Starting point
Translating our expanded understanding of risk into methodological terms is a precondition for its use in any survey. Because no individual economic risks will be described and analyzed, but rather environmental developments that hold potential risks for the global economy, so-called risk areas were chosen as the survey’s starting point. Risk areas are multifaceted environmental developments and interrelated series of consequences that have high relevance for future economic development.
A first challenge was to develop a suitable process for selecting the risk areas to be analyzed by the participating experts. The final selection had to reflect the theoretical constraints of the underlying concept of risk, and be broad enough to encompass both known risks and those that have received comparatively less attention. At the same time, the candidates had to be able to be dealt with in a survey framework. Therefore, a second necessary step was to create a suitable description of risk fields, in which the essential facts were described, but without anticipating the implications and evaluations of potential risks. The risk area descriptions subsequently formed the foundation of the actual expert survey.
Identifying risk areas
The first step in identifying risk areas was based on a multi-part analysis of megatrends, which included both continuities (i.e., an extrapolation of existing global trends) and discontinuities (i.e., breaks with previous trends). Megatrends are processes of transformation that can be empirically and clearly demonstrated to be long term, and which have a global reach. The megatrend concept originally comes from U.S. futurologist John Naisbitt, whose work provided the field of scientific futures research with a foundational methodological procedure in the analysis of global trends. Since megatrends
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are stable over a time horizon of multiple decades, and have comprehensive impacts in all world regions, they provide reliable information on future challenges for societal, economic and political actors.
At the same time, megatrends have a high level of inherent complexity, which is particularly significant with respect to regional variations. The global trend of demographic change, for example, is precipitating a massive aging of the population both in post-industrial societies such as Europe or Japan and in the economically developing China; however, in many emerging and developing countries, the same trend is leading primarily to massive population growth. In addition to regional aspects, functional and structural factors contribute to the complexity of megatrends. It can thus be assumed that in some circumstances, corporate decision makers might develop different perspectives on the risks and solutions associated with long-term megatrends than would actors from politics, academia or the media.
The present analysis draws on a selection of 20 megatrends that have been successfully used by Z_punkt The Foresight Company in performing futures analyses and developing strategies for public institutions and businesses. As a rule, the analysis of megatrends is based on the extrapolation of key empirical indicators, identification of the most important drivers, and an impact analysis within the context of the specific issue under examination. The advantage of the megatrend approach in an analysis of risk potential lies in its comprehensive perspective: Alongside purely economic factors of influence, it allows future developments holding the potential for significant economic relevance to be included, even if their sources or impacts lie outside the economic sphere.
Fig. 2: Megatrends – A starting point for risk identification
Because economic risks often arise from the interaction of various environmental trends, the analysis of megatrends was supplemented by the additional methodological step of cross-impact analysis. Using this method, the interactions of two megatrends can be examined. The primary focus in this task is on discovering which specific risks for the global economy result from the interaction of two long-term global trends. In fact, a variety of megatrends are in themselves consistent, meaning that they show no internal contradictions and are not mutually exclusive. This additional analytical step thus represents an expansion and deepening of the megatrend analysis, capturing issues that are underrepresented in the public discourse.
Continuity and discontinuity
Both analytical processes were initially carried out under an assumption of continuity – that is, the assumption that the future course of development would remain stable. The risks in this case can be derived from the
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megatrends themselves, as they involve specific constellations of risk that emerge as developments evolve over the long term. The megatrends and their interrelationships are thus systematically analyzed for potential risks to the overall interactions of the global economy. In essence, the results of the continuity analysis reflect the current scientific and media discourse on global economic risks.
Fig. 3: Process design – Analysis of continuity and discontinuity
The fact that many of the long-term trends are well-recognized and in many respects also well understood can be seen as an indicator of their high relevance within the economic risk discourse. However, under our concept of risk, the pure focus on an assumption of continuity is problematic, because risk potentials tend to remain unrecognized. In this respect, the analysis of discontinuities enables a view of risks that are comparatively unknown, but are no less relevant. Megatrends are stable over long periods of time, but are by no means immutable. Breaks in trends (disruptions) have enormous
consequences for economic relationships, because they typically have not been previously accounted for.
The first phase of discontinuity analysis examines the potential risks arising from an interrupted megatrend. What would happen, for example, if demographic change were to quickly shift direction, and birth rates in previously aging societies were to suddenly rise? Or what would happen if criticism of globalization increased to such an extent that states saw themselves as forced to close off their national economies from the world market? The analysis particularly reflects the fact that disruptions represent a break in the structure of expectations, and therefore can hardly be addressed using standard methods of economic risk analysis.
The cross-impact analysis, looking both at potential trend disruptions and trend continuities, represents an expansion and deepening of the previous analysis. Which impacts might prompt the progressive individualization of society to produce a sudden increase in births, and which economic consequences might precipitate this constellation of forces? What would the challenges to the economy be if globalization continues, but leads to increasing resentment of cultural diversity and a return to traditional ways of life? The analysis focuses particularly on interactions between megatrends, as these often influence multiple reference frames simultaneously, thus creating very complex patterns of risk.
Within this second phase of discontinuity analysis, the plausibility of disruptions is an important criterion. Disruptive events with comparatively low plausibility – we speak in this case of risks with a wildcard character – must be clearly distinguished from the impact that the disruption of one trend might have on a second trend. Against the background of our current understanding of risk, wildcards can best be characterized as threats, which due to their low plausibility are not treated as an economic decision problem, or are done so in only a very limited way. The disruption of two megatrends simultaneously is also deemed to be a wildcard; this type of scenario is correspondingly excluded from the analysis.
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Formation of risk areas
The continuity analysis was able to identify a total of 53 individual risks, while the discontinuity analysis identified an additional 87. Throughout, it was clear that there were significant overlaps and redundancies within each analytical section as well as between the continuity and discontinuity analyses. At this point, a cluster analysis was used in order to separate the factors (individual risks) into internally similar groups.
The resulting clusters form risk areas, each composed of a variety of individual risks that themselves reference multiple facets and domains. Thus, for example, the cluster or risk area “protectionism/trade wars” contains individual risks that themselves fall variously into the Society, Economy and Politics categories. Specifically environmental risks, which fall into the cluster or risk area “Food and water scarcity,” are also part of the Society, Economy, Environment and Politics categories. Overall, 30 risk areas were able to be formed in this way, 13 of which involve risks derived exclusively from the continuity analysis, seven with risks exclusively from the discontinuity analysis, and an additional 10 with risks drawn from both blocks.
With an eye to the scope of the expert survey, as well as to keeping relevant systemic economic risks distinct, these risk areas were subjected to an additional cross-impact analysis, aimed specifically at examining interdependencies between the impacts of individual factors. The strongly interconnected risk areas were selected; these were distinguished by a particularly large number of interdependencies, thus demonstrating active impact on other risk areas as well as being passively influenced by others. From this analytical process came the 11 risk areas that were ultimately evaluated by participants in the study:
1. Food and water scarcity 2. Energy and resource scarcity 3. Socioeconomic gaps
5. International terrorism 6. Aging societies 7. Sovereign debt/default 8. Financial market collapse 9. Protectionism/trade wars 10. Pandemic outbreaks
11. Technology infrastructure failure