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Global Growth @ Risk
1. COMMITTED TO
IMPROVING THE STATE
OF THE WORLD
Global Growth@Risk
The World Economic Forum is an independent
international organization committed to improving
the state of the world by engaging leaders in
partnerships to shape global, regional and
industry agendas.
Incorporated as a foundation in 1971, and based
in Geneva, Switzerland, the World Economic
Forum is impartial and not-for-profit; it is tied to
no political, partisan or national interests.
(www.weforum.org)
A Report of the Global Risk
Network
in collaboration with
PricewaterhouseCoopers
3. The 23 Core Global Risks: Likelihood with Severity by Economic Loss
Increasing consensus around risk
Foreword The Global Risk Network of the World Economic Forum
250 billion - 1 trillion more than 1 trillion
is composed of an unparalleled network of industry, risk Retrenchment from
Asset price collapse
and regional experts who work with business leaders globalization
and policy-makers to:
This report has been prepared by the Global Risk
Network for the Inaugural Annual Meeting of the New • Create a framework for assessing and prioritizing
Champions (Dalian, People’s Republic of China, 6-8 existing and emerging risks to global business over Interstate and
September 2007). In preparing this report, more than 30 the short and long term civil wars
Pandemics
Oil price shock
experts from business, academia, and policy-making • Alert key decision-makers to the impact these risks
China economic hard landing
were asked to consider the recent period of might have on their environments
unprecedented global growth: its drivers, its champions • Assist leaders in their reflection on how risks may be
Severity (in US$)
Middle East Transnational crime and corruption
instability
and the challenges facing the businesses, countries, mitigated at the global, regional, industry and Breakdown of CII
Fall in $
regions and emerging leaders who will pilot growth for company levels Coming Chronic disease in
50-250 billion
the next 10 years. • Transform these global risks into business fiscal crises Climate change developed countries
opportunities Liability regimes
NatCat: Tropical storms
Key conclusions of the report: Developing world disease
NatCat: Earthquakes
To generate a global risk, an issue must have global
Loss of freshwater services
NatCat: Inland flooding
1. Many of the economic underpinnings of global scope, cross-industry impact, and there must be
Failed and failing states
growth will remain in place for the next 10 years, but uncertainty as to how the risk will manifest itself (in
10-50 billion
Proliferation of WMD
this does not mean that a continuation of recent regard to the likelihood of occurrence and severity of Nanotechnology
trends is certain or even likely. impact). International terrorism
2. Economic interdependence means that downturns
and shocks are more likely than ever to be global. Over the last three years, the Global Risk Network has
New consumer markets must develop to mitigate engaged a wide range of experts in the economic,
this risk. geopolitical, environmental and societal fields to explore
2-10 billion
3. Global growth is threatened not just by shocks and the nature of the risk landscape facing governments,
shifts but by curbs and constraints: political, social, societies and businesses. In conjunction with its
economic and environmental constraints to current partners, the Global Risk Network has identified an
growth trends are already beginning to show. annually updated list of 23 core global risks to the
below 1% 1-5% 5-10% 10-20% above 20%
4. Unfettered globalization and growth is coming to an international community over the next 10 years.
end, as governments seek to balance economic
Likelihood
expansion with political priorities and sustainability These core global risks have been assessed in terms of
Note: Likelihood was based on actuarial principles where possible. For most risks, however, qualitative assessment was used.
concerns. likelihood and severity (see Figure). In addressing
Source: World Economic Forum Global Risks 2007
likelihood, actuarial principles were applied in the few
The winners of this next phase of globalization will cases where sufficient data existed; in most cases only
recognize that growth will not be a free-for-all. Rather, qualitative assessments, based on expert opinion, were
increasingly, political, social, environmental and possible. Although some risks are inherently long term
Risk to Whom? A New Perspective: Global
economic forces will obligate business to participate in (such as climate change) and others (such as an oil-
an exchange with society that balances what is taken price shock) could occur in the near term, all risks were Growth@Risk
from participating markets with productive contributions evaluated within a 10-year time frame. The Global Risk Network considers risk and mitigation
in return. from a truly global perspective: the human and Inspired by the Inaugural Annual Meeting of the New
A more detailed description of the core global risks can economic welfare of the world is its stakeholder at risk. Champions and the World Economic Forum’s new
be found in the Global Risks 2007 report, published for Using the results of the Global Risks report as a starting community of Global Growth Companies, this report
About the Global Risk Network the World Economic Forum Annual Meeting in Davos point, the Network has begun to look at global risks takes as its primary stakeholder groups the companies,
(and available at from a variety of narrower perspectives: exploring industries, countries and regions at the front edge of
The report builds on the existing work of the Global Risk www.weforum.org/en/initiatives/globalrisk). regional perspectives in Europe@Risk, India@Risk, Latin global economic growth, and those who will continue to
Network: primarily, the annual Global Risks report America@Risk, and Middle East@Risk, and diving into champion that growth during the coming 10 years.
