The World Economic Forum released Global Risks 2010, its annual report on the most significant global risks facing the global economy, in a presentation held at Marsh’s London office.
The report, which the WEF has prepared in each of the last five years, highlighted the interdependence of the global community in facing both catastrophe risks, such as the Haitian earthquake, but also the systemic risks, which may constitute even greater potential hazards for the world community.
“Events of the past year have revealed a fundamental need to change thinking on global risks and how they are managed,” said the WEF’s bulletin. “With unprecedented levels of interconnectedness between all areas of risk, the report stresses that the need to combat governance gaps globally is greater than ever. It argues that this can only be addressed by an overhaul of current values and behaviours by decision-makers to improve coordination and supervision.”
Robert Greenhill, the WEF’s Managing Director and Chief Business Officer, introduced the report. He underscored the “challenges created by these unprecedented levels of interconnectedness between risks.” He described the situation in the aftermath of the financial crisis and the ensuing recession as having “created a more vulnerable environment where unaddressed risks may become tomorrow’s crises.”
He cited growing threats from “transnational crime, bio-diversity and cyber liability,” as just a few examples of the types of hazards that, as they don’t demand immediate action, tend to be put off. Even if countries have “spent much treasure” on combating immediate problems, they still need to consider what can be done about problems that, while they don’t pose an immediate threat, will, if left unaddressed, eventually blow up.
Daniel M. Hofmann, group chief economist of Zurich Financial Services discussed the economic side of global risks. “The events of the last year have shown that there are underlying risks within the global economy that need to be addressed,” he said. “In reaction to the financial crisis, many countries have put themselves at risk of overextending their fiscal positions and being burdened with extremely high levels of debt. This could put upward pressure on real interest rates, rein back growth and lead to protracted high levels of unemployment.”
Hofmann pointed to higher food prices, rising oil prices, the fall of the dollar and the situation in China as particular concerns. These, along with a number of others, could herald future fiscal emergencies, he warned.
Country debt levels, which have reached heights that Hofmann deems are “unsustainable,” cause particular concern. He pointed out that “when a country’s debt exceeds 90 percent of its GDP, it reduces its growth by around one percent.” Thus over time debt levels are a drag on its economy, which in turn make it even harder to lower its debt to a sustainable level.
Swiss Re’s Chief Risk Officer Raj Singh cited figures from the World Bank that it requires around $35 trillion just to sustain global infrastructures. The figure includes the costs of maintaining agricultural production, especially water resources, as well as roads and other transportation costs.
Singh expressed particular concern over food production, as the world’s population is expected to expand to around 9 billion by 2050. “We need a vast increase in food production to feed the growing world population, and a billion people are already undernourished,” he said. “Billions of dollars need to be spent on water provision, energy supply, transport and climate change adaptation measures. Governments must work together with the private sector to make it happen. Insurers can provide risk management tools that create greater financial stability for farmers and the agriculture industry.”
John Drzik, CEO of Oliver Wyman, an MMC operating company, picked up on both the need to improve infrastructure and the “interdependence of risks.” As an example he noted that the “recent drop in oil prices has been good for consumers, but has also contributed to a significant cut in much-needed investment in energy infrastructure and renewable energy projects.”
However, there’s also a feedback in creating renewable energy sources, such as bio fuels, as “they are based on food products, corn, etc.,” he said. In effect using bio fuels, while it increases renewable energy supplies, also reduces the amount of land used to grow food for people to eat.
All of the presenters stressed that only through coordinated efforts, between governments and private businesses, including the insurance industry, can these sorts of global threats be adequately considered and measures taken to contain the worst impacts.
The report will be presented at the WEF’s Davos summit, which begins January 27. Go to www.weforum.org for further information on the meeting.
Source: World Economic Forum press conference
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