Posted by: Nicholas Davis | March 2, 2011

From Global Risks to Emerging Realities

Here’s a challenge: How do we sensibly connect the kind of macro analysis that is done in reports such as the World Economic Forum’s Global Risks publications with the emergence of actual risks such as the current upheaval in the MENA region?

This was the key issue for a speech I gave this morning at a Financial Times conference in Frankfurt.  The theme of the event was “Emerging Risks for Cross-Border Business” and my keynote was titled “From Global Risks to Emerging Risks” (let me know if you’d like the presentation).

The problem is this: the people who care most about global risks are those who are directly exposed to them in the form of potential opportunities and costs. Yet it is a non-trivial task to move from an high-level awareness of the landscape of global risks and key interconnections to actually creating and embedding strategies  that allow an organization to take advantage of this knowledge. What forms of analysis and what kinds of thinking are required for people interested in understanding how such macro factors might occur and change aspects of the business environment?

I don’t have all the answers, of course, but given that our risks report this year spoke directly to many of the much-discussed factors that are seen as contributing to the current situation in the MENA region (economic disparities, demographics and youth unemployment, corruption, food prices etc), I wanted to use the ongoing revolts and accompanying political and social uncertainties as an example of how global risks, many of which are chronic, actually combine and interact to create acute events of intense relevance to the entire world. Here are some brief thoughts:

A) Use a systems-based, complexity-aware approach to assessing risks at a deeper level: abandon a “linear” approach to trying to understand and predict events based on a combination of prevailing conditions and individual triggers. In the MENA case, many reports have spoken to youth unemployment, food prices, inequality and corruption as important, but ignore the fact that these factors have existed for many years – indeed, the Tunisian food riots in 1984 combined the exact same concerns and factors yet resulted differently. The trigger represented by Mohamed Bouazizi’s self-immolation may ignore the fact that such an act was not (according to people I’ve spoken to who know the region much better than I do) in itself an uncommon act.

Instead, two other questions might be useful: 1) “What has changed about the prevailing conditions?” and 2) “How did interactions between factors and responses by other actors (e.g. the Government, media, political factions, the military) influence the outcome?”. In my opinion, the conditions of the financial crisis, the ability to operate proxy servers around censorship,  the impact of the wikileaks revelations and the growing political expectations of a “lost generation” of youth are all important recent shifts in the social environment. To the second question, the reactions of both Tunisian and Egyptian governments in trying to block access to this and other kinds of information, as well as the reaction of the Egyptian military, are critical to our understanding of how things are playing out.

In sum, don’t be tempted to isolate individual causes and ascribe blame to a single part of the system. It is more useful to look at how the system has changed and how it interacts to throw out risks of this type.

B) Think in terms of managing uncertainty instead of managing risk. This means that, in addition to thinking in system terms, you should think in scenario terms, consciously looking for where uncertainty is present and as far as possible challenging your own and other assumptions about “the way things work”. When dealing with true, Knightian uncertainty, failures of imagination are more dangerous than failures of data. Much of what we should be truly concerned about is unmeasurable and hasn’t happened before in precisely the way that it will in the future. Therefore we need to search for different perspectives, outlier data points and challenging ideas in order to even come close to encompassing important and useful scenarios in our thinking. This is precisely why the Forum uses scenario thinking.

C) Think about “the day after tomorrow”. It is tempting to consider “what’s next” and to hypothesize on a variety of first-order impacts. However it is often having awareness of potential second-order impacts that both matter and convey competitive advantage to stakeholders, particularly when events move so rapidly that there is no time to react to the initial impact directly before the situation has changed again. In the case of the MENA region, we are still waiting to see what happens in Tunisia and Egypt – if the “revolt” will really become a “revolution” – and wondering what might happen to Gaddhafi is at this stage not as useful as considering the scenarios for investment that could evolve under a new government.

D) Try and be friends with everyone. With downward pressure (in my opinion) on the left-end of Bremmer’s “J-Curve” that is destabilizing (and causing risk premia to rise for) autocratic and authoritarian regimes, it is essential that political risk management involve a broadening of stakeholder engagement, both in terms of ex ante information flow as well as ex post preparedness . Notably, this will not only include identifiable leaders of opposition groups, but also the often-unidentifiable groups that exist informally. Being friends with a Facebook group might be a particularly useful strategy for understanding and communicating with a new generation of influencers in the region. While you’ll still only get access to a small proportion of the population, it might be the population that has a lot of decision-making power when push comes to shove.

Finally, I recognize that all of these are “easier said than done” – but hopefully as we continue thinking about these we can develop better and better systems for moving from understanding the conceptual risks to managing the real risks that matter. And from this morning’s discussion, there are a lot of people interested in and committed to doing just that.

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Responses

  1. Nicolas, you are correct. The cuasal vectors (unemployment etc.) were all present, but are fairly useless predictive measures. What is more important is a way of tracking tension in the system. That tension which builds to critical instability is best measured by peoples perception of “thriving”. At low enough threshold, the likelihood of revolt increases exponentially. ie. the system has an increase in critical instability which could lead to a large “log normal” scale event and ultimately regime change in the statistical and political sense of the word.

    One of the best metrics which gets scant attention is a gallup poll asking this question. “are you thriving.” Morrocco is still only rumbling.

    http://www.gallup.com/poll/145883/Egyptians-Tunisians-Wellbeing-Plummets-Despite-GDP-Gains.aspx

    In looking for systemic shifts “regime changes” in the systemic sense, it makes sense to measure systemic build up of tension within the system. In people based systems, the peoples aggregate attitudes and perceptions are the best indicator of tension. Although not absolutely predictive tension indicators are useful in predicting the scope for significant shift. A highly disenfranchised minority can be supressed, a large group without hope is volatile. It would be interesting to see how many are “thriving in China?” probably stable for now, but the test of the system isn’t in how it manages growth, but how it sustains itself through economic challenge.

    • Thanks Nick, great link, will use that in my work on scenarios for the region! It would indeed be nice to have similar data for China etc – let me know if you come across any. I agree that the key is tension – the trick is picking the critical point after which government intervention will tend to only make things worse.

      Hope you’re well and thanks as always for the comments. 🙂

      N

  2. I visited China in Easter 2008. In contrast to the West they were well aware of the ‘risk’ of a banking collapse after the Olympics, and were busy taking concrete action and preparing the people. I was told that they needed to achieve 8% growth to keep the people ‘sweet’, but it seemed to me that many of the poorest people were quite happy to make sacrifices if they could be confident that it would benefit future generations. The intelligentsia that I met seemed much more ‘on the ball’ than their western counter-parts. They were clued up on Keynes and Whitehead and showed much more understanding of the pivital role of uncertainty than I have found elsewhere.

    It would certainly be useful to talk to them, but I understand that we British are not keen. Meanwhile I am developing a blog on my understanding of some of the issues at djmarsay.wordpress.com.

    Regards, Dave M.

    • Thanks for the comment Dave, and for alerting me to your blog – truly interesting. I’m currently deciphering your metaphors for complexity. One of our goals for the risk report this year is actually to understand better how different regions and cultures appreciate uncertainty. Not sure how deep we’ll get, but it’s a really interesting issue.

  3. I think Gallup has an interactive map for the whole world on “thriving” China was 9%.

    saw it the other day, very flash interactive. don’t have URL…google to the rescue?


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