Governance Failures & Economic Disparity: WEF Global Risks Report 2011

The Global Risks Report 2011 from the World Economic Forum highlights two primary megatrends with the potential to inject significant disruption into global systems. From the report:

Two risks are especially significant given their high degrees of impact and interconnectedness. Economic disparity and global governance failures both influence the evolution of many other global risks and inhibit our capacity to respond effectively to them.

In this way, the global risk context in 2011 is defined by a 21st century paradox: as the world grows together, it is also growing apart.

It is worth noting how inter-related these two megatrends are as wealth consolidation into an elite class enables them to further deconstruct global governance mechanisms. This has been a feedback loop for at least the past 40 years, if not longer, as western growth fueled the rise of non-state economic bodies & super-empowered individuals who then lobbied against regulatory measures that would aim to keep their rise in check and mitigate the risk of disparity. Elites consolidate more money & power, further driving disparity and eroding governance. What results is an interstitial vacuum where corporate intervention fails to see any profit motive and where state intervention lacks the funds or will to govern effectively.

In effect, the combination of super-empowered non-state actors, failures of state governance, and widespread economic disparity undermines the Rule of Law by releasing elites from accountability and driving the underclass deeper into criminality.

Within these megatrends they cite three important risk factors:

The “macroeconomic imbalances” nexus: A cluster of economic risks including macroeconomic imbalances and currency volatility, fiscal crises and asset price collapse arise from the tension between the increasing wealth and influence of emerging economies and high levels of debt in advanced economies.

The “illegal economy” nexus: This nexus examines a cluster of risks including state fragility, illicit trade, organized crime and corruption. A networked world, governance failures and economic disparity create opportunities for such illegal activities to flourish. In 2009, the value of illicit trade around the globe was estimated at US $1.3 trillion and growing. These risks, while creating huge costs for legitimate economic activities, also weaken states, threatening development opportunities, undermining the rule of law and keeping countries trapped in cycles of poverty and instability.

The “water-food-energy” nexus: A rapidly rising global population and growing prosperity are putting unsustainable pressures on resources. Demand for water, food and energy is expected to rise by 30-50% in the next two decades, while economic disparities incentivize short-term responses in production and consumption that undermine long-term sustainability.

These risk factors are certainly of concern but it’s worth looking at how they represent symptoms of an underlying current. Macroeconomic imbalances & illegal economies are two sides of the same coin, both indicating that the fundamental truths of economics are no longer applicable to the current global system. The territory has shifted but the map has yet to be effectively updated. The legacy code of macroeconomics is far too simplistic to contain the realities of the modern globalized marketplace.

Furthermore, undue faith in free markets has blinded the regulatory eye to the simple fact that markets have been thoroughly gamed by a small class of particularly savvy players. Markets are in no way free and it’s a fine trick of the big players to turn blame towards state regulation rather than admitting their own aggressive influence. The light being shown on Rupert Murdoch’s empire during the News of the World scandal is a prime example of this posturing. Murdoch has used his media empire to champion the free market mythology and to challenge state governance while shrewdly re-drawing the regulatory and tax laws to suit the needs of his own business.

Thus, the rise of the illegal economy is both a necessary alternative to a broken formal economy thoroughly gamed by elites, and a perverse imitation of the seemingly above-the-law attitudes of those very same elites who are in many ways idolized by the downtrodden.

Similarly, but perhaps more fundamentally, the water-food-energy nexus arises as a consequence of the growth models so canonical to historic economics. These models arose before there was a nuanced understanding of finite natural systems. Growth was eternal and all economic success has been measured against metrics of expansion. Extract more oil, mine more resources, build more cities, sell more gizmos, hire more people, expand into new markets. But again, the map was too simple to really reflect the territory. Resources are finite. The planetary system is ultimately closed and you can’t send waste away and import new resources (at least not yet or any time soon).

The common picture that emerges is that our models for how civilization interacts with the physical world, and the governors that have emerged over millenia to keep the global system in relative stability, are out-dated and losing relevancy. The system is moving into a phase change and will shed many legacy governors and force the maps to be re-drawn. This is, arguably, where we stand today amidst the obvious turmoil of our world – a world that is being completely revolutionized by globalization, ubiquitous computing, and asymptotic population growth.

Across this landscape arise five risks to watch:

Cyber-security issues ranging from the growing prevalence of cyber theft to the little-understood possibility of all-out cyber warfare

Demographic challenges adding to fiscal pressures in advanced economies and creating severe risks to social stability in emerging economies

Resource security issues causing extreme volatility and sustained increases over the long run in energy and commodity prices, if supply is no longer able to keep up with demand

Retrenchment from globalization through populist responses to economic disparities, if emerging economies do not take up a leadership role

Weapons of mass destruction, especially the possibility of renewed nuclear proliferation between states

These are the more pragmatic and addressable drivers forming the new governing mechanisms. They will draw towards them the coordinated efforts of many interests. Grappling with these emergent threats will build the structures necessary to contain them effectively. However, the traditional reliance on state governance to overcome these challenges looks increasingly unreliable, and it remains unclear whether corporate solutions will offer trustworthy substitutes. More likely, responsibility will fall on local efforts, distributed collectives, community governance, and investment and championship by benevolent economic elites. This perspective offers another view of the WEF2011 paradox, “as the world grows together, it is also growing apart”.

Of note, the solution space is much greater than in the past. The upside of population growth and the rise of the developing world is that the resource pool for creative innovation in the face of these risks is now larger than ever. Likewise, the tools for knowledge gathering and collaboration are readily available to most of the world and offer incredible power, capacity, and scalabilty. The phase change will continue to be full of turbulence but the sandbox for innovation is huge and the timeframes for iteration are tiny.

From another WEF article published after the Japanes tsunami crisis, titled Lessons for Living in a New World of Risk:

Thus a global network that shares best practices, promotes lessons learned in one part of the world for application in another, and assists its members both to better prepare before an event and better respond after can be of enormous value. By establishing direct channels of communication to government leaders, risk experts from some of the world’s leading companies, academic institutions, NGOs and other parts of society can provide valuable assistance in times of crisis.