Vijay Kumar Gaba

 The latest edition of the World Economic Forum’s global risk report (The Global Risk Report 2022) offers some valuable and interesting insights into the current global risk perceptions and areas of concern. The key message is that “A divergent economic recovery from the crisis created by the pandemic risks deepening global divisions at a time when societies and the international community urgently need to collaborate to check COVID-19, heal its scars and address compounding global risks.”

The clear and present global challenges include “Supply chain disruptions, inflation, debt, labour market gaps, protectionism and educational disparities are moving the world economy into choppy waters that both rapidly and slowly recovering countries alike will need to navigate to restore social cohesion, boost employment and thrive. These difficulties are impeding the visibility of emerging challenges, which include climate transition disorder, increased cyber vulnerabilities, greater barriers to international mobility, and crowding and competition in space”. To meet these challenges, the world needs trust and cooperation within and between countries, lest the world shall continue to drift apart.

Risk Perception of global managers

Results of the Global Risks Perception Survey, that underpins the report, highlight the following key sentiment indicators:

·         Most respondents see social risks in the form of “social cohesion erosion”, “livelihood crises” and “mental health deterioration” continue to worsen.

·         Frighteningly, “only 16% of respondents feel positive and optimistic about the outlook for the world, and just 11% believe the global recovery will accelerate. Most respondents instead expect the next three years to be characterized by either consistent volatility and multiple surprises or fractured trajectories that will separate relative winners and losers.”

·         The societal and environmental risks are seen as the most concerning for the next five years.

·         However, over a wider horizon of next 10 years, health of the planet dominates concerns;  with “climate action failure”, “extreme weather”, and “biodiversity loss” ranking as the top three most severe risks. “Debt crises” and “geoeconomic confrontations” are seen as among the most severe risks over next 10 years.

·         Technological risks—such as “digital inequality” and “cybersecurity failure”—are seen as the other critical short- and medium-term threats to the world.

·         About the present risk mitigation methods and techniques, the global risk managers believe that “the current state of risk mitigation efforts fall short of the challenge in areas like “Artificial intelligence”, “space exploitation”, “cross-border cyber-attacks and misinformation” and “migration and refugees”. The present risk mitigation efforts are seen as effective in facing the established risks such as “trade facilitation”, “international crime” and “weapons of mass destruction”.

Climate Action Failure – top most long term risk

The failure in addressing the climate concerns is perceived as “the number one long-term threat to the world and the risk with potentially the most severe impacts over the next decade. It is highlighted that the “Climate change is already manifesting rapidly in the form of droughts, fires, floods, resource scarcity and species loss, among other impacts. In 2020, multiple cities around the world experienced extreme temperatures not seen for years—such as a record high of 42.7°C in Madrid and a 72-year low of -19°C in Dallas, and regions like the Arctic Circle have averaged summer temperatures 10°C higher than in prior years.

It is evident that “Governments, businesses and societies are facing increasing pressure to thwart the worst consequences. Yet a disorderly climate transition characterized by divergent trajectories worldwide and across sectors will further drive apart countries and bifurcate societies, creating barriers to cooperation.”

Cyberthreats emerging as prominent risk

As per the Report, “in 2020, malware and ransomware attacks increased by 358% and 435% respectively—and are outpacing societies’ ability to effectively prevent or respond to them. Lower barriers to entry for Cyberthreats actors, more aggressive attack methods, a dearth of cybersecurity professionals and patchwork governance mechanisms are all aggravating the risk.”

It is anticipated that “attacks on large and strategic systems will carry cascading physical consequences across societies, while prevention will inevitably entail higher costs. Intangible risks—such as disinformation, fraud and lack of digital safety—will also impact public trust in digital systems. Greater cyberthreats will also hamper cooperation between states if governments continue to follow unilateral paths to control risks. As attacks become more severe and broadly impactful, already-sharp tensions between governments impacted by cybercrime and governments complicit in their commission will rise as cybersecurity becomes another wedge for divergence—rather than cooperation—among nation-states.”

“Involuntary migration” poses a potent risk

Economic hardships, climate change and political instability in many countries is forcing a lot of people to migrate to safer places involuntarily. At the same time, effects of pandemic and other factors are resulting in increased economic protectionism and restrictive labor markets, creating higher barriers to entry for migrants. “These higher barriers to migration, and their spill-over effect on remittances—a critical lifeline for some developing countries—risk precluding a potential pathway to restoring livelihoods, maintaining political stability and closing income and labour gaps.”

In the most extreme cases, humanitarian crises will worsen since vulnerable groups have no choice but to embark on more dangerous journeys.

It is noteworthy that “the United States faced over 11 million unfilled jobs in general and the European Union had a deficit of 400,000 drivers just in the trucking industry.”

Space could be new war zone

The report mentions that ‘New commercial satellite market entrants are disrupting incumbents’ traditional influence over the global space commons in delivering satellite services, notably internet-related communications. A greater number and range of actors operating in space could generate frictions if space exploration and exploitation are not responsibly managed. With limited and outdated global governance in place to regulate space alongside diverging national-level policies, risks are intensifying.”

