Global Risks 2013
Global Risks 2013
Special Report: Building National Resilience to Global Risks
Special Report: Building National Resilience to Global Risks
Global risks would meet with global responses in an ideal world, but the reality is that countries and their communities are on the frontline when it comes to systemic shocks and catastrophic events. In an increasingly interdependent and hyperconnected world, one nation’s failure to address a global risk can have a ripple effect on others. Resilience to global risks – incorporating the ability to withstand, adapt and recover from shocks – is, therefore, becoming more critical. This special report is organized around two axioms:
- Global risks are expressed at the national level.
- No country alone can prevent their occurrence.
As global risks can be expressed in many countries at the same time, they can spread through countries that share borders, have similar fundamentals or depend on the same critical systems. This special report is a pioneering effort to construct a diagnostic framework that applies the concept of “resilience” to assess national preparedness for global risks.
The proposed resilience framework would function as the “MRI” for national decision-makers to reveal underlying weaknesses in global risk readiness that may not be apparent via more traditional risk assessment methods. It is a prototype featuring potential qualitativexv and quantitative indicators produced by the World Economic Forum and by other research institutions. The aim is to refine and improve this framework by soliciting feedback from readers of this Special Report and then to introduce an interim finding that provides more detail on national resilience to global risks during summer 2013.
Types of Risk
To assess and evaluate a nation’s resilience to global risks requires defining such risks in their most appropriate organizational context. Although this report does not differentiate between the views of a public or private sector organization, it does underscore the importance of understanding the qualitative distinctions among the types of risks that organizations face.1 Harvard Business School Professors Robert Kaplan and Annette Mikes distinguish three types of risks:
- Preventable risks, such as breakdowns in processes and human error
- Strategic risks, which are undertaken voluntarily after weighing them against the potential rewards
- External risks, which are beyond one’s capacity to influence or control
In the case of business, Kaplan and Mikes suggest that the first two types can be approached through traditional risk management methods, focusing mostly on organizational culture and strict compliance with regulatory, industry or institutional directives. Given the exogenous nature of external risks, cultivating resilience is the preferred approach for this last type of risk.2
Another way of categorizing risk is to ask two questions: How predictable is its likelihood and potential impact, and how much do we know about how to deal with it? If we can predict it and we know a lot about it, we can come up with specific strategies to anticipate the risk, mitigate its effects and minimize losses. As Figure 21 shows, resilience is most important for risks that are difficult to predict and/or where there is little knowledge on how to handle such risks.3
The majority of the 50 global risks, viewed with a 10 year time horizon, that feature annually in the World Economic Forum’s Global Risks report fall under this categorization of risks. The 50 include risks which could manifest either suddenly or through gradual shifts. Although they are known risks, mapped and monitored by the Forum’s Risk Response Network, there are varying degrees of uncertainty regarding how and when they might manifest, especially in this interconnected world, and regarding what primary and secondary consequences they would have for countries.
Resilience: A Working Definition
In the wake of unprecedented disasters in recent years, “resilience” has become a popular buzzword across a wide range of disciplines, with each discipline attributing its own working definition to the term. A definition that has long been used in engineering4 is that resilience is the capacity for “bouncing back faster after stress, enduring greater stresses, and being disturbed less by a given amount of stress”.xvi This definition is commonly applied to objects, such as bridges or skyscrapers. However, most global risks are systemic in nature,xvii and a system – unlike an object – may show resilience not by returning exactly to its previous state, but instead by finding different ways to carry out essential functions; that is, by adapting.5 For a system, an additional definition of resilience is “maintaining system functionxviii in the event of disturbance” (see Figure 22).
The working definition of a resilient country for this report is, therefore, one that has the capability to 1) adapt to changing contexts, 2) withstand sudden shocks, and 3) recover to a desired equilibrium, either the previous one or a new one, while preserving the continuity of its operations.xix The three elements in this definition encompass both recoverability (the capacity for speedy recovery after a crisis) and adaptability (timely adaptation in response to a changing environment).
