Global Risks to the Business Environment · 2 Global Risks to the Business Environment The Global Risks Programme aims to identify key risks to the global economic outlook, the links

Global Risks to the Business

Environment

A project of the World Economic Forumin collaboration withMerrill Lynch

January 2005

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1Global Risks to the Business Environment

This paper, the output of two workshops organized by theWorld Economic Forum in collaboration with Merrill Lynch,reviews major, global risks facing business leaders today,and examines how those risks differ from the challengesof the past. Some key points:

1) Global Risks and Business – At a time when risksnot specific to business are having an unprecedentedeffect on the corporate world, it is crucial for businessleaders to understand the environment in which theirbusiness operates, in order to survive, remaincompetitive and grasp opportunities.

2) An Increasingly Turbulent and Complex World –Today’s risks are much more interconnected than inthe past. They are much more volatile and can disruptmarkets throughout the world with almostinstantaneous precision. Such risks can be difficult toanticipate and respond to, even for the most seasonedbusiness leaders.

3) The Global Risks – We identify 36 “global” risks,classified into four categories: economic, geopolitical,societal and environmental. This report details theprevailing consensus reached at our workshopdiscussions as to the ten risks most likely to have amajor or extreme impact on business:

• Instability in Iraq• Terrorism• Emerging fiscal crises• Disruption in oil supplies• Radical Islam• Sudden decline in China’s growth• Pandemics – infectious diseases• Climate change• Weapons of mass destruction (WMD)• Unrestrained migration and related tensions

4) Risk Mapping - Connecting the “Dots” andSpotting the Patterns – In an interconnected world,global risks should not be considered on a stand-alonebasis; it is important to understand how they cantrigger, amplify or buffer one another.

5) Dealing with Global Risks – Seldom can global risksbe addressed by a single business entity, industry orcountry, and many institutional mechanisms areproving fairly ineffectual as they struggle to cope withthe challenge. There is also a large discrepancybetween the immediate time horizon employed bymost business and political leaders and the long-termapproach required to tackle risks on a global scale. Asa result, our capacity to address risk is jeopardized; amyopic tendency – or worse: denial – prevails. Finally,of equal concern is the problem that some major risksare being passed on to those least able to solve them– or with least responsibility for creating them.

Execut ive Summary

2 Global Risks to the Business Environment

The Global Risks Programme aims to identify key risks tothe global economic outlook, the links between theserisks, and their likely effect on markets and businesses.

Systemic risks are quite complex. Our objective is to helpbusiness leaders cut through the complexities and makewell-informed decisions. The World Economic Forum’sGlobal Risks Programme will provide business leaderswith the following:

• Understanding: to help business leaders and otherkey decision-makers understand and make sense ofthe macro-level factors at play (such as globalization,technology, demographics and geopolitical changes);

• Awareness: to help business leaders avoid the “boilingfrog syndrome” by becoming more aware of mountingrisks before it is too late to avoid them or mitigate theirconsequences;

• Planning and implementation: to contribute to thedevelopment of tools that enable decision-makers tobetter confront or moderate a risk, in addition toidentifying opportunities that could emerge.

To launch this new programme, the World EconomicForum organized two workshops in collaboration withMerrill Lynch at its London office and New Yorkheadquarters. Both workshops were attended by leadingexperts in a broad range of risk fields, ranging frominternational security to climate change. Data and advicewere also drawn from the Forum’s community of Fellowsand various experts in leading think tanks and academicinstitutions. In convening these sessions and drawingupon outside expertise, we were acutely aware thatcross-cluster risk analysis of this type is rare.

There is substantial evidence to suggest that exogenousrisks affect business today much more than ever before.For instance, a study conducted by A.T. Kearney inSeptember 2004 shows that a large number (43%) ofFortune 100 companies blame various global risks fortheir company’s failure to meet earning expectations.

Identifying global risks – and how they might affect one’sbusiness – is all about spotting the trends and“connecting the dots”. It requires the ability to seethrough the complexity of today’s world and identifyopportunities and constraints before they arise.

Unfortunately, there is a widespread tendency amongmany businesses to be well prepared only for the lastevent that has occurred – not the next one comingaround the corner. Denial is an all too common strategy,and there is a natural tendency not to react until thecatastrophe is unavoidable.

