Rising inequality and social polarization are set to shape world developments for the next decade after contributing to Britain's decision to leave the European Union and the ballot-box success of U.S. President-elect Donald Trump, the World Economic Forum said.

Climate change was underlined as the third major global trend in the WEF's annual assessment of global risks, released Wednesday in London. It said world leaders must work together to avoid “further hardship and volatility in the coming decade.”

“There's a wide array of potential threats; growing social and political turmoil, potential business interruptions which could stem from inter-state conflict, from social instability, terrorist attacks,” John Drzik, president of global risk at Marsh USA Inc., which contributed to the study, said in an interview. “This whole social and political context creates the potential for disruption.”

A weak economic recovery following the global financial crisis has widened the gap between rich and poor, fueling a sense of “economic malaise” that's led to the rise of populist parties, according to the report. While Brexit and Trump were the highest-profile signs of an anti-establishment backlash in Western democracies, the evidence extends far wider, with support growing for far-right parties in Germany, France, Italy and the Netherlands among others.

“Continued slow growth combined with high debt and demographic change creates an environment that favors financial crises and growing inequality,” WEF founder Klaus Schwab wrote in the report's preface. “Pervasive corruption, short-termism and unequal distribution of the benefits of growth suggest that the capitalist economic model may not be delivering for people.”

The survey involved 750 experts assessing 30 global risks ranging from deflation and asset bubbles to extreme weather events, terrorist attacks, food crises and cyber attacks. They identified trends including an aging population, climate change, social polarization and income inequality that could amplify those risks.

The forum ranked risks by impact and by likelihood. While weapons of mass destruction were deemed the most impactful risk, they were also judged unlikely. Extreme weather events were the next most impactful, and were also rated the most likely risk. The next four most likely risks were large-scale involuntary migration, major natural disasters, large-scale terrorist attacks and a massive incident of data theft or fraud.

The report will be discussed at the WEF's annual gathering of political and business leaders in Davos, Switzerland, beginning Jan. 17. Rising income inequality was identified as the most important underlying trend determining global events, followed by climate change and societal polarization.

The WEF said that the share of income going to the top 1 percent of earners has increased in countries including the U.S., Britain, Australia and Canada since the 1980s. The policy of quantitative easing, whereby central banks make large-scale purchases of government bonds, has exacerbated inequality by enriching owners of financial assets, it said.

“Concerns over income and wealth distribution are becoming more politically disruptive, and much greater emphasis is needed on the increasing financial insecurity that characterizes many people's lives,” the WEF said. “The combination of economic inequality and political polarization threatens to amplify global risks, fraying the social solidarity on which the legitimacy of our economic and political systems rests.”

The report's authors pointed to a “deteriorating commitment to global cooperation,” with Russia and South Africa among nations pulling out of the International Criminal Court in 2016 and China rejecting the verdict of an international tribunal over disputed waters in the South China Sea. In addition, Trump has said he's considering pulling the U.S. out of the Paris Agreement, the first truly global deal committing nations to curb the emissions that cause global warming.

For businesses, the biggest risk is the potential for cyberattacks, particularly as more household devices and industrial controls become connected to the Internet, according to Drzik.

“This is the risk that is on the minds of the boards and CEOs,'' Drzik said. “If you take an event where 100,000 household devices are activated as weapons, it starts to get you to think in an era of geopolitical tensions and state-sponsored attacks about what could happen. These are things like thermostats, any lighting device, anything that's connected to the Internet in your house can be used now as a weapon.''

New Technologies

The WEF called for the creation of new policies to help more people benefit from new technologies. It examined 12 emerging technologies, ranging from three-dimensional printing to renewable energy. Advances in artificial intelligence and robotics yielded the greatest potential benefits, but also the biggest potential negative effects, it said.

“Without proper governance and re-skilling of workers, technology will eliminate jobs faster than it creates them,” said Cecilia Reyes, chief risk officer at Zurich Insurance Group, which contributed to the study. “Governments can no longer provide historical levels of social protection and an anti-establishment narrative has gained traction, with new political leaders blaming globalization for society's challenges, creating a vicious cycle in which lower economic growth will only amplify inequality.”

Bloomberg News

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Polarization Heightens Risk: World Economic Forum

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