World Economic Forum 2018 – Global Risks Report

World Economic Forum 2018 – Global Risks Report

 

 

Please find original at https://www.weforum.org/reports/the-global-risks-report-2018 and full document at http://www3.weforum.org/docs/WEF_GRR18_Report.pdf

  • Top 3 risks (page 3) based on likelihood and impact
    1. Extreme weather events (remained #1 for 2017)
    2. Natural disasters (increased from #3 to #2 from 2017)
    3. Cyberattacks (significant increase from 2017 to #3 in 2018)
  • Interconnections (page 4) again note the issues related climate and the effect this could have on mfg / distribution / marketing / sales. Cyber dependencies follow a close 2nd for all those same areas.

WEF Connectivity

  • Preface (page 13)
    1. Worst of financial crisis behind
    2. Globally enjoying highest standards of living in human history
    3. Absorptive capacities of institutions/individuals/communities being pushed to the limit
    4. Current generation enjoys unprecedented tech/scientific and financial resources
    5. Lack necessary depth of collaboration to deliver change on the scale required
    6. Multi-stakeholder dialogue remains keystone of strategies … need to focus on “systems thinking” as well as new ways of collaborating globally
  • Exec summary (page 14)
    1. Global economic recovery is under way and should not be squandered
    2. Proliferating indications of uncertainty, instability and fragility remain
    3. We are adept at understanding and mitigating conventional risks with standard risk management approaches but much less competent in dealing with complex risks of interconnected systems (organizations, economies, etc)
    4. Cascading risks thru complex systems creates not just incremental damage but “runaway collapse”.
    5. Environmental risks of grown in prominence in recent years with these risks being ranked higher than average for both likelihood and impact over next 10 years.
    6. Cybersecurity risks also growing in prevalence and disruptive potential with attacks on businesses doubling in the last 5 years. Also, events once considered “extraordinary” now being more commonplace.
    7. Critical infrastructure and strategic industrial sectors also being more commonly attacked via cyber techniques
    8. Financial/economic issues include: unsustainable assets prices, elevated indebtedness (China in particular), global financial system strains. New issues are limited policy firepower in the event of a new crisis; disrupted caused by automation and digitalization; protectionist and nationalist/populist politics
    9. New cyber sources of hardened soft power are playing out
    10. This year’s “WEC Risk Report” includes a new category of “Future Shocks” that look to how complex interconnected systems, feedback loops, threshold effects and cascade disruptions can lead to serious breakdowns. These “Future Shocks” are food for thought, not predictions
  • Global Risks 2018
    1. 2017 was a year of uncertainty, instability and facility. 2018’s survey indicates even more pessimism.
    2. Economic risks have significantly reduced being replaced by environmental issues. But, concern here is potential complacency for economic issues.  Worldwide earnings growth has been decelerating since 2012. High levels of personal debt along with inadequate savings and pensions.
      • Inequality in income/wealth is #3 as driver of global risks over next 10 years
      • Automation also identified as concern as driving down employment and wages. Norms relating to work are important in implicit contracts holding societies together.
    3. Global GDP is forecast to be 3.6% for 2017, only slightly higher than 2016.
    4. 93% of risk survey respondents believe a worsening of “political or economic confrontations” in 2018
    5. The US has been blocking appointments to the WTO appellate body and thus create tensions in being able to address global economic disputes
    6. The major systemic challenge rests in the interconnectedness between environmental risks and other categories (e.g., involuntary migration, water crises, agricultural systems, etc)
    7. Indoor and outdoor air pollution account for more than 10% of all deaths globally…90% of world’s population live in areas exceeding WHO guidelines
    8. Micro-plastic is becoming a serious health issue
    9. 2017 saw a jump in WEC survey respondents related to cyber issue concerns … cybercriminals have been exponentially increasing targets, especially thru the use of cloud services. Denial of service attacks are becoming common place. Annual cost of cyberattacks at a 27% year on year increase and over next five years will costs businesses $5b.  Also, critical infrastructure is being targeted  though in recent past, the systems haven’t been affected but with the persistant  targeting, concern is growing.
    10. Systemic risk (ecosystems, economies, societies, financial systems, etc) is growing and a failure scenario is not just incremental but rather “runaway collapse”. Repeated stress to systems can lead to their inability to rebound … become brittle.
  • Economic Storm Clouds
    1. World finally getting back on track after 2009/2010 global disruption. GDP growth is up, stock markets continue to climb, central banks beginning to unwind exceptional policies.
    2. Concerns remain: weakest post-recession recovery on record, productivity growth remains weak, investment growth weak, stagnating real incomes
