World Economic Forum Jan 2013 DAVOS Global Risks Assessment

7/29/2019 World Economic Forum Jan 2013 DAVOS Global Risks Assessment

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Global Risks 2013Eighth Edition

An Initiative o the Risk Response Network

Insight Report


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Global Risks 20132

The inormation in this report, or on which this reportis based, has been obtained rom sources that theauthors believe to be reliable and accurate. However,it has not been independently veried and norepresentation or warranty, express or implied, is madeas to the accuracy or completeness o any inormationobtained rom third parties. In addition, the statementsin this report may provide current expectations o utureevents based on certain assumptions and include anystatement that does not directly relate to a historical actor a current act. These statements involve known andunknown risks, uncertainties and other actors whichare not exhaustive. The companies contributing to thisreport operate in a continually changing environmentand new risks emerge continually. Readers arecautioned not to place undue reliance on thesestatements. The companies contributing to this reportundertake no obligation to publicly revise or updateany statements, whether as a result o new inormation,uture events or otherwise and they shall in no event beliable or any loss or damage arising in connection withthe use o the inormation in this report.

2013 World Economic ForumAll rights reserved.

No part o this publication may be reproduced ortransmitted in any orm or by any means, including

photocopying and recording, or by any inormationstorage and retrieval system.

ISBN: 92-95044-50-9978-92-95044-50-0REF: 301211

World Economic Forum91-93 route de la CapiteCH-1223 Cologny/Geneva

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[email protected]


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3Global Risks 2013

Global Risks 2013Eighth Edition

An Initiative o the Risk Response Network

Lee Howell

World Economic Forum

Editor in Chie

World Economic Forum in collaboration with:

Marsh & McLennan Companies

National University o Singapore

Oxord Martin School, University o OxordSwiss Reinsurance Company

Wharton Center or Risk Management, University o Pennsylvania

Zurich Insurance Group


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Global Risks 20134

Figure 1: Global Risks Landscape 2013 versus 2012i

Im

pactiftheriskweretooccur

Likelihoodto occur in the next ten years

2.5 3 3.5 4

4

3.5

3

2.5

Major systemic financial failure

Recurring liquidity crises

Chronic fiscal imbalances

Severe incomedisparity

Chronic labourmarket imbalances

Unmanageableinflation or deflation

Hard landing of anemerging economy

Prolonged infrastructure neglect

Unforeseen negative consequences of regulation

Extreme volatility in energyand agriculture prices

Im

pactiftheriskweretooccur


2.5 3 3.5 4

4

3.5

3

2.5

Persistentextremeweather

Risinggreenhousegas emissions

Failure of climate change adaptation

Land and waterwayuse mismanagement

Irremediable pollution

Unprecedentedgeophysicaldestruction

Vulnerability togeomagnetic storms

Mismanaged urbanization

Species overexploitation

Antibiotic-resistantbacteria

Impactiftheriskweretooccur


2.5 3 3.5 4

4

3.5

3

2.5

Unilateral resource nationalization

Global governance failure

Diffusion of weaponsof mass destruction

Critical fragile states

Failure of diplomaticconflict resolution

Terrorism

Entrenched organized crime

Pervasive entrenchedcorruption

Widespread illicit tradeMilitarizationof space



2.5 3 3.5 4

4

3.5

3

2.5

Water supply crises

Vulnerability to pandemics

Unsustainable population growth Rising religious fanaticism

Food shortage crises

Mismanagement ofpopulation ageing

Unmanaged migration

Rising rates of chronic disease

Ineffective illicit drug policies

Backlash against globalization



2.5 3 3.5 4

4

3.5

3

2.5

Massive digital misinformation

Proliferation of orbital debris

Massive incident ofdata fraud/theft

Failure of intellectual property regime

Mineral resourcesupply vulnerability

Unforeseenconsequences

of new life sciencetechnologies

Cyber attacks

Critical systems failure

Unforeseen consequencesof climate change mitigation

Unforeseenconsequences

of nano-technology

Technological

Geopolitical Societal

EnvironmentalEconomic

i NB: Some o the movements are due to changes in the composition o the sample. For more detail please see Section 4 Survey Findings.

Source: World Economic Forum


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5Global Risks 2013

Figure 2: Global Risks Landscape 2013


Likelihood to occur in the next ten years

Economic

Environmental

Geopolitical

Societal

Technological1 2 3 4 5

5

4

3

2

1

2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4 4.1 4.2

4.2

4.1

4

3.9

3.8

3.7

3.6

3.5

3.4

3.3

3.2

3.1

3

2.9

2.8

2.7

2.6

2.5

Critical fragile states


Water supply crisesChronic fiscal imbalances

Severe income disparity

Chronic labour market imbalances

Risingreligious

fanaticism

Mismanagement of population ageing

TerrorismPersistent extreme weather

Cyber attacks

Mismanaged urbanization


Massive incident of data fraud/theft

Rising rates ofchronic disease



Unforeseen negativeconsequences

of regulationMilitarization of space

Land and waterwayuse mismanagement

Unmanageable inflation or deflation


Vulnerabilityto pandemics

Unmanaged migration

Recurringliquiditycrises


Unsustainable population growth



Rising greenhouse gas emissions


Failure of diplomaticconflict resolution

Extreme volatility in energy and agriculture prices

Diffusion of weapons of mass destruction

Unforeseen consequences of new life science technologies

Backlash against globalizationBacklash against globalization

Unprecedented geophysical destruction

Ineffective illicit drug policies

Unforeseen consequencesof nanotechnology

Widespread illicit trade


Failure of intellectual property regime

Antibiotic-resistantbacteria

Pervasive entrenched corruptionHard landing of an emerging economy


Unforeseenconsequencesof climatechange mitigation

Prolongedinfrastructureneglect

Vulnerability togeomagneticstorms

Mineral resource supplyvulnerability



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Global Risks 20136

Figure 3: Global Risks Map 2013ii



Unforeseen consequences of nanotechnology

Hard landing of an emerging economy

Diffusion of weapons of mass destruction


Prolonged infrastructureneglect

Vulnerability to geomagnetic storms

Pervasive entrenched corruption

Widespreadillicit trade

Ineffectiveillicit drugpolicies

Mismanagedurbanization

Unmanaged migration




Recurring liquidity crises

Mismanagement of population aging

Unforeseen negativeconsequences of regulation

Militarization of space


Extreme volatility in energyand agriculture prices

Land and waterway usemismanagement

Unprecedentedgeophysicaldestruction

Mineral resource

supply vulnerability

Unforeseen consequencesof climate change mitigation

Testing Economic andEnvironmental Resilience

Digital Wildfires in aHyperconnected World

The Dangers of Hubrison Human Health

Antibioticresistantbacteria



Failure of intellectualproperty regime




Cyber attacks



Failure of diplomatic conflict resolution

Terrorism

Rising religious fanaticism




Chronic fiscalimbalances


Global governancefailure





Water supply crises

Antibioticresistantbacteria



Failure of intellectualproperty regime




Cyber attacks




Terrorism







Global governancefailure





Water supply crises


ii Please see gure 37 in Survey Findings or the complete global risks interconnection map.


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7Global Risks 2013

Contents

Section 1

8 Preace

9 Foreword

10 Executive Summary

13 Box 1: The Evolving Risk Landscape

14 Introduction

Section 2

16 Testing Economic and Environmental Resilience

21 Box 2: The Green Growth Action Alliance (G2A2)

23 Digital Wildres in a Hyperconnected World

27 Box 3: Hyperconnected World

28 The Dangers o Hubris on Human Health

34 Box 4: Bringing Space Down to Earth

Section 3

36 Special Report: Building National Resilience to Global Risks

42 Box 5: Supply Chain Risk Initiative

43 Box 6: Resilience Practices Exchange (RPE)

43 Box 7: One Year On Resilience Practices

Section 4

45 Survey Findings

53 Box 8: The Global Risks 2013 Data Explorer

Section 5

55 X Factors

60 Conclusion

Section 6

61 Appendix 1 - The Survey

62 Appendix 2 - Likelihood and Impact

66 Appendix 3 - Resilience

74 Acknowledgements

78 Project Team


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Global Risks 20138

As we strive to restore condence and

growth globally, leaders cannot continuewith a risk-o mindset i our collectivegoal remains to seize transormationalopportunities that can improve the stateo the world. Dynamism in ourhyperconnected world requiresincreasing our resilience to the manyglobal risks that loom beore us.

By their nature, global risks do notrespect national borders, as highlighted inthis report. And we now know thatextreme weather events exacerbated byclimate change will not limit their eects to

countries that are major greenhouse gasemitters; alse inormation posted onsocial networks can spread like wildre tothe other side o the globe in a matter omilliseconds; and genes that makebacteria resistant to our strongestantibiotics can hitch a ride with patientson an intercontinental fight.

