COMMITTED TO

IMPROVING THE STATE

OF THE WORLD

Global Risks 2007

A Global Risk Network Report

A World Economic Forum Report

in collaboration with
Citigroup
Marsh & McLennan Companies (MMC)
Swiss Re
Wharton School Risk Center

World Economic Forum

January 2007
The information in this report, or on which this report is based, has been obtained from sources that the authors believe to
be reliable and accurate. However, it has not been independently verified and no representation or warranty, express or
implied, is made as to the accuracy or completeness of any information obtained from third parties. In addition, the
statements in this report may provide current expectations of future events based on certain assumptions and include any
statement that does not directly relate to a historical fact or a current fact. These statements involve known and unknown
risks, uncertainties and other factors which are not exhaustive. The companies contributing to this report operate in a
continually changing environment and new risks emerge continually. Readers are cautioned not to place undue reliance on
these statements. The companies contributing to this report undertake no obligation to publicly revise or update any
statements, whether as a result of new information, future events or otherwise and they shall in no event be liable for any
loss or damage arising in connection with the use of the information in this report.

This work was prepared by the Global Risk Network of the World Economic Forum.

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REF: 150107
Contents

Introduction 4

Risk Assessment 6

Scenarios 13

Understanding the Nature of Global Risks 19

Risk Mitigation 21

Contributors 31

Participants 32

3
Introduction

At the core of this year’s overview of risks to the Climate change is now seen as one of the defining
global community over the next decade is a challenges of the 21st century – and as a global risk
fundamental disconnect between risk and mitigation. with impacts far beyond the environment. Effective
Expert opinion suggests that levels of risk are rising mitigation of climate change may ultimately have the
in almost all of the 23 risks on which the Global Risk consequence of improving resilience to oil price
Network has been focused over the last year – but shocks in developed countries by moving them from
mechanisms in place to manage and mitigate risk at hydrocarbons to alternative energy sources;
the level of businesses, governments and global ineffective mitigation of climate change will almost
governance are inadequate. The global economy certainly be a factor in major interstate and civil wars
has been expanding faster than at any time in within the next 50 years. The way in which climate
history – but it remains vulnerable. change is dealt with at the global level will be a
leading indicator of the world’s capacity to manage
Some tactical gains have been made in specific globalization in an equitable and sustainable way.
areas of risk mitigation: despite the raised threat of
terrorism, cooperation on dealing with the threat But the tactical gains may be illusory and are
continues to improve; fears of a major pandemic certainly temporary. The manifestation of any
outbreak have driven a major effort to upgrade our number of global risks in the way described in the
global preparedness to identify and isolate new plausible scenarios in this report could quickly put
diseases; there is a growing recognition of the need those gains into reverse.
to improve access to mechanisms of risk transfer in
emerging markets, to allow risks to be priced in a Global Risks 2007 suggests two possible
way that allows the potential economic growth of institutional innovations that may help mobilize
this century to be fully unlocked. businesses and governments to approach the global
risks of the next 10 years. One is the idea of a
There has also been major improvement in the Country Risk Officer – an analogy to Chief Risk
understanding of the interdependencies between Officers in the corporate world – intended as a focal
global risks, the importance of taking an integrated point for managing a portfolio of risk across
risk management approach to major global disparate interests, setting national prioritization of
challenges and the necessity of attempting to deal risk and allowing governments to engage in the
with root causes of global risks rather than reacting forward action needed to begin managing global
to the consequences. risks rather than coping with them. The second is to
create an avant-garde of relevant governments and

4
companies around different global risks – “coalitions
of the willing” – allowing risk mitigation to be a
process of gradually-expanding alliances rather than
a proposition requiring permanent consensus.

Above all, Global Risks 2007 makes the case for the
active engagement of all sections of the international
community in dealing with global risks. No one group
has the ability to effectively mitigate most global
risks. Interdependency implies not just common
vulnerability, but a shared responsibility to act.

A longer version of this report and further information

on the Global Risk Network can be found at
[Link]/en/initiatives/globalrisk. The
longer report includes further background on
methodology, risk descriptions, numeric
assessments, the process of workshops leading to
this report and additional mitigation and scenario
examples.

5
Risk Assessment

Risks are idiosyncratic – a risk to one group may “Core” Global Risks
present an opportunity to another. The qualification
of global risks lies in their systemic nature: their
impacts challenge the integrity of the system. Their
Economic
consequences are harder to predict, frequently
disproportionate, difficult to contain and present • Oil price shock/energy supply interruptions
challenges to us all. • US current account deficit/fall in US$
• Chinese economic hard landing
The key newcomers to the list for the Global Risks • Fiscal crises caused by demographic shift
2007 report include a number of geopolitical risks • Blow up in asset prices/excessive
which, though difficult to measure, specify and indebtedness
predict, were considered integral parts of the risk
landscape. The risk of major interstate and civil war Environmental
– often inadequately priced in markets – was one
• Climate change
risk considered. Another was the category of failed
• Loss of freshwater services
and failing states as an underlying risk to systemic
• Natural catastrophe: Tropical storms
integrity. Both featured in a number of scenarios
• Natural catastrophe: Earthquakes
developed by the Global Risk Network.
• Natural catastrophe: Inland flooding
Overall, the Global Risk Network identified 23 core
Geopolitical
global risks to the international community over the
next 10 years. A further description of the core • International terrorism
global risks can be found in the longer version of the • Proliferation of weapons of mass
report at [Link]/en/initiatives/globalrisk destruction (WMD)
• Interstate and civil wars
• Failed and failing states
• Transnational crime and corruption
• Retrenchment from globalization
• Middle East instability

Societal

• Pandemics
• Infectious diseases in the developing world
• Chronic disease in the developed world
• Liability regimes

Technological
• Breakdown of critical information
infrastructure (CII)
• Emergence of risks associated with
nanotechnology

6
 Understanding Geopolitical Risk

The first years of this century have been marked factors – makes their outcomes hard to predict
by the return of geopolitical risks to global with accuracy. For example, while the conditions
prosperity and stability. In 2006, the deterioration for the outbreak of war may be easily identifiable –
of the situation in Iraq and the Middle East militarization, existing disputes, an inflexible
occupied the full attention of some governments, attitude by the parties – the exact sequence of
reducing “bandwidth” available for focus on other events which turn conditions into reality are
global risks and increasing fears of the impossible to predict. The “gambler’s mentality” is
fragmentation of the international system. Should unlikely to succeed.
any of the main geopolitical risks outlined here
worsen considerably, the environment for business As a result, geopolitical risk analysts normally
and society could be changed beyond recognition. focus on underlying trends – economic decline,
In the scenarios below, geopolitics frequently environmental degradation, population density –
provide the narrative and backdrop to the which may provide keys to the emergence of a
emergence of other global risks. major event. Defence planners cope with
geopolitical risk on a prudential basis – preparing
Despite their importance, however, geopolitical for low-probability, high-severity risks (such as
risks are hard to quantify in terms of likelihood and interstate war) which present a sovereign risk, as
severity, and therefore difficult to price. While well as a range of more immediate challenges.
expert opinion suggests that geopolitical risk
worsened in 2006, market expectations of volatility Though businesses with international exposure
tended to fall, indicating a major disconnect. The cannot pursue the same catch-all policy, they
concerted action of governments may help to should look beyond discrete events and manage
reduce overall geopolitical risks in 2007 – their risk portfolio through an appreciation of
improved pricing of these risks may help underlying dynamics. The challenge for a geopolitical
businesses to manage their consequences when risk analyst advising business is to help distinguish
they do occur. between events with a tactical impact and those
that significantly alter underlying trends and, with
The range of different trajectories along which them, the overall calculation of risk.
geopolitical risks can develop – contingent on
human decision-making and a range of other

These core global risks were assessed in terms of

likelihood and severity.

