War and water haunts World Economic Forum in Davos

As world business, economic and political leaders gather for the World Economic Forum in Davos, the threat of sovereign state conflict will top the agenda in terms of likelihood. The risk of possible water crises will also loom large.

Water crises and conflict top the WEF risk-list. Above, irrigation water runs along a dried-up ditch between rice fields in California. Jae C. Hong / AP Photo

Global political, economic and business leaders are more worried about wars between sovereign states than at any time over the past 10 years, according to the World Economic Forum (WEF) as it prepares to hold its 44th annual four-day meeting in Davos, Switzerland, from today.

The annual Global Risks report, published by the WEF ahead of the Davos gathering, finds "the biggest threat to the stability of the world in the next 10 years comes from the risk of international conflict".

Conflicts between states with wider regional repercussions are judged more worrying — and more likely — by 900 world thought leaders polled by WEF than extreme weather events, failure of national governance, state collapse or crisis, or high structural unemployment.

However, in terms of impact, the WEF experts rank water crises as the most serious problem facing the world, more likely than the spread of an infectious epidemic, weapons of mass destruction, or climate change.

“2015 stands out as a year when geopolitical risks, having been largely absent from the landscape of leading risks for the past half-decade, returns to the fore. With geopolitics increasingly influencing the global economy, these risks account for three of the five most likely, and two of the most potentially impactful, risks in 2015,” the reports says.

“Three risks stand out as having intensified the most since 2014 in terms of likelihood and impact. These are interstate conflict with regional consequences, weapons of mass destruction and terrorist attacks,” it adds.

“Twenty-five years after the fall of the Berlin Wall, the world again faces the risk of major conflict between states,” says Margareta Drzeniek-Hanouz, the WEF’s lead economist. “However, today the means to wage such conflict, whether through cyberattack, competition for resources or sanctions and other economic tools, is broader than ever. Addressing all these possible triggers and seeking to return the world to a path of partnership, rather than competition, should be a priority for leaders as we enter 2015.”

The report also highlights the presence of more environmental risks among the top risks than economic ones. The top global risk as ranked by impact was water crises, then infectious diseases.

With almost 2 billion of Earth’s 7 billion people lacking access to clean drinking water, water was also eighth on the likelihood list.

The rise of environmental risks comes as a result of a marked increase in experts’ negative assessment of existing preparations to cope with challenges such as extreme weather and climate change, rather than a diminution of fears over chronic economic risks, the WEF says.

“Many observers believe that the world is entering a new era of strategic competition among global powers. Disillusion about globalisation is leading to more self-interested foreign policies in combination with a rise in national sentiment fuelled in part by the social pressures.

“Growing nationalism is evident around the world: in Russia, as seen in the Crimea crisis; in India, with the rising popularity of nationalist politicians; and in Europe, with the rise of far-right, nationalistic and Eurosceptic parties in a number of countries,” the WEF says.

Statistical evidence for the report was gathered between July and September last year, before the oil price began to fall dramatically. But the report includes an interview with Shanta Devarajan, the chief economist for the Middle East and North Africa at the World Bank.

"On the one hand, with the oil exporters, many of them prepared their budgets for the coming fiscal year based on an oil price of US$80 or $85 a barrel. That meant that now that they are getting less revenue than US$85, if they want to keep the expenditures at the same level, they are going to run a bigger deficit," Mr Devarajan says.

“So, some of the wealthier [Arabian] Gulf countries have large reserves — Saudi Arabia has reserves of $900 billion — so they can actually run a deficit, which they are running to the tune of about 6 per cent of GDP.

“But I think some of the other countries, particularly the countries with fewer reserves, like Algeria and so on, will have to make a decision: whether they can cut expenditures or continue to borrow to finance the deficit,” he adds. Mr Devarajan says he sees energy subsidy cuts ahead. “Fuel subsidies sometimes make up about 10 per cent of GDP in these countries.

“They will get reduced, as we have already seen in Kuwait, with the diesel subsidies. We’ve seen it in the UAE, with electricity subsidies,” he says.

This is one way of adjusting to the lower oil price, and since the price of oil has come down, the impact on the economy will be that much less.

“But I think there has to be some kind of expenditure rationalisation. In Algeria, I gather, the feeling is that they do not want to cut the investment budget but they might cut the current budget — that is the administrative budget — in order to accommodate the decline in oil prices,” he adds.

Growing global inequality is also likely to feature as a topic of conversation at the event, with one UK-based charity describing the gap as “staggering”.

The richest 1 per cent of people in the world will have a majority of the wealth on the planet next year, according to the charity’s US unit, Oxfam America. The most affluents’ share of global wealth climbed to 48 per cent in 2014, compared with 44 per cent in 2009 and will probably eclipse 50 per cent in 2016, according to a new issue brief the group released yesterday.

“The scale of global inequality is quite simply staggering,” Winnie Byanyima, a co-chairwoman of the events in Davos and Oxfam’s executive director, told Bloomberg. “Despite the issues shooting up the global agenda, the gap between the richest and the rest is widening fast.”

The Oxfam study uses data from Credit Suisse’s global wealth report and the Forbes billionaires list. One-fifth of global billionaires “have interests in the financial and insurance sectors” and saw their cash wealth climb 11 per cent in the past year, the Oxfam brief states. Pharmaceutical and health-care billionaires saw a 47 per cent bump in collective worth.

“Oxfam is concerned that the lobbying power of these sectors is a major barrier in the way of reforming the global tax system,” the release states.

The group proposes a crackdown on corporate and individual tax dodging, more investment in free public services, and a shift in taxes toward capital and wealth to help fix the problem.

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