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Widening Wealth Gap Is Biggest Global Risk, World Economic Forum Predicts

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Wealth Disparity

According to the World Economic Forum’s Global Risks 2014 report, the chronic gap between the incomes of the richest and poorest citizens is the risk most likely to cause serious global damage in the next decade. Looking forward, the 700 experts queried emphasized that the next generation will only feel this disparity more acutely if current conditions continue. Those presently coming of age face “twin challenges” of reduced employment opportunity and rising education costs, prompting the World Economic Forum to consider the impact on political and social stability as well as economic development.

“Many young people today face an uphill battle,” explained David Cole, group chief risk officer of Swiss Re. “As a result of the financial crisis and globalization, the younger generation in the mature markets struggle with ever fewer job opportunities and the need to support an aging population. While in the emerging markets there are more jobs to be had, the workforce does not yet possess the broad based skill-sets necessary to satisfy demand. It’s vital we sit down with young people now and begin planning solutions aimed at creating fit-for-purpose educational systems, functional job-markets, efficient skills exchanges and the sustainable future we all depend on.”

After a widening global wealth gap, experts predicted that extreme weather events will be the global risk next most likely to cause systemic shock on a global scale. They identified fiscal crises as the global risk with the potential to have the biggest impact over the next 10 years.

The top five most likely and most potentially impactful global risks are:

Most Likely Risks

1. Income disparity (societal risk)

2. Extreme weather events (environmental risk)

3. Unemployment and underemployment (economic risk)

4. Climate change (environmental risk)

5. Cyberattacks (technological risk)

 

Most Potentially Impactful Risks

1. Fiscal crises (economic risk)

2. Climate change (environmental risk)

3. Water crises (environmental risk)

4. Unemployment and underemployment (economic risk)

5. Critical information infrastructure breakdown(technological risk)

WEF Spotlights Insurers, Risk Response Network

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The annual World Economic Forum (WEF) kicked off yesterday in Davos, Switzerland, welcoming more than 2,500 business leaders, politicians and social activists.

A laundry list of issues awaited those in attendance, from the global economy to Eurozone debt to responsible capitalism to preventing the next financial crisis.

These issues, along with several others, are what prompted the WEF to form the Risk Response Network (RRN), “to better understand, manage and respond to complex, interdependent risk.”  In response to the new RRN, Kevin Steinberg, chief operating officer for the WEF in the United States commented:

“Over the past several years, the world has been very reactive. If you look at the number of crises that have hit from financial to social to economic ones, almost everybody has felt they’ve been trying to avoid falling off the cliff.

One of the moods we’re starting to see here in Davos is the sense we need to be more proactive. We need to think about risk not only in terms of responding to events after the fact but structuring our thinking before, being prepared.”

The RNN will be comprised of risk officers from top corporations, governments and global risk regulating bodies who will draw from the WEF’s own knowledge and insight with the aim of helping decision-makers better understand risks and respond to them proactively. The project also involves WEF-led partnerships that mobilize rapid response teams after disasters.

In other news from Davos, insurers became the topic of conversation when the question was raised as to whether large insurers should be included in a shortlist by regulators “for big players in need of more safeguards to avoid posing a threat to the whole financial system” These “big players” are known as Systemically Important Financial Institutions (SIFIs), and even though it has been said time and time again that insurance companies are not inherently systemic, the questions arises yet again. Needless to say, insurance execs at the WEF resisted being grouped as a SIFI.

“I don’t see any reason to elevate the status of insurers in a way that they are systemic,” said Dieter Wemmer, Chief Financial Officer at Swiss insurer Zurich Financial Services. Sometimes the word systemic is being used very loosely and we should understand what it means.”

‘Round and ’round we go…

Q&A on the “Global Risks 2010” Report

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Recently, the World Economic Forum released its “Global Risks 2010” report, in which partners, including Swiss Re and other corporate and academic entities, collaborated to analyze the most serious global risks for the current year. This was the one of several posts we have run recently about the biggest risks ahead for 2010, whether economic, political or otherwise. One thing that we see through all of them is the word “China.” It will be interesting to keep an eye on this prediction and whether the country will hinder or help the U.S. in 2010.

To discuss this and the rest of the year ahead, I was fortunate enough to touch base with Kurt Karl, chief U.S. economist at Swiss Re, to get his take on this year’s report.

In your opinion, what is the biggest global risk facing the U.S. for 2010 and why?

Kurt Karl: The biggest global risk facing the U.S., as the “Global Risk 2010” report points out, is renewed asset price collapse. This would essentially be a global double-dip recession. With very high deficits and very low interest rates, another recession would be very difficult to combat. A return to recession could come from continued employment declines eroding consumer confidence, another banking sector scare or possibly a mutation in the pandemic virus which increases the fatalities causing consumers to panic and stop traveling and reduce shopping.

How will underinvestment in infrastructure (especially agriculture) affect the U.S. economy in the long run?

Karl: Infrastructure is essential for long-term growth and there is some evidence that the U.S. has been under-investing in infrastructure. Not only could this lead to catastrophes, such as the Minneapolis bridge collapse, but it would reduce economic growth by creating bottlenecks in, for example, the transportation system. The key risk for the agricultural sector is infrastructure that supports water supplies. This is partly an investment issue and increasingly a political issue. Reduced agricultural production will harm the US trade deficit — we export a lot of agricultural products — increase inflation and reduce standards of living.