Resilience applies to different entities, ranging from communities to countries, but the critical point is to avoid examining any of them in isolation.6 We need to think of a country as a system that is comprised of smaller systems and a part of larger systems. A country’s resilience is affected by the resilience of those smaller and larger systems.7
What makes a system resilient?xx Unlike an object, such as the aforementioned bridge, systems are too complex for mathematical calculations to predict the stresses that might arise.8 Systems thinking provide a foundation to assess resilience through considering such components as the system’s robustness, redundancy, resourcefulness, response and/or recovery, all of which are defined in the following section.9
National Resilience: Five Subsystems and Five Components
This diagnostic tool is intended to measure the resilience of a country to global risks by treating it as a system composed of subsystems.xxi Several methods already exist to measure the resilience of such subsystems, mostly as they relate to the economy or ecosystem.xxii But what makes an economic system resilient is different from what makes an ecological system resilient (not only are the threats and risks different, but so are the interconnections with other systems). The aim of this report, therefore, is to present a prototype framework to measure a country’s overall resilience via a five-part initial framework, depicted in Figure 23. This framework considers the country as comprised of fivexxiii core subsystems:xxiv
- Economic subsystem: includes aspects such as the macroeconomic environment, goods and services market, financial market, labour market, sustainability and productivity. 10
- Environmental subsystem: includes aspects such as natural resources, urbanization and the ecological system.
- Governance subsystem: includes aspects such as institutions, government, leadership, policies and the rule of law.
- Infrastructure subsystem: includes aspects such as critical infrastructure (namely communications, energy, transport, water and health). 11
- Social subsystem: includes aspects such as human capital, health, the community and the individual.
As depicted in Figure 23, each of the five subsystems is assessed further using five components of resilience: 1) robustness, 2) redundancy, 3) resourcefulness, 4) response and 5) recovery.xxv These five components can be categorized further into two types: resilience characteristics (robustness, redundancy and resourcefulness) and resilience performance (response and recovery). The measurement of these components presents a significant research challenge, as there are many attributes underpinning each of them, and these attributes are overlapping and complementary (Appendix 3 identifies potential qualitative and quantitative indicatorsxxvi).
This report has adopted one approach from the World Economic Forum’s annual Global Competitiveness Report (GCR), which measures the microeconomic and macroeconomic foundations of national competitiveness.xxvii Similar to the concept of national resilience, the measurement of national competitiveness uses data from both international sources as well as from the Forum’s annual Executive Opinion Survey (EOS) to capture concepts that require a more qualitative assessment, or for which internationally comparable statistical data are not readily available. For the purposes of this inaugural effort, we started the analysis by using data from EOS to assess components of national resilience.xxviii
Since 2011, the Global Competitiveness Report has included a prototype Sustainability-Adjusted Global Competitiveness Index (GCI).xxix This not only measures the propensity to prosper and grow but also integrates the idea of “quality growth”, taking into account environmental stewardship and social sustainability. The quality of growth is an important aspect for resilience and this will be addressed as we develop the framework further.
Resilience Characteristics (Robustness, Redundancy and Resourcefulness)
The following three components of resilience are used to describe a country’s state of resilience. These components should be designed into a system and, as such, will enable assessments of a country’s inherent resilience capabilities.12 Relevant perception data and potential hard data for the three resilience characteristics are available in Appendix 3.
Robustness incorporates the concept of reliability and refers to the ability to absorb and withstand disturbances and crises.13 The assumptions underlying this component of resilience are that: 1) if fail-safes and firewalls are designed into a nation’s critical networks,xxx and 2) if that nation’s decision-making chains of command become more modular in response to changing circumstances, then potential damage to one part of a country is less likely to spread far and wide.
Example of Attributes
- Monitoring system health: Regularly monitoring and assessing the quality of the subsystem ensures its reliability.
- Modularity: Mechanisms designed to prevent unexpected shocks in one part of a system from spreading to other parts of a system can localize their impact, as happened with the contagion from investment banking to retail banking during the 2007-2008 financial crisis.
- Adaptive decision-making models: Networked managerial structures can allow an organization to become more or less centralized depending on circumstances, such as when branch offices of the Japanese retailer Lawson’s continued operating through the serious disruptions of the Great East Japan Earthquake in 2011.14 These measures can include having in place the right investment and incentive structures to overcome competing interests.
