The Global Risks Report 2018 is based on a survey conducted by the World Economic Forum. The survey it draws on is the annual Global Risks Perception Survey, which is completed by around 1,000 members of the Forum’s multistakeholder communities. The report explains how humanity is less competent when dealing with complex risks in the interconnected systems that support our world such as organizations, economies, and the environment. When risks cascade through a complex system, the danger is not of incremental damage but of “runaway collapse” or an abrupt transition to a new, suboptimal status quo. In the Global Risks Perception Survey, environmental risks have grown in prominence, cybersecurity risks are growing, and the world has moved into a new and unsettling geopolitical phase. This year’s Global Report introduces three new series: Future Shocks, Hindsight, and Risk Reassessment with the purpose of broadening the report’s analytical reach.
Fractures, Fears, and Failures
This section explores the different responses from the survey participants. Fifty-nine percent of respondents believe there will be an increase in risk for the year 2019. The four main concerns covered in this section are inequality and unfairness, domestic and international political tensions, environmental dangers, and cyber vulnerabilities. The first issue discussed is inequality and unfairness. While global inequality is trending downward, within-country inequality is an increasingly corrosive issue in many places. According to the International Monetary Fund, 53% of countries have seen an increase in income inequality in the past three decades. This is important as rising income and wealth disparity ranks third as a driver for global risks over the next 10 years. The second issue discussed is the risk of conflict domestically and internationally. Clashes related to identity and community drive political dislocations and fuel cross-border tensions. Societal polarization is no longer one of the top three global risks, but it remains a political destabilizing force. Far right parties continue to grow in strength and influence in European countries. Ninety-three percent of respondents expect a worsening of political or economic confrontations between major powers. Environmental risks are the third issue discussed. Environmental risks have grown in prominence over the past 13 years. All five risks in this category indicate higher than average likelihood and impact. September 2017 experienced the most expensive hurricane season ever. Ninety percent of the world lives with polluted air. The last issued to be discussed is cyber vulnerabilities. Cyberattacks are increasing in prevalence and disruptive potential. Breaches recorded by businesses have almost doubled in five years. Internet devices are expected to increase from 8.4 billion in 2017 to 20.4 billion in 2020, giving attackers more targets. The financial costs of cyberattacks are rising.
Economic Storm Clouds
Economic indicators suggest the world is finally back on track after the global crisis a decade ago. However, this has been the weakest post-recession recovery on record. The reassuring headline indicators mean that economic and financial risks are becoming a blind spot. The risks can be divided into two categories: familiar vulnerabilities and emerging challenges. Among the familiar vulnerabilities are unsustainable asset prices. This is shown as inflation in traditional asset classes have been dwarfed by speculative assets as Bitcoin increased in value by 1200% in 2017. Another familiar vulnerability is indebtedness. The total global debt to GDP ratio is higher than it was before the crisis. The total non-financial debt across the G20 rose from $80 trillion in 2007 to $135 trillion in 2015. Third is the global financial system. Measures of banks’ capitalization continue to rest on risk-weighting methodologies that mask a lot of uncertainty about underlying risks. Deregulation is now more likely for the financial sector. Banks identified as too big to fail are still an issue. In the emerging challenges area there is limited firepower and technological disruption. Limited firepower deals with the issue of monetary and fiscal policy firepower to deal with another crisis. One major issue is that the major banks can no longer rely on cutting rates to assist in recovery. Lastly there is technological disruption. The most frequent pairing of interconnected risks on the survey was unemployment and the adverse impact of new technologies. The World Bank, among others, has cautioned that current patterns of innovation threaten the viability of long-established paths to development
This section provides a warning against complacency and a reminder that risks can crystallize with disorientating speed. This section provides 10 possible breakdowns. The first is Grim Reaping, simultaneous breadbasket failures threaten sufficiency of global food supply. The second is a tangled web, artificial intelligence “weeds” proliferate, choking off the performance of the internet. The third is the death of trade, bilateral trade wars cascade and multilateral dispute resolution institutions are too weak to respond. The fourth is democracy buckles, a new wave of populism threatens the social order in one or more mature liberal democracies. The fifth is precision extinction, AI-piloted drone ships wipe out a large proportion of global fish stocks. The sixth is into the abyss, a cascading series of economic/financial crises overwhelm political and policy responses. The seventh is inequality ingested, bioengineering and cognition-enhancing drugs widen the gulf between haves and have-nots. The eighth is war without rules, state-on-state cyberattacks escalate unpredictably owing to a lack of agreed upon protocols. The ninth is identity geopolitics, self-determination around contested borders sparks regional conflict. The tenth is walled off, regulatory, cybersecurity and protectionist concerns lead to the fragmentation of the internet.
Geopolitical Power Shifts
The world has moved into a new and unsettling geopolitical phase. The intensification of strong-state politics is affecting both large and small states, while global norms are eroding and tensions growing between major powers. There are four major causes which are state-centered politics, major-power tensions, small-state disruptions, and geo-economic risks. The intensification of nationalist and strong-state narratives creates risks both domestically and internationally. The United States has become less willing to act as an enforcer of global norms. A weak or collapsing state can become a locus of instability that radiates disorder or pulls in larger neighboring states. Plans to extend and deepen networks of economic corridors are spurring huge investments in infrastructure. The geostrategic interdependence they create are more durable and difficult to unwind than mere trade agreements.
This section looks back on three risks that were mentioned in previous Global Risks Reports. This year the three selected are Antimicrobial Resistance (AMR), Youth Unemployment, and Digital Wildfires. The drivers of AMR are the overuse and misuse of antibiotics, in both human health systems and livestock management; and the fact that no new classes of antibiotics had been invented since the 1980s. The risks that arise due to AMR have intensified in the past five years. The costs associated with AMR are rising and resistance continues to spread. Youth unemployment can hinder young people’s integration into traditional patterns of economic life, such as earning, saving and building careers. It remains moderately higher than before the global financial crisis. Youth unemployment is set to remain an important global challenge and will continue to amplify numerous domestic and global risks, including social exclusion, mass migration and generational clashes over fiscal and labor-market policies. Digital wildfires are increasing danger of misinformation being spread by social media. The prevalence and impact of digital wildfires have surged in the five years. It is difficult to mitigate the risks of intentional misinformation without limiting a citizen’s rights.
This section invites selected risk experts to share their insights about developments in our understanding of risks. The two topics discussed in this section are resilience in complex organizations and cognitive bias and risk management. In a deeply interconnected world, stresses and shocks propagate across systems in ways that evade forecasting. Simply denying the existence of black swans is hardly a way to deal with them. Fortunately, there is an alternative, which consists of applying a resilience lens where complexity prevails and traditional risk management is insufficient. Risk management starts with identifying and estimating the probability and impact of a given threat. Our brains play tricks that make some risks appear to be more or less likely than they are in reality. Being aware of the blinders that make it harder to recognize obvious risks allows leaders to counteract them, helping to prevent crises or at least mitigate the damage caused.
Read ERM articles as soon as we post them
Keep up-to-date with current developments in ERM. Subscribe to the ERM Newsletter.