What is the biggest, long-term international risk you see? And how will that affect the U.S.?

Karl: China, which is growing rapidly, is the biggest risk and the biggest opportunity for the U.S. economy. The global economy is increasingly dependent upon the health of the Chinese economy. At the same time, China needs to become a more open economy, with — ultimately — a floating exchange rate and free trade practices where it and other countries are competing on a level playing field.

What do you see as the biggest factor that could possibly prevent a complete economic recovery?

Karl: The biggest risk is global employment growth. If confidence turns sufficiently negative, companies will start cutting jobs again and that would kill the recovery.

The biggest global risk facing the US, as the Global Risk 2010 report points out, is renewed asset price collapse. This would essentially be a global double-dip recession. With very high deficits and very low interest rates, another recession would be very difficult to combat. A return to recession could come from continued employment declines eroding consumer confidence, another banking sector scare or possibly a mutation in the pandemic virus which increases the fatalities causing consumers to panic and stop traveling and reduce shopping.
2.  How will underinvestment in infrastructure (especially agriculture) affect the US economy in the long run?
Infrastructure is essential for long-term growth and there is some evidence that the US has been under-investing in infrastructure. Not only could this lead to catastrophes, such as the Minneapolis bridge collapse, but it would reduce economic growth by creating bottlenecks in, for example, the transportation system. The key risk for the agricultural sector is infrastructure that supports water supplies. This is partly an investment issue and increasingly a political issue. Reduced agricultural production will harm the US trade deficit — we export a lot of agricultural products — increase inflation and reduce standards of living.
3.  What is the biggest, long-term international risk you see? And how will that affect the US?
China, which is growing rapidly, is the biggest risk and the biggest opportunity for the US economy. The global economy is increasingly dependent upon the health of the Chinese economy. At the same time, China needs to become a more open economy, with — ultimately — a floating exchange rate and free trade practices where it and other countries competing on a level playing field.
4.  What do you see as the biggest factor that could possibly prevent a complete economic recovery?
The biggest risk is global employment growth. If confidence turns sufficiently negative, companies will start cutting jobs again and that would kill the recovery.1. In your opinion, what is the biggest global risk facing the U.S. for 2010 and why?
The biggest global risk facing the US, as the Global Risk 2010 report points out, is renewed asset price collapse. This would essentially be a global double-dip recession. With very high deficits and very low interest rates, another recession would be very difficult to combat. A return to recession could come from continued employment declines eroding consumer confidence, another banking sector scare or possibly a mutation in the pandemic virus which increases the fatalities causing consumers to panic and stop traveling and reduce shopping.
2.  How will underinvestment in infrastructure (especially agriculture) affect the US economy in the long run?
Infrastructure is essential for long-term growth and there is some evidence that the US has been under-investing in infrastructure. Not only could this lead to catastrophes, such as the Minneapolis bridge collapse, but it would reduce economic growth by creating bottlenecks in, for example, the transportation system. The key risk for the agricultural sector is infrastructure that supports water supplies. This is partly an investment issue and increasingly a political issue. Reduced agricultural production will harm the US trade deficit — we export a lot of agricultural products — increase inflation and reduce standards of living.
3.  What is the biggest, long-term international risk you see? And how will that affect the US?
China, which is growing rapidly, is the biggest risk and the biggest opportunity for the US economy. The global economy is increasingly dependent upon the health of the Chinese economy. At the same time, China needs to become a more open economy, with — ultimately — a floating exchange rate and free trade practices where it and other countries competing on a level playing field.
4.  What do you see as the biggest factor that could possibly prevent a complete economic recovery?
The biggest risk is global employment growth. If confidence turns sufficiently negative, companies will start cutting jobs again and that would kill the recovery.

What If?

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Every year the World Economic Forum releases its Global Risk Report with the aim of addressing the key current and emerging risks and advancing thinking about their mitigation. It’s no suprise that financial risks top this year’s list. The potential for further deterioration of asset prices and fiscal positions could be exacerbated by a potential slowdown in the Chinese economy and gaps in global governance that could allow a problem to reach critical mass before it is addressed. Meanwhile, natural resource concerns, particularly about water scarcity, loom as does the possibility of increased levels of chronic disease around the world. In all, 36 risks are mentioned in the report and very few are seen to be decreasing in terms of possible severity and liability. It’s enough to give you nightmares.

As with any report of this kind, there is a temptation to dismiss the findings as far-fetched and unlikely — the kind of thing best left to the Chicken Littles of the world who want to live in fear that the sky is falling. But what if the sky does fall? What do you do then? As John Merkovsky, managing director of Marsh Risk Consulting, said during Marsh’s analysis of the report this morning, “It doesn’t matter if you’re out of business for reason A, B, C or D. You’re still out of business.” 

Risk is increasingly interconnected and any risk manger can visualize a scenario where a global concern can quickly become a personal concern. Now is not the time for what the World Economic Forum calls “risk myopia.” The impacts are too great. After all, if the extremes on the bell curve can kill you, it would be crazy not to pay attention.

Below is a video from a World Economic Forum panel discussion on the survey’s results from January.