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Risk management: Global Risks Report 2013 Critical Essay


The Global Economic Forum meets annually to discuss some of the global risks, their likelihood of happening and the impact that these risks possess in the event that they actualise. The Global Risks Report 2013, which is the latest report from the forum, bears the theme of strategic resilience and dynamism.

This paper supports the approach used in the categorisation of risks and the formulation of recommendations. The main assumption of the experts writing the report was that the majority of the risks mentioned in the report bear the likelihood of being unmanageable.

The report also recommends dynamism of strategies by assuming that most strategies currently in place may not adequately cater for the future impacts of most risks.

This paper is also in support of the approach that the experts used in formulating ideas by contrasting ‘external’ risk factors such as global risks with ‘preventable’ and ‘strategic’ risks, thus enabling understanding of how global risks should be approached.

The report is the product of a Risk Response Network initiative that involves over one thousand experts from different fields ranging from governments, business organisations, academic institutions, and non-governmental organisations.

The broad spectrum of participants and their expertise make the research and resultant predictions credible, thus adding to the usefulness of the report in averting future global crises.

The Global Risk Report’s focus on a ten-year period is plausible as the experts participating in the survey are taken from different fields and different regions thus giving a more objective look at issues as opposed to conclusions based on assumptions.

However, it is worth noting that the report is an analysis of the past and present occurrences and thus cannot be conclusive.

Institutions and governments using the report should thus use it as an indicator of issues to address regarding policies and projections in conjunction with their own outlooks unique to their micro and macroeconomics.

On main shortcoming foreseeable in this timeframe is on issues regarding the environment, as changes in natural events are hard to predict (Bernstein 56). The best thing would be to apply of keen observation to changes and to alter measures in conformity with the changes to ensure adaptability.

The report aims at promoting decisive action in the face of uncertainty especially due to the ambiguity of a risk or the uncertainty of its severity.

The report notes that, based of cognitive psychology, people have a tendency to pay closer attention to risks that they have already experienced than risks that they perceive unlikely as it is yet to happen to them and thus unlikely to happen in the near future (World Economic Forum 16).

For instance, a person who is a victim of destruction of property by fire is more likely to take up insurance against fire than a person who is not.

Similarly, a person who takes up insurance against fire and does not encounter an incident requiring the claim is likely to let the insurance lapse for a year or several years as he or she perceives the likelihood of the event happening to be very little.

Psychologists explain that this aspect occurs as the person has the tendency to view such insurance as a bad investment rather than protection (Hendrick 37).

This ‘rule of thumb’ psychology as they call it often leads to laxity in updating risk management strategies and the underestimation of the impact that a risk can have, both on an institution and in the macroeconomics of a country.

The impact of such action can have unpredictable global economic significance, especially if the country has a huge global presence such as the United States, most European countries and Asian countries such as China. A good example of how such a situation might occur is the global financial crisis that took place in 2007/2008.

The financial management policies in the American government provided a lot of freedom to financial institutions in the banking sector and became lax in the supervision of these institutions causing a collapse in the economy that rippled throughout the globe.

In the years preceding 2006, there had been steady growth and availability of credit, mainly aided by foreign exchange and growth of investments from Asia and Russia.

This element led to a rapid increase in the housing construction business thus increasing competition in the housing sector, which caused a fall in the price of housing, to the benefit of consumers wishing to invest in the housing sector.

At the same time, financial institutions were increasingly putting into effect the deregulation policy established in the 1970s, which worked to their advantage (Healey and Palepu 23).

The government had established these policies to reduce some of the regulations enforced against financial institutions so that they could conduct business more freely and with added flexibility to suit their customers’ needs.

This requirement meant that banks and other financial institutions could afford to lend money to consumers at low rates.

The deregulation policy on the other hand reduced oversight on financial institutions, which led to laxity in policies made by the institutions, with regard to the requirement for qualification for loans and specifically mortgage loans.

Hedge funds and investment firms willing to provide mortgage loans to individuals without sound financial backing were on the rise, taking over a market mainly occupied by commercial banks, leading to unscrupulous dealings.

It also led to a laxity in policy making within the lending institution, which overlooked the necessity to put in place measures to cushion them from possible losses owing to the subprime mortgages.