Redundancy involves having excess capacity and back-up systems, which enable the maintenance of core functionality in the event of disturbances.15 This component assumes that a country will be less likely to experience a collapse in the wake of stresses or failures of some of its infrastructure, if the design of that country’s critical infrastructure and institutions incorporates a diversity of overlapping methods, policies, strategies or services to accomplish objects and fulfil purposes.
Examples of Attributes
- Redundancy of critical infrastructure: Designing replication of modules which are not strictly necessary to maintaining core function day to day, but are necessary to maintaining core function in the event of crises.
- Diversity of solutions and strategy: Promoting diversity of mechanisms for a given function. Balancing diversity with efficiency and redundancy will enable communities and countries to cope and adapt better than those that have none.
Resourcefulness means the ability to adapt to crises, respond flexibly and – when possible – transform a negative impact into a positive.16 For a system to be adaptive means that it has inherent flexibility, which is crucial to enabling the ability to influence of resilience.17 The assumption underlying this component of resilience is that if industries and communities can build trust within their networks and are able to self-organize, then they are more likely to spontaneously react and discover solutions to resolve unanticipated challenges when larger country-level institutions and governance systems are challenged or fail.
Example of Attributes
- Capacity for self-organization:18 This includes factors such as the extent of social and human capital, the relationship between social networks and state, and the existence of institutions that enable face-to-face networking. These factors are critical in circumstances such as failures of government institutions when communities need to self-organize and continue to deliver essential public services.
- Creativity and innovation: In countries and industries, the ability to innovate is linked to the availability of spare resources and the rigidity of boundaries between disciplines, organizations and social groups.19
Resilience Performance (Response and Recovery)
These two components of resilience describe how a system performs in the event of crises. Response and recovery are dependent on risk, event and time. These components will provide us with the ability to compare systems and feed the measurements and results to calibrate the resilience characteristics. As we are dealing with global risks, the ability to adapt the framework is also very important.
Response means the ability to mobilize quickly in the face of crises.20 This component of resilience assesses whether a nation has good methods for gathering relevant information from all parts of society and communicating the relevant data and information to others, as well as the ability for decision-makers to recognize emerging issues quickly.
Example of Attributes
- Communication: Effective communication and trust in the information conveyed increase the likelihood that, in the event of a crisis, stakeholders are able to disseminate and share information quickly, and to ensure cooperation and quick response from the audience.
- Inclusive participation: Inclusive participation among public sector, private sector and civil society stakeholders can build a shared understanding of the issues underpinning global risks in local contexts, reduce the possibility of important interdependencies being overlooked,21 and strengthen trust among participants.22
Recovery means the ability to regain a degree of normality after a crisis or event, including the ability of a system to be flexible and adaptable and to evolve to deal with the new or changed circumstances after the manifestation of a risk.23xxxi This component of resilience assesses the nation’s capacities and strategies for feeding information into public policies and business strategies, and the ability for decision-makers to take action to adapt to changing circumstances.
Example of Attributes
- Active “horizon scanning”: Critical to this attribute are multistakeholder processes tasked with uncovering gaps in existing knowledge and commissioning research to fill those gaps.24xxxii
- Responsive regulatory feedback mechanisms: Systems to translate new information from horizon-scanning activities into action – for example, defining “automatic policy adjustments triggers” – can clarify circumstances in which policies must be reassessed.25
As an example of the overlapping and complementary nature of these attributes, inclusive participation is listed as a key attribute of response, but it is also vital in other areas such as recovery and resourcefulness. Also inherent in all resilience characteristics, though referenced above only in the attribute of adaptive decision-making models, are investment and incentive structures and design requirements to overcome collective action problems and competing interests. There are many individual stakeholders who would benefit from greater shared resilience but currently lack either the incentive or feel too pressed for time and resources to take the necessary actions.
