Weakened World Economy Continues to Face Multiple Global Risks

By | January 13, 2011

The financial crisis has to some extent lessened its impact on the economic situation in many countries, notably the “developed” ones, but it nonetheless remains an overall factor in the ability of governments and industries to deal with a host of risks that aren’t going to go away.

That rather bleak assessment is the basic conclusion of the sixth edition of the Global Risks Report prepared for presentation at the World Economic Forum (WEF) in Davos, Switzerland later this month.

In the presentation on Wednesday at Marsh’s office in London, Robert Greenhill, Managing Director and Chief Business Officer of the WEF, warned that “20th century systems are failing to manage 21st century risks.” He stressed the importance of the “interconnectedness” of the types of risks the world faces, even as the economic crisis has weakened the overall ability of governments to address them and find solutions.

The WEF report singles out “economic disparity and global governance failures” as the two major roadblocks that impede the creation of practical solutions to deal with global risks. As a result many of the current solutions that governments have employed – trade embargoes, currency management, industry regulations, etc. – have tended only to “simply shift risk to other stakeholders or parts of society.”

The report links a number of different risks, both in its presentation and some alarming diagrams that show just how much the world has become interdependent. Some examples include:
Economic disparity, which is linked to demographic (population) challenges, migration, chronic and infectious diseases, strains on water supplies, rising food prices and a number of others.
Global governance failures are linked to corruption, organized crime, illicit trade, fragile states, geopolitical conflicts and ultimately to terrorism.
Climate change also affects water use and food, as well as causing more floods, stronger and more frequent weather events and biodiversity loss.

Oliver Wyman Group President and CEO John Drzik summarized the potential risks posed by the increasing scarcity of global resources. “Demand for food, water and energy resources is growing by double digits,” he said. As competition grows for bigger slices of several shrinking pies, conflicts are inevitable, and can only be avoided by more global cooperation in allocating those resources.

Drizik also pointed out that using resources more efficiently should be a major priority; however, “chronic fiscal deficits are threatening investments in infrastructure crucial to improving availability and access to them.”

The connection between the need for new solutions and the apparent lack of funds to pay for them cuts across all aspects of the global risks report. Daniel Hofmann, Zurich’s Chief Economist, bluntly stated that the “current fiscal policies are unsustainable in most industrialized economies.” He warned that unless some “far-reaching structural corrections” are made, the risk of defaults and other disruptions will be the result.

Swiss Re’s Chief Marketing officer, Christian Mumenthaler, painted a stark scenario industrialized countries face, as their populations age. “Long-term unfunded liabilities created by ageing populations mean that fiscal pressures will continue to grow,” he explained. Eventually governments, who have made “promises” in the form of pension commitments, “will be unable to honor those promises,” Mumenthaler said.

A possible solution would involve the re/insurance industry more closely in dealing with these liabilities, and using the capital markets to find ways to fund them.

The U.S. isn’t immune to any of these risks, in fact it’s classified as being in the “danger zone” in relation to its sovereign debt ratio to its GDP, which is currently over 90 percent, and is forecast to rise to over 200 percent by 2020. However, as Hofmman pointed out, it occupies a special position, as “the dollar is the world’s reserve currency, essential to capital markets and trade.” Over time, however, this may no longer be the case.

The report singles out a number of other interlinked risks, and points out the need for greater cooperation between international bodies, national governments, private industry and non-governmental organizations to address them. Given the current state of international relations, with most governments seemingly concentrating on protecting their own, that’s a rather slender peg on which to hang the future of the world.

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