produced in collaboration with Citi, MMC, Swiss Re and The World Economic Forum Global Risk Network has mitigation of specific risks such as natural catastrophes
the Wharton Risk Center. identified 23 core global risks over a ten-year time and unsustainable water use in collaboration with This report does not seek to apply or recreate the more
frame: specific industry groups. Information on these projects rigorous methodological approach of the Global Risk
can be found at Network, but rather to provide a qualitative first review
www.weforum.org/en/initiatives/globalrisk. of the trends, issues, threats and vulnerabilities that may
affect global economic growth and its new champions
over a 10-year horizon.
4 | Global Growth@Risk 5 | Global Growth@Risk
4. From Global Risk to Business Risk
How do global risks impact business operations in global growth markets? Growth – particularly at the rates the world has seen for the
Driving Growth
past 10 years – is not a given. As such, the question of
Global Growth@Risk is one of opportunity cost: not current
The holistic nature of global risks implies that no single company, industry or state can successfully mitigate them on their
assets in jeopardy, but future opportunities that may or may
own. Unfortunately, the larger than life character of such risks has led some enterprises to conclude that there is nothing that
not come to fruition. Thinking about opportunities is at the
can be done to address global risks. A closer look reveals that executives ignore global risks at their own peril, however, The Global Risk Network has attempted to clarify some of
heart of the new champions’ world view, as
because they lead to operational realities. A significant variety of operational risks that routinely challenge enterprises in key the important drivers of recent global expansion, in an effort
entrepreneurship at its core means putting scarce assets at
to better assess their inherent sustainability and vulnerability
global growth markets – such as China, India and Brazil – are embodiments of global risks. For example: risk to seize great opportunities. If these opportunities
to exogenous risks.
become limited or constrained, the spirit of
entrepreneurship that drives growth will suffer.
Three interlocking trends form an umbrella over the factors
Global Risk Related Operational Risks Often Cited in driving growth in recent years: national economic reform,
Thus, the biggest risks to today’s global wealth and welfare
Global Growth Markets globalization and technological development.
may be shocks and shifts (pandemics, climate change), but
the biggest risks to tomorrow’s growth are brakes (political,
Retrenchment from globalization • Protecting against foreign exchange and interest rate economic, social, and environmental issues) that may slow Global Growth
risk under conditions of significant government economic and entrepreneurial activity. Developing world sets the pace for global economic growth
intervention
• Competing against societal or government-driven 8%
There is great optimism that many of the drivers of the Emerging market and
developing countries
favouritism in business practices, including in pricing recent global expansion are robust, and that the next 10
6
and procurement practices years will be good ones for economic growth. There is also World
GDP growth
• Navigating different standards of ethics when debate, however, about the sustainability of some of those 4
operating across borders or within different economic Advanced
drivers, and significant concerns about non-economic economies
sectors of a market constraints that are already emerging to challenge 2
conventional approaches to expansion at both the
Breakdown of critical information • Controlling operating costs and/or possible Forecast
company and macroeconomic level. 0
1984
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2007F
2008F
disruptions in production due to quality and delivery
infrastructure
levels of state-owned services and infrastructure Source: IMF
Whether growth continues at speed remains to be seen.
• Planning for business continuity in circumstances of
What is clear is that assumptions about yesterday’s growth
infrastructure breakdown Reform
opportunities are very unlikely to apply to tomorrow’s.