Qualitative Assessment of National Resilience
As a first step towards developing the diagnostic framework, we have begun to explore perception survey data in assessing resilience. This year, the World Economic Forum introduced questions about resilience into two of its global surveys: 1) the Global Risks Perception Survey (GRPS) measured the perceptions of the Forum’s expert network about their nation’sxxxiii resilience to global risks; and 2) the Executive Opinion Survey (EOS) introduced a question to assess a government’s effectiveness in managing risks in 2012. 26
The qualitative assessment will be coupled with a quantitative one that includes statistical data by country.xxxiv This will result in a rating that combines perception data and objective data (i.e. qualitative and quantitative data), and that enables an analysis of patterns among resilience, risk management, competitiveness and sustainability (see Appendix 3 for examples). Our working hypothesis is that if leaders wish to assess the potential support for improving their country’s resilience, then perception surveys are a good place to start.
Global Risks Perception Survey (GRPS): Resilience Question
More than 1,000 respondents to the GRPSxxxv were asked, per risk and regarding their country of expertise:
“If this risk materialized in your country* of expertise, what is the ability of the country to adapt and/or recover from the impact?”
(*Your country refers to the country you selected in the respondent’s information page.)
This question enables us to understand respondents’ perceptions of the ability of a country to adapt and/or recover from the impact of global risks. In the survey, respondents assess this ability against all five categories of global risks: economic, environmental, geopolitical, societal and technological. Assuming, economic global risks will highly impact the country’s economic subsystem, and environmental global risks will highly impact the country’s environmental subsystem (see Figure 24).xxxvi This section focuses on analyzing how these country subsystems are expected to recover after a crisis caused by economic and environmental global risks.
Data collected from the current GRPS gave us sufficient responses for the analysis of 10 countries: Brazil, China, Germany, India, Italy, Japan, Switzerland, Russia, the United Kingdom and the United States.27xxxvii Figure 25xxxviii illustrates these countries’ ability to recover from and adapt to economic and environmental risks respectively.
Switzerland was perceived as having the highest ability to adapt and/or recover from economic and environmental global risks; both Italy and India were rated relatively low. Japan was seen to have a comparable ability to Switzerland to adapt and recover from environmental risks, but lower in terms of economic risks. This may be a reflection of frustration about Japan’s economic position and the risk of recession.
The question from the GRPS is one indicator for the response component of the proposed resilience framework. It represents the way respondents perceive their country’s ability to adapt to and/or recover from certain types of global risks. In building a framework for National Resilience, further analysis will provide insights into areas needing greater investment and resources to build resilience.
Executive Opinion Survey: Risk Management Effectiveness Question
More than 14,000 respondents to the Executive Opinion Survey (EOS)xxxix were asked:
“How would you assess your national government’s overall risk management effectiveness of monitoring, preparing for, responding to and mitigating against major global risks (e.g., financial crisis, natural disasters, climate change, pandemics, etc.)? (1 = Not effective in managing major global risks; 7 = Effective in managing major global risks)”
Research28 has linked the ability to respond effectively and efficiently during a crisis with good risk management, which cuts across all five subsystems. The question above from the EOS collected perceptions from business managers about their government’s risk-management effectiveness. Therefore, for the purpose of this analysis, we focus on the governance subsystem and response component of resilience, as illustrated in Figure 26.
Figure 27 demonstrates that there may be a link between a government’s risk management effectiveness and that country’s overall competitiveness. As observed, a country with high risk-management effectiveness appears to have scored highly in competitiveness, and a country with low risk-management effectiveness appears to have scored low in competitiveness (except Japan). From further analysis of the EOS question on the 10 countries from the Global Risks Survey,xl we can see that governments in Germany, Switzerland and the United Kingdom are perceived by business leaders to have comparatively high risk-management effectiveness. While India and Italy scored relatively lower on the GRPS output, Russia was seen as having the least effective risk management based on the EOS responses. In addition, although in Figure 25 Japan was seen to have greater ability to recover from environmental risks, its government’s risk-management effectiveness was rated poorly in comparison to other countries.
Additional analysis revealed other potential indicators that may be linked to risk management, which will require further scrutiny. Correlation analysis showed there were moderate relationships between the government’s risk management effectiveness and the following seven indicators from the EOS.xli (Further details are available in Appendix 3).