What is needed instead is for senior executives tobecome better prepared, perhaps by simply taking abroader look at the world, stretching their horizons furtherthan the next quarterly report, and asking the simplequestion: “What would I do in the event of... ?”, or “Whatnew business opportunities will be created by these risks,and how can I get ahead of the competition?”

The Global Risks Business Case for CEOs

Professor Nitin Nohria, a member of the Leadership Initiative at

the Harvard Business School, has been compiling data on the

leading US business figures over the past 100 years, to try to

understand what the leadership criteria are for those companies

that generated outstanding shareholder value over a period of 15

years. There are no real common traits, except for “contextual

intelligence” which seems to connect leaders across generations.

All successful leaders “knew where they were in the evolving

business environment” and all “were shrewd in calculating the

impact of factors such as technology, globalization, labour

relations, demographics, government regulation and social

mores”. “What makes a leading business figure is the ability to

understand and capitalize on the sweeping trends influencing the

marketplace of their time”. The iconic example is Jack Welch, the

retired General Electric chief, who recognized in the 1980s what

very few executives of that era saw: the decline of the basic

industries that had long driven the economy.

Introduct ion Global Risks and Business


Global Risks Can Provide New BusinessOpportunities for Those Who Seize the AdvantageFirst

Successful businesses will be those prepared to reactquickly to new risks or, even better, anticipate them wellbefore their competitors. For example, the threat ofterrorism has generated substantial opportunities in thehigh-tech sector for security systems, new screening anddetection devices, and new tools for sifting throughvolumes of data and information. Indeed, the US marketfor information security, currently US$ 8.7 bn, is expectedto grow between 15-20% per year through 2008.

Climate change has begun to trigger a “race for green” inboth the automotive and energy sectors, with companieslike Toyota and BP striving to get out ahead of theircompetitors and establish new complementary qualitiesto their brand (see box). Others are moving to establishnew trading and futures markets or provide services tohelp businesses manage their energy use more wisely.

Equally, the risk of pandemics, increased by globalizationand the associated mobility of people, goods andservices, and the risk that biological weapons will be usedby terrorists, have opened up new opportunities forbusinesses that can excel in the early detection andidentification of diseases. Travel vaccines, together withinfluenza vaccines, are expected to grow the fastestamong currently available vaccine products, and there is aburgeoning new market for defence against bioterroragents (see box).

VaxGen’s Re-focus

VaxGen, a company in California, is emerging as a major player

in the market for vaccines and therapeutics against bioterror

agents. The US government announced in November 2004 that

it is purchasing from VaxGen 75 million doses of a new-

generation anthrax vaccine under a US$ 877.5 m US contract –

the first awarded through a federal programme to develop and

stockpile antidotes to biological and chemical weapons. VaxGen

has also partnered with Kaketsuken, the largest vaccine

company in Japan, to develop Kaketsuken’s attenuated smallpox

vaccine, LC16m8, for the US and potentially other markets.

VaxGen has been working on landing this contract for more than

two years. The company switched its corporate focus to

developing bioterrorism vaccines after its much-hyped AIDS

vaccine failed a late-stage clinical study in February 2003, and

decided to rethink its strategy.

First Out of the Gate: Toyota and Climate Change

With the successful rollout of its hybrid gas-electric vehicle, the

Prius, Toyota appears to have gained a substantial competitive

advantage in the race to claim the brand for “climate friendly’’

vehicles. Global sales of the vehicle reached the 200,000 mark in

May 2004, and Toyota is now ramping up production to 180,000

vehicles per year, primarily for the US market. The financial

figures are proprietary, but Toyota does seem to have found a

way to turn a global risk – climate change – into a profit

opportunity. The Prius was designed as an entirely new vehicle,

with fuel economy about twice that of a typical American

passenger vehicle, and, consequently, substantially lower carbon

emissions. The Prius is now the “green’’ vehicle in the US, greatly

enhancing the image of Toyota’s brand and establishing itself as

the benchmark against which all other “climate-friendly’’

advances will be judged. Perhaps more importantly, Toyota

recognized early on that creating the Prius would give them

substantial experience in engineering and road testing electrical

components that will be essential for future vehicles running on

hydrogen-powered fuel cells.


The Changing Nature of Risk

Several factors contribute to make the world increasinglyfragile and turbulent.

