Risk in Focus
2.1Introduction
This section of the Global Risks 2015 report presents deep-dives into three “risks in focus” – the interplay(มีอิทธิพลซึ่งกันและกัน) between geopolitics and economics, rapid and unplanned urbanization in developing countries, and emerging technologies – that emerged from the Risks Interconnections Map and the Risks-Trends Interconnections Map (see Figures 2 and 3). These provide good illustrations of the links between different global risks. The analysis in the following pages is based on follow-up research and interviews with experts.
As discussed in Part 1, geopolitical risks are back, as evident from the central node of the failure of national governance in the interconnections maps, and the strong linkages to interstate conflict and profound social instability, among others. With economies tied together on an unprecedented scale by financial and trade flows, many analysts are concerned about the resurgence of the trend towards the interplay between geopolitics and economics. While national governments in the past also made use of economic tools to increase their relative power, today’s strong economic ties arguably make this interplay more complex and therefore more difficult to navigate. This resurgence could have profound implications for the effectiveness of global governance mechanisms in other areas, from combating climate change to reaching an international solution for Internet governance.
Even as nation states step up their efforts to maintain or expand power, urbanization is slowly but surely rebalancing the locus of power from national to city governments. The data gathered for this report suggest that urbanization is a critical driver of profound social instability, failure of critical infrastructure, water crises, and the spread of infectious diseases (see Figure 3). This will only be further exacerbated by an unprecedented transition from rural to urban areas: by 2050, two-thirds of the world’s population – an estimated 6.3 billion people – will live in cities, with 80% in less developed regions.1 Rapid and unplanned urbanization in these regions has the potential to drive many risks. How effectively the world addresses global risks, ranging from climate Global Risks 2015 27 Part 2 Part 3 Part 1 change to pandemics, will increasingly be determined by how well cities are governed. The concentration of a large number of people, assets, critical infrastructure and economic activities means that the risks materializing at the city level have the potential to disrupt society.
From artificial intelligence to synthetic biology, the need for governance on a global scale comes into focus when considering emerging technologies, given the many uncertainties about how emerging technologies evolve and their far-reaching economic, societal and environmental implications. The data also point to strong interconnections with man-made and natural environmental catastrophes (see Figure 2). The coming years are likely to see rapid advances in such fields as artificial intelligence and synthetic biology – and while many of their impacts are likely to be beneficial, negative effects will spread quickly in today’s hyper connected world. Some of those negative effects may be difficult to anticipate and safeguard against.
In many cases, by addressing the trends underlying most of the risks, the vulnerability to risks can be reduced significantly. In addition, understanding the context and possible trajectories of a significant nexus of risks and trends can help to clarify ways to address them and to capitalize on opportunities presented by the trends. That is the aim of the analysis that follows.
2.2 Global Risks Arising from the Accelerated Interplay between Geopolitics and Economics
Geopolitics traditionally focuses on military might, resources and demographics as measures of national influence, while economics focuses on growth, productivity and prosperity. However, geopolitics and economics have been intertwined through history – for example in the rise of British political power on the back of the “economic” Industrial Revolution, the era of British and French colonialism, or the Cold War, when a deep geopolitical divide separated economies. When the Cold War ended, an era of common norms ushered in a global economy; now, more than 25 years after the fall of the Berlin Wall, strategic competition is returning. The world is grappling with a seemingly accelerating dynamic between geopolitics and economics. Today’s realpolitik is not ideologically driven, includes new players and takes place in the context of deep economic integration
Will the global economy, the efficiency of the international system and the winwin logic of commerce be undermined by geopolitics? How will economic decisions and spheres of influence impact the global balance of power? What global risks could emerge when countries use economic rather than military tools to advance their ends? These questions have been brought into focus by trends including the recent heightened tensions in East Asia, the acceleration of regional integration in South-East Asia and the rise of preferential and regional trade agreements more generally, the shale gas and oil revolution in the United States, turbulence in the Middle East and Ukraine, competing integration mechanisms in Latin America, China’s assertion of leadership in the global economy, and acts of terrorism and violent strife that are redrawing borders and sending economies backwards.
Global interconnectedness and the rising speed of information transmission have reinforced the interdependence between geopolitics and economics, with cyberspace representing an important new front in the geopolitical equation as cyber-attacks have the growing potential to inflict economic damage. This makes it difficult for decision-makers to predict the development of such situations as sanctions and other instruments of economic coercion, thus raising the risk of unintended consequences. The interplay between geopolitics and economics can create, reinforce and alter the nature of the interconnections between global risks, affecting many areas of public policy and international cooperation.
Governments and businesses alike need to conduct “geopolitical due diligence” to not be caught off guard. The focus below is on three areas where direct effects are likely – disruptions to international trade, and threats to political cooperation and the international rules based system.
Global Risks Emerging from the Interplay between Geopolitics and Economics
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Opinion polls show that the public in countries such as Japan, Germany and the United States are increasingly sceptical about the benefits of trade and foreign investment, even as their governments push for increased liberalization. Despite progress on the trade facilitation agreement, the larger Doha Round of trade negotiations has stalled, costing an estimated $180 billion per year at the global level. Negotiations of regional agreements are also being questioned (one example is TTIP in Germany). Although growing again, global flows of foreign direct investment remain down by more than a quarter from their 2007 peak, and international trade growth has slowed since 2012. It has yet to be determined, however, whether this is merely a cyclical or structural phenomenon heralding a phase of de-globalization in which globalized markets give way to regional groupings and to a rise in protectionist measures.
When confronted with political and economic volatility at home, countries often revert to protectionism under the guise of policies to reduce risk. A recent OECD report shows that despite their professed commitment to free trade, G20 economies have increasingly reverted to protective measures since growth slowed in 2012 in the wake of the global financial crisis.3 Protectionism can take different forms. It can be related, for example, to the protection of strategic sectors, local content requirements in the case of external investment, or state bailouts.
Economic sanctions are another type of punitive geo-economic measure, such as the tit-for-tat engaged in by Russia and the West, which indicates that some countries are ready to countenance a long period of economic hardship and diplomatic woe to achieve their political goals. The risk is thus significant that if the use of punitivegeo-economic measures becomes more widespread, a growing number of countries may revert to protecting national producers and supply chains, which could considerably impact global trade flows. The economic effects of sanctions can include slow growth, unemployment and fiscal pressures. Taken together, the slowdown in globalization, the rise in protectionism and the increasing prevalence of sanctions could give rise to a scenario of slower growth in advanced and emerging economies. Slower growth in emerging economies could translate into social unrest and political instability if the aspirations of large portions of the population cannot be met.
The Increasing Risk to the Architecture of Global Governance
Much of the interplay between economic and geopolitical interests plays out not in the trade arena but in the Bretton Woods institutions. Countries’ inability to agree on an institutionalized, closer coordination of macroeconomic policies to reduce global imbalances provides an interesting example. Some observers see the failure to mitigate these imbalances, combined with the return of strategic competition in an era defined by an erosion of trust, as raising a tail-risk possibility of undermining the Bretton Woods institutions themselves and the international rule-based system more generally.
These developments are reflected in the recent alternative structures being established by selected