Analytics, Economics, EU – Baltic States, Modern EU

World Economic Forum publishes regularly Global Risks Reports with the analysis of the world’s socio-economic development. Present report -12^th in line- focuses on the evolution of global risks and interconnections between them. Besides, it highlights potentials of several long-term economic trends, e.g. inequality and deepening social and political polarization, the weakness of economic recovery and the speed of technological change.

Economic inequality, societal polarization and intensifying environmental dangers are the top three trends that will shape global developments over the next 10 years, said the new World Economic Forum’s Global Risks Report 2017. The report concludes that collaborative action by world leaders will be urgently needed to avert further hardship and volatility in the world. In this year’s annual survey, some 750 experts assessed 30 global risks, as well as 13 underlying trends that could amplify them or alter the interconnections between them. 

Three key findings

Looking at the mounting political disaffection and disruption across the world, three key findings emerged from the report:

First, rising income and wealth disparity and increasing polarization of societies have been noted among the underlying trends that will determine global socio-economic development in the next ten years. The most interconnected pairing of risks in the present survey is between high structural unemployment or underemployment and profound social instability.

Second, the environmental issues will dominate the global risks landscape, for example, climate change was the underlying trend. For the first time, all five environmental risks in the survey were ranked both high-risk and high-likelihood, with extreme weather events emerging as the single most prominent global risk.

Third, society is not keeping pace with technological change. Of the 12 emerging technologies examined in the report, experts found artificial intelligence and robotics to have the greatest potential benefits; these technologies will have the greatest potential negative effects and the greatest need for better governance in the future.

http://reports.weforum.org/global-risks-2017/press-releases/  

2017 –a pivotal year for leaders

The founder and executive chairman of the World Economic Forum, Klaus Schwab said in the report’s preface that “the year 2017 would be a pivotal year for the global community” because of trends towards “less cooperative and more inward-looking states”, which would harness possibilities to address global risks. To overcome these threats, he argued the states would require “responsive and responsible leadership with a deeper commitment to inclusive development and equitable growth”.

It will also require, he added “collaboration across multiple interconnected systems, countries, areas of expertise, and stakeholder groups with the aim of having a greater societal impact”.

These trends have been already visible during 2016, with rising political discontent and disaffection evident in countries across the world.

The report underlined that highest-profile signs of disruption may have come from the Western countries: with such examples as the UK’s Brexit and new US President Donald Trump. However, the evidences are growing from a number of other countries, e.g. among the EU member states.  

Global risks: top trends

The report also highlighted five top trends that will determine global development; thus the report mentioned: 1. rising income and wealth disparity, 2. changing climate, 3. increasing polarization of societies, 4. rising cyber dependency and 5. ageing population (p.11).

The first two are in the economic category, in line with the fact that rising income and wealth disparity is rated as the most important trend in determining global developments over the next 10 years. This points to the need for reviving economic growth, but the growing mood of anti-establishment populism suggests a new stage where this alone would remedy fractures in society. Therefore the report adds: reforming market capitalism must also be added to the agenda.

With the electoral surprises of 2016 and the rise of parties stressing national sovereignty and traditional values across Europe and beyond, the societal trends of increasing polarization and intensifying national sentiment are ranked among the top five. Hence the next challenge: facing up to the importance of identity and community. Rapid changes of attitudes in areas such as gender, sexual orientation, race, multiculturalism, environmental protection and international cooperation have led many voters – particularly the older and less-educated ones – to feel left behind in their own countries. The resulting cultural schisms are testing social and political cohesion and may amplify many other risks if not resolved, argued the report.

Although anti-establishment politics tends to blame globalization for deteriorating domestic job prospects, evidence suggests that managing technological change is a more important challenge for labour markets. While innovation has historically created new kinds of jobs (as well as destroying old types), this process may be slowing. It is no coincidence that challenges to social cohesion and policy-makers’ legitimacy are coinciding with a highly disruptive phase of technological change.