Due to the advances in technology and the progress ofglobalization, the levels of interdependence andinterconnectivity between businesses, markets, peopleand nations have increased greatly. At the same time, thepace of change has increased dramatically; the effects –and consequences – of a risk event are felt more widelyand more quickly than ever before. And conditions notonly change rapidly, they change more frequently and inincreasingly unpredictable ways. Sometimes it is not evenclear whether and when a return to equilibrium will occur,creating great difficulty for business models that may havebeen applied successfully in the past.

Taking the global financial markets as an example, twoissues stand out according to Kevan Watts, Chairman ofMerrill Lynch International: the first is whether theaccommodative monetary policy that the US FederalReserve has pursued in recent years has led toinappropriate risk taking by investors. Indeed, there aremembers on the US Federal Open Market Committeewho already wonder whether “the prolonged period ofpolicy accommodation has generated a significant degreeof liquidity that might be contributing to signs ofpotentially excessive risk-taking in financial markets.” Ifthis is the case, then it is possible the world might seeincreased volatility in global financial markets as and whenthe Fed decides to rein in that liquidity growth andinvestors reassess their risk-appetite. The second issue ismore strategic and concerns the low level of saving byAmerica. Low interest rates and tax cuts haveencouraged both borrowing and consumption by UShouseholds that have contributed to the emergence oflarge current account and budget deficits in America.Going forward, one of the biggest economic uncertaintiesis how sustainable these American deficits are – and inparticular how willing non-American investors will be tocontinue funding them. A better global balance would notonly require higher saving in America, but also strongerdomestic demand among America’s trading partners.Such a shift could potentially have major implications forboth financial markets and for corporate strategies.

Additionally, there is the challenge of making sounddecisions about risk on the basis of incomplete orimprecise data, or – in today’s “information era’’ –because there is too much data. Information overload canmake it difficult to decipher useful signals frommeaningless noise, stalling the decision-making process,or even bringing it to a halt.

Finally, there are asymmetries inherent in some of today’srisks, enabling even small events, seeminglyinconsequential decisions, or small clusters of ill-intentioned people to have a disproportionately bigimpact. An obvious example here is terrorism, but thereare others as well. A recent example of a seeminglyinconsequential decision with major consequences wasthe decision by electric utility managers in Ohio to forgoregular maintenance of tree limbs overhanging powerlines which led to the power blackout in 2003 thatparalyzed much of the north-east US for days.Nonlinearity has become a defining characteristic of manyrisks today.

Is the World a Riskier Place?

This is a difficult question to answer. Certainly the worldhas experienced sudden outbreaks of war, majordisruptions in oil prices or supply and pandemics killingmillions of people many times before. Indeed, many of therisks we face today are not new. If we take a largenumber of indicators that measure the “riskiness” of theworld (e.g., life span, number of deaths in conflicts orcaused by terrorism, number of outbreaks of epidemics),the world is probably less risky today than it has everbeen.

But what makes the world seem riskier today are theways in which interconnected risks can amplify aggregateeffects and the speed at which risk can spreadthroughout the world, disrupt tightly coupled systems, orbecome known immediately to millions of people ormarkets – almost instantaneously via the Internet andbroadcast media.

An Increasingly Turbulent and Complex World


What Shapes Our Ability to Identify Risks?

It is important to understand that risk is a function of bothprobability and impact, and both can be highly subjective.We need to assess the chances of a risk occurring, aswell as the magnitude of its impact and consequences.And we need to be aware of some well-known factorsthat inhibit our ability to make good decisions.

For example, people will often judge an event as eitherfrequent or likely to occur simply because it is easy toimagine or recall, i.e., if it is readily available to one’smemory. In addition, if events are sensationalized by themedia, we tend to “perceive” a higher frequency andassume a higher probability. In general, people will over-estimate risks with which they are familiar and under-estimate the unknowns.

There is also something called “confirmation bias’’: peopletend to look for evidence that confirms their own viewand disregard any findings that contradict it. Similarly,people tend to place great faith in their own judgements,and conclude very often that certain bad things “won’thappen to me”. Finally, it is not uncommon for us to makeestimates by starting with a value we know (the ‘’anchor’’)and adjusting from that point. The fixed, mentalframeworks from which we view the world colour orinhibit our ability to process or accept new data orinformation.

To a substantial extent, risk perception and riskmanagement are also affected by culture – the degree towhich people are well-informed and/or have developedsome degree of resilience or tolerance to risk. One canimagine, for example, that Israelis have developed somedegree of resilience to terrorism, or that many inhabitantsof Florida are able to block out the potential for a majorhurricane to destroy their homes or livelihood.