“One consequence of accelerated space activity is a higher risk of collisions that could lead to a proliferation of space debris and impact the orbits that host infrastructure for key systems on Earth, damage valuable space equipment or spark international tensions.”

In the recent Global Competitiveness Report, the World Economic Forum examined how different countries are traversing on the road to recovery from the health and economic shock of Covid-19 pandemic, which “impacted the livelihoods of millions of households, disrupted business activities, and exposed the fault lines in today’s social protection and healthcare systems”. On the positive side, the shock is believed to have accelerated “Fourth Industrial Revolution on trade, skills, digitization, competition and employment”.

There is large section of observers who reject World Economic Forum in general and its research in particular, as mostly elitist and prejudiced against developing economies. I do not have any strong objection to the views of this section of people. However, I do occasionally study the work done under the aegis of WEF and find it useful for identifying the problem areas and directions for further study. I read the Global Competitiveness Report 2020 also with this perspective. The following are some of the points that I find mostly incontrovertible and useful in making a reasonable assessment of the present situation.

·         Before pandemic high levels of debt in selected economies as well as widening inequalities was a major area of concern. The emergency and stimulus measures have pushed already high public debt to unprecedented levels, while tax bases have continued eroding or shifting. Now, the priority should be on preparing support measures for highly indebted low-income countries and plan for future public debt deleveraging. In the longer run (transformation phase) countries should focus on shifting to more progressive taxation, rethinking how corporations, wealth and labour are taxed.

·         The COVID-19 crisis has accelerated digitalization in advanced economies and made catching up more difficult for countries or regions that were lagging even before the crisis. In the revival phase, countries should upgrade utilities and other infrastructure as well as closing the digital divide within and across countries for both firms and households.

·         Skills mismatches, talent shortages and increasing misalignment between incentives and rewards for workers had been a major problem for advancing productivity, prosperity and inclusion for many decades. The focus should now turn to new labour market opportunities, scaling up reskilling and upskilling programmes and rethinking active labour market policies. The leaders should work to update education curricula and expand investment in the skills needed for jobs in “markets of tomorrow”.

·         The pandemic has highlighted how healthcare systems’ capacity has lagged behind increasing populations in the developing world and ageing populations in the developed world. Now, the health system capacity needs to be expanded to manage the dual burden of current pandemic and future healthcare needs. Especially, there should be an effort to expand eldercare, childcare and healthcare infrastructure and innovation.

·         Over the past decade, while financial systems have become sounder compared to the pre-financial crisis situation, they continued to display some fragility, including increased corporate debt risks and liquidity mismatches. The countries now prioritize reinforcing financial markets stability, while starting to introduce financial incentives for companies to engage in sustainable and inclusive investments.

·         Pre-crisis, there was increasing market concentration, with large productivity and profitability gaps between the top companies in each sector and all others; and the fallout from the pandemic and associated recession is likely to exacerbate these trends. In the revival phase, therefore, the effort should be to strike a balance between continuing measures to support firms and prevent excessive industry consolidation with sufficient flexibility to avoid keeping “zombie firms” in the system.

·         Post global financial crisis, a trend was seen emerging against globalization. In revival strategies, countries should lay the foundations for better balancing the international movement of goods and people with local prosperity and strategic local resilience in supply chains.

It is emphasized that “The global economic outlook for 2021 is highly dependent both on the evolution of the pandemic and on the effectiveness of the recovery strategies of governments”. It is critical to assimilate that the governments across the globe have deployed US$12trn to support households and businesses with emergency income and cash flows. This support shall begin to expire as the process of “unlocking” progresses. The recent economic recovery with the support of these support measures may not be a guidepost for the future economic trends. “Instead, the road towards economic recovery will be long, asymmetric and asynchronous across different economies”.

Where does India stand on the road to recovery?

1.    Amongst G-20 countries, India is a dismal and distant last in terms of percentage change in the skills of graduates during 2016-2020. Suadi Arab, China and South Korea share the podium positions in this area.

2.    India with 9.5% NPA level (2018 data) has the lowest score of soundness of banks amongst selected countries and ranks at the bottom (only better than South Africa) in terms of finance access to SME.

3.    India is placed close to the bottom in terms of share of global patent applications.

4.    Global business leaders see no significant improvement in the globalization of India’s value chain in future.

5.    India ranks much below the global average on workforce upgrade (law and social protection), investment in of skills and upgrading education curricula, digital access, rethink on competition and antitrust framework, creating markets of tomorrow, investment in R&D and innovation, diversity & inclusion,

6.    India is placed in the 9^th declie (bottom 20%) in terms of readiness for economic transformation post pandemic.

In view this gives a fair idea of areas where we are lacking and need to work hard. As an investor, this also allows me to upgrade my matrix of key factors that I focus on for identifying major risks and opportunities.