In addressing likelihood, actuarial principles were

applied in the few cases where sufficient data
existed; in most cases only qualitative assessments,
based on expert opinion, were possible. In
assessing severity, two indices were considered:
destruction of assets/economic damage and –
where applicable – human lives lost. Although some
risks are inherently long term (such as climate
It was only in July 1914, a month before the outbreak of change), and others (such as an oil-price shock)
World War I, that liquidity in global equity markets dried up.
Before then, the markets had not priced the geopolitical risk
could occur in the near term, all risks were evaluated
of war, one that would kill millions and trigger a retrenchment within a 10-year time frame.
from globalization.

7
 The 23 Core Global Risks: Likelihood with Severity by Economic Loss

Increasing consensus around risk

250 billion - 1 trillion more than 1 trillion

Retrenchment from
globalization Asset price collapse

Interstate and
Pandemics civil wars
Oil price shock
China economic hard landing
Severity (in US$)

Middle East Transnational crime and corruption

instability
Breakdown of CII
Coming Fall in $
Chronic disease in
50-250 billion

fiscal crises Climate change developed countries

NatCat: Tropical storms Liability regimes
NatCat: Earthquakes Developing world disease
NatCat: Inland flooding Loss of freshwater services
Failed and failing states
10-50 billion

Proliferation of WMD
Nanotechnology
International terrorism
2-10 billion

below 1% 1-5% 5-10% 10-20% above 20%

Likelihood

Note: Likelihood was based on actuarial principles where possible. For most risks, however, qualitative assessment was used.

8
 16 Core Global Risks: Likelihood with Severity by Number of Deaths

Increasing consensus around risk

200,000-1,000,000 more than 1,000,000

Developing world disease

Severity (in no. of deaths)

Pandemics Interstate and civil wars

Chronic disease in
developed countries
40,000-200,000

Middle East instability

Loss of freshwater services

Climate Failed and failing states
NatCat: Inland flooding change
8,000-40,000

NatCat: Earthquakes Transnational crime and corruption

NatCat: Tropical storms International terrorism

1,600-8,000

Nanotechnology Breakdown of CII

Proliferation of WMD

below 1% 1-5% 5-10% 10-20% above 20%

Likelihood

Note: For seven of the core global risks, severity by number of deaths was not applicable. Likelihood was based on actuarial principles where possible.
For most risks, however, qualitative assessment was used.

9
In addition to risk assessment in terms of likelihood the risk for the next 10 years has become more or
and severity, the Global Risk Network developed a less acute. For example, while 2006 saw fewer
qualitative global risk “barometer”, based on expert tropical storms than in 2005, expert consensus was
judgement of the outlook for global risks. This is clear that the risk trend is moving upwards, with
essentially a forward-looking measure: it does not growing agreement on the impact of climate change
look at how the risk has played out over the last on severe meteorological events.
year; rather, it assesses whether the seriousness of

A qualitative global risk “barometer”

Key: Increased overall risk Stable overall risk Decreased overall risk Expert disagreement

ECONOMIC Reason for increased, stable or decreased overall risk

Oil price shock/energy Though some estimate capacity will increase to meet demand (forecast
supply interruptions 25% increase by 2015), the energy market remains tight and, as such,
highly vulnerable to both physical and speculative shocks.

US current account Although the trade-weighted real exchange rate of the US$ has
deficit/fall in US$ depreciated 23% since 2002, many believe this will continue, in order
to limit a widening US current account deficit.

Chinese economic Chinese growth is both investment- and export-led. The expansion of
hard landing exports may generate a backlash (particularly in the US); high
investment (over 40% of GDP) has generated excess capacity and
fears of potential bad debts.

Fiscal crises caused by The deterioration of fiscal balances in G8 countries, combined with
demographic shift continuing large deficits in other large countries, renders a series of
major fiscal crises possible, exacerbated by the long-term challenges of
ageing and equitable healthcare provision.

Blow up in asset House prices have doubled in most mature markets (and in some
prices/excessive emerging markets) in real terms over the last 10 years, putting price-to-
indebtedness income ratios at all-time highs. Many experts fear a major correction,
with differential impacts on consumption, economic growth and other
asset prices.

ENVIRONMENTAL Reason for increased, stable or decreased overall risk

Climate change Carbon emissions are growing above trend and there are indications
that feedback mechanisms, particularly increased heat-absorption
caused by Arctic ice-melt, will increase the speed and scale of
warming. New research argues that the increasing intensity of North
Atlantic hurricanes is due to global warming.

Loss of freshwater The mitigation effects of improved water-pricing have yet to have an
services effect; economic development and global warming have increased the
risk to the sustainability of many already stressed freshwater systems
worldwide, particularly in Asia.

10
 ECONOMIC Reason for increased, stable or decreased overall risk

Natural catastrophe: The increasing risk from tropical storms includes two major components.
Tropical storms The hazard itself may be increasing as global warming drives sea surface
temperatures higher. Global vulnerability to tropical storms may also be
increasing as a result of coastal development.

Natural catastrophe: The threat of earthquakes, in terms of likelihood and severity, remains the
Earthquakes same, driven by basic geophysics. Meanwhile, slight increases in the exposure
of populations are matched by slight reductions in the vulnerability of assets.

Natural catastrophe: Increasing floodplain development and an expected increase in climate

Inland flooding change-driven extreme weather events increase the risk of disruptive and
costly inland flooding.

GEOPOLITICAL Reason for increased, stable or decreased overall risk

International terrorism The risk of future attacks has risen: according to official threat assessments in
Britain, an attack is “highly likely”; the US National Intelligence Estimate
report has argued the Iraq war has heightened risks, while the situations in
Afghanistan, Somalia and Pakistan continue to cause concern.

Proliferation of WMD North Korea tested a nuclear device in 2006, Iran continued its programme,
the US weakened its commitment to non-proliferation in a controversial
deal with India, while some Middle East states said they would seek
civilian nuclear technologies. All increase the risk of proliferation for 2007.

Interstate and civil wars Civil war took hold in Iraq in 2006 while tensions fluctuated on the Korean
peninsula and in the Middle East. The International Crisis Group identified
November 2006 as the worst month for conflict prevention in 40 months.
The risk of any of a number of hotspots causing a major conflagration in
2007 increased.

Failed and failing There is little prospect of immediate improvement in serial failed and
states failing states – notably Somalia, Afghanistan and Pakistan. The creation of
the UN peacebuilding commission may improve mitigation in 2007 but
risks are increasing.

Transnational crime Transnational crime and corruption remain endemic in a number of

and corruption developing and developed countries, damaging state authority, economic
prosperity and weakening the ability to deal with other global risks.

Retrenchment from Progress on the Doha trade round appears distant, while failures will be difficult
globalization to reverse after expiry of Presidential negotiation authority. Populist sentiment
in Europe and the US is set to increase. (See the Europe@Risk report.)

Middle East instability Overall stability is deteriorating, despite rapid growth and moves towards
stability in some Gulf countries. Grand bargains to stabilize the region may
be possible in 2007, but underlying problems of Islamist extremism,
political succession (as in Egypt) and fragile economic structures will make
the region highly volatile.

11
 SOCIETAL Reason for increased, stable or decreased overall risk

Pandemics Some measures (e.g. improved research and cooperation on early warnings)
have improved response capability. However, the aggregate risk is constant
as uncertainty remains over the timing and nature of any outbreak.

Infectious diseases in Although infection rates have stabilized in some countries, infection rates
the developing world for HIV and other diseases are rising in others, presenting major risks to
future prosperity. India passed South Africa as the country hosting the largest
population of HIV/AIDS infected people. (See the India@Risk briefing.)

Chronic disease in the Experts were divided on the balance between potential advances in
developed world medical science over the next 10 years and the increasing prevalence
of “life-style” diseases.

Liability regimes Experts were divided on the risks to global prosperity from liability regimes
over the next 10 years: some argue liability regimes represent a legitimate
policy choice, others suggest they represent a growing cost to business,
yet others suggest that US-style liability regimes are unlikely to make
headway in other parts of the world.

TECHNOLOGICAL Reason for increased, stable or decreased overall risk

Breakdown of critical Expert judgement suggested a balance between increasing vulnerability

information arising from interconnectivity and growing awareness of security issues
infrastructure (CII) surrounding CII with investments in resilience and spare capacity in some
key infrastructure areas.