Business executives are, of course, human beings. They are vulnerable to the very same kinds of forces and factors.


At the outset of this project, we developed a large list ofglobal risks aggregated across four categories: economic,geopolitical, societal and environmental (see the table inthe Appendix). Although some of the risks in this list aremore regionally specific than others, we felt that all had apotentially global impact. We also recognized thatunderstanding the granularity of risks would be important.For example, the risk of terrorism has differentimplications for a business whose operations are mostlyin Europe, versus one in the Middle East, and climatechange poses different risks for businesses operating inBangladesh versus those in California.

Which Global Risks Matter Most/Least to Business?

Using our table of risks as a starting point, we asked the60 or so participants in our workshops in London andNew York to indicate their views on the probability andpotential impact of each. The chart below summarizesthe outcome of these discussions. While not the result ofa statistically valid survey or study, this assessment doesreflect the best judgement and the consensus of theexperts and business leaders who participated in theworkshops.

The time horizon in which any of these risks may occurvaries considerably. Some, such as the US currentaccount deficit or further deterioration of the situation inIraq, are unfolding today. Others, such as climate change,will produce impacts whose most severe consequencesmay not be felt for decades.

“Top Ten” Risks

Of all the risks we examined, there was generalconsensus that ten are “likely’’ or “certain’’ in terms oftheir probability, and “major’’ or “extreme’’ in terms of theirimpact. These risks – which potentially could be mostdisruptive to business and markets – are summarizedbelow. Others, such as the destabilization of Saudi Arabiaor a conflict between India and Pakistan, were thought tobe less likely. However, because a worst case event inthese areas of risk could have an extreme impact, theyshould not be ignored – especially by businesses whoseviability would be most immediately affected.

Instability in Iraq

Iraq is at a tipping point. If instability prevails, theimplosion of the country is very possible, with devastatingconsequences cascading one after the other. First,destabilization could spread to adjacent countries withstrong vested interests in Iraq’s future – Turkey, Syria andIran. Second, the Middle East would have to cope withthe possibility of a large failed state serving as a breedingground for international terrorism. Third, the security ofglobal oil supplies would be put at great risk, with aconsequent impact on prices and the global economy.Fourth, the image of the US as an ultimate guarantor ofinternational stability would be shattered, raisingsignificant credibility problems in other parts of the world.

The Global Risks

Note: Apart from climate change, all environmental risks are not included in the matrix because of the great variability in

terms of time horizon and impact, as well as their dispersion in geographical terms.


Terrorism

Businesses and governments now perceive risks ofterrorism through the post 9/11 prism and the realpossibility that terrorist attacks of catastrophicproportions (“catastrophic terrorism”) with extremeconsequences for the economy and business mightoccur. Under the brand of Al Qaida, splinter groups areemerging and operating without the mandate of a largeorganization – terrorism is becoming much more fluid anddecentralized than before. In our workshops, bioterrorismemerged as a major concern, as technological advanceshave made it much easier to develop pathogens cheaplyin a world that is simply unprepared for a major bioterrorattack. There is also a growing consensus among expertsthat “the war on terror” is being lost, and that the rate ofnew recruits joining terrorist organizations is greater thanthe rate at which terrorists are being eliminated (oneexpert put it at 3 to 1).

Emerging fiscal crises

A number of global risks identified in our programmecould pose major problems for the financial solvency ofseveral countries. The need to sustain an ageingpopulation, urbanization, increased security costs,adapting to climate change – these are critical challengeswith time horizons that vary. Some – such as ageing – arecertain (i.e., already unfolding) and their effects are notdifficult to anticipate; others are more difficult to predictand measure (e.g., the costs of providing adequateinfrastructure, healthcare and other services for rapidlyurbanizing regions). If these risks peak simultaneously,they could provoke a “perfect storm” by enormouslycomplicating governments’ ability to meet their fiscalobligations. The after-effects could then extend beyond aspecific country or region. Future fiscal crises will affectmany countries in the world, but it was felt that Europeanand Asian countries are most at risk because of their highlevels of indebtedness.