I, thereore, invite you to read the casestudies in this report o the threeexamples cited above to understandbetter the international and

interdependent nature o suchconstellations o risks. I think you willagree that each one makes a compellingcase or stronger cross-bordercollaboration among stakeholders romgovernments, business and civil society a partnership with the purpose obuilding resilience to global risks. Theyalso highlight the need or strengtheningexisting mechanisms to mitigate andmanage risks, which today primarily existat the national level. This means that whilewe can map and describe global risks,we cannot predict when and how they will

maniest; thereore, building nationalresilience to global risks is o paramountimportance.

Preace Resilient Dynamism is the theme or thisyears World Economic Forum AnnualMeeting in Davos-Klosters, and I ampleased to introduce the Global Risks2013 report in the same spirit. Based onan extensive survey o over 1,000 expertsworldwide, the report now in its eighthedition serves to orient and inorm

decision-makers as they seek to makesense o an increasingly complex andast-changing world. I hope this reportchallenges, provokes and inspires you,and I invite you to engage i you have notalready done so with the WorldEconomic Forums Risk ResponseNetwork, which provides private andpublic sector leaders with a collaborativeplatorm to build national resilience toglobal risks.

Klaus SchwabFounder and Executive ChairmanWorld Economic Forum


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9Global Risks 2013

Section

1

Section

2

Section

3

Section

4

Section

5

Section

6

Foreword

Resilience is the theme that runs through

the eighth edition o this report. It seems anobvious one when contemplating theexternal nature o global risks because theyare beyond any organizations or nationscapacity to manage or mitigate on theirown. And yet global risks are otendiminished, or even ignored, in currententerprise risk management. One reasonor this is that global risks do not t neatlyinto existing conceptual rameworks.Fortunately, this is changing. The HarvardBusiness Reviewrecently published aconcise and practical taxonomy that mayalso be used to consider global risks.1

There are three types o risks as catego-rized by Proessors Kaplan and Mikes.First are preventable risks, such asbreakdowns in processes and mistakes byemployees. Second are strategic risks,which a company undertakes voluntarily,having weighed them against the potentialrewards. Third are external risks, whichthis report calls global risks; they arecomplex and go beyond a companysscope to manage and mitigate (i.e. they areexogenous in nature). This dierentiation

will, we hope, not only improve strategicplanning and decision-making but alsoincrease the utility o our report in privateand public sector institutions.

The concept o resilience also infuencedthis years Global Risks PerceptionSurvey, on which this report is built. Theannual survey o experts worldwideadded a new question asking respond-ents to rate their countrys resilience or,precisely, its ability to adapt and recover in the ace o each o the 50 riskscovered in the survey. More than 1,000

experts responded to our survey, makingthe dataset explored in this report moretextured and robust than ever.

Per the revamped methodology intro-duced in 2012, the 2013 report presentsthree in-depth risk cases exploringthemes based on analysis o survey data,as well as detailed ollow-up expertinterviews and partner workshops. Thiseighth edition increased its geographicbreadth and disciplinary depth by

bringing on two new report partners romacademia: the National University oSingapore (NUS) and the Oxord MartinSchool at the University o Oxord. Wealso entered into an exciting editorialpartnership with Nature, a leadingscience journal, to push the boundarieso the imagination urther with a re-vamped X Factors section o the report.

We have introduced unique content anddata online, including an interactivewebsite through which you can explorethe risks landscape and a one-year-onollow-up o the three risk casespresented in the 2012 report rom aperspective o how to promote resilience.

Our Special Report this year takes the rststeps towards developing a nationalresilience measurement with regard toglobal risks. It explores the use o qualitativeand quantitative indicators to assess overallnational resilience to global risks by lookingat ve national-level subsystems(economic, environmental, governance,inrastructure and social) through the lens

o ve components: robustness,redundancy, resourceulness, responseand recovery. The aim is to develop a newdiagnostic report to enable decision-makers to track progress in buildingnational resilience and possibly identiywhere urther investments are needed. Theinterim study will be published this summer.

Linked to this research eort is the launcho an online Resilience PracticesExchange, where leaders can learn andcontribute to building resilience using thelatest social enterprise technology. Thesenew eorts will enable the World EconomicForums Risk Response Network (RRN) tobecome the oremost international platormto enable leaders to map, mitigate, monitorand enhance resilience to global risks.Thereore, I invite you to get in touch withthe RRN and share your ideas andinitiatives to assess and to improve nationalresilience to global risks.

Lee HowellManaging DirectorRisk Response Network

1 Kaplan, R.S., and Mikes, A. Managing Risks: A NewFramework. In Harvard Business Review, 2012.


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Global Risks 201310

Executive Summary

The global risk that respondents rated most likely to maniestover the next 10 years issevere income disparity, while the riskrated as having the highest impact i it were to maniest ismajorsystemic nancial ailure. There are also two risks appearing inthe top ve o both impact and likelihood chronic scal

imbalances and water supply crisis (see Figure 4).

Unoreseen consequences o lie science technologies was thebiggest mover among global risks when assessing likelihood,while unoreseen negative consequences o regulation movedthe most on the impact scale when comparing the result withlast years (see Figure 5).

Figure 4: Top Five Risks by Likelihood and Impact

Impact

Average Impact

Major systemic nancial failure

Water supply crises

Chronic scal imbalances


Diusion of weapons of mass destruction

Likelihood

Average Likelihood

Very Unlikely Almost Certain

Low Impact High Impact

1 2 3 4


Chronic scal imbalances


Water supply crises


1 2 3 4

5

5

3.99

3.85

4.14

3.91

3.83

3.99

3.95

4.05

3.97

3.92


The World Economic Forums Global Risks2013 report is developed rom an annualsurvey o over 1,000 experts rom industry,

government, academia and civil society whowere asked to review a landscape o 50global risks.


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11Global Risks 2013

Section

1

Section

2

Section

3

Section

4

Section

5

Section

6

Three Risk Cases

The report introduces three risk cases, based on an analysis osurvey results, consultation with experts and urther research.Each case represents an interesting constellation o global risksand explores their impact at the global and national levels. Thethree risk cases are:

Testing Economic and Environmental Resilience

Continued stress on the global economic system is positionedto absorb the attention o leaders or the oreseeable uture.Meanwhile, the Earths environmental system is simultaneouslycoming under increasing stress. Future simultaneous shocks to

both systems could trigger the perect global storm, withpotentially insurmountable consequences. On the economicront, global resilience is being tested by bold monetary andaustere scal policies. On the environmental ront, the Earthsresilience is being tested by rising global temperatures andextreme weather events that are likely to become more requentand severe. A sudden and massive collapse on one ront iscertain to doom the others chance o developing an eective,long-term solution. Given the likelihood o uture nancial crisesand natural catastrophes, are there ways to build resilience inour economic and environmental systems at the same time?

Figure 5: Top Five Changes by Likelihood and Impact

Average Impact Score [Rank]

Average Likelihood Score [Rank]

Very Unlikely Almost Certain

Low Impact High Impact

1 2 3 4

1 2

5

5

3.73 [11th]

3.66 [14th]

3.49 [27th]

3.40 [30th]

3.38 [27th]

3.36 [28th]

3.18 [43rd]

3.15 [36th]

3.02 [43rd]

2.77 [48th]

3.83 [5th]

3.46 [21st]

3.45 [23rd]

3.44 [18th]

3.23 [38th]

3.11 [44th]

3.07 [37th]

3.05 [38th]

2.80 [46th]

2.68 [49th]

By Impact


Unforeseen consequences

of new life science technologies

Unforeseen consequences

of climate change mitigation

2013

2012

By Likelihood

43

2013

2012







Unforeseen negative

consequences of regulation


Digital Wildfres in a Hyperconnected World

In 1938, thousands o Americans conused a radio adaptation othe H.G. Wells novel The War o the Worlds with an ocial newsbroadcast and panicked, in the belie that the United States hadbeen invaded by Martians. Is it possible that the Internet couldbe the source o a comparable wave o panic, but with severegeopolitical consequences? Social media allows inormation tospread around the world at breakneck speed in an open systemwhere norms and rules are starting to emerge but have not yetbeen dened. While the benets o our hyperconnectedcommunication systems are undisputed, they could potentiallyenable the viral spread o inormation that is either intentionally orunintentionally misleading or provocative. Imagine a real-worldexample o shouting re! in a crowded theatre. In a virtualequivalent, damage can be done by rapid spread omisinormation even when correct inormation ollows quickly.Are there ways or generators and consumers o social media todevelop an ethos o responsibility and healthy scepticism tomitigate the risk o digital wildres?