Emergence of risks In the absence of any major scientific discovery, experts estimated the
associated with potential risks arising from nanotechnology were unchanged.
nanotechnology

Key: Increased overall risk Stable overall risk Decreased overall risk Expert disagreement

Generally, the picture provided by the risk barometer

of expert opinion on the year-on-year assessment of
global risks is one of rising risks. Expert consensus
was that none of the 23 global risk issues identified
had improved since 2006. However, experts noted
that awareness on a number of risks – the first step
to effective risk mitigation – had improved in a
number of areas.

12
Scenarios

It is a central tenet of work conducted by the Global risks. Many of the risk issues have multiple causes
Risk Network that global risks do not manifest and consequences beyond the risk list itself – the
themselves in isolation: their drivers, triggers and matrix is not supposed to be a comprehensive
consequences are interconnected. This was explanation of causality. However, the correlation
apparent in 2005 when the domino effects of matrix portrays the strength of the macro
Hurricane Katrina briefly shook the global system. correlations perceived by experts to exist between
More recently, the connections between two of the the risk issues identified and studied in this report. In
major issues for public policy and private enterprise the graphic below, the numerical strength of
– energy security and climate change – have correlation between risk issues is reflected in the
reinforced the sense that global risks share a thickness of the lines connecting them.
common lineage.
Correlation provides an excellent overall view of links
How can one best think about interconnectedness? between risks, but may not capture the dynamics of
One approach is to assess correlation. This provides interconnectedness: even when causation or
a simple measure of static interconnectedness. In consequence can be determined with confidence,
2006 the Global Risk Network engaged in an the context in which risks emerge and interact as
ongoing survey of academics and experts to build they play out may lead to different assessments of
up a picture of correlation between the 23 core probability and impact.

The Correlation Matrix

Key: Current account

Oil price shock deficit/ Fall in US$
Proliferation of WMD
correlation
Stronger

Spread of International terrorism

liability regimes
Pandemics

Loss of freshwater
services Climate change

Breakdown of CII
Retrenchment from
globalization
Coming
fiscal crises
China economic
hard landing
Failed and
failing states
Middle East instability

NatCat: Tropical storms

Developing world disease
Emergence of (HIV/AIDS, TB, malaria)
nanotech risks
NatCat: Inland flooding
Asset prices/ excessive
indebtedness NatCat: Earthquakes
Transnational crime Chronic disease in
and corruption Interstate and developed countries
civil wars

13
In order to provide this context, the Global Risk Global Risk Scenario A:
Network looked at how key risks could play out in Pandemic and Its Discontents
narrative scenarios. These scenarios do not
represent “best”, “worst” or even “base” cases, nor The following scenario illustrates the impacts
are they predictions. Instead, they are possible, on business, the financial system and political
plausible global risk features in which the challenges and economic conditions that could follow
of interconnectedness become plain. from the emergence of a new pandemic.
It also illustrates the amplifying role played
The scenarios below contain a number of surprises by “infodemics”, where the rapid spread of
– some of them disturbing – but understanding the inaccurate or incomplete information can
possible surprises ahead may allow policy-makers amplify the effects of the core risk event.
and business people to make decisions that will
avert the worst consequences of surprise and turn In January 2008, reports of a new virus emerge in
risk into opportunity. While all the scenarios are Asia. Its properties are not well understood, but its
plausible, none is likely to play out in precisely the roots may lie in the high viral loads present in the
way described. The short-term outlook for the global heavily vaccinated Asian chicken population.
economy remains good: one Citigroup Global
Capital Markets report (22 November 2006) predicts From the outset, speculation about the virus spreads
global GDP growth of 3.4% in 2007 and 3.8% in faster than essential facts. Expert commentators
2008. But these scenarios show how short-term suggest the virus is more deadly than SARS, while
central expectations may plausibly deteriorate. governmental data is widely questioned. Fear
spreads ahead of the disease, and some neighbouring
One of the key lessons that emerged from all the countries close their borders immediately.
risk scenarios developed by the Global Risk Network
was the absolute centrality of cooperation between By February 2008, the disease has claimed fewer
the United States and China in dealing with a than 50 lives. Before the end of the month, Australia
number of major global risks – from mitigating and Germany report infections carried out of Bangkok
climate change, to managing pandemics. Without International Airport. Many passenger aircraft
the full engagement of both the US and China, travelling to South-East Asia are grounded. But the
global risks will be extremely difficult to manage effect on air freight companies is worse: a number
successfully. The accelerating shift in influence, are forced to declare force majeure on significant
power and prosperity to the countries of Asia contracts, pushing them towards bankruptcy.
represents a generational opportunity to rethink
governance and creates the necessity to forge The knock-on effects on just-in-time inventories
common approaches to global risks. appear by the beginning of March, with
longshoremen refusing to unload cargoes from
infected countries. The oil price crashes.

In late February, a large hedge fund fails due to

sudden asset devaluations. Herd behaviour causes
global liquidity to dry up. Neither the G8 nor the G20
is able to coordinate a response. Central banks
inject liquidity ad hoc, creating inflationary risks. As
black box models fail to adjust, financial contagion
continues.

By late March, there are several hundred confirmed

deaths outside South-East Asia, but the virus
remains poorly understood. Conspiracy theories
abound, with ethnic minorities a frequent target.

14
 By November 2008 the disease is a full-blown
pandemic, with one million deaths worldwide.
Centralized containment measures are of limited
efficacy, but private and decentralized efforts help
slow the spread. By January 2009, a partially
effective vaccine is produced, with distribution from
March. However, internationally, there are questions
of who should distribute the vaccine, to whom and
at what cost. Domestically, active militaries step into
a crisis-management role helping to distribute
vaccines.

By summer 2009, vaccination and natural immunity

have stemmed the spread of the disease. Globally,
normalcy returns, though increased militarism and
authoritarian tendencies have reshaped global
Bird flu outbreak at the Norfolk road farm, Britain, April 2006 geopolitics.

By early June consensus emerges that the virus has Global Risk Scenario B:
been spreading for a year. Yet characterization of the Out of the Global Warming Frying Pan
virus continues to move slowly and the ineffectiveness (and Into the Fiscal Fire)
of existing anti-virals has led to a containment crisis.
Liability fears among pharmaceutical companies Information asymmetry also plays a key role in
threaten eventual vaccine production, while this scenario, which illustrates the knock-on
governments fail to credibly signal exemptions. effects of a major shift in risk perception:
A scaled-up response looks unlikely. namely, that climate change has arrived.

In some Asian countries, widespread discontent at Events in 2007 trigger an inflection point in global
the authorities’ response to the pandemic – concern over the consequences of climate change.
particularly in inland regions – leads to the
centralization and militarization of government First, massive inland flooding in South Asia resulting
services. In developed democracies, armies become from a late monsoon leads to crop failure, as well as
key emergency service providers. mass migrations. Tensions rise on the Bangladesh-
India border as thousands flee humanitarian disaster.
Failed and failing states, particularly Myanmar, Nepal In the Americas, oil supply is still disrupted from 2007
and Pakistan, end up completely isolated and tropical storms; an unprecedented cold snap in the
deteriorate quickly, although for different reasons. In north-east of the US leads to a spike in heating-fuel
Myanmar, different factions scramble to maintain prices as domestic and local supplies are exhausted.
their relative positions. In Pakistan, rumours of Finally, figures released in December 2007 show an
inequitable mobilization of government resources unprecedented spike in the global temperature of
cause tensions between central and border regions 1.5 degrees Celsius for the year as a whole.
and between the Sunni majority and Shiite minority.
In Nepal, the country is shut from all sides, affecting China’s remarkable story of 28 years of economic
the provision of stabilization assistance and growth – a Citigroup Global Capital Markets report
sharpening political divisions. (22 November 2006) predicts real GDP growth of
9.8% in 2007 and 10.7% in 2008 – is disturbed by
Globally, increased fear of cross-border movement awareness of environmental degradation and
and trade feed an emerging backlash against inequality between “many Chinas”. Some 150 million
globalization, which in turn compounds the hit on surplus rural workers drift between villages and cities
global demand. by 2008, with many subsisting through part-time,

15
 Meanwhile, China concludes the only practical
option for the country’s future energy needs is
nuclear, with coal-fired electricity as a bridging
source. The government announces large-scale
infrastructure spending and concludes negotiations
with major suppliers of uranium.