Disruption in oil supplies

High oil prices are not unprecedented; indeed, after theIranian revolution in 1979 they rose to US$ 75/bbl in2004 dollars. The view expressed in our workshops wasthat a new equilibrium above US$ 30/bbl will be reachedin the mid term, as production capacity and demand arerealigned. However, it was also felt that a supplydisruption is moderately likely in the near to mid-term inNigeria, Saudi Arabia, Venezuela or Russia. Just one ofthese would be sufficient to provoke a major spike in oilprices, and even though economic growth and the overall

health of the global economy are less coupled to oilprices than in the 1970s, it could have significant impactson markets and businesses across the board.

Radical Islam

Some experts at our workshops made the point thatrather than being in the middle of a “war on terror”, theWestern world is in the midst of an ideological conflictwith a radical stream of Islam. In this view, radical Islam isabout mobilizing masses towards the supreme politicalgoal: the triumph of the Islamic state and theimplementation of Islamic law worldwide. Others arguethat the fault really lies with ruling powers in the MiddleEast and elsewhere, and their failure to reform economicand political systems in ways that would improve thewelfare of their people. Whatever the root cause,optimists point to the fact that, since Afghanistan, radicalIslamic groups have not seized power anywhere in theworld. Pessimists stress that the group ideology isspreading, in particular in Europe and parts of Asia, andthat significant risks lie ahead. More generally, there isconcern that the spread of religious fundamentalismgreatly complicates the mechanics of internationalcooperation.

Sudden decline in China’s growth

With annual real GDP growth of 9% over the past twentyyears, China is often perceived as the emergingsuperpower of the 21st century. Yet, vulnerabilities doexist. People in the workshop felt that the greatest riskfacing China’s continued growth is not necessarilyeconomic. Indeed, the ability of the government toengineer a soft landing using market instruments – e.g.,a progressive increase in interest rates – seems real, asis its determination to address the issue of non-performing loans in the banking sector and to restructurepublic enterprises. The greatest risks that might bringChinese growth down in an abrupt manner stem fromother sources: i.e., the risk of pandemics, particularlyacute in this part of the world, the inability of cities toabsorb the huge influx of peasants from the countryside,the spread of regional poverty and the inability to put inplace an effective system of governance with low levelsof corruption. Any of these would impact growth andtrigger an immediate domino effect. Additionally, thelimited availability of data on socio-economic conditionsin areas of China outside the main centres ofmodernization along the coasts creates concern that wemay not really understand the full range of risksgoverning China’s future, and that there may well besurprises down the road.


Pandemics – infectious diseases

The expansion of trade and greater mobility associatedwith globalization, together with the encroachment ofhumans into natural areas, growing resistance to drugsand changes in climate are increasing the risk of a majoroutbreak of infectious diseases. Some infectious diseasesare new or relatively new (e.g., HIV/AIDS, SARS), someare re-emerging (e.g., TB, cholera), and some are shiftinggeographically (e.g., West Nile, Dengue fever). There isparticular concern over the spread of infectious diseasesfrom animals to humans; public health officials havewarned, for example, that an outbreak of avian flu couldkill millions of people and cause major disruptions tomarkets and travel worldwide. The risks are amplified bythe woeful inadequacy of existing public health services toprevent, detect and/or respond to the spread of infectiousdiseases.

Climate change

There is now widespread scientific consensus that climatechange poses a serious threat, along with increasingevidence that we are already beginning to see someeffects (e.g., the European heat wave of 2003 and thebreak up of Arctic ice). Besides an increase in averageglobal temperatures, changes that are highly likely includea rise in sea levels, the increased frequency of heatwaves, more droughts and floods, and significantchanges in the range and distribution of bothcommercially and ecologically important species. Suchchanges – along with the advent of new regulatorycontrols on carbon emissions and other greenhousegases in Europe, parts of the US and elsewhere – poseimportant risks for a broad range of economic sectors,ranging from agriculture, tourism and insurance, to powergeneration and transportation. This is particularly true forinvestment projects of a long-term nature (e.g., powerplants or forest plantations).

WMD

Recent revelations about nuclear weapons programmesin North Korea and Iran have reinforced fears that thenuclear non-proliferation regime has begun to breakdown. When coupled with Russia’s difficulties inimplementing full security and safeguards for large

quantities of nuclear weapons material left over from theCold War, there is growing concern that we may witnessterrorist use of a nuclear weapon or “dirty bomb” within adecade or so. Indeed, some experts at our meetings inLondon and New York put the odds at 50-50. In addition,there is the continuing risk of a “launch on false warning”,resulting from the fact that both the US and Russiacontinue to maintain thousands of nuclear warheads onhair-trigger alert. Biological weapons in the hands ofterrorists pose a special danger as well, with highlikelihood that access to many forms of deadly agentshas or will be achieved in the not-too-distant future.