Due to the lack of proper security on loans, defaults in payments led to foreclosures, leaving many people homeless and causing investors in the housing sector to withdraw their money (Conrad 147).

As a result, Wall Street experienced an unprecedented fall in stocks causing international alarm and the start of a global financial crisis.

The American government was not able to give as much in grants and loans to other countries as it had to save its own economy, meaning that even developing nations in Africa felt the effects of a crisis that a single government had caused (Sampson and Chambers 73).

The positive outcome of this experience is that governments all over the globe are developing adequate measures to deal with such a crisis should it occur in the future as well as gaining the confidence of individual investors who are still cautious on their investments.

The report mentions the likelihood of the occurrence of a similar crisis in the future, even though the impact of such a crisis would be lower than that felt in the previous crisis. However, it is prudent to note that the occurrence of the 2007 financial crisis was not the first.

Years before it happened, the Great Depression had befallen the globe. Therefore, according to the psychology the paper mentions, governments should exercise great discipline and vigilance of policies to ensure that they address signs of such an occurrence early enough.

The political impact of such an occurrence would mainly be in terms of policy making. Governments would have to formulate legislation that necessitates risk management measures.

Socially, amenities such as healthcare facilities and transportation would bear the bulk of the burden as drugs and fuel are internationally obtained products, not readily available in every country.

Technological advancements require funding, an aspect that would be severely affected by the occurrence of another global economic crisis.

Although the crisis would not have as much impact environmentally as it would economically, there are still certain aspects that would suffer, such as environmental conservation projects, with the likelihood of moving funds allocated to these projects for other purposes being high.

The framing of the risks in the survey exudes the interdependence of risks, which the experts explain in the survey that it is to enable the clarification of the thinking process. It also bases the survey on the concept of globalisation and the inter-connectivity of various countries, regardless of the geographical location.

They present three risk cases namely, “the testing of economic and environmental resilience, digital wildfires in a hyper-connected world and the dangers of Hubris on human health” (World Economic Forum 17).

The editor in chief of the report, Mr. Lee Howell explains that the case on testing the economic and environmental resilience enables an understanding of what happens when two major systems experience simultaneous stress.

The report explains that pressure on a major system such as the environmental system not only affects the economy in terms of remedying environmental disasters, but also affects the social welfare of a country, making it hard for the government to cater for the social needs of the people.

An environmental disaster, such as a hurricane, more often than not destroys social amenities such as roads and electricity supply. The economic effect takes the form of the financial obligation that a country has to repair the damage.

If two major systems, such as the economy and the environment experience simultaneous strain, it affects the political structure of the country. A country whose government is unable to provide solutions to its citizens is likely to experience political unrest and result in civil warfare.

In the end, such problems become an international affair due to the effect that conflict on a country has on its trade partners and neighbouring states.

Digital wildfires in the hyper-connected world is a case that explains what happens when a seemingly minor risk surpasses the expected proportion of impact, while the dangers of hubris on human health explains what happens when people become complacent about to the perceived ability of a system to deal with an evolving problem.

Technological advancement is an important element in the development of the economy as well as the social structure through communication facilities. The report points out the dangers that technology holds and the impact it has on the global community due its characteristic effect of interconnectivity.

Technological advancements necessitate the review of policies, both economic and political, as it affects the rate of economic growth and provides new avenues for law breaking. The economic impact of technological advancement is largely positive, states the report, although it can cause friction internationally.

The first time a developing country raised an issue about the differences between developed and developing countries in terms of global intellectual property legislation was in the year 1961, when Brazil, with sponsorship from Bolivia, tabled a resolution in the United Nations General Assembly asking for the assembly to address the issue.

The aim of tabling the resolution was to ask developed countries to permit the use of intellectual property by developing countries in order to enable developing countries to benefit from technological advancements.

The argument was that developed countries use intellectual property rights to institute monopolies on discoveries that are able to aid in the development of poor economies with the aim of gaining profit.

The issue that sparks concern and disagreement is the fact that the regulations seem to favour developed countries more than they do developing countries. Developing countries argue that the higher level of protection provided for intellectual property, the less convenient it is for developing countries.

One of the justifications given for this inference is that the financial capabilities of developed countries and those of developing countries are very different.