The past 10 to 15 years have been dominated,
Transnational crime and corruption • Protecting intellectual property and combating piracy
economically, by the decline of centrally planned economies
amidst inconsistent regulations and enforcement
and the implementation (often halting and imperfect) of
• Complying with overseas laws that place restrictions
CEO Perspectives comparatively liberal, market-led economic strategies.
on local operations (e.g., bribery and corruption
statutes)
As part of its research on Global Growth@Risk, the Reform has had many faces, from deregulation to lower
Global Risk Network interviewed more than 30 leading taxation to the exit of the state from ownership of certain
Spread of liability regimes • Managing gaps between stated requirements and
thinkers from business, academia and policy-making. industries. But in the economies that have benefited most
what is acceptable practice
from ongoing reform – China, India, East Asia and Eastern
Crucial to building the report were perspectives from
• Developing systems to comply with complex financial
Europe – the results have had much in common. Reform
regulations and reporting requirements CEOs from companies operating in high-growth
has released pent-up entrepreneurship, labour and capital,
• Complying with a complex set of non-aligned laws environments: emerging markets, fast-growing sectors
and, crucially, consumer demand that had lain dormant in
(including local and regional enactments, and and globalizing businesses. PricewaterhouseCoopers,
international agreements) many locations.
a strategic partner of the World Economic Forum and
the Forum’s Global Risk Network, conducted
Climate change • Addressing different standards and enforcement of Many observers have also noted a domino effect in
interviews with a number of these CEOs, five of which
emissions quotas and other environmental norms economic reform. National self-interest encourages
have been included throughout this report under the countries to follow their neighbours in liberalizing market
CEO Perspectives heading. activity (indeed, the downside of this phenomenon has
Enterprises would benefit from taking their own steps to mitigate these operational risks, without neglecting the connection
frequently been called “the race to the bottom”). As the
to global risk.
world’s largest economic domino – China – fell and began
Penetration of Markets Seen as the Most Important Opportunity for Growth
trading, the effect on other economies was remarkable.
To make global risk mitigation manageable and relevant to their unique standing in global markets, enterprises should also Survey: quot;Which one of the following do you see as the major
Even North Korea has begun consulting with China about
opportunity to grow your business in the next 12 months?
ask themselves the following questions: the creation of Special Economic Zones.
30%
• What global risks are most salient to our company, and to the industry(ies) and state(s) in which we do business?
25
• What global risks are we best equipped to help manage in view of our core competencies, geographic position(s), Liberalizing reforms, where successful, have often been
Averages
Percentage of respondents
20
cautiously managed. But, in many of the world’s highest
economic power and other factors?
growth economies, reform has been partial at best, and
15
• How can we contribute to risk mitigation, in collaboration with companies, industries and states, in ways that would
political environments have remained unstable. Yet, the
benefit individual market actors and societies alike? 10
Western Europe
North America
Latin America
Asia Pacific
effects of this uncertainty on growth have been less than
5
CEE
might have been expected. This suggests a (at least
0
relative) decoupling of politics and economic trends. This is
Improved Improved Access Technological New product M&A Access new Expand
supply chain customer to key talent innovation development geographic existing
mgnt service markets markets
probably driven by the declining share of the economy
Source: PricewaterhouseCoopers
6 | Global Growth@Risk 7 | Global Growth@Risk
5. CEO Perspectives
Robert A. Willett, CEO, Best Buy International
and Chief Information Officer, Best Buy Co. Inc.
owned by governments, and relatively credible production and the resulting gains from trade. Offshoring,
outsourcing and supply chain optimization have allowed
commitments to medium-term stability (in monetary policy,
What have been the global growth drivers for you With risks of that sort – let’s take religion-driven
firms, countries and regions to establish comparative
business cycle management, etc.) that have outweighed
historically? I know you’re fairly new in China. conflict – is there an opportunity there for Best Buy?
advantage in aspects of production, lowering costs and
short-term uncertainty.