Unrestrained migration and related tensions

The issue here is not migration per se, but rather theuncontrolled and chaotic movement of people –compelled by poverty, wars, political persecution, naturaldisasters or other factors. Orderly migration can provide asignificant benefit for nations whose demographicchanges have created a labour gap or a “pension timebomb”. Illegal (and to a much lesser extent legal)migration, however, can overwhelm a society’s copingmechanisms and give rise to powerful constituenciesagainst it, creating strong interracial and political tensions.The instability that may result, together with uncertaintyabout the availability of labour and impacts on the costsand benefits of social services, can create important risksfor business. In extreme cases, some people in ourworkshop felt it might even provoke the disintegration ofsociety.

A quick glance at the list above and the accompanyingchart should leave the reader with a discomforting finding:attention paid to risk mitigation by both business andgovernment alike doesn’t necessarily correlate with theviews from our two workshops on the most importantpriorities. For example, the time, resources and expertisebeing devoted to risks such as climate change,pandemics or the rise of radical Islam are most likely notat a level commensurate with their potential for seriousdisruption or harm.


We have stated that the extent of interconnectionbetween risk categories is one of the main reasons for theabiding impression that the world has grown riskier. Butwhat are these linkages, and which are the risks thatmatter most?

Global risks are pervasive in nature. They are fluid andmutable. To capture the power of interconnectedness,one has to understand that we have entered a quantumera, where small things and hidden connections can havemajor consequences and can happen very quickly andunexpectedly.

Global risks are connected together by a complex web.Some connections are obvious. For example, we can seethat there are links between poverty and migration,between Iraq and terrorism, between the US currentaccount deficit and asset prices. There is a correlation,and often a causation link, between these different issues.But what about links that are less obvious and that maycreate new risks or inadvertently precipitate a lowprobability risk?

Aggregation of Risks

Many low probability and apparently independent eventscan combine to create a substantial risk and produceextreme events or “perfect storms” outside the range ofconventional forecasts. As an example, a relatively smallnumber of radical Islamic elements in Chechnya couldobtain nuclear WMD through organized crime channels inRussia, elevating the risk of a catastrophic terrorist attack.

Mutation of Risks

Some risks may mutate, changing the nature of the threatthey pose. Changes in the availability of water caused byclimate change, for example, could be the transmissionmechanism by which an environmental risk could mutateinto a geopolitical one. Away from the coast, it is easy tosee how the increased frequency of drought or floodconditions will affect water supplies and irrigation, puttingpressure on agriculture and food security, andexacerbating existing resource conflicts. Along the coastsin low-lying areas such as Bangladesh, rising sea levels ofjust one metre or less could flood lands now inhabited bymillions of people, adding to poverty, and forcingmigration to adjacent areas.

What Are the Inevitable Surprises to Look Out For?

Business leaders should also be aware of risks known as“black swans”. These are risks that defy probability; theydo not fit neatly into a bell curve or other familiardistribution pattern. Instead, a few observationscontribute disproportionately to the total picture, resultingin incomputable probabilities with a potentially largeimpact. So-called “unknown unknowns” made famous inremarks by US Defence Secretary Donald Rumsfeld duringthe early stages of the conflict in Iraq are of this kind.

Risk Mapping - Connect ing the “Dots” and Spott ingthe Patterns


The “Governance Gap”

By definition, global risks transcend national boundaries.There are only a limited number of global institutions toaddress global risks, and there is ample evidence thatneither these institutions nor nation states are respondingto global risks in the most efficient or effective way. Manyexisting governance structures tend to be toocompartmentalized or fragmented, and many businessleaders are compelled to focus on their short-term bottomlines. A fundamental discrepancy exists between the time-horizon of political and most business leaders and thelong-term nature of most global risks, which results inmost risks being dealt with in a purely reactive way.