The resolution conferred upon the secretary general the tasks of, among others, surveying patent legislations in some selected developed and developing countries and studying the effects that royalties have on underdeveloped countries that pay for the use of patents with regard to the balance of payment.

The draft also requested the secretary general to look into and form an analysis on the characteristics of the domestic legislations of underdeveloped countries with a focus on their development objectives.

The draft also requested an indication of the possibility of revising legislation in accordance to international law, such that the legislation encourage and permit the rapid integration of new inventions in order to enhance the rate of development in underdeveloped countries (Bogle10).

There international community has made considerable effort to remedy this situation. Nations, both developing and developed have held various conferences that endeavour to solve the inequalities that international patent laws occasion.

However, there has been dismal success owing to the presence of conflicts of interest between developing and developed countries and among the developing countries.

Developed countries find the existing intellectual property laws appropriate for them, as they need such high standards of protection to take care of the increasing innovativeness in their countries especially in this technological era (Merges, Manell, and Lomney 112).

They have fewer, stricter requirements in their legislations to govern patent requirements and procedures and there requirements are usually in synchrony with international laws.

Developing countries on the other hand have more complicated systems nationally that provide many requirements for the validation of patents. These requirements also vary from one country to another due to the uniqueness of national laws and economic goals.

In light of this example, a weakness arises in the recommendations that would result from the report. The report exudes a sense of homogeneity in the risks that apply to countries globally. However, the survey is done with most of the observations originating from the North American, European and Asian economies.

The resultant recommendations would thus not cater fully to economies in African countries.

 

The risk of disparity between the rich and poor countries would thus be easier to avert in the Western countries, through the integration and synchronisation of economic policies, than it would be in the African countries.

This move would lead to economic rivalry and misunderstandings especially in issues of trade and tourism.

The experts also indicate a risk in the decline of resources such as oil, justifying the need to research on other planets. In addition, the likelihood of a rise in the population has led to the use of resources, which according to the research, are constant and therefore diminishing with time.

The likelihood of a political risk in this is high as it presents an avenue for political unrest in many countries. A good example is Iran, one of the worlds largest energy reserve. Iran has had political unrest for several years now, with the neighbouring countries and international community sensing fears of a nuclear threat.

Economically, presence of warfare in the country causes spikes in oil prices, affecting the entire global economy.

The survey indicates that research in technology reduces the impact of the risk as new inventions are actualised such as the recent invention of a solar-powered airplane (Kearney Para.9). The report suggests that technology and social media poses a threat to the economy especially in this age of globalisation.

It stipulates a likelihood of the occurrence of digital wild fires in a hyper-connected world.

Some of the main concerns include the destruction of company reputations through propaganda on social media and the easy flow of trade secrets such as the challenges companies face and the financial trouble experienced, which can be detrimental to the economy especially in areas such as the stock market.

It also poses a political risk as the disrepute of companies has bearing on the political health of a country to the international community. Social risks such as cyber bullying are also on the rise, necessitating the institution of protective punitive action as a preventive measure.

The democratisation of information acts as a sword and shield, possessing the ability to protect and build the economy through the sharing of ideas on one hand and destroying it on the other hand by making it easy for secret information to leak to the public.

The survey indicates that social sites grow at a blurring rate, with Facebook attracting over one billion active users in less than a decade and twitter attaining more than five hundred million users in seven years (World Economic Forum 24).

It notes that this aspect was a major factor in the facilitation of the revolutions experienced in Tunisia and Egypt in the rise of the Arab Spring. As a positive effect, analysis of information on the social sites can help in the prediction of election results, facilitating strategic planning in the campaign period.

Another advantage is that governments can use technology as a tool for protecting their economies and security. In recent years, digital technology has increasingly been the tool of choice in the breaking of intellectual property laws (Cortada 42).

As a preventive measure and another way of curbing intellectual property related crime, the United States government, through the United States Department of Homeland Security (Para.12), has increased surveillance on the sources of these packages and the websites involved leading to the taking down of 697 websites by the Immigration and Customs Enforcement Department.

Customs and Borders Patrol took care of forfeitures occasioned by the move. Due to the combined effort of both agencies, there was a decrease in the seizures made in 2012, amounting to 22,848 as opposed to 24,792 in 2011 and indication of the decline in intellectual property related crimes.

