economic horizon of the developing world is promising,” said Marcelo Giugale, World Bank's Director for Poverty Reduction and Economic Management in the Latin America and Caribbean Region, and co-editor of the study.

"The rebalancing of global growth toward a multiplicity of engines will give the developing countries new relevance. It will also change their policy agendas: on average, economic management will be stronger, governments will be better, and the beginning of the end of poverty will be within reach.”

The study urged the developing countries to take advantage of their relatively healthier fiscal positions to foster inclusive growth -- in particular better targeting of social programmes, greater emphasis on giving people the same opportunities, and business environments that facilitate the creation of formal jobs.

Other upcoming, developing-country trends identified in the book include the recovery of remittances, an increase in South-South trade, rising investment by sovereign wealth funds, more conservative debt management, and progress by many governments in gaining public trust.