While supply constraints and elevated demand keep

oil prices high over 2007 to 2010, other developing
countries follow China’s lead, and demand the right
to sovereign control of the nuclear fuel cycle. This
puts increasing pressure on the international nuclear
non-proliferation regime, causing it to reach a tipping
point. The continued failure of the international
A farmer gathers the rice crop from his paddy field after community to halt Iran’s nuclear programme leads
Typhoon “Prapiroon” hit Southern China in August 2006.
that country to proclaim successful enrichment in
low-paying jobs. This dislocation is masked by early 2015.
unreliable official figures, but eventually causes
widespread civil unrest. In part due to the Beijing Global concerns cause risk premiums to rise, and
Olympics, the government is initially unable to calm equities to slide. In North America and Europe,
demonstrations resulting from viral text-message retirement funds are impacted. Governments are put
campaigns. The protests seize the mood of global under pressure to increase state financial support,
discontent and speak loudly on the issue of causing fiscal positions to worsen, particularly in
environmental degradation. Europe. At the same time, the bursting of the US
housing bubble and declines in equity markets
In North America, public concern over climate cause private savings in major developed economies
change leapfrogs scientific consensus. High oil to rise – beginning a process of correcting long-
prices cause a pull back from US asset markets, standing global economic imbalances.
bursting that country’s “housing bubble”. Popular
discontent results in calls for radical action.

In the United States, legislators follow California's

populist lead, establishing a national carbon trading
scheme and creating industry incentives for
conservation and alternative energy. In late 2008, the
US administration releases a white paper entitled
"From Addiction to Oil, to Blessed by Biofuel",
signalling an enhanced focus in US energy policy on
biofuels, particularly relevant to farming communities
in the American Mid-West. The white paper wins
political support both from “hawks” seeking US
energy independence and those fearing climate
change.

This policy response has the unintended

consequence of setting up acute competition for Gas emissions at a plant near downtown Toronto, November
2006. Current per capita CO2 emissions in Canada and the
productive land, between food, fuel, forests and
United States are approximately 5 times Chinese levels. If
fibre, with increased carbon sequestration and China were to emit at the North American per capita rate, its
mining activities competing at the margin. Prices rise total emissions would be more than 4 times greater than those
of the US.
for agricultural commodities and land.

16
Global Risk Scenario C:
Oil Shock and Its Consequences Continuing with the scenario, the collapse of
Pakistan is averted in mid-2008 by redirected oil
This scenario also illustrates the ways in which revenues, resulting in a geopolitical realignment with
policy responses to a single shock can either Arab OPEC nations. Other blocs, similarly structured
create opportunities for change or facilitate a around commodity exporters, emerge in other parts
chain reaction of global risks. of the world: between Venezuela, Bolivia and poor
Latin American countries; between Russia and
In early 2008, terrorists attack multiple tankers in former Soviet republics with major energy deficits
the Malacca Straits, sparking a major supply-side oil (notably Uzbekistan, Georgia and Armenia); between
price shock. The initial shock drives oil above US$ African commodity exporters and their neighbours.
150 per barrel. Producing countries, acting in While some alignments cause concern in the West,
concert, choose to “close the tap”; a global slowdown they also help to avert state failure.
does not reduce demand for oil products enough to
counteract the supply shock. The short-term price But the emergence of the ChavPec block does not
elasticity of demand for oil proves itself to be low. go unanswered.

A secondary reaction of oil-producing countries is to A countervailing OECD bloc emerges. The Malacca
match economic weight with a permanent increase events cause an immediate slowdown, but the 2008
in international political weight. Oil-producing slowdown quickly turns into a recession in 2009 as
countries aim to achieve this by setting up parallel OECD governments and central banks have used
alliances known collectively as ChavPec. The up their ability to inject liquidity. The recession is worse
operational mode of these alliances is the expansion in the US than elsewhere. In the US, falling asset
of development assistance from oil producers to prices drive down consumption while the unwinding
politically sympathetic and economically vulnerable of long-term current account imbalances to which the
countries, in return for political support. Rather than US is particularly exposed causes a deep recession. In
windfall gains from high hydrocarbon prices flowing Japan, while higher energy prices help Japan escape
to the developed world, the windfalls generate deflation, growth is destroyed by the decline in
political goodwill among developing countries. European and American demand for finished goods.

Oil Shocks (Using Hamilton Filter), 1961-3Q.06

140% 140%

120% 120%

100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0%
61 65 69 73 77 81 85 89 93 97 01 05

Note: The filter measures an oil shock as the greater of zero or the percent change of the inflation-adjusted US$ oil price over the peak price of the
previous three years. Shaded areas are U.S. recessions.
Sources: BLS, NBER and The Wall Street Journal

17
In the US, Europe and Japan, events are marked by isolated by these events, failing to find its place in
retrenchment from globalization in general, any of the emerging major blocs. Over a period of
characterized by populism (in Europe and the United time, tensions with Pakistan – particularly after
States), regionalism (in the emerging OECD bloc as Pakistan’s realignment with Arab OPEC countries –
a whole) and militarism (in the US and Japan). worsen, leading to heightened fears of a nuclear
exchange over Kashmir.
But the most problematic response to high oil prices
comes from China, which experiences its own The final major casualty of the oil price shock is the
economic hard landing in 2009, primarily due to the prospect for collective action to mitigate climate
collapse in OECD consumption. The speed with change. Though the high oil price causes the rate of
which longstanding global imbalances unwind increase of oil consumption to fall, its major impact
affects China more than OECD bloc countries. But is to delegitimize proposals for a global carbon tax.
the major consequence is political. China’s The effect of higher oil prices on alternative energy
leadership emphasizes militarism in an effort to substitutes only plays out in a 10-year time-horizon.
consolidate power. Tensions over Taiwan are In the short to medium term, the chief substitute for
inflamed. An emboldened military builds up power oil – where this is possible – is an increase in the
projection capacities from a relatively low base and consumption of coal. The fracturing of the international
turns its attentions south, with an eventual aspiration community means that a framework that would
to control the sea lanes and approaches to major make carbon capture and storage attractive
choke-points (including the Malacca Straits). India is politically or economically does not emerge.

Financial market scenario

Currency (Trade- Investment Grade

Short-Term Long-Term Equities Weighted Basis) Corporate Credit
Interest Rates Interest Rates (Changes) Changes Spreads
Stress case, Oil Shock, 3-month horizon

United States 5.25 4.75 -15% -3% +40bp

Japan 0.25 1.50 -15% -3% +20bp
Euro area 3.50 4.50 -15% +5% +40bp
UK 5.50 5.00 -12% +3% +40bp
Australia 6.25 5.75 +5% +0% +30bp

Note: Over a 3-month time horizon of oil prices above US$ 100, equities in the United States and other markets are expected to decline by over 10%.
Source: Citigroup Global Capital Markets report, 22 November 2006

18
Understanding the Nature of Global Risks

This section of the report provides a brief exploration there has been a focus by researchers and
of three fundamental aspects of global risks: practitioners on strategies for dealing with this issue
interdependency, heuristic biases and policy under the heading of interdependent security (IDS).
mistakes. The first provides an insight into the nature An interdependent security setting is one in which
of interdependency and provides an example of how each individual or firm that is part of an
interdependency affects the way in which we interconnected system must decide independently
manage and mitigate global risks. The second whether to adopt protective strategies that mitigate
reflects a human approach to risk in general. future losses. These measures can reduce the risk of
Humans operate with incomplete information a direct loss to a country, firm or individual, but there
through the use of heuristics. The third, often is still some chance of suffering damage from others
connected to the second, explores how policy, often who do not take similar actions.
intended to mitigate risk, can actually exacerbate it.
The economic incentive of a decision-maker to
Why Interdependence invest in protective actions depends on whether
Matters for Security others are expected to follow suit. The fact that the
risk is often determined in part by the behaviour of
A major challenge for policy-makers is how to others gives a complex structure to the incentives
encourage firms to invest in risk-reducing measures that individuals or firms face to reduce or invest in
in a world where there are growing interdependencies risk mitigation measures.
between different parts of the system. Since 9/11