Think scale, learn carefully, and scale fast, resist looking at The Middle East is a tremendous opportunity. I think Turkey improving technical efficiency. These effects generate
every country through a core US lens but through the lens is a great opportunity – Istanbul is the only city that sits in growth for new producers and maximize the welfare of
The next 10 years. Economic policy reform is an ongoing
of customers in whatever country we are entering. both Europe and Asia. There are substantial sums of global consumers. As Esmeralda Da Silva Dourado, Chief
process, even in the world’s most advanced economies.
money being spent in those countries; they’re really Executive Officer of SAG Gest in Brazil, puts it: “China will
Concern is already emerging that some recent “success
We are also going to focus on countries that provide us investing in manufacturing. We’re going to retail [in Turkey] be the ‘industrial plant’ of the world; India the ‘back office’
story” economies may be resting on their laurels and not
with the ability to be #1 in the eyes of the customer and a and source [from Turkey]. I think that’s what you always of the world; and Brazil the food provider of the world” (see
doing enough to foster growth, for example, by
minimum of US$ 6 billion of sales, if not, we will not go have to do. You go to a country and say ‘What can we CEO Perspectives, p. 8). Of course specialization has been
encouraging investment of accumulated savings or
there at this stage in our maturity. offer to them and what can we learn from them.’ even more granular – Bangalore in IT services, Taiwan in
increasing labour market flexibility. Reform for many
semi-conductors, Singapore and Hong Kong in financial
Are the drivers now going to be the same as the Does the thought of China building new coal-fired emerging economies is already taking on a different
services.
drivers in the next 10 years? What are the risks that plants and every day billions more people driving cars character – from the removal of shackles on business to the
you’re most worried about? and using electricity concern you? creation of proactive and enabling policies focused on This specialization has been funded by increasing capital
productivity. flows. Investment has flowed to fast-growing producers
I believe that the more balanced our country portfolio is Yes, I think it does. But we shouldn’t be selfish because the
through increasingly open financial markets, whose
over the years to cope with turbulence in different markets US and UK did the same thing – we were burning coal in
Sustainability and constraints. Reformist policy-making integration has outpaced the integration in goods and
the better, as turbulence is not going to go away, so we the UK for 100 years. We had pollution where you couldn’t
will always face political constraints — not only from vested services trade. But these years have also seen enormous
need as many ‘fingers’ as possible in developing growth see your hand in front of your face. China’s evolved in 10
interests and populists, but also from the understandable
markets. years – guess what? They’re going to make some growth in foreign direct investment (FDI), particularly in
mistakes. But the powers that be are aware of this. I think political priority of minimizing socio-economic turmoil, China and Eastern Europe.
The challenge is also to stay focused on your core market, their problem isn’t central government, it’s local level environmental degradation and insecurity. Indeed, the
in our case the US. The moment you lose focus on that government. They’re on a real journey in making change Facilitating both types of flow have been twin sources of
pendulum in many places already appears to be swinging
market, you are ‘dead in the water’, and forget happen locally that’s difficult. I think they’ll address it over liquidity – easy access to capital for investors and
back towards these priorities and away from the sometimes
international. time … the expectation of the West is ‘You guys have got businesses. The first, ‘traditional’ source of liquidity, has
competing priority of economic growth. This may shape a
to get this right now.’ Well, look in the mirror. been easy monetary policy, with the OECD countries
very different – and more active — kind of economic
If some day the Chinese economy is larger and your maintaining low interest rates since 2000. Despite a
governance in the coming 10 years.
revenues in China are larger than they are in the US Is climate change a threat to Best Buy? startling rise in energy and commodity prices, core
will that become your core market?
consumer prices have dodged inflation during this period,
No, I think it’s an opportunity. You know, you look at the
with upward pressures eased by rapidly implemented
Global Flows
The US is our core market but I do not think that matters. packaging of products – look at the amount of cardboard
Goods, capital and communications all crossing borders more easily
technological change and the continuing supply of low-cost
Retail used to be about location, location, location. Today it and stuff that’s around a product. If you could take out 1/2
labour. Central banks have therefore been able to keep
is innovation, innovation, innovation that comes from of that and push it back up the pipeline. What would that 2600
money loose while remaining hawkish on inflation.
multiple geographies which is one of the most significant do? Isn’t that a better way to resolve the problem? I think
benefits of going international, and the learnings flowing all of those risks we talk about are also opportunities for us 2100
The second, ‘new’ source of liquidity, is a product of
back to the core are outstanding. Product convergence to create different solutions – looking through the lens of
Index (100=1985)
FDI inflows (US$)
1600
financial innovation. The remarkable growth in derivative
2005: $916 billion
and market consolidation is happening at a significant pace the consumer and creating work in developing countries.