The Dangers o Hubris on Human Health

Health is a critical system that is constantly being challenged, beit by emerging pandemics or chronic illnesses. Scienticdiscoveries and emerging technologies allow us to ace suchchallenges, but the medical successes o the past century mayalso be creating a alse sense o security. Arguably, one o themost eective and common means to protect human lie theuse o antibacterial and antimicrobial compounds (antibiotics) may no longer be readily available in the near uture. Every doseo antibiotics creates selective evolutionary pressures, as somebacteria survive to pass on the genetic mutations that enabledthem to do so. Until now, new antibiotics have been developed toreplace older, increasingly ineective ones. However, humaninnovation may no longer be outpacing bacterial mutation. None

o the new drugs currently in the development pipeline may beeective against certain new mutations o killer bacteria thatcould turn into a pandemic. Are there ways to stimulate thedevelopment o new antibiotics as well as align incentives toprevent their overuse, or are we in danger o returning to apre-antibiotic era in which a scratch could be potentially atal?

Special Report: National Resilience to

Global Risks

This years Special Report examines the dicult issue o how acountry should prepare or a global risk that is seemingly beyond

its control or infuence. One possible approach rests withsystems thinking and applying the concept o resilience tocountries. The report introduces ve components o resilience robustness, redundancy, resourceulness, response andrecovery that can be applied to ve country subsystems: theeconomic, environmental, governance, inrastructure and social.The result is a diagnostic tool or decision-makers to assess andmonitor national resilience to global risks.


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Global Risks 201312

X Factors rom Nature

Developed in partnership with the editors oNature, a leadingscience journal, the chapter on X Factors looks beyond thelandscape o 50 global risks to alert decision-makers to veemerging game-changers:

- Runaway climate change: Is it possible that we have already

passed a point o no return and that Earths atmosphere istipping rapidly into an inhospitable state?

- Signifcant cognitive enhancement: Ethical dilemmas akinto doping in sports could start to extend into daily working lie;an arms race in the neural enhancement o combat troopscould also ensue.

- Rogue deployment o geoengineering: Technology is nowbeing developed to manipulate the climate; a state or privateindividual could use it unilaterally.

- Costs o living longer: Medical advances are prolonging lie,but long-term palliative care is expensive. Covering the costsassociated with old age could be a struggle.

- Discovery o alien lie: Proo o lies existence elsewhere inthe universe could have proound psychological implicationsor human belie systems.

The Global Risks report is the fagship research publication othe World Economic Forums Risk Response Network, whichprovides an independent platorm or stakeholders to exploreways to collaborate on building resilience to global risks. Furtherinormation can be ound at www.weorum.org/risk.


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Section

1

Section

2

Section

3

Section

4

Section

5

Section

6

Breakdown of

critical informationinfrastructure

Breakdown of critical information infrastructure

2007 2008 2009 2010 2011 2012* 2013*

1stAsset price collapse Asset price collapse Asset price collapse Asset price collapse Fiscal crises Major systemic

nancial failureMajor systemicnancial failure

2ndRetrenchmentfrom globalization

Retrenchmentfrom globalization(developed)



Climatologicalcatastrophes

Water supplycrises

Water supplycrises

3rdInterstate andcivil wars

Slowing Chineseeconomy (


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Global Risks 201314

Introduction

The nature o global risks is constantlychanging. Thirty years ago, chlorofuorocar-bons (CFCs) were seen as a planetary risk,

while threat rom a massive cyber attackwas treated by many as science ction. Inthe same period, the prolieration o nuclearweapons occupied the minds o scientistsand politicians, while the prolieration oorbital debris did not. We see a similar storywith asbestos then and carbon nanotubestoday, and the list goes on.

With new inormation, the perceptions andrealities o risks change, and oten inunoreseen directions. Consider that insome circles the threat rom greenhousegas emissions made nuclear energy seemless hazardous than ossil uels over the longrun. Yet the nuclear catastrophe inFukushima, Japan, not only changed publicperceptions there but also energy policy,almost overnight, in some parts o Europe.

The World Economic Forum is now in its eighth year opublishing the Global Risks report. The purpose o the currentedition is twoold. First, it aims to show how experts rom aroundthe world, rom dierent backgrounds, currently perceive therisks that the world is likely to ace over the next decade. To

capture these opinions, a survey was carried out, interviewswere conducted with specialists in dierent elds, and a serieso workshops and conerence sessions were held with expertgroups to interpret the research ndings and to work out thethree risk cases developed in the report. Second, with thisreport the World Economic Forum aims to continue to raiseawareness about global risks, to stimulate thinking about howrisks can be actored into strategy development, and tochallenge global leaders to improve how they approach globalrisks.

Annual Survey Assessing Global Risks

The Global Risks Perception Survey was conducted inSeptember 2012. Over 1,000 experts responded to evaluate 50global risks rom ve categories economic, environmental,geopolitical, societal and technological. For each global risk,survey respondents were asked, On a scale rom 1 to 5, howlikely is this risk to occur over the next 10 years?, and I it wereto occur, how big would you rate the impact o this risk? Theaggregated responses to these two questions are depicted inthe Global Risks Landscape scatterplot in Figure 2.

The evaluation o the 50 risks also ocused on their linkages,given their interdependent nature. Survey respondents wereasked to nominate pairs o risks that they believe to be strongly

connected. They were also asked to nominate a Centre oGravity the systemically most important risk or each o theve categories o global risks. Putting all paired connectionstogether results in a network diagram presented in Figure 37 inSection 4 the Survey Findings.

The survey data was also analyzed to examine how thebackground o the respondents aects their perceptions. Arethe views o people based in Europe similar to those in Asia? Doyounger people perceive the world dierently rom older people?And how does specialist knowledge in a eld aect how risksare perceived? These questions are explored in Section 4 o thisreport.


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15Global Risks 2013

Section

1

Section

2

Section

3

Section

4

Section

5

Section

6

The Cases Making Sense o Complex

Systems

The 50 global risks in this report are interdependent andcorrelated with each other. The permutations o two, three, ouror more risks are too many or the human mind to comprehend.Thereore, an analysis o the network o connections has beenundertaken to highlight some interesting constellations o globalrisks seen in Figure 3.

In Section 2, these constellations o global risks are presented asthree important cases or leaders: Testing Economic andEnvironmental Resilience on the challenges o responding toclimate change, Digital Wildres in a Hyperconnected Worldon misinormation spreading via the Internet, and The Dangerso Hubris on Human Health on the existential threat posed byantibiotic-resistant bacteria.

Each case was inspired by the ndings rom an initial networkanalysis and urther developed through extensive research into

current trends, potential causal eects, levels o awareness andpossible solutions. Unlike traditional scenario methodologies,the risk cases do not attempt to develop a ull range o allpossible outcomes. They are instead an exercise in sense-making as well as a collective attempt to develop a compellingnarrative around risks that warrant urgent attention and actionby global leaders. Readers are encouraged to rene these casesurther and to develop their own scenarios based on the datapresented.iv

X Factors rom Nature Looking Even

Further Ahead

The section on X Factors invites the reader to consider emergingconcerns that are not yet on the radar o decision-makers. I the50 global risks represent known-knowns, then these X actorscould be considered as known unknowns. They were co-developed with the editors oNature and benet rom theircontributors deep knowledge o cutting-edge scientic re-search that has not yet crossed over into mainstream discourse.

Resilience Preparing or Future Shocks

This years Special Report examines the increasingly importantissue o building national resilience to global risks. It introducesqualitative and quantitative indicators to assess overall nationalresilience to global risks by looking at ve national-levelsubsystems (economic, environmental, governance,inrastructure and social) through the lens o ve components:robustness, redundancy, resourceulness, response andrecovery. The aim is to develop a uture diagnostic report toenable decision-makers to track progress in building nationalresilience and possibly identiy where urther investments areneeded. The interim study will be published this summer, andwe invite readers to review the proposed ramework and toshare ideas and suggestions with the Risk Response Network.v

iv See also the World Economic Forums series o What-I interviews or more case studieson a variety o topics: http://orumblog.org/tag/what-i/.

v For urther details please reer to http://www.weorum.org/riskor contact us at [email protected].


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Global Risks 201316

Testing Economic andEnvironmental Resilience

Economic and environmental systems aresimultaneously under stress worldwide, andthis is testing resilience at the global and

national levels. Economic dicultiesworldwide are continuing to make greaterdemands on political attention and nancialresources. Meanwhile, the impact o climatechange is more evident as temperature risesand more requent extreme weather eventsloom on the horizon. The economic andenvironmental challenges require bothstructural changes and strategic investments,

but are countries prepared to manage bothronts, conceivably at the same time?