Setting policy under conditions of There are a number of alternative approaches.

interdependency: Reducing the risk One is based in the provision of the service as a
of power outages right for the customer, under which a utility would
be held responsible for the full costs of a service
Consider a utility that is part of an integrated failure, wherever it occurs. This is only possible,
system – the power grid – and wants to determine however, if the grid is set up in such a way that
whether to invest in additional capacity or security additional costs for providing transmission services
measures (such as taking care of growing are not directly passed on to customers. A second
vegetation near distribution lines) to reduce the approach, more explicitly based in regulation, is to
chance that it will cause a power outage. In any mandate minimum reliability standards with
highly interdependent system, such as the power monitoring and serious penalties for non-
grid, there is a systemic tendency to underinvest in compliance.
reliability. A consequence of interdependency is
that a part of the cost of a failure is passed on to The first approach provides a clear incentive on
competitors and their customers. the part of service providers to avoid failures. But it
is only a valid option when accompanied by
Since 2002 several outages in individual European oversight. If customers are made to bear the cost,
countries (France, Italy, Germany, Switzerland) the distribution of incentives would be asymmetric.
have had cross-border impacts. An agreement The transaction expenses (information, proving
between different European grid operators already responsibility, legal fees) would be prohibitive for
exists, defining who should provide back-up individual customers to seek to recover outage
power when an outage in one country risks costs. The second seeks to prevent them through
undermining the stability of the European explicit regulatory action.
transmission system as a whole. Although this
agreement was able to avoid larger damage, it Further examples of interdependency can be found
could not prevent the spread of the problem. in the longer version of the current report at
[Link]/en/initiatives/globalrisk

19
In many interdependent security problems, if one Policy Errors in Risk Management
actor believes others will not invest in security, the
incentive to do so is reduced. The end result may be Historically, public policy in financial markets has
that no one invests in protection, although all would both mitigated and exacerbated risk. Global risks,
have been better off if all had incurred the cost of a difficult to understand and dependent on a range of
protection strategy. On the other hand, should each interconnected factors, are particularly susceptible to
decision-maker believe others will also undertake policy errors, whether on the part of governments,
mitigation measures, the optimal strategy will be to regulators or central banks.
do the same.
In some cases, policy has dampened the effects of
Heuristics the market and thereby reduced volatility –
automatic stabilizers in welfare economies, for
The world is increasingly complex and uncertain. example, have helped to flatten economic cycles. In
With imperfect information, humans cannot make others, however, policy has seriously exacerbated
fully-informed decisions; contrary to neo-classical risk: most initial government responses to the stock-
theory, humans do not make fully rational decisions market crash of 1929 – combining mercantilism with
either. Our decisions frequently depend on a classical approach to wages and prices –
approximations of the world around us – short cuts sharpened the consequences of the event rather
that allow quick decisions by resorting to learned than mitigated them. More recently, errors of
behaviours. These short cuts and “rule-of-thumb” regulatory or monetary policy have either reduced
practices are known as heuristics, derived from the the ability of the market to mitigate risk, or
Greek word “to find”. exacerbated risks within the market itself.

To a large extent, the existence of heuristics stems Policy errors are generally obvious in retrospect but
from the fact that human brains have evolved to rarely obvious at the time – decisions made by
specialize in rapid decision-making at the expense of governments and regulators depend on judgement,
processing complexity. In our original condition, experience, incomplete information and the balancing
survival depended upon the rapid appreciation of of alternative paths of action. However, the awareness
threat and an effective response. Heuristics are often of potential policy mistakes may offer the best
useful, making decisions quicker and easier. But mitigation strategy for avoiding errors in the future.
they can also lead to inaccurate judgements,
particularly in risk perception.

There are approximately 80 specific heuristic biases

that distort our ability to assess risk effectively. Most
are not independent of one another, but exacerbate
the effects of others. The use of highly diversified
networks can help overcome a number of biases:
interpreting a story of events through the lens of
superficially similar accounts (availability), focusing
on instances which seem to confirm our initial
assumptions rather than those that question them
(confirmation bias), overestimating our own abilities Policy decisions by governments and central banks can help
improve resilience and prevent the contagion of financial risk.
to assess (overconfidence) and clinging mentally to In 1929, however, policy in the US and elsewhere exacerbated
facts or figures heard in a particular context (anchoring). the impacts of the equity crash.

20
Risk Mitigation

The aim of risk identification and risk assessment is Mitigation involves a constant balance between
to provide the tools to mitigate exposure to global action and reaction, between preventing a risk from
risk. But the step from the assessment of individual occurring and dealing with its consequences when it
global risks to the mitigation of global risks under does, between acting rashly and acting too late.
conditions of uncertainty, interdependency and
competing interests is far from simple.

Risk Mitigation

Number of Indicators

Degree of Uncertainty
Room for Action

REACTION

ACTION

Options for Action

Time

Note: As time progresses, the information surrounding a given risk event may increase. But as it does, the options available for effective mitigation are
bound to reduce. Risk mitigation – as with risk itself – involves degrees of uncertainty. Taking proactive mitigation policies implies operating under
considerable uncertainty, with incomplete indicators.
Source: Crisis and Risk Network, Swiss Federal Institute for Technology

21
 Prioritizing Risk high-impact events which cannot necessarily be
well understood through classic cost-benefit
Resources for risk mitigation are necessarily analysis. Third, global risks (such as climate
limited; prioritization among risks is a necessary change) may emerge over a multi-decade time-
step for deciding how mitigation resources should frame, making it necessary to compare mitigation
best be spent. over different generations to ensure equity. Fourth,
interconnections between global risks complicate
The normal basis for prioritization is, firstly, an prioritization – looking at global risks in isolation
assessment of the likelihood of the risk occurring may increase the perceived costs of mitigation: as
and the severity of the consequences of the risk this report argues, interdependencies are the key
occurring. These assessments are necessarily factor in the global risk environment. Finally,
idiosyncratic and distorted by a range of heuristics mitigating global risks often requires the
– for example, perceived likelihood is affected by cooperation of different groups – issues of how to
“recency” and “availability” biases while severity manage collective action impact heavily on how
depends on “vividness” and perceived vulnerability. individual and global risk mitigation priorities can
A second element to prioritization is values – the be successfully aligned (the “tragedy of the
different values of an organization may determine commons”). Most global risks are not open to
its perception of vulnerability, as well as its effective mitigation by any individual organization.
perception of responsibility for mitigation. A third
and final element is openness to mitigation – risks The Stern Review on the Economics of Climate
where there are clear strategies for mitigation will Change offers one approach to managing risk
tend to be mitigated before those where strategies prioritization on the multi-decade and global scale,
are more diffuse, even if the assessment of suggesting a low discount rate for calculating the
likelihood and severity is less acute. net present value of future costs from not acting to
mitigate climate change. It is an approach that
At the global level, these key elements of risk aims to get beyond national vulnerabilities to
mitigation are problematic. First, the potential assess the systemic costs. An alternative
consequences of combinations of risks affect all approach, explicitly stating a limitation on available
organizations, even if global risks are often mitigation resources, is that undertaken by the
perceived by individual organizations and countries Copenhagen Consensus project. Risk prioritization
as exogenous. Second, global risks may produce at the global level is a major task – but a
consequences outside the central expectations of necessary prerequisite to efficient mitigation.
risk managers – they represent low-probability,

The approach taken to mitigate an individual global However, this assumes a degree of certainty about
risk will depend on prioritization, resources and the manifestation of the risk, and the expectation
understanding. Some risks can effectively be that it can be managed in isolation. The scenarios in
mitigated with relatively few resources by changing this report suggest that interdependency between
individual mindsets and altering behaviours – others global risks is hard to manage in this way. An
require strong institutional processes and actions. alternative is to attempt to understand nodes of
What is common to the mitigation of all global risks interconnectedness between global risks, and focus
is that they require alignment on priorities, common mitigation efforts on them.
understanding and common efforts to overcome
problems of collective action. A final approach is to improve resilience,
allowing the system to cope with a range of
One approach involves acting to prevent the unexpected manifestations. Such “downstream
manifestation of a specific risk. The advantage of mitigation” recognizes that not all events can be
“upstream mitigation”, if successful, is that it allows predicted and prevented.
the disruption of the risk event itself to be avoided.