The fifth key challenge is to protect and strengthen the systems of global cooperation. There are many states seeking to withdraw from various international cooperation mechanisms. A lasting shift in the global system from an outward-looking to a more inward-looking development styles would be a highly disruptive development. In numerous areas it is clear that global cooperation can reduce the risks. Further challenges requiring global cooperation are in the environmental category.

During last decades, a number of environment-related risks – notably extreme weather events and failure of climate change mitigation and adaptation as well as water crises – has emerged as the central feature of the risk landscape, strongly interconnected with many other risks, such as conflict and migration. The environmental concerns are more prominent than ever, with all five risks in this category assessed in the report as being above average for both impact and likelihood.  

Social and political challenges

Electoral shocks in the US in 2016 posed for many a question of whether the crisis of mainstream political parties in Western democracies also represents a deeper crisis with democracy itself. The first of three “risks in focus” considered in Part 2 of the Report assess three related reasons to think so: = the impacts of rapid economic and technological change; = the deepening of social and cultural polarization; and = the emergence of “post-truth” political debate. These challenges to the political process bring into focus numerous policy questions such as how to make economic growth more inclusive and how to reconcile growing identity nationalism with diverse societies.

The second risk also relates to the functioning of society and politics: it looks at how civil society organizations and individual activists are increasingly experiencing government crackdowns on civic space, ranging from restrictions on foreign funding to surveillance of digital activities and even physical violence.

Although the stated aim of such measures is typically to protect against security threats, the effects have been felt by academic, philanthropic and humanitarian entities and have the potential to erode social, political and economic stability, said the report.

An issue underlying the rise of disaffection with the political and economic status quo is that social protection systems are at breaking point. The third risk in report focuses on how the underfunding of state systems is coinciding with the decline of employer-backed social protection schemes. This is happening while technological change suggests that stable, long-term jobs are giving way to self-employment in the “gig economy”.

The report suggests that some innovations will be needed to fill the gaps emerging in social protection systems as individuals shoulder greater responsibility for costs associated with economic and social risks such as unemployment, exclusion, sickness, disability and old age. 

Managing the 4th Industrial Revolution

The final part of this Report explores the relationship between global risks and the emerging technologies of the Fourth Industrial Revolution (4IR). This “revolution” needs new rules, norms, standards, incentives, institutions and other mechanisms which would challenge governance practices, the report argues.

It is complicated to deliver at the same time on governing fast-developing technologies (as regulating too heavily and/or too quickly can hold back progress), but a lack of governance can exacerbate risks as well as create unhelpful uncertainty for potential investors and innovators.

Currently, argues the report, the governance of emerging technologies is patchy: some are regulated heavily, others hardly at all because they do not fit under the remit of any existing regulatory body.

The report sees two emerging technologies as being most in need of better governance: = biotechnologies, which tend to be highly regulated, but in a slow-moving way, and = artificial intelligence (AI) and robotics, the issues which are presently only slightly governed.

Thus risks associated with AI are on the path of “letting greater decision-making powers move from humans to AI programme”, as well as prepare for the possible development of machines with greater general intelligence than humans.

The report concludes by assessing the risks associated with how technology is reshaping physical infrastructure: greater interdependence among different infrastructure networks is increasing the scope for systemic failures – whether from cyber-attacks, software glitches, natural disasters or other causes – to cascade across networks and affect society in unanticipated ways. http://reports.weforum.org/global-risks-2017/executive-summary/

Global risks: some likelihoods

On the global level, the following risks are quite predictable:

 - weapons of mass destruction;

 - extreme weather events;

 - water crisis; 

 - major natural disasters; and 

 - failure of climate-change mitigation and adaptation. 

On the societal effect/economics impact two main features are mentioned: = Brexit, and = the EU President’s rise of populism. Issues surrounding identity and culture are going to be at the root of some pivotal political outcomes in future. Thus, perceived political outsiders outperformed the establishment by being able to better engage with traditional voters on concerns regarding sovereignty and national pride. Unusually, older voters were found to be the driving force of political movements over the last years; therefore with populations ageing the pendulum is unlikely to swing back to the younger generation for some time.

Rising income and economic disparity ranked among the most critical risk which could shape global developments over the next decade.