    3. Economic/financial disks becoming a blind spot: familiar vulnerabilities have grown or mutated and new facilities have emerged.
      • Unsustainable asset prices…global stock markets have had huge increases and bond valuations trading with negative yield.
      • If a sharp market correction were to occur, effect on countries most heavily exposed to sectors in which bubbles have formed would occur…countries reliant on an export commodity. Also, confidence and wealth effects would also occur countries with financial assets are widespread (e.g., US)
      • High levels indebtedness … global debt to GDP ratio is significantly higher now than it was prior to 2010. In 2007, non-financial debt in G20 was $80T, in 2016 it was $135T. Significant uptick in corporate defaults. Emerging markets have taken on a significant increase in debt, especially China.
    4. Limited firepower by policy makers to address future financial/economic issues…no headroom in interest rate cuts
    5. Technical disruptions – concern the Fourth Industrial Revolution will actually deliver economic benefits (transformative power). Concerns for workers who are not skilled to re-engage in new jobs… causing such workers to actually cause lose in productivity
  • Future Shocks – I’ve not listed all as some seem “out there”…but again, food for thought. Look at the full text if you want to read all
    1. Concurrent breadbasket failures that threaten global food supply
    2. AI Weeds – low level algorithms which slowly choke off the internet…the ability to track code humans have written and automated code. Digital “hygiene” is going to become a concern
    3. Bilateral trade wars cascade and multilateral dispute resolution institutions are too weak to respond
    4. Regulatory, cybersecurity and protectionist concerns lead to fragmentation of the internet…leading to “walled gardens”. This in turn leads to barriers to flow of content and transactions.
  • Resilience in complex organizations
    1. Standard risk management tools assume risks follow a normalized distribution.
    2. “Fat Tails” / “Black Swans” have become terms more common since 2008 in risk conversations …the cascading event crisis/risks
    3. Fat tail risks are not normal distributions.
    4. Resilience is a property of complex systems…a level of complexity literacy is crucial to engage in modern age systems (business, government, etc).
    5. Resilience tools and approaches informed by complexity theory: the capacity of a company or other organization to adapt and prosper in the face of high impact, low-probability risks. The resilience tools need to be used in concert with traditional risk management tools
      • Resilience analysis tools were grouped into three main areas: “Structural Resilience” (systemic dynamics within the organization), “Integrative resilience” (the complex interconnections with the external context) and “Transformative resilience” (responding to mitigating some risks requires transformation)
      • Structural Resilience
        1. Redundancy (most expensive approach)
        2. Modularity (needs to be a system which is loosely coupled, but not too separate as you loose a system)
        3. “Requisite Diversity” (picking between the extremes of redundancy and modularity)
      • Integrative Resilience – focus on context of the organization and interconnections
        1. Multiple scales – the health at and of connections
        2. Thresholds – the past of every organizations shows discontinuities but future plans are always smooth … threshold effects can’t be forecast but can’t be ignored
        3. Social cohesion – the social capital an organization has to fall back on in a crisis
      • Transformative resilience – not about being able to return to starting point after a shock
        1. Distributed/Polycentric governance – centralizing authority may seem efficient but usually comes at the cost of resilience. Multiple and overlapping governance builds essential adaptive capacity in an organization
        2. Foresight – systemic effects can’t usually be extrapolated from past data.
        3. Experimentation and innovation – capacity for change in an organization requires the capacity to explore the edges of the system…need people and time to go outside the usual organizational boundaries. Learning faster than competitors provides long-term advantage. Having a system for this inquiry builds resilience
      • Cognitive bias and risk management
        1. Risk management begins with identifying/estimating the probability and impact of a threat. Individuals and organizations usually stumble during this step (grey rhino versus black swan)
        2. Adjusting for bias in risk assessments
          • Identifying blinders to risks help mitigate damage to risk assessment
          • Information and views presented early in deliberations causes distort their importance. Change the format/process of such meetings to help consider a range of points of view.
          • “Availability bias” cause decision makers to rely on examples/evidence which immediately comes to mind.
          • Hyperbolic (exaggerated) discounting leads decision makers to prioritize short term goals ahead of long term goals.
          • A decision making team is too homogeneous
          • Humans typically discount worst-case scenarios
          • C-suite/exec’s approach risk analysis as a standalone activity… fail to then mitigate risks identified…fail to communicate the risks identified throughout the organization

 

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