Five years ater the nancial crisis, macroeconomic worriescontinue to weigh heavily on leaders minds. This is conrmedby data rom the World Economic Forums quarterly condenceindexvi as well as the Global Risks Perception Survey, in whichrespondents ratedmajor systemic nancial ailure as the

economic risk o greatest systemic importance or the next 10years.

The very same survey respondents also identied the ailure oclimate change adaptation and rising greenhouse gas emissionsas among those global risks considered to be the most likely tomaterialize within a decade. Compared to last years survey, theailure to adapt to climate change replacedrising greenhousegas emissions as the most systemically critical. This change inour data mirrors a wider shit in the conversation on theenvironment rom the question o whether our climate ischanging to the questions o by how much and how quickly.

Figure 7: Testing Economic and Environmental Resilience Constellation

Globalgovernance

failure






Globalgovernance

failure


Persistent extreme weather



Water supply crises

The Economic System

The Environmental System

Source: World Economic Forum vi The Global Condence Index is an index developed by the World Economic Forum thatrepresents condence among decision-makers in three areas: global economy, globalgovernance and global cooperation. For greater detail, please consult: http://www.weorum.org/CondenceIndex


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17Global Risks 2013

Section

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Sect

ion

2

Section

3

Section

4

Section

5

Section

6

The narrative emerging rom the survey is clear: like a superstorm, two major systems are on a collision course. Theresulting interplay between stresses on the economic andenvironmental systems will present unprecedented challengesto global and national resilience.

Will countries be able to address complex challenges unoldingon very dierent time scales simultaneously? A cynic may argue

that any uture environmental loss could actually have astimulative economic eect this is the same rationale used tocriticise GDP-driven growth policies, whereby the reconstructionollowing a massive earthquake can boost overall GDP over thelong term. However, this view ignores two realities. First, morepeople reside and work in urban areas than ever beore inhuman history this concentration will continue and is likely todrive environment-related losses to even greater historic highs.Second, the existing debt levels o many major economies canbe unsustainable. Given this scal constraint, we are witnessingthe use o extraordinary monetary policies to stimulate globalgrowth, which some argue are essentially experimental.

The act remains that todays massive socio-economicchallenges demand immediate attention, yet availability o publicresources is limited especially to nance eorts to avert thelong-term eects o climate change, which, in turn, couldseverely disrupt the global economy. We ace a dauntingnegative eedback loop. The logic o risk managementprescribes that countries should invest today to saeguardcritical inrastructure and centres o economic activity againstuture climate-related losses that could be o much greatermagnitude. And there is an even more compelling political logicto do this in order to generate new employment and to reviveeconomic growth as soon as possible. But investment instrategic inrastructure is more easily said than done, despite theshort- and long-term benets.1 New approaches are needed

that are based on a meeting o minds across varied proessions,sectors and geographies; a capacity to act decisively is alsoneeded, despite considerable uncertainty about what the bestplan o action might be. Hesitating to act now will only add to theburdens o the next generation.

Persistent Global Economic Fragility

The global economic situation remains ragile. The InternationalMonetary Fund projects slow growth in the advancedeconomies, an annual rate o between 1.3% and 2.6% between2012 and 2017.2 Combined with scal ragility, this will continueto strain government spending. Given the current levels ogovernment debts and decits in these economies, it will takeyears o concerted political and economic eort beore debt toGDP levels o the United States, Japan and many Euro Areacountries are brought down to stabilize at lower levels.3 Also,the economic growth o emerging markets and developingeconomies is projected to be slower than at its peak in 2010.4

The current eurozone instability will continue to shape globalprospects in the coming years.5 The associated risk o systemicnancial ailure, although limited, cannot be completelydiscarded. Given the anti-austerity protests across the eurozone,the election o rejectionist governments could lead to urthereconomic paralysis and bring the eurozone crisis to a head,6potentially destabilizing the global nancial system in whichcondence is already waning.7

This persistent global economic ragility continues to divert our

attention rom longer-term solutions by limiting the availability opublic resources and generating greater caution in use o scarceunds or strategic investment projects. There are other loomingissues related to ongoing prescriptions to counter economicmalaise. Will the massive quantitative easing undertaken by keycentral banks to stave o defation inevitably lead to destabilizinghyper-infation? Will structural economic reorms deliver thenecessary employment gains over the long run?

Figure 8: Further Required Defcit Reductions or Fiscal

Sustainability (2011)

Required adjustment (% GDP)

-5 0 5 10 15 20

Gross debt (% of GDP)

0 50 100

Philippines

Thailand

Mexico

Argentina

Kenya

Malaysia

Morocco

PakistanBrazil

India

Jordan

Germany

United Kingdom

France

Belgium

Iceland

United States

Ireland

Portugal

Italy

Japan

Greece

150 200

Source: Adapted rom IMF Fiscal Monitor, 2012 as cited in Global Economic Prospects: ManagingGrowth in a Volatile World. June, 2012. Washington DC: World Bank.


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Global Risks 201318

The Changing Debate on the Global

Climate

Mitigation eorts have made signicant progress at country levelin the past 15 years in areas such as emissions regulations andnancial incentives or example, the US$ 3.4 billion madeavailable to match private sector investment unds in the USSmart Grid Investment Grant program.8 Nonetheless, in todaysincreasingly multi-polar geopolitics, it has become harder toreach and eectively implement international agreements onclimate change mitigation. Pledges made in the run-up to the2009 Copenhagen climate change negotiations, which wereintended to limit global warming to 2 degrees Celsius, nowappear collectively insucient to meet this target o 2 degrees.9Recent scenario projections based on existing governmentpolicies and declared policy intentions predict that a long-termincrease o more than 3.5 degrees Celsius is probable. Themore pessimistic scenario assuming no change in governmentpolicies and measures beyond those adopted or enacted bymid-2011 talks o a conceivable increase o 6 degrees Celsius or

more.10

I the current mitigation commitments remain unmet, a globalmean temperature increase o 4 degrees Celsius could occur asearly as the 2060s. This would likely lead to negative impactsincluding an increase in the requency o high-intensity tropicalcyclones, inundation o coastal cities as sea levels rise, andincreased drought severity in several regions. Together, theeects would not only mean signicant economic losses butalso mass displacement o populations, rising ood insecurityand aggravated water scarcity11 (also see Figure 9).

Recent climate and weather events, some o which arevisualized in Figure 10, have reminded us o the economic andhuman cost o the kind o natural disasters that we know arelikely to become more requent and severe as climate continuesto change. The estimated economic loss o the 2011 Thailandfoods, or example, was US$ 30 billion,12 and o HurricaneKatrina US$ 125 billion; meanwhile, the 2003 European heatwave resulted in more than 35,000 atalities13 and the Horn o

Arica droughts in 2011 claimed tens o thousands o lives andthreatened the livelihoods o 9.5 million people.14 More recently,Hurricane Sandy let a heavy bill, estimated today at over US$70 billion or New York and New Jersey alone.15 Such eventsremind us that many economies remain vulnerable to damagesarising rom climatic events today, let alone those o the uture.16

While there is no consensus on how ast and how much ourclimate is changing, the growing realization that some degree oclimate change is inevitable is refected in a shiting o the debateto how to adapt. Advocating or greater attention to be paid toadaptation is controversial in some quarters as it is interpretedas a tacit admission that mitigation eorts are no longer worthpursuing. However, the less eective mitigation eorts are, themore pronounced adaptation challenges will become; thereore,mitigation and adaptation need to be addressed in concert whiletaking advantage o all possible synergies.

Figure 9: Possible Impact o Global Warming on Dierent Sectors

Weather

Water

Food

Ecosystem

Social

Threat to local watersupply as glaciers melt

Major cities around the worldthreatened by sea level rise

Changes in water availability, threatening up to a billionpeople

Falling crop yields in many developing regions Falling yields in many developed regions

Ecosystems extensivelyand irreversibly damaged

Many more speciesface extinction

More than a billion people may have to migrate - increasing the risk of conicts

Temperature above preindustrial - IPCC scenario A1B

Year of impact: 2030 2050 2080

1C 2C 3C 4C 5C

More intense storms, forest res, droughts, ooding and heat waves

Source: Adapted rom Shaping Climate-Resilient Development: A Framework or Decision-Making. 2009. Economics o Climate Adaptation Working Group.


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A number o climate adaptation related initiatives and reportshave been emerging.vii While poorer countries will need helprom the international community to nance adaptationinvestments, adaptation eorts are by their nature local, with

countries, companies and individuals being largely responsibleor their own adaptation costs.