22
 Why are organizations not more The “5 Pathways” to Mitigation
proactive in mitigating risk?
• Improving insight: moving risks from the
The following is a list of common reactions to unknown to the known through research. The
risk, which prevent a proactive approach to risk best mitigation strategies often derive from
mitigation: the changed mindset which can result from
• Someone else will manage my risk. enhanced knowledge and information.
• The risk is not relevant to my organization.
• Won’t taking action just slow me down? • Enhancing information flow: allowing
• No one is telling me that I must act. information to flow effectively between
• What reward do I get from mitigating risk? decision-makers and those experiencing the
• It is too costly to mitigate. risk first-hand, to provide early warning,
• Why worry about it? inform the public and exchange best practice.
It could never happen to me.
• It is too large to manage, and success • Refocusing incentives: creating the incentive
is not guaranteed. frameworks that will allow decisions to be
made to reduce risks previously considered
exogenous.
In reality, these approaches are not mutually
exclusive. Mitigation strategies tend to involve parts • Improving investment: providing the
of both – like global risks themselves they are investments necessary to mitigate risk.
dynamic and complex.
• Implementing through institutions: improving
In the 2006 report, the Global Risk Network (or creating) the framework needed to
developed the idea of the “5 pathways” to mitigate risks for which an institutional
mitigation, defining five elements of risk mitigation response is required.
strategies: improving insight, enhancing information
flow, refocusing incentives, improving investment
and implementing through institutions. In the 2007
report, these “5 pathways” have been applied to the
“core global risks” to achieve an understanding of
where mitigation efforts should focus.

23
Applying the “Five Pathways” to the 23 “Core” Global Risks

Enhancing Implementing
Improving Re-focusing Improving
information through
Global Risk insight incentives investment
flow institutions

Oil price shock/energy supply

interruptions
US current account deficit/fall
in US$
Chinese economic
hard landing
Fiscal crises caused
by demographic shift
Blow up in asset prices/
excessive indebtedness
Climate change
Loss of freshwater services
Natural catastrophe:
Tropical storms
Natural catastrophe:
Earthquakes
Natural catastrophe:
Inland flooding
International terrorism
Proliferation of WMD
Interstate and civil wars
Failed and failing states
Transnational crime
and corruption
Retrenchment from
globalization
Middle East instability
Pandemics
Infectious diseases
in the developing world
Chronic disease in the
developed world
Liability regimes
Breakdown of critical
information infrastructure (CII)
Emergence of risks associated
with nanotechnology

24
Two Possible Institutional Innovations require consensus to act and that their objectives
for Managing Global Risks are frequently sidelined by institutional conflicts. At
a time of acute global risks, the lack of
Country Risk Officer decisiveness may have severe costs.

The Country Risk Officer concept would require An alternative may be so-called “coalitions of the
governments to appoint a single Country Risk willing” whereby a number of individual, interested
Officer, prioritizing risks on a cross-sectoral basis, and vital states cooperate in a non-exclusive
exploring private sector techniques of risk fashion on a specific global risk issue for a specific
assessment, management and transference. period of time, acting as an avant-garde for risk
mitigation. Other countries will join the initiative as
In the corporate sector, the Chief Risk Officer it progresses towards a statement of policy
(CRO) is responsible for all categories of risk, actions. The incentive to join is to influence a
particularly risk reporting, consolidation and successful global policy. The incentive to pursue
aggregation. Enterprise CROs take a portfolio view the risk mitigation goals seriously once inside
of risk – a Country Risk Officer would serve a would be a “naming and shaming” of those
similar function, acting as a focus point for countries that do not meet the specific, agreed,
strategic thinking (rather than day-to-day commitments and the possible risk of expulsion.
management) and forward action within
government on how global risks can be effectively The principal advantage of the “coalition of the
managed and mitigated. willing” structure is its flexibility and the
involvement of only interested states, thereby
The principal advantage of the CRO concept reducing the possibilities for obstruction and
domestically would be to allow effective trade-offs gradually drawing less interested states into a
between the priorities of different ministries, and to dialogue. The principal disadvantage of such an
allow governments to escape silo-thinking. This is approach would be the inability to effectively
particularly relevant when thinking of negotiate trade-offs between different countries’
“downstream” resilience strategies as similar approaches to different global risks. For “grand
measures can help mitigate the consequences of bargains” between states a coordinating role
different risks: buildings which are protected would still be required.
against earthquakes are also likely to better
withstand an explosion.

At the international level, the meeting of national

CROs could provide a coordination body for global
risk mitigation efforts.

“Coalition of the Willing”

An alternative institutional solution to the

management of global risks is the setting up of
“coalitions of the willing” regarding individual global
risks involving different groups of countries in a
system of flexible geometry. A common criticism of The World Economic Forum can play a key role in
facilitating dialogue on risk issues, helping to achieve
current international approaches to major risk consensus around the need for change and possible
issues is that they depend on bureaucracies that mitigation solutions.

25
Focus on Mitigation: Oil Price • Reduce legal and political uncertainties related
Shock/Energy Supply Interruptions to emissions-trading schemes and renewable
energies to allow markets to fully develop their
The recent progress on mitigating the risk of an oil potential.
price shock includes reductions in oil subsidies, • Develop nuclear energy and coal-fired electric
higher investment in energy efficiency and utility plants in a manner that is mindful of the
increased strategic oil inventories: risks and environmental concerns.
• Energy price subsidies have been reduced • Increase investment in refinery capacity and in
in some countries, for example, Liquid Natural Gas plants, off-loading and
Indonesia and Russia. processing terminals.
• High oil prices have increased investments in • Increase taxes progressively on fuel in the
the oil and gas sector, public and private United States to European levels, made more
investment in energy efficiency and alternative politically palatable with an equal value cut in
energy sources. income tax.
• Reserves have been added to Strategic • Eliminate remaining energy-price subsidies. This
Petroleum Stockpiles, in, for example, is particularly necessary to encourage energy
the US and China. efficiency in emerging markets and
hydrocarbon-rich nations.
Future mitigation needs can be divided into those • Stockpile oil in Strategic Petroleum Reserves,
which address the question of interruptions but release supplies unpredictably when
specifically, and those that broadly address the necessary to undercut speculative psychology
question of demand and supply. in the markets.
• Remove the silo-based approach to risk • Promote intergovernmental cooperation on
management and link energy security with energy security policies in defined geographies
considerations on climate change. – such as the European Union.
• Promote marketing of energy-efficient products • Promote and ensure common standards for
and clean energy sources and attempt to promote energy transit.
sustainable economic growth as a positive
economic choice in the developed world and as
a long-term policy for emerging markets.