According to a report posted by the Chamber of Commerce on the 5th of January, 2013 through the Global Intellectual Property Centre’s website, 84 per cent of all the seizures made in 2012 by the two agencies originated from China and Hong Kong (GIPC Para.16).

The estimated value of the counterfeits seized amounts to $1.3 billon according to statistics from the GIPC. This type of information has the possible resultant effect of making governments over scrutinise each other and cause tension in trade and political policy related aspects.

From the above example, for instance, it would be understandable for the American government to pay close attention to visitors from the two states in the effort to ensure that no counterfeit goods enter its borders (Hull19).

On the other hand, visitors put under such scrutiny might misinterpret the prerogative as an act of discrimination, causing the same effect to American citizens visiting the countries.

Conclusion

The report’s findings are largely accurate, an aspect that owing to the fact that the experts chosen in the survey are multicultural, international and conversant in different disciplines.

The number of experts that contributed to the survey is also a key factor in the determination of the viability of the outlook that the report presents.

The survey’s main themes are dynamism and resilience, focusing on fifty different risks and thus providing a wide angle on the issues that governments and institutions a like need to focus on in order to build on resilience.

The report notes that complacency is one of the main problems that contribute to the miscalculation of the severity of risks.

The justification for this fact is the cognitive tendency of people to focus on issues that they currently experience or those that they have encountered in the past in strategising for future contingency plans.

In doing so, people frequently overlook slow-developing risks such as climate change and the possible occurrence of natural disasters.

The resultant effect of this aspect is that it becomes expensive for governments to deal with the crises once actualised, leaving little room in budgets for the development of future risk-management strategies.

Such laxity also has political effects in the long term, creating room for civil unrest when governments are unable to cater for their citizens.

Social amenities are not left out, as strategies such as bailouts cause the reallocation from projects in the social sectors such as transport and communication in order to rescue the economy.

The experts in this report seemingly suggest that it is wise for governments to look at their economies as small companies look at theirs in terms of protection of future profits. However, the survey’s assumption of homogeneity is erroneous as it overlooks the uniqueness of some of the economies in the world.

It works to give an overview of most of the countries and the various continents in the globe but overlooks states in developing countries that operate substantially differently from those in developed countries.

Countries in Europe and America posses synchrony and similarity in legislation and would thus find it easier to put the report to test practically.

However, African countries experience unique differences in the running of their economies, which is the reason most of them do not agree on international Intellectual Property legislation. Regardless, the countries can still use the report as a guide in the formation of national risk management policies.

Works Cited

Bernstein, Peter. Against the gods: The Remarkable Story of Risk, New Jersey: John Wiley & Sons, 1998. Print.

Bogle, John. The Battle for the Soul of Capitalism, New Haven: Yale UP, 2009. Print.

Conrad, Edward. Unintended Consequences, Westminster: Penguin, 2012. Print.

Coppola, Damon, and George Haddow. Introduction to Emergency Management, Burlington: Butterworth-Heinmann, 2010. Print.

Cortada, James. The digital Hand: Volume II: How computers changed the work of Financial Telecommunications, Media and Entertainment Industries, Oxford: Oxford University Press, 2005. Print.

Global Intellectual Property Centre, (GIPC). United States Chamber of Commerce, 2013. Web.

Hendrick, Tom. Identifying and Managing Project Risk: Essential tools for failure-proofing your project, New York: AMACOM, 2009. Print.

Healey, Paul, and Krishna Palepu. “The Fall of Enron”. Journal of Economic Perspectives 17.2 (2003): 3-26. Print.

Hull, John. Risk Management and Finance Institutions, New Jersey: John Wiley & Sons, 2012. Print.

Kerney, Laila. , 2013. Web.

Merges, Robert, Peter Menell, and Mark Lemley. Intellectual Property in the New Technological age, New York: Aspen, 2012. Print.

Sampson, Gary, and Bradnee Chambers. Developing Countries and the WTO: Policy approaches, New York: United Nations University Press, 2008. Print.

United States Department of Homeland Security. IPR seizure statistics, 2013. Web.

World Economic Forum. , 2013. Web.

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