While it is possible to make various dierent underlyingassumptions in modelling the eects o climate change, it isclear that the economic costs are likely to be considerable. Areport by Mercer,17 which considers the cumulative economiccost o changes to the physical environment, health and oodsecurity due to climate change, quotes a possible range o US$2 trillion to US$ 4 trillion by 2030 across dierent climatescenarios.18 The EU Climate Change Expert Group suggeststhat the costs o climate change impacts, increasing inmagnitude with the rises in global temperature, may amount to5% to 20% o GDP (or higher) in the long term.19

Some people aected by climate change may seek to recovercosts rom past emitters o greenhouse gases. Although theAlaskan village o Kivalina which aces being wiped out bythe changing climate was unsuccessul in its attempts to le aUS$ 400 million lawsuit against oil and coal companies,20,21uture plaintis may be more successul. Five decades ago, theUS tobacco industry would not have suspected that in 1997 itwould agree to pay US$ 368 billion in health-related damages.22For some businesses, investing in climate change mitigationnow could be as much about enterprise risk management asabout mitigating a global risk.

Decisive Action in a Climate o

Uncertainty

As the consensus that the climate change is becoming moreevident grows, data across many disciplines (includingorestry, water and land management, or example) remainslimited, not readily available or communicated in a ormat thatmight not acilitate actionable decisions on climate adaptation.Yet, uture climate risks may require human judgement todayor in the coming years, while the ull scientic data may notcome until it is too late. Complex systems such as the climateare non-linear by nature chain reactions through the systemare unpredictable and not directly proportional to the size othe triggers. A limited amount o data and constraints oncomputational power have been strong impediments tobringing greater clarity into predicting uture climatic

developments at a local level.23,24

For instance, there havebeen inconclusive predictions regarding the likely impacts oglobal warming on rainall patterns in Guyana: possibilitiesranged rom a 5% rainall decline by 2030, lessening the risk ofooding, to a 10% rainall increase, worsening this risksignicantly.25

Faced with uncertainty about the likely eectiveness and risko unintended consequences o a proposed intervention,policy-makers can be paralyzed by a desire to wait or moredetailed analyses and data regarding the precise timing,maniestation or impact o uture climatic changes in their localenvironments. Greater support or scientic research, bettercomputational power and data are needed to shed greater

clarity into predicting uture climatic developments, especiallythe climate and weather extremes.

vii For examples please see Shaping Climate-Resilient Development: A Framework orDecision-Making by the Economics o Climate Adaptation Working Group, Managing theRisks o Extreme Events and Disasters to Advance Climate Change Adaptation SpecialReport o the Intergovernmental Panel on Climate Change, and Private Sector Initiative othe UNFCCCs Nairobi Work Programme eaturing good practices and climate changeadaptation activities undertaken by the private sector (some o which have been carriedout in partnership with NGOs or the public sector) across dierent regions and sectors.39

Figure 10: 2011 Economic Losses Related to Selected Natural Catastrophes

>US$25,000m

US$5,000m - US$25,000m

US$1,000m - US$5,000m

US$250m - US$1,000m

US$100m - US$250mUS$50m - US$100m

< US$50m

Earthquake, Tsunami, Volcano

Extreme Weather

Flood

Storm, Hail

Source: Adapted rom sigma natural catastrophe data base o Swiss Reinsurance Company.


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While this will come, can leaders embrace the need to make adecision without the complete assurance that they are makingthe best decision? This is more easily said than done, especiallywhen there are competing demands or attention andresources. For example, the 2008 nancial crisis shows howurgent macroeconomic diculties can divert attention romother signicant global governance challenges, rom climatechange negotiations to the Millennium Development Goals. Yet

the actions o the G20 during the crisis also demonstrate thepotential or bold, coordinated international action.

As global risks ultimately require a national response, muchmore attention must be given to how decisions are made in theace o such overwhelming economic and environmentalchallenges. Perception is typically regarded as a passiveprocess, in which people view an objective reality. Yetperception is actually an active process o understanding,through which people construct their own version o reality.26Research in cognitive psychology and decision-makingsuggests that people use rules o thumb to make judgementsin the ace o ambiguity and complexity.viii This approach usuallyserves well but can lead to predictably aulty judgements undersome circumstances. Psychologists call such predictably aultyjudgements cognitive biases,27 and these biases infuence howwe respond to the best inormation at our disposal andintegrate it in decision-making structures.

Cognitive biases become important when addressing theslow-moving uture threat o climate change in the context oan ongoing unstable economic outlook. Some examples are:

- We tend to place too much emphasis on recent personalexperience when estimating the likelihood o a riskoccurring. For example, experience in the United Statesshows that many more people buy food insuranceimmediately ater a major food. On average, those people

hold food insurance or only two to our years beore lettingit lapse i they have not suered a claim because they arelikely to view insurance as a bad investment rather thanseeing it as a orm o protection.28

- Through a process known as hyperbolic discounting, wetend to give disproportionately more weight to immediatecosts and benets than to delayed ones. Individuals, orinstance, may oten be reluctant to incur the upront costso measures such as investing in climate change adaptationmeasures when the benets will not be elt or severalyears.29,30

- We ail to take protective measures i the perceivedlikelihood o the risk in question is below our threshold level

o concern or example, discounting entirely the possibilityo a natural catastrophe that has a low chance o occurring.This bias is exacerbated by a tendency to underestimatethe likelihood o a negative event occurring due tomisperceptions o the risk.31,32

The cumulative eect o such cognitive biases is that we maynot pay due attention to, or act eectively on, risks that areperceived to be long-term and relatively uncertain. Theimpossibility o ully eradicating ambiguity, along with therelatively lengthy time scales involved, mean that cognitivebiases are likely to remain signicant hurdles to beacknowledged and overcome on the path towards eective

action on climate change and related risks.

Exploring New Approaches with

Climate-Smart Mindsets

Acknowledging the eect o our cognitive biases may be therst step towards building resilience against a uture perectstorm o economic and environmental challenges. Only thencan we start weighing the various demands equally, in the nearand the long term, on scarce public resources and dwindlingrisk-mitigation budgets.

To reconcile the challenge o building environmental resilienceamid economic stress, current policies and strategies mayneed to be re-evaluated. For instance, in several countries,government insurance schemes and building-permit policiescontinue to encourage urther urbanization in coastal or highfood risk areas rather than preventing it.33 In doing so, they maybe creating large pockets o vulnerability to climate risks. A2007 OECD study analysing 136 port cities around the worldconcluded that the population exposed to coastal foodingcould triple by the 2070s due to the combined eects o climate

change and urbanization, among others.34

In light o the increased certainty that global temperatures willrise to some extent, a climate-smart mindset needs topermeate all levels o decision-making. Climate-smart is aterm that originated in agriculture, to describe such agriculturethat not only increases resilience in light o climate adaptationbut also reduces greenhouse gas emissions.35 A climate-smartmindset incorporates climate change analysis into strategic andoperational decision-making. It entails a search or synergiesacross climate change mitigation- and adaptation-relatedeorts where possible. Such a mindset needs to become anintegral part o our urban planning, water- and ood-securitymanagement, investment policy, and demographic policy

development, among others. In 2006, during its term over therotating European Union presidency, Finland introduced apolicy innovation which encouraged ministers with otherportolios rom transport and urban planning, to agriculturaland employment policies to consider the eects o theirdecisions on the populations health.36 Something similar maybe needed to ensure that all ministers enact policies in theirdomains that are inormed by a climate-smart mindset.

The current debt crisis o several leading economies will make itmore dicult to nance climate-smart activities, such as the SmartGrid Investment Grant. That said, the private sector has a criticalrole here as well. In the United States, around 80% o critical

inrastructure is owned or operated by the private sector, notgovernments.37 It is likely that many o the preparations to weatherthe colliding economic and environmental storm systems will beound in private-sector initiatives to reinorce critical assets andshield them rom potential uture risks and liability.Given the pressure on public nances generally and theirscarcity to address climate change-related challenges, newunding models will need to be ound. Private unds can beunlocked through innovative public-private collaboration thatranges across disciplines as well as stakeholders. In order toenable scalable, eective partnerships, a variety o actors andproessional disciplines will need to converge on mutuallybenecial and economically sustainable solutions. This is no

minor task since, in addition to the diversity o interests at stake,dierent proessionals oten have conficting biases and havebeen trained to think in siloed ways. Yet such partnerships havestarted to emerge.viii The phrase rule o thumb means a quick and easy way o making estimates, based on

experience that will not be precisely accurate but will nonetheless be adequate or mosteveryday situations.