- Politicians’ ability to govern
- Business-government relations
- Reform implementation efficiency
- Public trust of politicians
- Wastefulness of government spending
- Measures to combat corruption and bribery
- Government provision of services for improved business performance
The most related questions seem to be intuitively what one might expect. Of the seven indicators, the most highly correlated question is that on leadership, i.e. a politician’s ability to govern. This corroborates the message about leadership in risk management at the country level of the Global Risks 2012 report special feature on The Great East Japan Earthquake. It also underscores the recommendation from the Global Risks 2007 report to establish the role of National Risk Officers.xlii
Other interesting relationships highlighted above were with business-government relations and government provision of services for improved business performance. These relationships require further analysis but they may indicate the ability to share information effectively to improve monitoring and risk preparedness. By assessing government wastefulness, reform-process efficiency and corruption, we may be able to deduce that effective risk management practices are likely to be transparent and adaptive.
The analysis in this subsection is an initial indication for how we intend to proceed with building the National Resilience Rating. It is also a step towards understanding how questions from the GRPS and the EOS may identify indicators for the different components of resilience, which will be further complemented with quantitative data in the interim report in summer 2013.
Next Steps Towards a National Resilience Rating
As early as 2007, the Global Risks report suggested the creation of the role of Country Risk Officer. The national resilience rating proposed in this Special Report would enable such officers and other decision-makers to benchmark and track a nation’s level of resilience, understand the balance that needs to be struck between resilience and other goals, and identify areas that may require further investment.
For example, the national resilience rating will also help decision-makers to think about resilience in supply chains.xliii According to the World Economic Forum’s Dynamic Resilience in Supply Chain project, this is rising to the top of the political and executive agendas in the wake of recent major disruptions, but there remains a reluctance to invest in resilience due to lack of good data (see Supply Chain Risk Initiative below).
There is also a lack of knowledge about practical actions that leaders can take to build resilience. To tackle this shortfall, the Risk Response Network has built its Resilience Practices Exchange (RPE)xliv using the latest social network technology, which will build and share knowledge about effective practices online (see Resilience Practices Exchange (RPE) below).
More broadly, the Risk Response Network’s goal is to build a common discussion framework in the global community, nurturing a culture of risk and resilience awareness across stakeholder groups. We invite readers of this Special Report to contact us at http://www.weforum.org/globalrisks2013 or at [email protected] with suggestions on how to approach measuring national resilience.
Supply Chain Risk Initiative
Launched by the World Economic Forum in May 2011, the Supply Chain Risk Initiative (SCRI) addresses the need for a better risk-based approach for safeguarding global supply chains and published the report “New Models for Addressing Supply Chain and Transport Risk” in 2012. US Secretary of Homeland Security Janet Napolitano also joined the call for increased global dialogue by launching at the Annual Meeting 2012 in Davos-Klosters the first US Strategy for Global Supply Chain Security.
Phase I of the work brought agreement on priorities and recommendations for action (the graph shows risk management priorities ranked by survey respondents on a scale of improvement needed and future importance):
- Improve international and interagency compatibility of resilience standards and programmes
- More explicitly assess supply chain and transport risks as part of procurement, management and governance processes
- Develop trusted networks of suppliers, customers, competitors and government focused on risk management
- Improve network risk visibility, through two-way information sharing and collaborative development of standardized risk assessment and quantification tools
- Improve pre- and post-event communication on systemic disruptions and balance security and facilitation to bring a more balanced public discussion
Phase IIxlv of the Supply Chain Risk Initiative entailed regional workshop across Asia, Europe and North America which brought together supply chain and risk experts from across government and industry to:
- Deepen collective understanding of the risk and threat landscape
- Work towards a blueprint for a resilient global supply chain
- Improve transparency across supply chains.
Addressing the vulnerabilities identified in Phase I (e.g. reliance on oil and weak information flow), Phase II focused on shared efforts to build resilience. Resilience has been the core focus, as risk assessment goes hand in hand with resilience it has implications to the strategy of governments and organizations. The Forum identified measures such as improving information sharing between governments and businesses, harmonizing legislative standards and building a common risk assessment framework for building resilient supply chains.
Development of risk assessment framework is critical to improve supply chains adaptability to build resilience. The core components are data and information sharing for improved visibility along the supply chain.
Resilience Practices Exchange (RPE)
The Resilience Practices Exchange (RPE) is an initiative of the World Economic Forum to share insights and ideas that improve national and organizational resilience to global risks.
