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Assessing risk: business in global disorder

    International Dialogue
    • London
    • 4 March 2016

          The starting premise at this Aspen Dialogue session was that assessing economic, political, and social risks is by definition a hugely difficult task, and that moreover an element of risk is inevitable in market systems, given that they intrinsically hinge on opportunities for profit and innovation. It was noted, however, that the world economy is going through a very volatile phase. The increasing global risk for businesses was seen as linked to the growing complexity of the economic system (spanning financial instruments to supply chains), the emergence of new actors, and rapid technological change, which often introduces highly unstable dynamics and produces almost entirely unforeseen effects.

          National political institutions, as well as multilateral organizations of a technical nature, were characterized as struggling to keep pace with the changes, having thus lost a large part of their effectiveness and legitimacy in the eyes of citizens, who are both voters and consumers. Indeed, the interplay taking place – not just in the more advanced and open democracies – between economic variables and political choices has itself become a source of great uncertainty, instability, and hence further risk.

          It was observed that, in Europe, such phenomena have translated into widespread mistrust of the integration process, but also of separatist and protest movements at the level of individual member states. This has resulted in an increasingly nationalist and populist debate – and therefore one less inclined to cooperation even at an intergovernmental level – in the face of multiple challenges (ranging from competitiveness, the environment and energy, to migration, terrorism, and the future of the Middle East), which actually call for close coordination and the pooling of substantial resources. It was suggested that the discussions underway regarding a possible “Brexit”, or, at any rate, over the conditions that would enable Britain to stay in the EU, is a specific instance in a wider backdrop of structural crisis. The participants stressed that there are concrete options for improving the efficiency of the European Union, but pursuing them requires a collective effort and farsighted vision of shared and national interests. To that end, it was felt that the continent needs a strong, courageous, and creative leadership, which has thus far struggled to emerge, while the central role played by Germany remains controversial, especially due to the way in which Berlin has chosen to interpret the protection of the eurozone.

          Three factors were singled out as having contributed to creating an unfavorable climate for productive investment and consumption, namely: uncertainty over commodity prices (especially for energy); widespread lack of confidence in political and institutional dynamics (including electoral cycles that are particularly unstable and decision-making processes in Brussels); and a banking system that is considered unreliable. To counter this climate, it was seen as essential at a time of great volatility to better clarify (and better communicate and explain to the public) the economic “fundamentals”, and to promote forms of “good risk-taking” while at the same time reducing systemic risk on the basis of lessons learned.

          In the Middle East, crises and centripetal forces were viewed as having combined to undermine the continued survival of many state frameworks, with spillover effects in surrounding regions, starting with Europe. It was observed that the unresolved core issue which is producing serious – and violent – regional instability is the quality of governance. Indeed, it was proposed that without a gradual improvement in this area, only palliative measures can be put in place to contain or slow down crises already unfolding. Looking beyond the various past errors or misunderstandings by external players, it was suggested that true lasting solutions will need to be rooted in local realities. The problem, however, is that the American – and also partly European – decision to allow more leeway for regional actors than in the past has sparked intense competition between the major states that has yet to settle into a peaceful and in some measure orderly arrangement, with the linchpins of any potential new equilibrium being Saudi Arabia, Iran, Turkey, and to a certain extent Egypt. While it was conceded that some geopolitical solutions could emerge despite the many obstacles (starting with the lingering disaster in Syria), the capacity of governments to respond in a credible manner over the coming years to major social challenges (particularly demographic pressures) was viewed as a decisive factor.

          On the Asian front, China was described as having recently become a systemic risk factor, after years of serving primarily as the real engine of global growth and as the agent of a global pivot to the Pacific and the major emerging markets. It was felt that what is being witnessed is, in part, China’s anticipated shift in focus towards the internal market and a greater emphasis on the standard of living of its citizens (including the welfare state, environment, infrastructure, and so on), but partly also a delicate institutional and political transition, the likely outcomes of which remain very uncertain. The international effects of this were envisaged as undoubtedly massive, given the size of the country and the heavy dependence on China that many economies have developed. It was felt, in any case, that the People’s Republic has not yet achieved a level of influence commensurate with its production potential in areas such as foreign direct investment, meaning that the global trade system can expect to experience further shocks, even if the current readjustment phase is handled judiciously and constructively.

          Another focus of discussion was the impact of new technologies, especially in the fields of digitization, sensors, and portable devices, that are today being very rapidly transformed into everyday useable products. The key challenge highlighted in this regard was that of creating incentives for continued innovation, but also regulating the effects of new technologies (such as on privacy, and on the cybersecurity of businesses and institutions). In particular, it was stressed that the democratization of digital access should be tempered with constant efforts to improve quality of life and reduce inequalities.

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