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Global Scale by Coletta Kemper Taking Ownership

Globalization, while benefiting the economies of the world, may leave us more vulnerable to new risks.

By  Coletta Kemper

Even if you read nothing else this year, make sure you pick up a copy of Global Risks 2008, released by the World Economic Forum (WEF). It focuses on four emerging issues shaping the risk landscape around the world.

The report, prepared in collaboration with Citigroup, Marsh & McLennan, Swiss Re, Wharton School Risk Center and Zurich, identifies issues that the WEF believes “will not only shape the year, but the decades to come.” The issues are systemic financial risk, food security, supply chains and energy—all essential to a well-functioning world economy.

Systemic financial risk. It’s certainly no surprise that systemic financial risk tops the list. A year ago, the world economy was bustling along with predictions of continued strong economic growth. But the picture quickly changed as the fallout from the subprime meltdown in the U.S. resounded worldwide. The Federal Reserve has estimated direct losses related to subprime at $150 billion, with greater non-subprime financial losses.

The warning signs in 2007 were largely ignored. Experts identify three major threats to the global economy—a housing recession, the beginning of a liquidity crunch and high oil prices.

The chickens have come home to roost.

The WEF says systemic financial risk is not only the most immediate problem, but the most severe in terms of economic costs. With the shakeout of the 2007 liquidity crunch still unsettled, the outlook going forward is far more uncertain today than it was a year ago. The analysts do not rule out a U.S. recession and are divided over whether Asia can lead a recovery. The uncertainty in the European market is likely to be mixed, and there is some question whether even the major European economies will be resilient if the financial crisis widens.

If that picture isn’t gloomy enough, the WEF warns that the increasing pressure on the U.S. dollar as the global reserve currency may undermine the country’s geopolitical position in the world and “foreshadow the end of a hegemonic period in global economic history.”

Food security. The WEF says food security is emerging as one of the major risks of the 21st century. Factors such as population growth, changing lifestyles, climate change and the growing use of food crops for biofuels may result in more volatile and sustained high prices. To put the food problem into perspective, world food reserves are at the lowest point in 25 years. Many staple food prices hit record levels in 2007. The price of corn jumped 50% in late 2007 compared with a year before, and the price of wheat has doubled.

Supply chain risks. Supply chains have helped commerce boom around the world. It’s common for goods and materials to circumnavigate the world before being delivered to the manufacturer or the end consumer. For efficiency reasons, production has become concentrated in geographic zones, such as China. Consequently, risk has accumulated to dangerous levels in these concentrated areas, leaving business highly vulnerable if the chain snaps.

Energy. Energy is a key driver of the global economy. Without a sustainable, safe energy supply, economies will falter. The WEF report says there is considerable uncertainty surrounding supply and demand in the long term, but there are more reasons to expect energy prices will rise than fall over the next 10 years. The International Energy Agency predicts a 37% rise in demand for oil to 116 million barrels per day (bpd) by 2030, but experts expect only 100 million bpd to be produced. The lack of investment in exploration and energy infrastructure may result in a failure to keep up with demand. The WEF suggests government regulatory policies involving greenhouse gas emissions may discourage investment in oil production.

There is far more in the World Economic Forum report that merits your attention. But the underlying theme is that globalization, while benefiting the economies of the world, may be leaving us all more vulnerable to shared risks that didn’t exist a decade or two ago. The challenge is to recognize the risks and trade-offs of globalization and mitigate the impact on the economy and people.

The report concludes that managing global risks in 2008 will be a challenge. Politics and the economy will dominate the dialogue. The liquidity crisis is far from over and will put pressure on global growth. The continued tensions in the Middle East and regime changes in some countries will drive the political agenda. And leadership on global risk will be “a precious commodity.”

In the introduction to the report, the World Economic Forum asks this core question: Who owns the risk? In a globally connected economy, we all own the risk.

Kemper is The Council’s vice president of Industry Affairs.

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