In a nutshell, short-termism prevails: business cannotrespond in time because the pressure to produce strongquarterly results collides with the long-term perspectiveneeded to address most global risks. If companies try toaddress the issue in earnest, they can be punished by themarkets. The same is true for politicians: their willingnessto tackle the problem is most often bound by the time-horizon dictated by the electoral cycle. Indeed, thechallenge of dealing with long-term global risks iscompounded by the fact that the tenure of most businessleaders is less than five years.

The “Leadership Gap”

Difficulties caused by the governance gap arecompounded by a leadership gap, both at theinternational level and in terms of mobilizing society. Thisgenerates a “pass the buck” strategy where risks arebeing redistributed from the core to the periphery. Forexample, many health, poverty and environmental risksare being transferred to those with the least capacity orresources to solve them: developing countries, forexample, or low-income populations in Westerncountries, or even future generations.

Some major risks, such as the current account deficit inthe US, the impact of climate change or the welfare of anageing population, are being transferred to futuregenerations. Others, such as global security, are beingtransferred to one single country, either willingly or bydefault.

The main concern is that the transfer of global risks in thisway may reduce the world’s capacity to respondsatisfactorily in the long term. Some might argue thatcountering such transfers of risk from the core to theperiphery belongs solely within the sphere ofgovernmental institutions. But can business really sit backand leave the future of their markets to others?

Dealing with Global Risks

ConclusionIn the brief review above, we have summarized themost important global risks that emerged from a series ofworkshops conducted jointly by the World EconomicForum and Merrill Lynch. We have also attempted toidentify some of the factors that distinguish today’s risksfrom those of earlier decades and have described someof the challenges business leaders face in addressingrisks.

This first phase of our Global Risks Programme – inwhich we have attempted to identify and examinesome of the most important global risks facingbusiness today – will be followed by further projectsthat the Forum will undertake for the benefit of itsmembers, in close collaboration with leading expertsand decision-makers. By blending the world’s bestminds with rigorous, innovative methodology and newtechnologies, we will aim to provide our members withunique tools to assess and manage the global risksthat lie ahead.


Appendix: Global or Systemic Risks

Economic Risks

Oil prices/energy supplyAsset prices/excessive indebtednessUS current account deficitComing fiscal crisesChina’s growth

Societal Risks

Radical IslamComing religious warsRetrenchment from globalization and liberalism Over-regulationDemographics:• Ageing• Population loss• Male surplusMigrationPandemics (HIV/AIDS, TB, malaria, SARS, etc.)PovertyPublic response to tech developments (Biotechnology,nanotechnology, other areas)

Geopolitical Risks

TerrorismOrganized crimeCurrent/future hot spots (with int’l implications):• Israel/Palestine• India/Pakistan• Iraq• Chechnya• Korean peninsula• China/Taiwan• Iran• Saudi Arabia• Failing/failed states• Resource-driven conflictsWeapons of mass destruction

Environmental Risks

Ecosystem services and biodiversityClimate changeWater supply/qualityNatural catastrophes/accidentsNitrogen loadingAir pollution


Contr ibutors

Thierry Malleret, Ilaria Frau and Bud Ris contributed fromthe World Economic Forum.

Merrill Lynch participated in this report within theframework of its Strategic Partnership with the WorldEconomic Forum. The effort was led by Kevan Watts.

The World Economic Forum would like to thank VictorPinchuk for his contribution to this programme.Victor Pinchuk is founder of Interpipe Corporation and isamong the Ukraine’s most successful business people.He has steered his company, now a global leader inferroalloys and pipe production, through difficult andchallenging times. His approach to global riskmanagement focuses on effective forecasting, remainingflexible, and on acting and reacting quickly. Mr Pinchukalso believes in social responsibility and both he and hiscompany are active in the fight against HIV/AIDS.

Edited by Fabienne StassenLayout by Kamal Kimaoui

For a more detailed analysis of global risks, their framework and effects on business, go toweforum.org/globalrisks

The World Economic Forum is an independentinternational organization committed to improvingthe state of the world. The Forum provides acollaborative framework for the world’s leaders toaddress global issues, engaging particularly itscorporate members in global citizenship.

Incorporated as a foundation, and based inGeneva, Switzerland, the World Economic Forumis impartial and not-for-profit; it is tied to nopolitical, partisan or national interests. The Forumhas NGO consultative status with the Economicand Social Council of the United Nations.(www.weforum.org)

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Global Risks to the Business Environment · 2 Global Risks to the Business Environment The Global Risks Programme aims to identify key risks to the global economic outlook, the links