Davos Forum: Beware Tail-Risk and Income Disparity

Income disparity and major systematic financial failure are the greatest global risks in 2012, according to the World Economic Forum.  

(October 15, 2012) – According to the Global Risks 2012 report from the World Economic Forum, economic issues pose a larger threat to the world’s well-being than any other class of risks. 

The group, made famous by its annual and highly exclusive conference in Davos, surveyed 469 experts from industry, government, civil society and academia on 50 potential global risks across five categories: economic, environmental, geopolitical, societal, and technological. 

Worryingly, the opening chapter of the report is titled, “Seeds of Dystopia.” 

The group’s analysis contended that the interplay among fiscal, demographic and societal 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.” 

The report charted each risk within the five categories by likelihood of occurring and the potential impact if it should occur. 

The most likely problems to manifest in the coming decade, according to the survey: first, severe income disparity, and second, chronic fiscal imbalances (defined as “failure to redress excessive government debt obligations“). Unfortunately, respondents also said that both events come with grave outcomes and correlations to other global risks. 

Chronic fiscal imbalances, for one, are most highly correlated with major systematic financial failure, and also shows strong links with global governance failure, mismanagement of population ageing, and risks relating to the collapse of governments and international trade. 

“General expectations about the potential of the world economy may not be met due to the interplay between fiscal imbalances and demographic trends,” the report’s authors wrote. “The resulting disappointment is amplified by a growing sense that wealth and power are becoming more entrenched in the hands of political and financial elites. Though rapid urbanization offers economies of scale if infrastructure keeps pace, it also makes the gulf in living standards between the rich and the poor more immediately visible to more people—a trend which is further amplified by the Internet.” 

Major systematic financial failure rated very highly on both the likelihood and impact axes, and is an example—or consequence of—the kind of left-tail risks keeping institutional investors up at night

Based on the experts polled by the World Economic Forum, which included top climatologists, archbishops, accountants, and World Bank Economists, more so than any other category, “economic risks play a particularly significant role in defining the level of resilience or instability within the global risk system as a whole.”