World Forum: Economies face big risks

WORLD governments have been drained of resources after the financial crisis and are poorly-equipped to handle 21st-century global risks, a new study reported yesterday.

Governments are less able to tackle emerging global risks such as shortages of natural resources, an ageing world population and fragile states dominated by illegal activity. But the macroeconomic trends that precipitated the credit crunch are still in evidence, the World Economic Forum Global Risks 2011 report said.

Huge fiscal imbalances between indebted developed states and debt-free developing economies leave countries vulnerable to excessive and destabilising capital flows, asset price collapses and volatile currencies.

These risks are “coming together in a particularly dangerous cocktail,” said World Economic Forum managing director Robert Greenhill.

Most advanced countries are running a fiscally unsustainable position, Daniel Hofman, group chief economist at Zurich Financial Services, said.

Public debt in countries such as the US, Ireland, Belgium and Italy is now more than 90 per cent of GDP, a level at which it puts a one per cent drag on growth.

Ageing populations, as much a threat to China and Brazil as developed countries, will push states far further into debt. Age-related liabilities are estimated to average 440 per cent of GDP in developed countries – or ten times the average cost of the financial crisis.

Shortages of vital resources such as food, water and oil will push price volatility on key commodities to new highs, said John Drzik, chief executive of consultancy Oliver Wyman.

“We are experiencing a new age of commodity price volatility and many commodities are at all-time price highs,” he said.

Volatility has risen dramatically since 2005 and is set to continue as supplies of corn, wheat, oil and metals struggle to meet demand. But Drzik also blamed financial markets for the problem. “Financial speculators will be an unpredictable source of demand, creating even more volatility in prices,” he said.

AT A GLANCE | GLOBAL RISKS IN 2011

OVERARCHING RISKS
Growing economic disparity both between and within countries is making it harder for governments to tackle crises, while global governance structures are failing to manage disparate national interests.

MACROECONOMIC IMBALANCES
Weaknesses left in the global economy from the financial crisis, such as high levels of developed country debt, are creating unsustainable imbalances such as currency and inflationary pressures between countries.

ILLEGAL ECONOMIES
Fragile states supporting illicit trade, organised crime and corruption pose a particular risk to global stability. The deterioration in countries such as Afghanistan undermines rule of law and exacerbates poverty, while illicit trade was estimated to be an $1.3 trillion (£835bn) industry in 2009.

NATURAL RESOURCES
A growing world population is putting unsustainable pressure on resources. Demand for food, water and energy is predicted to rise by 30-50 per cent by 2030. Shortages may increase commodity price volatility and could spark social unrest, political instability and environmental damage.

FIVE RISKS TO WATCH
The report tips cyber-security; demographic challenges from ageing populations; resource security; a backlash against globalisation and renewed threat from weapons of mass destruction as five areas that may have severe and under-appreciated consequences.