A prolonged period of historically low interest rates across the world is one key reason which has heightened economic concerns. Previously trusted financial mechanisms which underpinned healthy economic activity were found to be in urgent need of recalculation. China's economic slowdown remains a prominent risk, e.g. the Yuan posted its biggest yearly loss against the dollar in over two decades, making it the worst performing major Asian currency.  

The report concluded the path back to robust rates of economic growth was increasingly difficult to foresee. Thus, some experts (e.g. D. Rodrik, Harvard economist) proposed a theory describing “the globalization trilemma” in which among democracy, national sovereignty and global economic integration, only two could be simultaneously compatible.

Recent political events in Europe and the U.S. suggest democracy and national sovereignty would be the priorities moving forwards, according to the report.

http://www.cnbc.com/2017/01/11/top-five-global-risks-for-2017-wef.html

Technology/disruption. Technological developments were found to be a more sound explanation for industrial decline and deteriorating labor-market prospects than globalization. Drastic change in technology was said to have accelerated problems in geopolitical stability, job security and even social relationships.

The Fourth Industrial Revolution (4IR) has created an unprecedented amount of new global risks as well as exacerbating existing problems, according to the report. Artificial intelligence (AI) and robotics were found to pose the greatest danger over the coming decade. AI will enable to address some of the great issues of our age, such as climate change and population growth, much more effectively. However, increased reliance on AI will dramatically exacerbate existing risks, such as cyber, making the development of mitigation measures just as crucial.

Geopolitics. Paris Climate Change pact in 2015 has come under fire throughout D. Trump's strategy, as he described climate change as a “hoax”. However, his predecessor, President B. Obama described the adoption of clean energy in the U.S. as "irreversible" in February 2017.

However, the departure from the Trans-Pacific Partnership and Trans-Atlantic Trade and Investment Partnership would have also geopolitical significance. Moreover, an absence of a unified international accord to support the United Nations could handicap efforts to provide humanitarian relief and support in the world.  

Therefore, urgent actions are needed among leaders to identify ways to overcome political or ideological differences and work together to solve critical challenges. The momentum of 2016 towards addressing climate change shows this is possible, and offers hope that collective action at the international level aimed at resetting other risks could also be achieved, the report added.

Environmental issues. Environmental risks have dominated the Global Risks Reports for the past seven years. Extreme weather events, climate change and water crises have consistently featured among the top-ranked global risks over the past decade and the experts surveyed urged for action to be accelerated in order to limit any environmental risks.

The Paris Agreement, which has been ratified by more than 110 countries, as well as empirical evidence that a global transition to a low-carbon economy is underway were highlighted as reasons to be hopeful yet the report stressed the pace of change is not quick enough.

The UN’s 2016 Emissions Gap Report projected that the world would need to eradicate emissions altogether by the year 2100 in order to avoid dangerous climate change.

Multidimensional cooperation would be required to aid governments and international agencies in order to respond adequately to structural environmental risks, according to the report. Though in the current political climate, adopting an internationally connected cooperation would be challenging but necessary, the WEF report concluded.

Leaders’ challenges. The 12^th edition of The Global Risks Report is published at a time when deep-rooted social and economic trends are manifesting themselves increasingly disruptively across the world. Persistent inequality, particularly in the context of comparative global economic weakness, risks undermining the legitimacy of market capitalism. At the same time, deepening social and cultural polarization risks impairing national decision-making processes and obstructing vital global collaboration. 

Technology continues to offer hope of solutions to many of the problems; but the pace of technological change is also having unsettling effects: they range from disrupting labour markets through automation to exacerbating political divisions by encouraging the creation of rigid communities of like-minded citizens. States need to be better and quicker in managing technological change.

Above all, the leaders must redouble efforts to protect and strengthen the systems of global collaboration. More urgent it is in the environment sphere, where important strides have been made in the past but much more remains to be done.

The world faces important risks, but there are also opportunities to work together to find new solutions to the shared problems. More than ever, this is a time for all stakeholders to recognize the role they can play by exercising responsible and responsive leadership on global risks, concludes the report.