By providing an online, interactive repository of ideas, the RPE aims to improve resilience to global risks within organizations, industries and countries, as well as across economic, environmental, geopolitical, societal and technological areas. A digital platform enables a diverse community of experts to contribute, discuss and explore various existing practices as a basis for further exchange, evaluation and innovation (Figure 28).
The aim is to develop a process that takes a suggested practice through a community discussion phase and then on to a process of evaluation and innovation to improve that practice. This is limited not only to the online exchange but can also involve in-person meetings, virtual meetings, workshops and other forms of engagement with the Forum’s Risk Response Network.
The RPE is a secure platform currently accessible only by members of the Forum’s Risk Response Network and Network of Global Agenda Councils. The RPE may be accessed through a secure and trusted online platform of the World Economic Forum.xlvi
Examples of Resilience Building Practices
- The G20 establishing the cross-border Financial Stability Board (FSB): A regulatory body to coordinate financial services regulators and international standard-setting bodies across borders and organizations.
- The Indonesian government response to the 2004 Tsunami in Aceh Province, Indonesia: After the 2004 Indian Ocean tsunami and earthquake, the Government of Indonesia set up a pragmatic and region-based agency to effectively lead the relief efforts in the province of Aceh.
- Governmental cyber risk information-sharing partnerships: Governments are setting up agencies to share information with international partners, including overseas governments, agencies and businesses to provide an international, informed response to cyber risks.
Please contact [email protected] for further information.
One Year On Resilience Practices
Practices to Improve Resilience from the 2012 Risk Cases
The World Economic Forum’s Risk Response Network, in collaboration with PwC, has revisited the three cases in the Global Risks 2012 report – Seeds of Dystopia, How Safe are Our Safeguards? and The Dark Side of Connectivity – to analyse practices to improve resilience against the risks highlighted in each case, available on our interactive website.
- Seeds of Dystopia (with further collaboration from Eurasia Group): As fiscal, ageing and employment trends combine to threaten the emergence of a new class of fragile states, the private sector, civil society, local and national governments, as well as multilateral organizations need to work in concert to create a modern and sustainable social contract. The resilience practices highlighted here are engaging multiple stakeholders in solutions based on holistic insights; continuous monitoring of trends to enable assumptions to be revisited; promoting open and inclusive attitudes towards immigrants; and embracing innovative financing models.
- How Safe are Our Safeguards? Jurisdictional safeguards against cross-border risks can quickly become outdated in an interdependent and rapidly changing environment. Practices that improve resilience can be found by looking for common threads in two very different areas – financial system stability and pandemic influenza. The resilience-enhancing practices highlighted are: revisiting underlying assumptions related to safeguards in place; introducing forward-looking elements such as stress testing and scenario planning into safeguard development; leveraging incentives; and promoting cross-border collaboration among governments and other organizations.
- The Dark Side of Connectivity: In an increasingly hyperconnected world, the impacts of our successes and mistakes are significantly magnified. Resilience of cyberspace could be strengthened by treating cyber security as a board-level issue within organizations; establishing mechanisms for governments and private companies to share information in a trusted space, and for governments to collaborate in emergency cyber-attack situations; and designing devices and systems that incorporate as much protection as possible against inevitable human error.
For the full case responses, please see Resilience Practices: One-Year Follow-Up Analysis Of Global Risks 2012 Cases.
Figure 21: Resilience is Most Applicable to Unpredictable Risks with Little Knowledge About Effective Measures
Source: Adapted from Comfort, L. K., Boin, A., & Demchak, C. C. The Rise of Resilience, in Designing Resilience: Preparing for extreme events. Pittsburg: University of Pittsburgh Press, 2010.
Source: Adapted from Martin-Breen, P. & Anderies, J.M. “Resilience: A Literature Review”. Rockefeller Foundation, http://www.rockefellerfoundation.org/news/publications/resilience-literature-review, 2011.
Source: World Economic Forum
Source: World Economic Forum
Figure 26: Govt's Risk Mgmt Effectiveness may be Potential Variable for Response Comp't of Governance Subsystem
Source: World Economic Forum