Global Economy
World Economic Forum says financial crisis has drained the world’s capacity for dealing with shocks
By Finfacts Team
Jan 13, 2011 - 2:53 AM

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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. These are the conclusions of the World Economic Forum’s Global Risks 2011, Sixth Edition, launched on Wednesday.

"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,” said Robert Greenhill, managing director and chief business officer at the World Economic Forum.

This year's annual meeting of the Forum will be held in Davos, Switzerland from Jan 26th.

The risk report says economic disparity and global governance failures are shaping the evolution of many other global risks, and inhibit our 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.

Through a combination of quantitative and qualitative survey methodologies, Global Risks 2011 concludes that three key clusters of risk are creating significant liabilities for the coming decade:

Macroeconomic risks: 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 form a complex nexus of economic risk. Crisis-induced indebtedness has reduced the capacity to handle further shocks to critically low levels.

Daniel M. Hofmann, chief economist, Zurich Financial Services Group noted: “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: the report says 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$ 1.3trn 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. Effective international cooperation is urgently needed.

Resource limits to growth: the report says 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. 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. “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,” said John Drzik, president and CEO, Oliver Wyman Group (Marsh & McLennan Companies).

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

Jacob Wallenberg, chairman of the Swedish investment firm, Investor AB, will be a co-chair at this year's Davos meeting. Wallenberg is a member of Sweden's most enduring business family. His great-great-grandfather André Oscar Wallenberg in 1856 founded the Stockholms Enskilda Bank, the predecessor of today's Skandinaviska Enskilda Banken (SEB). He speaks here on current challenges:

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