World Economic Forum offers prescription for risk mitigation

Supply chains may be wrapping themselves around the world and the global economy may be expanding faster than ever, but it all remains increasingly vulnerable to disruption, says the World Economic Forum in its recently released "Global Risks 2007" report.

The report identifies 23 core global risks that could shake the world's economy—and global supply chains along with it. These risks are divided into five groupings: economic, environmental, geopolitical, societal, and technological.

Despite a growing awareness worldwide of the consequences of the 23 risks, none of them has diminished since 2006, according to the report's consensus of experts. Particularly worrisome are the economic markets' failure to reflect the worsening geopolitical conditions of the past year. The forum advises businesses to take better stock of underlying dynamics when managing their risk portfolios. For example, don't just analyze a supplier's reliability and quality; also be aware of whether it's located in a country where war might break out.

The report also emphasizes the interconnection of global risks. For instance, whether or not Iran builds a nuclear weapon may seem to have little to do with transportation costs. But weapons proliferation could lead to more instability in the Middle East, which does have a very strong connection to oil prices.

"Global Risks 2007" suggests that governments and companies adopt two innovations that could improve risk mitigation: country risk officers and coalitions focused on specific risks. Governments would appoint country risk officers to manage a portfolio of risk across disparate interests, set country-specific prioritization of risk, and encourage proactive steps for managing global risks. These officials would be well positioned to see the interconnections between risks and respond with mitigation efforts that could address more than one risk at the same time.

The second suggestion involves the formation of coalitions of interested states and companies that would work toward creating global policies for specific risks. For example, a coalition focusing on mitigating oil price shocks might work together to promote energy-efficient products and clean energy sources, reduce legal and political concerns around emissions trading, and responsibly develop nuclear energy and coal-fired electric plants.

While these suggestions are intriguing, the report is frustratingly vague— particularly in regard to the role of the business community. The report also fails to fully acknowledge the roadblocks to the real-world success of these two ideas.

Yet "Global Risks 2007" is correct in its contention that the active engagement of all sectors of the international community is crucial for effectively dealing with global risks. As the report states, "No one group has the ability to effectively mitigate most global risks. Interdependency implies not just common vulnerability, but a shared responsibility to act."

[Source: "Global Risks 2007: A Global Risk Network Report," World Economic Forum, January 2007: www.weforum.org/pdf/csi/global_risks_2007.pdf.]