26
Focus on Mitigation:
International Terrorism In post-event mitigation:
• The private sector has continued progress on
Despite the increase in the overall strategic threat diversifying operations and building up
from international terrorism (particularly in Iraq, resilience, for example, by establishing a
Afghanistan and Somalia), there have been a second computer backbone.
considerable number of tactical advances in the • Terrorism insurance schemes have been
mitigation of terrorism risk. These range from established to spread the risk among the
improved security controls, to improved political different stakeholders in some markets through
understanding and better management of public-private partnerships: NHT in the
terrorism events when they occur, including Netherlands, Pool Re in the UK, Gareat in
development of terrorism insurance markets to France, Extremus in Germany and TRIA in the
cover some of the economic consequences of US.
attacks and facilitate the recovery process. • Terrorism insurance has risen: one survey of
Marsh clients revealed that terrorism coverage
On pre-event mitigation: rose from 23% in mid-2003 to 64% by the end
• In the United Kingdom, a plot to blow up of 2005.
aircraft between Britain and the United States
was disrupted. Future specific needs for mitigating the terrorism
• The European Union is improving its security risk:
information-sharing system, through work on an • Renew terrorism insurance schemes scheduled
EU-wide counter-terrorism database. to sunset in 2007 in some form; improve
• The United States is improving its tracking of framework for public-private arrangements in
imports and exports, through its Automated other countries.
Commercial Environment system. • Reach an internationally-agreed definition of
• In Saudi Arabia, over 20 senior Al Qaeda terrorism and terrorist acts and build a body of
operatives have been killed. A few years ago, transcultural values to help combat terrorism.
fears that the Saudi regime was under threat • Expand intelligence capabilities, while re-
were widespread – these fears are now enforcing oversight functions to ensure that
reduced. privacy is maintained.
• The Philippine authorities are re-establishing • Improve cooperation between intelligence
control over Basilan and the Jolo Islands, agencies. In regions where bilateral cooperation
operational centres for the Abu Sayyaf and is already good and a level of trust has been
Jemaa Islamiyah terrorism organizations. established, transition to a more dynamic and
• In Indonesia, the government’s multipillar efficient multilateral mode of cooperation.
counter-terrorism campaign is being • Improve tracking of financial flows to cut off
strengthened, with considerable new counter- funding to dispersed terrorist cells.
terror legislation, the prosecution of a number • Strengthen the monitoring of the shipment of
of major terrorists and the support and goods to allow for the detection of explosive
promotion of moderate Islam as an alternative devices and nuclear/biological/chemical/
to radical theology. radiological material.
• The private sector has improved physical
security measures and screening.

27
Focus on Mitigation: Climate Change • Strengthen current market mechanisms by
ensuring a stable and predictable legal
As the science surrounding global climate change environment and ensuring ambitious overall
continues to unfold, a range of public and private limits on emissions.
mitigation measures are critical both in the • Create strong incentive structures and provide
immediate term and over the long term. research funds to foster possible “breakthrough
technologies” such as hydrogen fuel cells or
Some steps are already under way: advanced thin film photovoltaics, particularly in
• Awareness of the impacts of climate change is the power-generation sector.
rising quickly (particularly in the developed • Provide investment or tax incentives that level
world), building public support for mitigation. the playing field for capital intensive investments
Ultimately, changes in the mindset of in clean-coal combustion and carbon
consumers – altering their behaviour as a result sequestration.
– may produce considerable mitigation. • Improve cost-effective reductions in emissions
• The European Union launched an Emissions at the business and domestic level. Many well-
Trading Scheme in 2005. managed corporations have already identified
• California has passed a law aiming to reduce more efficient processes that can lead to cost
greenhouse gas emissions by 25% by 2020. savings in their production processes,
transportation and facilities management. These
But there are a number of mitigation needs which should be extended.
should be introduced, updated or implemented • Improve the protection of private and public
more fully: operations from discontinuities caused by
• Raise awareness in the developing world of the severe physical risks due to climate change,
impacts of climate change. including strategic assessments of long-term
• Involve major developing countries in new vulnerabilities.
frameworks for limiting future emissions’ growth • Encourage long-term adaptation in countries
(particularly China and India). where impacts of climate change are most likely
• Urgently begin work on a successor to the to be felt, by increasing adaptation aid and
Kyoto agreement with three central principles: creating financial structures to leverage global
• Involvement of the United States and major insurance capacities.
developing countries (particularly China and
India);
• Differential responsibilities for future
emissions’ reduction dependent upon past
emissions and stage of economic
development; and,
• Common overall responsibility for climate
change.
• Allow transfer of technologies which may help
reduce climate change, or mitigate its impacts.
• Expand market mechanisms – such as carbon
emissions’ credit trading – which encourage
innovation, reward efficiency and ease the
development of insurance and other financial A car struck by a tree blown down in the storm on a road
in China’s Guangdong province. Typhoon “Prapiroon”
tools to manage risks inherent in emissions’ killed at least 48 and left 15 others missing after crashing
reduction projects. ashore in Southern China.

28
Focus on Mitigation: Pandemics • Manage expectations of what government will
and will not do if an outbreak occurs, endorsing
The nature of the pandemic threat has become wider accountability in the event of a pandemic
much more widely understood over the last year: and driving financial responsibility.
• A pandemic is not a one-time occurrence, but • Improve governmental ability to provide timely,
occurs as a series of waves. clear and effective information, and improve
• An outbreak cannot be predicted – multiple, education of first-responders.
simultaneous geographic outbreaks may occur • Increase research into the identification of
with concurrent failures in the supply/value critical choke-points in the supply/value chain
chain. where skill sets are rare, interdependencies are
• The behavioural response to an outbreak – the greatest and the risk of triggering systemic
“infodemic” element – may be more significant failure is highest.
than the virus itself. • Invest in surge capacity in healthcare services.
• Encourage private sector investment in surge
As a result, mitigation measures have advanced, capacity for vaccine manufacture.
both for the specific HN51 virus, as well as • Develop effective domestic plans for the
preparedness for a pandemic outbreak more distribution and administration of vaccines and
generally: other medication in a pandemic situation.
• There has been an increase in exchange of best • Reach understanding between manufacturing
practices between businesses. and consuming countries on an equitable and
• The coordination of international organizations agreed basis for international distribution of
has improved. vaccines in a pandemic situation.
• The awareness of the significance of national • Encourage the maintenance of basic supplies
transparency in order to aid any future at home.
international effort makes the control of the • Explore the possibility of “work-from-home” for
disease more likely. some businesses, reducing the potential for
infection and spread.
Some future mitigation needs may only become • Undertake an administration-wide skill-set
available once an outbreak has occurred and its evaluation to allow planning for replacing skilled
origins and vector of transmission have been personnel, should they become unavailable.
identified. But many mitigation options remain • Explore the feasibility of alternate financing
incomplete or not fully exploited: schemes to serve as a backstop and transfer
• Strengthen collaborative preparedness the risk to a larger community, including the
activities, including simulations and decision- public sector, to avoid systemic failure.
modelling exercises among national, local and
value-chain interdependent parties.

29
All of the four global risks focused on here – oil-price In some cases, this approach would not work: a
shocks, international terrorism, climate change and global definition of terrorism and terrorist acts is
pandemics – would benefit in different ways from the clearly a task which requires cross-cultural
institutional innovations suggested in this report: a consensus from the outset. However, for others –
Country Risk Officer or the setting up of “coalitions such as an oil-price spike – this structure might
of the willing” around particular global risks. create exactly the balance between inclusiveness
and manageability that is required to produce
A Country Risk Officer would allow prioritization to agreement on appropriate measures for global risk
be made effectively and resources to be focused on mitigation.
different risks at different times – creating, for
example, the kind of surge capacity for dealing with There is no guarantee of mitigation initiatives
pandemics which is outlined above. A Country Risk preventing global risks from causing major disruption
Officer would be equally well placed to understand to the international system, economic damage and
the interconnections between many global risks – irreparable human loss. Global risks cannot – for the
understanding how some mitigation measures for most part – be mitigated out of existence. But
climate change might help improve energy security inaction in the face of global risks is not an option –
while others would transfer the risk, or either for businesses or government.
understanding how improvements in preparedness
for natural catastrophes could also strengthen
resilience to international terrorism. Faced with a
portfolio of mitigation options, a Country Risk Officer
would be able to shape the necessary strategic
understanding and response to global risks that are
needed.

The “coalition of the willing” idea would allow for

flexibility and clarity in adopting many of the specific
mitigation options suggested above. The appropriate
governance, management and mitigation of global
risks are only likely to emerge from the expanding
participation of interested parties. Some of the
specific mitigation ideas above are already under
way in some parts of the world, but their impact is
reduced by the partial nature of their adoption
elsewhere. Structured “coalitions of the willing”
would allow momentum to build up around
mitigation measures, bringing countries and
businesses into an evolving set of standards, rather
than seek to achieve an overarching arrangement at
the outset. As such, a “coalition of the willing” would
reflect the realities of global politics – and attempt to
derive dynamic advantage from them.