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In order to address the current shortall in green inrastructure ina number o emerging economies, more than 50 leadingcompanies rom nance, inrastructure, energy and agriculturesectors joined public institutions to orm the Green GrowthAction Alliance (G2A2). As described in greater detail in Box 2,the aim o this initiative is to unlock greater sums o privateinvestment or green inrastructure.

Other examples o innovative partnerships include a company inChina which has partnered with government, industryassociations and international NGOs to enable a sector-widereplication o green preabrication production, currently saving360 hectares o orest and 314,000 tons o greenhouse gasemissions a year; and the Desertec Foundation or Clean EnergyGeneration, which assisted in ounding an industrial initiative o55 industrial and nancial companies and institutions working toenable large-scale generation o renewable power rom desertsto serve markets in North Arica, Middle East and Europe.38

As the world aces a squeeze in public unds at the same timeas the eects o climate change are increasing, it is only throughcollaboration among governments (to urther the publicinterest), businesses (to search or innovative products andsolutions), legal experts (to mitigate ear o liability), science (tobring good quality supporting data and analyses) and thenancial sector (to innovate and avoid uture damaging costs)that the limits o environmental and economic resilience can besuccessully navigated.

Questions or Stakeholders

- How will we reconcile climate change mitigation andadaptation eorts with the desire or prosperity given currentdemographic trends?

- How can like-minded municipalities, companies andcommunities drive orward a new set o climate-smartapproaches that avoid cognitive biases?

- How can we rethink cross-industry collaboration to nd theright balance between competition and cooperation amongcompanies in a resource-constrained and increasinglyinterconnected world?

Box 2: The Green Growth Action Alliance

(G2A2)

As emerging economies grapple with how to grow theireconomies without worsening their environments, many aredeveloping green growth strategies designed to attractinvestment in sustainable water, energy, transport andagricultural inrastructure. Up to US$1 trillion a year o privatesector investment is needed, according to the 2012 B20 GreenGrowth Task Force. However, due to the limited track record osome technologies, combined with the perception o investmentrisk, private capital providers are oten reluctant to invest ingreen growth.

To address the current shortall in green inrastructureinvestment, more than 50 leading companies rom nance,inrastructure, energy and agriculture sectors joined with publicnance institutions to launch the Green Growth Action Alliance(G2A2) at the 2012 G20 Summit in Mexico. Chaired by the thenMexican President Felipe Caldern, the G2A2 will pursue our

strategic activities over a two-year timerame:1. Highlight innovative models or public-private

collaboration:The G2A2 will launch a report at the 2013World Economic Forum Annual Meeting identiying existingsources o nance and pinpointing innovative ways or publicpolicy to unlock private unds.

2. Stimulate private investment at country level: The G2A2 isworking with the governments o Kenya, Vietnam and Mexicoto incubate innovative nancing models with the domesticand international private sector.

3. Provide new ideas and models to shape the policyagenda: The G2A2 has ormed working groups on greenree trade, end-user nancing o renewable energy,institutional investors and energy eciency. The energyeciency working group is looking to pilot new nancingstructures or energy services companies; the green ree-trade group has led calls to establish ree-trade regulations orclean technologies such as solar.

4. Help to scale up and replicate successul approaches: Tohelp governments, development banks and nanceinstitutions to ensure rapid replication and to scale upsuccessul models, the G2A2 will document case studies inthe Green Investment Report and engage with policyplatorms and investor networks, such as the G20Development Working Group and Finance Track group onclimate nance, the UNFCCCs Momentum or Change

Initiative and the International Development Finance Club. TheG2A2 will also collaborate closely with the UN SustainableEnergy or All Initiative and the Global Investor Coalition onClimate Change.

The World Economic Forum is serving as the secretariat or theG2A2.


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Reerences

1. Strategic Inrastructure Steps to Prioritize and Deliver Inrastructure Eectively and Eciently.September, 2012. Geneva: World Economic Forum in collaboration with PwC.

2. World Economic Outlook: Coping with High Debt and Sluggish Growth. October, 2012.Washington DC: International Monetary Fund.

3. Global Economic Prospects: Managing Growth in a Volatile World. June, 2012. Washington DC:World Bank.

4. World Economic Outlook: Coping with High Debt and Sluggish Growth. October, 2012.Washington DC: International Monetary Fund.

5.

Global Economic Prospects: Managing Growth in a Volatile World. June, 2012. Washington DC:World Bank.

6. Eichengreen, B. Europes Populists at the Gate. Project Syndicate, A World o Ideas, http://www.project-syndicate.org/commentary/the-political-risk-to-the-euro-by-barry-eichengreen,2012.

7. Tonkin, S. Global Experts Poll: Economic Condence Plummets to Lowest Level in FiveQuarters. World Economic Forum, http://www.weorum.org/nr_gci5.

8. Smart Grid Investment Grant Program, Progress Report. July, 2012. U.S. Department o Energy,Electricity Delivery and Energy Reliability.

9. Too Late or Two Degrees? Law Carbon Economy Index 2012. November, 2012.PricewaterhouseCoopers LLP.

10. World Energy Outlook 2011. 2011. Paris: International Energy Agency.

11. Turn Down the Heat. Why 4 C Warmer World Must Be Avoided. A Report or the World Bank bythe Potsdam Institute or Climate Impact Research and Climate Analytics. November, 2012.Washington DC: World Bank.

12. Natural Catastrophes and Man-Made Disasters in 2011: Historic Losses Sur face from RecordEarthquakes and Floods. November, 2012. Zurich: Swiss Reinsurance Company.http://direito.olha.uol.com.br/uploads/2/9/6/2/2962839/natural_catastrophes_and_man_made_disasters_2011.pd.

13. Shaping Climate-Resilient Development: A Framework or Decision-Making. 2009. Economics

o Climate Adaptation Working Group.14.Tavanti, M. From Food Insecurity to Food Security: Understanding Human and Food Security

Implications or Somalia and the Horn o Arica. Somalia Strategy Review, http://www.somaliastrategyorum.org/journal/v1i1/tavanti_oodsecurity_v1i1.pd, 2012.

15. Hurricane Sandys Rising Costs. The New York Times, http://www.nytimes.com/2012/11/28/opinion/hurricane-sandys-rising-costs.html, 2012.

16. Shaping Climate-Resilient Development: A Framework or Decision-Making. 2009. Economicso Climate Adaptation Working Group.

17. Climate Change ScenariosImplications or Strategic Asset Allocation. 2011. Mercer.

18. Ibid.

19. The 2C Target. Background on Impacts, Emission Pathways, Mitigation Options and Costs.July, 2008. EU Climate Change Expert Group.

20. Lean, G. Micronesia Lawsuit Highlights Climate Change Litigation. The Telegraph, http://www.telegraph.co.uk/earth/environment/climatechange/8533367/Micronesia-lawsuit-highlights-climate-change-litigation.html, 2011.

21. Saxe, D, James, M. Kivalina Loses its Climate Change Nuisance Case Again. http://envirolaw.com/kivalina-loses-climate-change-appeal/, 2012.

22. Gruber, J. The Economics O Tobacco Regulation. Health Aairs, http://content.healthaairs.org/content /21/2/146.ull, 2011.

23. Based on comments rom expert review.

24. Palmer, T. A CERN or Climate Change. In Physics World, 2011, 24:14-15.

25. Shaping Climate-Resilient Development: A Framework or Decision-Making. 2009. Economicso Climate Adaptation Working Group.

26. Heuer, R.J. Psychology o Intelligence Analysis. Center or the Study o Intelligence, CentralIntelligence Agency, 1999. https://www.cia.gov/library/center-or-the-study-o-intelligence/csi-publications/books-and-monographs/psychology-o-intelligence-analysis/PsychoIntelNew.pd

27. Ibid.

28. Michel Kerjan, E., Lemoyne de Forges, S. and Kunreuther, H. Policy Tenure Under the USNational Flood Insurance Program (NFIP). In Risk Analysis, 2011, 32(4):644-658.

29. Michel-Kerjan, E. Overcoming Decision Biases to Reduce Lossesrom Natural Catastrophes. InE. Shar (ed), Behavioural Foundations o Policy. 2012. Princeton: Princeton University Press

30. Laibson, D. Golden Eggs and Hyperbolic Discounting. In The Quarterly Journal o Economics,1997, 112(2):443-478.

31. Based on comments rom expert review.

32. Kunreuther H., Meyer, R. and Michel-Kerjan, E. Overcoming Decision Biases to Reduce Lossesrom Natural Catastrophes.Behavioural Foundations o Policy. In E. Shar (ed), 2012. Princeton:

Princeton University Press.33. Based on comments rom expert review.

