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The World Economic Forum’s Risk Response Network has published a fascinating, if sobering, overview of major risks that face the world in the next decade: Global Risks 2012, 7th edition. They predict that economic and societal factors are the most likely to cause major problems, but these will be exacerbated by climate change, water shortages and resulting agricultural challenges.

“Three distinct constellations of risks that present a very serious threat to our future prosperity and security emerged from a review of this year’s set of risks.

“Case 1: Seeds of Dystopia Dystopia, the opposite of a utopia, describes a place where life is full of hardship and devoid of hope. Analysis of linkages across various global risks reveals a constellation of fiscal, demographic and societal risks signalling a dystopian future for much of humanity. The interplay among these risks could result in a world where a large youth population contends with chronic, high levels of unemployment, while concurrently, the largest population of retirees in history becomes dependent upon already heavily indebted governments. Both young and old could face an income gap, as well as a skills gap so wide as to threaten social and political stability…

Case 2: How Safe are our Safeguards? As the world grows increasingly complex and interdependent, the capacity to manage the systems that underpin our prosperity and safety is diminishing. The constellation of risks arising from emerging technologies, financial interdependence, resource depletion and climate change exposes the weak and brittle nature of existing safeguards – the policies, norms, regulations or institutions which serve as a protective system. Our safeguards may no longer be fit to manage vital resources and ensure orderly markets and public safety….

Case 3: The Dark Side of Connectivity. The impacts of crime, terrorism and war in the virtual world have yet to equal that of the physical world, but there is fear that this could change. …”

The top-five risks in terms of impact are expected to be:

“Major systemic financial failure

Water supply crises

Food shortage crises

Chronic fiscal imbalances, and

Extreme volatility in energy and agriculture prices.”

The World Economic Forum calls for more flexible, more effective regulations: “To improve management of uncertainty in a complex world, it is necessary to accept that we will not get safeguards right the first time. Regulations have often been viewed as a way for authorities to signal to the public that they are in control of a situation, but in a complex system this control is often an illusion. While we should start by considering counterfactuals in order to anticipate possible outcomes of regulations, it is even more important to define broader system safeguards. Such safeguards need to be flexible and dynamic enough to adapt to changing information and should closely involve stakeholders in the co-production of new types of regulation…

Such a dynamic process of iteration between regulators and practitioners at the cutting edge of knowledge exemplifies how safeguards should ideally be defined. At the heart of this process is a necessary understanding of who bears the risks and who reaps potential benefits, so that incentives can be aligned in an appropriate manner…”

The report also includes a study of the Japanese earthquake, and a snapshot of companies that proved most resilient. For example, “Lawson stores continued to serve their communities, make vital supplies available and minimize financial losses to the company. This response has been attributed to the networked managerial structure put in place as a result of lessons learned from the 1995 Kobe earthquake disaster (see Figure 25). Each branch office was required to assess emerging risks and draft detailed disaster recovery plans twice a year; this will increase to three times a year in 2012. For example, bicycles were stationed in branch offices because they were the only functional means of transport in the 1995 earthquake. It became mandatory to keep stocks of emergency goods in branch offices, and the concentration of distribution hubs was reassessed to allow for more effective catering to disaster-struck evacuees. As the nature of crises can never be fully anticipated, a network of employees who have access to real-time coordinating mechanisms and the authority to make decisions can be more valuable than teams of highly-trained, specialized risk managers…”

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