30
Contributors

This report was prepared by Charles Emmerson of Citigroup

the Global Risk team of the World Economic Forum,
in conjunction with its partners: John Ingraham, Managing Director, Head of Risk
Aggregation, Citigroup, USA
Global Risk Team, World Economic Forum
Wharton School
Charles Emmerson, Global Leadership Fellow,
editor Global Risks 2007 Witold Henisz, Associate Professor of
Jesse Fahnestock, Global Leadership Fellow Management, The Wharton School, University of
Johanna Lanitis, Team Coordinator Pennsylvania, USA
Thierry Malleret, Senior Director Stephen Kobrin, Professor of Multinational
Gareth Shepherd, Global Leadership Fellow Management, The Wharton School, University of
Supported by Sean Cleary, Strategic Adviser Pennsylvania, USA
Howard Kunreuther, Cecilia Yen Koo Professor of
MMC Decision Sciences and Public Policy, The Wharton
School, University of Pennsylvania, USA
Sara Dixter, Senior Business Analyst, Marsh, Erwann Michel-Kerjan, Managing Director, Center
United Kingdom for Risk Management and Decision Processes, The
John Drzik, President, Mercer Oliver Wyman, USA Wharton School, University of Pennsylvania, USA
David Frediani, Executive Director, MMC International,
Marsh & McLennan Companies, United Kingdom
John Merkovsky, Managing Director, Global
Practice Leader, Marsh Risk Consulting, USA
Roland Rechtsteiner, Director, Corporate Risk
Consulting, Mercer Oliver Wyman, Switzerland

Swiss Re

Esther Baur, Head, Issue Management, Swiss

Reinsurance Company, Switzerland
Catherine Burger, Head, Networks and Research,
Swiss Re Centre for Global Dialogue, Switzerland
Annabelle Hett, Head, Emerging Risk Management,
Swiss Re, Switzerland
Kurt Karl, Head, Economic Research and Consulting,
Swiss Re Financial Services Corporation, USA
Ivo Menzinger, Head, Sustainability and Emerging
Risk Management, Swiss Re, Switzerland
Christian Mumenthaler, Chief Risk Officer and
Member of the Executive Board, Swiss Re,
Switzerland

31
Participants

Over the past year there have been a number of Sir Paul Judge, Chairman, Royal Society (UK)
workshops associated with the Global Risk work. Ethan B. Kapstein, Professor, Department of
Four of these, at the Wharton School in May, in Economics and Political Science, INSEAD
London in June and October, and in New York in Stefan H.E. Kaufmann, Founding Director, Max
September, directly contributed to the writing of the Planck Institute for Infection Biology
current report. We would like to thank the participants Micheal Keen, Chief, Tax Policy Division,
in these workshops for their time – and above all for International Monetary Fund (IMF)
their insights: Parag Khanna, Fellow, New American Foundation
David Knipe, Director, Mercer Oliver Wyman (MMC)
Mohammad Hossein Adeli, Chairman, Center for Gary S. Lynch, Managing Director and Business
Economic & International Studies (Iran) Continuity Practice Leader, Marsh (MMC)
William A. Anderson, National Intelligence Officer, Nick Mabey, Chief Executive, E3G
National Intelligence Council Simon Maxwell, Director, Overseas
Dan Ariely, Professor, MIT - Media Laboratory Development Institute
David Bowers, Joint Managing Director, Absolute Vivian Menna, Managing Director, Marsh (MMC)
Strategy Research Sean M. Mooney, Chief Economist,
Christopher Bunting, General Secretary, Guy Carpenter (MMC)
International Risk Governance Council Berrien Moore, Director, Institute for
Matthew Burrows, Director of Analysis and the Study of Earth, Oceans and Space,
Production Staff, National Intelligence Council University of New Hampshire
Jon Danielsson, London School of Economics Geoff Mulgan, Director, The Young Foundation
Frank Diebold, Professor of Economics, Finance Neil Doherty, Frederick H. Ecker Professor of
and Statistics, Wharton School Insurance and Risk Management, Wharton School
Patrick Dill, Vice-President, Emerging Risk Tina Nelson Fordham, Director, Economic and
Management, Swiss Re Political Strategies, Citigroup Global Markets
Hadi Dowlatabadi, Professor, Sustainable Herbert Oberhänsli, Head, Economics and
Development Research Institute, University of British International Relations, Nestlé SA
Columbia Martin Parry, Co-Chair, Working Group II (Impacts
Alex Evans, Senior Research Fellow, and Adaptation), Intergovernmental Panel on Climate
Center on International Cooperation Change, Hadley Centre, Met Office
Jean Fournier, Managing Director, Innovation, Christian Pedersen, Director, Mercer Oliver
Marsh (MMC) Wyman (MMC)
Leon Fuerth, Research Professor of International John L. Petersen, President, The Arlington Institute
Affairs, George Washington University Erik Peterson, Senior Vice-President and Director,
Boris Galonske, Senior Manager, Mercer Oliver Center for Strategic and International Studies (CSIS)
Wyman (MMC) Sanjay Purohit, Head, Corporate Planning, Infosys
Ian A. Goldin, Director, James Martin 21st Century Technologies Ltd
School, University of Oxford Danny Quah, Professor of Economics, London
Robert L. Grenier, Managing Director, Kroll (MMC) School of Economics
Gary S. Guzy, Practice Leader, Emerging Walter V. Reid, Director, Conservation and Science
Environmental Risk, Marsh (MMC) Programme, The David and Lucile Packard
Beat Habegger, Senior Researcher, Foundation
Crisis and Risk Network Uriel Rosenthal, Professor of Government and
Bruce Hoffman, Professor, Security Studies, Public Administration, Leiden University
Georgetown University David Rothkopf, President and Chief Executive
John P. Holdren, Director, Woods Hole Officer, Garten Rothkopf LLC
Research Center Nouriel Roubini, Professor, New York University
Charles Hollis, Head, Middle East Programme, Joanna Rubinstein, Dean, Health and Science
Kroll (MMC) Initiative, Columbia University
Bob Howe, Chief Risk Officer, Swiss Re Life & Health

32
Enrique Rueda-Sabater, Director, Strategy and
Integrated Risk Management, World Bank
Michael Ryan, Director, Epidemic and
Pandemic Alert and Response, World Health
Organization (WHO)
David Salisbury, Director, Immunization,
Department of Health of the United Kingdom
Armen Sarkissian, President and Founder, Eurasia
House International
Claire Spencer, Head, Middle East Programme,
Chatham House
Don Sull, Associate Professor of Management
Practice, London Business School
Rolf Tanner, Director, Political & Sustainability Risk
Management, Swiss Re
James Tansey, Deputy Director, James Martin
Institute for Science and Civilization
J. Adair Turner, Chairman, UK Pensions
Commission
Gary G. Venter, Managing Director,
Guy Carpenter (MMC)
David G. Victor, Director, Program on Energy and
Sustainable Development, CESP
Katherine Walker, Vice-President, Europe, Middle
East and Africa, Merrill Lynch Europe, Middle East
and Africa
Alyson C. Warhurst, Chair, Strategy and
International Development, Warwick
Business School
Kevan V. Watts, Chairman, Merrill Lynch
International Inc.
Mark E. Welland, Head of the Laboratory,
Nanoscience Centre
Martin Weymann, Assistant Vice-President,
Emerging Risk Management, Swiss Re
Dickie Whitaker, Managing Director, Guy Carpenter
(MMC)
Angela Wilkinson, Director, Scenario Planning and
Futures Research, James Martin Institute for Science
and Civilization
Gareth Williams, Partner, Worldwide, Mercer
Human Resource Consulting (MMC)
Justin Wolfers, Assistant Professor of Business and
Public Policy, Wharton School, University of
Pennsylvania
Ngaire Woods, Director, Global Economic
Governance Programme
Keith Woolnough, Actuary, Swiss Re Life & Health

33
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