34. Nicholls, R.J., Hanson, S. and Herweijer, C. et al. Ranking o the Worlds Cities Most Exposed toCoastal Flooding Today and in the Future, Executive Summary. 2007. Organisation or EconomicCo-operation and Development.

35. Climate-Smart Agriculture: Policies, Practices and Financing or Food Security, Adaptationand Mitigation. 2010. Rome: Food and Agriculture Organization o the United Nations.

36. Puska, P. Health in All Policies. In The European Journal o Public Health, 2007, 17(4):328.

37. Report o the Critical Inrastructure Task Force. January, 2006. Homeland Security AdvisoryCouncil, http://www.dhs.gov/xlibrary/assets/HSAC_CITF_Report_v2.pd

38.Annex to the Message rom the Friends o Rio+20. 2012. The Friends o Rio+20. http://www3.weorum.org/docs/WEF_FriendsRio20_Annex_2012.pd

39. Private Sector Initiative - Database o Actions on Adaptation. United Nations FrameworkConvention on Climate Change, http://unccc.int/adaptation/nairobi_work_programme/private_sector_initiative/items/6547.php, 2012.


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Digital Wildires in aHyperconnected World

In 1938, when radio had become widespread, thousands o Americansconused an adaptation o the H.G. Wells novelWar o the Worlds with anews broadcast and jammed police station phone lines in the panickedbelie that the United States had been invaded by Martians.

It is dicult to imagine a radio broadcast causing comparablywidespread misunderstanding today. In part this is becausebroadcasters have learned to be more cautious and responsible,in part because the media is a regulated industry, and in partbecause listeners have learned to be more savvy and sceptical.Moreover, the news industry itsel is undergoing a transormation asthe Internet oers multiple options to conrm or reute a breaking newsstory. But the Internet, like radio in 1938, is a relatively youngmedium. The notion that a tweet, blog or video posting could drive asimilar public panic today is not at all ar-etched.

The Internet remains an uncharted, ast-evolving territory. Currentgenerations are able to communicate and share inormationinstantaneously and at a scale larger than ever beore. Social mediaincreasingly allows inormation to spread around the world atbreakneck speed. While the benets o this are obvious and welldocumented, our hyperconnected world could also enable the rapidviral spread o inormation that is either intentionally or unintentionallymisleading or provocative, with serious consequences. The chanceso this happening are exponentially greater today than when theradio was introduced as a disruptive technology, despite our mediasophistication. Radio was a communication channel o one tomany while the Internet is that o many to many.

The global risk omassive digitalmisinormation sits at the centre o aconstellation o technological and

geopolitical risks ranging rom terrorism tocyber attacks and the ailure o global

governance. This risk case examines howhyperconnectivity could enable digitalwildres to wreak havoc in the real world. Itconsiders the challenge presented by themisuse o an open and easily accessiblesystem and the greater danger o misguidedattempts to prevent such outcomes.

Figure 11: Digital Wildfres in a Hyperconnected World Constellation


Cyber attacks



Cyber attacks



Massive incident of data fraud/theft Terrorism



Terrorism





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The Internet does have sel-correcting mechanisms, as Wikipediademonstrates. While anyone can upload alse inormation, acommunity o Wikipedia volunteers usually nds and corrects errorsspeedily. The short-lived existence o alse inormation on its site isgenerally unlikely to result in severe real-world consequences;however, it is conceivable that a alse rumour spreading virallythrough social networks could have a devastating impact beorebeing eectively corrected. It is just as conceivable that the oending

contents original author might not even be aware o its misuse ormisrepresentation by others on the Internet, or that it was triggeredby an error in translation rom one language to another. We can thinko such a scenario as an example o a digital wildre.

How might digital wildres be prevented? Legal restrictions ononline anonymity and reedom o speech are a possible route,but one which may also have undesirable consequences. Andwhat i the source o a digital wildre is a nation state or aninternational institution? Ultimately, generators and consumers osocial media will need to evolve an ethos o responsibility andhealthy scepticism similar to that which evolved among radiobroadcasters and listeners since the inamous War o the Worldsbroadcast in 1938. This risk case asks i explicitly recognizingthe potential problem and drawing attention to possible solutionscould acilitate and expedite the evolution o such an ethos.

Benefts and Risks o Social Media

From cuneiorm to the printing press, it has always been hard topredict the ways in which new communication technologies willshape society. The scale and speed o inormation creation andtranser in todays hyperconnected world are, however, historicallyunparalleled. Facebook has reached more than 1 billion activeusers in less than a decade o existence, while Twitter hasattracted over 500 million active users in seven years. Sina-Weibo,Chinas dominant micro-blogging platorm, passed 400 millionactive accounts in summer 2012.1 Every minute, 48 hours worth ocontent is uploaded to YouTube. The world o social media ismulticultural and young. Figure 12 shows the preerences acrossthe world or dierent social networking platorms, and Figure 13illustrates the trends o social media use by age group in the UnitedStates.

Figure 12: The World o Social Media

ea ng soca me a ne wor s y coun ry

Cloob

Zing

Mixi

Orkut

Odnoklassniki

VKontakte

Qzone

Facebook

USA

Facebook

Twitter

Linkedin

Brasil

Orkut

Facebook

TwitterSouth Africa

Facebook

Twitter

Linkedin

Australia

Facebook

Twitter

Linkedin

China

Qzone

Sina Weibo

Renren

Japan

Mixi

Twitter

Facebook

Russia

VKontakte

Odnoklassniki

Facebook

UK

Facebook

TwitterLinkedin

Egypt

Facebook

TwitterDominating networksby country

Draugiem

No data

India

Facebook

Orkut

Twitter

Source: Adapted rom Search Engine Journal, http://www.searchenginejournal.com/wp-content/uploads/2011/09/social-media-black.jpeg, 2012.

Figure 13: Users Timeline

US Internet users who use social networks sites, by age,in percentage of each group

05%

20

40

60

80

100

Sep2005

May2008

Nov2008

Apr2009

Dec2009

May2010

7%

4% 13%

22%

26%

7%

11%

16%

25%

36%

47%

12%

25%

36%

48%

58%61%

16%

67%

73%76%

83%86%

18-29 years

30-49 years

50-64 years

65+ years

Source: Adapted rom Search Engine Journal, http://www.searchenginejournal.com/wp-content/uploads/2011/09/social-media-black.jpeg, 2012.


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The other dangerous situation is when inormation circulateswithin a bubble o likeminded people who may be resistant toattempts to correct it. In the case o the Sandy NYSE tweet,other Twitter users rapidly posted accurate inormation, andnobody had a vested interest in continuing to believe the original,alse inormation.16 Cases in which alse inormation eeds into anexisting worldview, making it harder to dislodge, are ar romunimaginable. This may be more o a problem with social

networks where inormation is less publicly visible, or example,through riend networks on Facebook or more opaque socialnetworks such as e-mail or text messaging.17 The spread omisinormation in such trusted networks can be especiallydicult to detect and correct since recipients are more likely totrust any inormation originating rom within the network.

We should, thereore, not underestimate the risk o confictingalse rumours, circulating within two online bubbles olikeminded individuals, creating an explosive situation. Theextensive use o Twitter by both sides during the November 2012clashes between Israel and Hamas in Gaza18 points to thepossibility o uture situations in which competing versions oevents are propagated in sel-reinorcing loops among groups opeople who are predisposed to believe one side or the other anddo not share a common inormation source that might help todissipate some o the sel-amplied inormation loops.

