Growing wealth gap makes the world riskierEconomic disparity threatens our wealth, health, and security warns co-author of the World Economic Forum’s 2011 Global Risks report Kristel Van der Elst.
Kristel Van der Elst: There are two very substantial cross-cutting risks—economic disparity and global governance failures. These inhibit the capacity to deal with other risks.
Then we found three major clusters or nexuses of risks that will be important during the next 10 years: macroeconomic imbalances, the illegal economy, and limits to water, food and energy resources.
Furthermore, we identified five risks to watch: cybersecurity, demographics, resource security, retrenchment from globalization, and weapons of mass destruction.
Economic disparity is new on the list. If wealth inequality is a systemic risk, what does this mean for modern capitalism?
Economic disparity has major potential impacts in the next 10 years and is also tremendously interconnected. But it is underestimated. If we do not deal with economic disparity we will have more problems dealing with other risks.
How is economic disparity connected to other risks?
A simple illustration is the illegal economy nexus. Here economic disparity creates both a demand environment and a supply environment.
In the demand environment when you have less income you might use counterfeited goods. In the supply side environment economic disparity creates conditions in which illegal trade and organized crime and corruption flourish.
Is there a way to reduce economic disparity and the associated risks?
We need to think about more sustainable and inclusive growth: tackle economic disparity between countries and within countries and grow in a way that includes all parts of society. The solutions are still to be created.
Even if everything continued in a steady-state way, if you look at the water, food, energy nexus in the next two decades there will be 50 percent more need for these resources.
It’s not just a question of more people, but also people starting to live in better conditions, a benefit of increased economic growth.
But we need to decouple GDP growth from resource usage. For example, in the energy sector people say the biggest energy resource in the next 20 to 30 years will be energy efficiency.
Your report says the financial crisis weakened the world system. Why hasn’t global finance been reformed?
The global financial system is one example of a global governance system that failed. The difficulty is that there are a lot of divergent interests, different norms and values so it is difficult to align the world around one system.
We see things moving forward in one of three ways: we muddle through with current systems; we create more agile structures; or global governance systems are completely discarded.
On issues like climate change and trade global governance has already been discarded. Will we see more of this?
I wouldn’t say that, but a key response from our experts was that global governance failures are still a very significant risk area. People are really, really worried. That is one reason it is important to think of systemic approaches to risks—because they are so interconnected—and why we need to think in the long term.
How can we think long term in a world governed by markets changing every minute and politicians swayed by the latest polls?
We are seeing some other systems of governance that have less short-term incentives, for example longer terms of government office.
We can also look at different ways of financing businesses, for examples not necessarily through markets and IPOs. The most important thing is that governance systems have a long-term view and incentives.
Will we have currency or trade wars?
There are some worries about currencies and trade wars related to the unsustainable economic imbalances between advanced and emerging economies.
Emerging economies fear that if their currencies appreciate they will become less competitive while some advanced economies might be thinking about devaluing their currencies to be more competitive.
If everyone starts devaluing you might have currency wars. To avoid that, we are calling for global coordination on international exchange rates.
We don’t feel we have focussed too much on the industrialized world. Perhaps the Western world is just more sensitive to risks.
We compared our OECD respondents with BRIC (Brazil, Russia, India, China) respondents and we found that on average people in BRIC countries had less high perceptions of risk.
But these countries do face a lot of risks too, for example the possibility of asset price collapse in China, or issues around energy, water and food resources.
Another division between advanced and emerging economies must be demographic risks like aging societies?
In the Western world this is more of an immediate issue. But if we look towards 2050 we see that many emerging economies will also have to deal with high old-age dependency ratios and all the consequences for health and pension systems.
Then there is the youth bubble in many emerging economies. This has great opportunities if countries invest in education and developing talent.
However, an overload of young people, where there is no means of going into legal economic life, and large economic disparities, has quite significant risks as we have seen over the last few weeks.