Davos Man, meet the Occupy movement.
The World Economic Forum sees growing risks to global stability and economic prosperity, with severe income disparity posing the single greatest threat, according to a report prepared for the Forum’s annual meeting in Davos, Switzerland, later this month.
The report, based on a survey of 469 experts from government, business, academia and nongovernmental organizations, reflects something of a sea change in thinking among the Forum’s movers and shakers. They see socioeconomic issues, led by income inequality and chronic fiscal imbalances, as posing the greatest risks today. By contrast, last year’s report saw the biggest dangers coming from environmental and business risks, led by meteorological catastrophes, hydrological catastrophes and corruption.
The shift comes as little surprise considering the events of the past year, which saw the Occupy Wall Street movement emerge in the West and put a spotlight on inequality while the debt crisis and social protests against austerity roiled European capitals. Still, there’s no small irony in the focus on inequality by the Forum, whose elite membership of corporate CEOs and bankers could say without boasting, “we are the one-tenth of one percent.”
Lee Howell, managing director of the Forum’s Risk Response Network, which produced the report, notes that the Forum has long addressed social issues alongside business topics. Recent years have produced vivid debates on executive compensation and calls for development metrics besides gross domestic product, for example. “That needle’s been moving” on measures of inequality, says Howell. “We know that’s just not healthy.”
This year’s report highlights the interplay between various risks and sketches out three scenarios that Forum experts believe pose the greatest threats to global prosperity and security. The first is a dystopian future of rising inequality, fiscal problems, and chronic unemployment, with those economic ills fueling protectionism and nationalism. The second is a scenario in which governments and regulators fail to effectively manage a range of complex and interrelated areas ranging from financial markets to climate change. The third risk, dubbed the dark side of connectivity, highlights the growing vulnerability of our online world to criminal attacks, terrorism and cyber warfare.
“The more interconnected systems are, the more complex and risky they are,” says Anwarul Hasan, director of risk management at Swiss Reinsurance Co. in Zurich, who helped draft the report. “It is a constant challenge to regulators and institutions.”
The report doesn’t offer much in the way of solutions to the various risks, and it is generally pessimistic about the willingness or ability of governments to head off these risks, especially with elections looming in France and the U.S. this year and a leadership transition under way in China.
“Many of these issues will not get on the radar screen because of the political cycle in major countries,” says Howell. “We need political leaders to show a little long-term vision.”
Companies are taking risk management more seriously, though. Most major companies now have enterprise risk management committees, something that wasn’t the case five years ago, and many are beginning to come to grips with risk of catastrophic events, says Michael Useem, a management professor at the University of Pennsylvania’s Wharton School in Philadelphia. “BP was a bit of a wake-up call,” he says. “The company put an enormous amount of shareholder value at risk.”