Astroturfng, Satire, Trolling and

Attribution Difculties

While it is certainly possible or a digital wildre to startaccidentally, it is also possible or misinormation to bedeliberately propagated by those who stand to reap some kindo benet. Some examples:

- In politics, the practice o creating the alse impression o agrassroots movement reaching a group consensus on anissue is called astroturng. During the 2009 Massachusettsspecial election or the US Senate, a network o ake Twitteraccounts successully spread links to a website smearing oneo the candidates.19

- Fake tweets have moved markets, oering the potential toprot rom digital wildres. A Twitter user impersonating theRussian Interior Minister Vladimir Kolokoltsev in July 2012tweeted that Syrias President Bashar al-Assad has beenkilled or injured, causing crude oil prices to rise by overUS$ 1 beore traders realized the news was alse.20

- Thirty thousand people o Assam origin fed the tech centre

Bangalore in panic in 2012 ater receiving text messageswarning that they would be attacked in retaliation orcommunal violence in their home state.21,22

Executives interviewed by Forbes and Deloitte placed socialmedia among the greatest risks that their corporations ace.23For example, ater the BP oil spill in the Gul o Mexico, a parodyTwitter account quoting the chie executive Tony Hayward assaying such things as Black sand beaches are very trendy insome places attracted 12 times more ollowers than BPscorporate Twitter account.24 While this example might have beenintended to be humorous, it is possible or satire to be mistakenor act. In October 2012, Irans ocial news agency ran a storythat originated on the satirical website The Onion, claiming that

opinion polls showed Mahmoud Ahmadinejad was morepopular than Barack Obama among rural white Americans.25

This phenomenon has many transormative eects. Studies oTwitter and Facebook activity in Egypt and Tunisia leave no doubtabout the role social media played in acilitating the Arab Spring.2,3

The social networking site Patientslikeme.com connectsindividuals with others who have the same conditions and ishelping to expedite the development o new treatments. Analysis oTwitter messages and networks has successully predictedelection results,4 movie box oce success5 and consumer

reactions to specic brands, among other things.6,7

However, some individuals and organizations have suered lossesdue to the capacity or inormation to spread virally and globallythrough social media. Some examples:

- When a musician travelling on United Airlines had his claim ordamages denied on a guitar that baggage handlers hadallegedly broken, he wrote and perormed a song UnitedBreaks Guitars and uploaded it to YouTube, where it hasbeen viewed more than 12 million times. As the video wentviral, United Airlines stock dropped by about 10%, costingshareholders about US$ 180 million.8,9

- In November 2012, the BBC broadcast an allegation that a

senior politician had been involved in child abuse, whichtranspired to have been a case o mistaken identity on thepart o the victim. Although the BBC did not name thepolitician, his identity was easily discovered on Twitter, wherehe was named in about 10,000 tweets or re-tweets.10 On topo pursuing legal action against all the people who spread thisalse inormation on Twitter, the injured politician settled on185,000 in damages with the BBC.11

- The existence on YouTube o a video entitled Innocence oMuslims, uploaded by a private individual in the UnitedStates, sparked riots across the Middle East. These riots areestimated to have claimed over 50 lives.12

These are very dierent cases a humorous response rom adisgruntled customer, a deamation o character and an aront toreligious sensitivities. What unites them is that hyperconnectivityamplied their impacts to a degree that would have beenunthinkable in a pre-Internet age, when only a small number olarge organizations had the capacity to broadcast inormationwidely. This new reality has some challenging implications.

When Digital Wildfres Are Most Dangerous

As Hurricane Sandy battered New York in October 2012, ananonymous Twitter user tweeted that the New York StockExchange trading foor was fooded by three eet o water. Other

Twitter users quickly corrected the alse rumour, though notbeore it was reported on CNN.13 In Mexico, there have beencases o mothers needlessly keeping their children rom schooland shops closing due to alse rumours o shootouts spreadingthrough social networks.14 In the UK, the video imagery relatedto a low level tactical incident o the British Army in Basra,spread through Reuters agency eed, YouTube and Blinkx, led toa misleading impression o a signicant military ailure among theBritish public which was never ully eradicated.15

These cases indicate one o the two situations in which digitalwildres are most dangerous: in situations o high tension, whenalse inormation or inaccurately presented imagery can cause

damage beore it is possible to propagate accurate inormation.The real-world equivalent is shouting re! in a crowded theatre even i it takes only a minute or two or realization to spreadthat there is no re, in that time people may already have beencrushed to death in a scramble or the exit.


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Global Risks 201326

More worrying or businesses may be misinormation thatcirculates at a time when markets are already anticipating animportant announcement. On 18 October 2012, NASDAQ haltedtrading on Google shares as a leaked earnings report (coupledwith weak results it entailed) triggered a US$ 22 billion plunge inGoogles market capitalization.26 In this case, the inormation wasrom a credible source, but it demonstrates impacts that could alsobe achieved by unortunately timed misinormation or rumours.

It is not always easy to trace the source o a digital wildre. It wouldbe possible or careul cyber attackers to cover their tracks, raisingthe possibility o an organization or country being alsely blamed orpropagating inaccurate or provocative inormation. Depending onexisting tensions, the consequences o the alse attribution couldbe exponentially worse than i no attribution had been made.

Towards a Global Digital Ethos

Around the world, governments are grappling with the questiono how existing laws which limit reedom o speech, or reasonssuch as incitement o violence or panic, might also be applied toonline activities. Such issues can be highly controversial: in theUnited Kingdom, courts initially convicted a man or making ajoke on Twitter in which he threatened to blow up an airport inrustration at the cancellation o his fight a conviction lateroverturned on appeal.27

Establishing reasonable limits to legal reedoms o online speechis dicult because social media is a recent phenomenon, anddigital social norms are not yet well established. The questionraises thorny issues o the extent to which it would be possible toimpose limits on the ability to maintain online anonymity, withoutseriously compromising the useulness o the Internet as a tool orwhistle-blowers and political dissidents in repressive regimes.

Even i the imposition o such limits were enorceable, whatauthority would we trust to do it? The World Conerence onInternational Telecommunications in Dubai aiming to revise the1988 treaty governing the International TelecommunicationsUnion28 sparked controversy in December 2012 when criticsargued that seemingly innocuous technical regulations could haveunintended negative consequences. Rules ostensibly designed todo everything rom ght spam to ensure quality o service oInternet trac could be used by individual governments to eitherthrottle back incoming communications or weed out speciccontent they want to block.29 As some revised treaty provisionswere believed to give a U.N. stamp o approval to state censorshipand regulation o the Internet and private networks,30 the UnitedStates reused to sign the amended treaty; a decision secondedby Canada and several European countries.31

When the incentives behind installing quality checks arequestionable, who can be trusted? And how do you create anestablished and recognized authority that can intervene ordisrupt misinormation fows when they happen?

There are also proound questions o education and incentives.Users o social media are typically much less knowledgeable thaneditors o traditional media outlets about laws relating to issues suchas libel and deamation. Many also have less to lose than traditionalmedia outlets rom spreading inormation that has not been properly

act-checked. But there are signs that new norms may be emerging.Figure 14 plots misinormation and correction tweets duringHurricane Sandy in October 2012. The misinorming tweet @ComortablySmugs about the NYSE foor fooding receivedsubstantially ewer re-tweets than the tweets that circulated ake

photos depicting sharks swimming in New Jersey streets and theStatue o Liberty with monstrous looming storm clouds. Socialmedia analysts say this is not surprising, as visual content tends tospread urther than text alone. In addition, the actual misinormingtweets posted by @ComortablySmug and @CNNweather peakedat signicantly ewer re-tweets compared to the correction postedby @BreakingNews, even though the corrected inormation wasposted within an hour o the misinorming tweet.32

One can speculate that people may have been more willing tore-tweet the photos o sharks and the Statue o Liberty becausethey were harmless and surprising and, most important, hadsignicant entertainment value. The entertainment value may alsoexplain the lack o interest in circulating the correction tweets rom@BreakingNews. People may have been less prepared to re-tweetinormation that could be tied to serious consequences, such asNYSE fooding, beore veriying. This suggests that norms may beemerging, and also re-emphasizes the act-checking responsibilityo trusted sources o inormation such as CNN. Slips like this couldone day be a litigation risk or media corporations.

Figure 14: Re-Tweets Over Time

Shark swimming in Jersey

Countsperhour

Crazy clouds over Liberty

@comfortablysmug - NYSE ooding

@cnnweather - NYSE ooding

@BreakingNews - xing misinformation

1000

500

2000

1500

30 Oct 31 Oct

Source: #Sandy: Social Media Mapping. Social Flow, http://blog.socialfow.com/

post/7120245759/sandy-social-media-mapping, 2012.

In addition to seeking ways to inculcate an ethos o responsibilityamong social-media users, it will be necessary or consumers osocial media to become more literate in assessing the reliability andbias o sources. Technical solutions could help here. Researchersand developers are working on programmes and browserextensions, such as LazyTruth,33 Truthy34 or TEASE35, that aim tohelp people assess the credibility o inormation and sourcescirculating online. It is possible to imagine the development o morebroad and sophisticated automated fags or disputed inormation,which could become as ubiquitous as programmes that protectInternet users against spam and malware.

Feedback ratings on eBay, which enable users to assess thereliability o vendors, oer a potential template or the developmento such a service. Until now, most rating systems are limited tospecic websites users do not carry their rating with them as arecord o credibility wherever they go online. It remains still to beseen i that would be a desirable or easible model. Inormationdisputed or ideological reasons or deliberate misattribution willcontinue to pose a number o challenges; however, a system couldbe developed that would trace inormation to its source andprovide inormation on whether the source was considered by abroader community to be ocial

World Economic Forum Jan 2013 DAVOS Global Risks Assessment

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