International outgoing
and you also have all types of non-standard competition credit products and risk management tools has allowed
telephone traffic (minutes)
1100
2005: 167 billion minutes
emerging. So, the more you‘re in these other markets, the Back to consumer markets and scale – what about lenders to allocate risks to a greater number of willing
Total exports (US$)
2006: $12 trillion
600
more you are seeing different ways of doing things; so you India and Indonesia? owners and lower the cost of risk financing. These
World GDP (US$)
2006: $48 trillion
bring those back and refresh your core business. phenomena have been symbiotic, and have made access
100
We are looking but we have to consolidate successfully
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to investment capital available on an unprecedented scale.
what we already have. We mustn’t apply our own
So, unlocking innovation is one of the upsides of Source: WTO; ITU; IMF; UNCTAD
orthodoxy when we look at these countries; sometimes you
going international. What are the risks? This flow of capital has been accompanied by information
have to say no that’s the orthodoxy that existed for a
and ideas. Productivity in emerging markets has benefited –
The most important topic that government can address – thousand years, don’t say it’s wrong. India is a great
Globalization and will continue to benefit – from the transfer of
and you don’t want government to do too much, because opportunity for the future.
technologies, processes and ideas that spur
they do too much as it is – is to really inspire Another meta-trend underpinning growth dynamics has, of
entrepreneurship. Some of this transfer comes with people,
entrepreneurship. That’s what you want and there is a big We are entering Turkey and Mexico ‘greenfield’; it will be course, been globalization. Globalization is many things, but
and the rich challenge for globalizing businesses has been
risk that it won’t happen. slow and we’ll listen and listen to the customer, learn, can be thought of in this context as the increasing flows of
to globalize management and corporate culture. Successful
understand and then scale fast. Make an acquisition? I’m trade, capital, information and, to a much lesser extent,
transfer is not one-way: globalizing businesses are
Risks such as political turbulence and restrictive markets not saying it’s out of the question. [But] We can make our people across national borders. The most celebrated facet
benefiting greatly from the repatriation of ideas, and not just
need to be addressed ongoing. Yes these are risks…but I own problems without cleaning up somebody else’s. I think of globalization has been the revolution in global business,
profits.
don’t think they’re any greater today. Do you think the that Best Buy values are so unique and special, that we’re via increased trade flows, foreign direct investment and the
world is in a riskier place than it was in the 40s, 50s, and actually better off initially going greenfield to start, but we geographic disaggregation of value chains around the
60s? When we all had atomic warheads facing one will always keep an open mind to do what is best for the To a certain extent, the specialization of production has
globe. This process has been facilitated by domestic
another? customer and our shareholders. created its own markets, lowering costs, improving quality,
economic reforms and international agreements on trade
or both, and stimulating additional demand. But recent
and investment, but is also driven by the new economic
The biggest risk is in the Middle East, the risk to the stability We’re off to Dubai in the autumn – let’s just say there’s a decades have also seen export markets opened by free
fundamentals that these policies have unleashed.
of the world and the peace of the world is not addressing great opportunity for us there. If you think about all the trade agreements, both bilateral and multilateral. The lion’s
that issue, plus you have some seriously disadvantaged countries that utilize the resources Dubai offers that are share of recent growth has been characterized as ‘export-
The opening of economies to trade and foreign investment
people. First world and other countries could wipe out so around the Middle East … you start by building a brand led growth’. The greatest – and most problematic – source
has created value through more efficient allocation of
many diseases overnight if they made medicine much and a reputation with governments together with customer
cheaper or even free in so many countries. Look how many centric skills, but it is not a race, you are going to be there
years they wanted to charge African countries for small pox for the millennium, so do it properly.
and malaria instead of just giving it to them. That’s where I
think there’s a problem – with values.
8 | Global Growth@Risk 9 | Global Growth@Risk
