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Global Growth @ Risk


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Global Growth @ Risk

  1. 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. ( A Report of the Global Risk Network in collaboration with PricewaterhouseCoopers
  2. 2. Contents Page 4 Foreword Page 7 Driving Growth Page 13 Constraints and Risks Page 19 Growth@Risk in China Page 22 World Economic Forum 91-93 route de la Capite Acknowledgements CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744 E-mail: © 2007 World Economic Forum All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. REF: 160807
  3. 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 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 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. 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 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 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. 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 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 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