WEF’s Global Risks 2011: New Risk Clusters in Focus

In the lead-up to its annual meeting at Davos, Switzerland, the World Economic Forum (WEF) issued the report Global Risks 2011. The report is set in the context of the WEF’s new platform, the Risk Response Network. The organization’s proclaimed objective to translate analysis into the development of practical solutions for the planet’s future, gives stakeholders and decision-makers an additional reason to study the findings of Global Risks 2011 thoroughly. This article reviews methodological issues as well as the major risk clusters identified in the report.

Approach and value added

The WEF, chaired by its well-connected founder, Klaus Schwab, draws the expertise, on which Global Risks 2011 is built, from a network of Global Agenda Councils, and from a survey of 580 leaders around the world. Risk research conducted for the report was also supported by several institutional partners from both the private sector and academia (Marsh & McLennan Companies, Swiss Reinsurance Company, Zurich Financial Services, and the Wharton Center for Risk Management at the University of Pennsylvania).

In methodological terms, the survey conducted for this report measures the risk perception of the participants. They were asked to assess likelihood and impact of some 37 global risks divided into five categories (economic, environmental, societal, geopolitical, and technological risks), which might affect business and societies over the course of the next ten years. Such perception research is not without problems which the report also acknowledges. One has to be aware of possible judgment biases by respondents, due to certain cognitive heuristics they might apply, such as availability, representativeness and anchoring (Kahneman/Tversky). Therefore, risk awareness might differ depending on the area of knowledge (e.g. economics or business) and the geographical area (e.g. Europe or Asia) the respondents come from.

However, by also asking for the interconnectedness of risks, with a global and midterm perspective, the editors of the survey  strive to cancel out major biases. In fact the Risk Interconnection Map really is the most outstanding feature of WEF’s global risk research. Measuring the relationship among risks, reminds the reader of social network analysis, whereby the importance of individual ‘nodes’ can be determined by the number, direction and strength of various connections with other nodes. In the context of global risks, the added value consists of introducing a weighting method for identifying both central risks and risk clusters.

This ingenious approach not only leads to a number of surprising insights, as we will see below. Furthermore, analyzing the interconnections between risks is also an appropriate procedure facing the high degree and complexity of future risks. And, given the WEF’s ambition to also improve risk management by involving stakeholders across the world, a working agenda based on a common prioritization of risk challenges is key.

The findings

The report highlights two cross-cutting risks, ‘economic disparity’ and ‘governance failures’, as particularly central and significant because they affect so many other global risk topics. These findings reflect the perception that the crisis of globalization has also brought about more fragmentation between countries and within countries, in the economic, political and social spheres. While the adequate answer to the rising risk of nationalism and social instability would consist of solving equity issues by improving international cooperation, the prominent risk perception of governance failures suggest that governments seem to be incapable of keeping up with the challenges. Examples given include the climate change negotiations, the Doha trade negotiations, the Millennium Development Goals, and the reform of the UN Security Council.

Following this more general insight, the report details three main risk clusters, that will definitely require better international governance in order to develop effective risk management processes and solutions. Two of them should be familiar to a broader audience, by now.

The first already omnipresent risk cluster is called the ‘macroeconomic imbalances nexus’, connecting the risks of currency volatility, fiscal crisis and asset price collapse. The cluster concerns the risks emanating from high levels of debt in developed countries on the one hand, including sovereign default risks, and the risks of increasing capital flows to emerging countries, possibly creating new ‘bubbles’ and overheating of these economies.

The ‘water-food-energy nexus’ has also become a cluster, whose separate components have gained broader media attention. The reports brings it altogether, whereby risks categorized as environmental (climate change), societal (water and food security) and economic (energy price volatility) are linked with each other. In short, the nexus describes future trends following from both population and economic growth, as well as climate effects, that will entail an increasing usage of energy and water for food production; moreover both the water intensity of energy production, and the energy intensity of water production will rise. If not managed properly on a global level, the risks deriving from a higher demand of scarce water, food and energy resources, will likely cause political and social instability or even geopolitical conflict.

The really surprising result of Global Risks 2011 is the prominence of the third cluster. It is called the ‘illegal economy nexus’. Grouped within the geopolitical risk category, the cluster connects state fragility, corruption, organized crime and illicit trade. This new focus on the drivers of transnational crime is overdue. It also adds credibility to the WEF’s risk analysis since the diagnosed cross-cutting risks of economic disparity and governance failures account for creating the opportunities criminals are ready to exploit. The report is also right in stressing that advanced economies produce much of the demand for illicit goods. Apart from the massive material cost inflicted on business and budgets, criminal networks are also capable of undermining societies and states increasing the risks of social unrest and state failure. In turn, the risks stemming from fragile states are related to issues of international security, such as terrorism and geopolitical conflicts. Serious international regulation, suited to curtail illegal profits, which is the most effective way to tackle the illegal economy, is required in the future. One critical area would be the harmonization and proper enforcement of anti-money laundering laws, targeting the most vulnerable flank of transnational crime.

Risk responses

Global Risks 2011 is about raising risk awareness for the most pressing risk complexes. Some additional information is included about so-called risks to watch, such as cyber security, resource security, weapons of mass destruction and demographic challenges. Not in the focus of risk perception in this year’s report are issues such as space security, slowing of Chinese economy (different from last year’s report), ocean governance and technology risks. The risk weighting through the interconnecting approach does not imply however, that these risks can be neglected.

The WEF’s pretense is not only to provide innovative risk analysis but also to improve international responses to those risks. The framework for risk response introduced at the end of this report is still generic, including the options of avoiding, mitigating, adapting and transferring of risks. Global Risk Affairs will watch the development of the WEF’s new Risk Response Network over the next months. It is to be expected, that the regard for risk interconnections, when considering risk responses, will make it easier to detect and avoid possible adverse effects on related second or third order risks. At the same time, in responding to central risks, difficult trade-offs with respect to other risks are sometimes necessary. The risk interconnection map can inform the international debate about the range of trade-offs. Both the risk report and the response network will be of strategic and operational relevance to the international debate and decisions made by leaders worldwide.