PUTTING RISK ON THE AGENDA

Global Catastrophic Risk Index

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Catastrophes take many forms: from economic downturns to political strife, social unrest, and environmental disaster. The impact of crises such as these can be multiplied by both governments’ failure to recognize them quickly, let alone preemptively, and their inability to respond effectively. These crises can be further compounded by economic vulnerability – itself heightened by the COVID-19 pandemic – and social instability stemming from poverty, poor governance, corruption and conflict. Moreover, in the highly integrated world of today, significant shocks to the system are unlikely to be contained within their country of origin. Instead, they will propagate among regional neighbors and trading partners with the potential to create complex, widespread emergencies. It is thus critical for policymakers and citizens alike to understand the interactive and reinforcing nature of the risks facing their countries and regions in order to avoid the governance and societal failures that could prove disastrous for the global population.

The Global Catastrophic Risk Index has been constructed to capitalize on the proven advantages of composite indices as guides to decision-making, providing a synthesized index at the country level for global catastrophic risks. Each of the 118 countries covered by the GCRI is evaluated across more than 85 indicators comprised of both vulnerability and resilience factors. The GCRI presents data from a variety of international organizations – including the World Bank, the United Nations and its various agencies, and the International Monetary Fund – to provide a broad-based understanding of global risk factors. The data is organized in seven key risk categories or “Pillars”: Economic Stability, Quality of Governance, Education and Skills, Gender Equality, Business Environment Resilience, Environmental Vulnerabilities, and a grouping of Exogenous Vulnerabilities that, although not falling neatly into the preceding categories, are nonetheless crucial.

 


PILLAR I

Economic Stability

There are no known instances of countries that have managed to grow in a sustainable way, while pursuing imprudent fiscal policies.

Having a stable macroeconomic environment is an essential ingredient for the successful implementation of broad-based reforms aimed at boosting human prosperity and reducing the risks of social and political upheavals. In order to determine the extent to which states have succeeded or failed in achieving this, the GCRI evaluates economic stability by averaging three sub-pillar scores: macroeconomic stability, structural resilience, and financial resilience. Each of these sub-pillars tells a story in its own right and, together, they offer a comprehensive yet intuitive measure of the risks to a given state’s economic stability.

The 2008-09 global financial crisis, its aftermath and, more recently, the need to help economies heal from the damaging effects of COVID- 19-related lockdowns and other restrictive measures brought about by public health considerations have highlighted the crucial importance of sound public finances and the benefits of having fiscal flexibility.

On the contrary, high public debt levels require that scarce public resources are allocated to debt service instead of education, public health or infrastructure improvements —all areas that help to augment national economic competitiveness. How well governments are able to allocate resources in a way that improves equity in society is also crucially important as there is ample empirical evidence that growing income disparities are a source of political instability, undermining the basis of democracy and the political and social order.

PILLAR II

Quality of Governance

A credible and legitimate government forms the backbone of a state’s ability to respond to crises as well as opportunities.

A key element of successful development is the extent to which a government can perform its fundamental duties on the behalf of its citizens and, more specifically, exercise its political authority for the effective and efficient stewardship of its resources. Quality of Governance is not only a crucial measure of risk in itself, but also an important indicator of a state’s capacity to address the risks identified in the GCRI’s other pillars.

Another indicator of quality governance is a strong rule of law. In particular, adequate safeguards must be introduced to prevent the emergence of situations in which ruling elites use political power for personal gain rather than public benefit. In contrast to trust and accountability, corruption is a corrosive element which undermines the national investment climate, discourages private-sector development and innovation, and encourages inefficiency; the more widespread, the more damaging its effects. For this and other reasons, including restrictions on press freedom and lack of transparency, catastrophic risk is higher for authoritarian regimes compared to their democratic counterparts.

PILLAR III

Education and Skills

Education and training are key drivers of productivity growth and prosperity and contribute to political and social stability and the mitigation of other risks.

High education levels allow for citizens to participate more effectively in the economic and political life of their nation (Sen 1999). When education systems fail to equip citizens with basic skills, the country’s risk profile increases as it severely limits the ability of citizens to participate in the development process, to be gainfully employed, to be well-informed judges of government policies and politicians, and to avoid falling prey to the manipulations of demagogues.

As the global economy has become more complex, it is essential that states boost the human capital endowments of their labor force. In order to compete and maintain a presence in global markets, workers must have access to new knowledge, including continual training in new processes – and in the operation of the latest technologies. Improving the effectiveness and capacities of the educational system also have beneficial effects on job creation indicators and employment rates. It is remarkable that there is high correlation between literacy rates and the overall scores for the Global Catastrophic Risk Index, strongly suggesting, as noted by Sen and others, that access to knowledge and having a well-informed public are vitally important for a country´s ability to mitigate the impact of various risk factors.

PILLAR IV

Gender Equality

Marginalizing women has been nearly lethal to human progress and prosperity. It has led to a more violent world and has undermined the basis of democracy and human rights.

A number of studies have shown that there is a close connection between national economic performance and the degree to which societies have succeeded in integrating women into the economy. This integration manifests itself in increased female participation in decision making and representation in parliaments, cabinets, and other legislative bodies. For its part, the GCRI shows a strong connection between countries’ scores and their scores in the Global Governance Forum’s Gender Equality and Governance Index (GEGI) score.

As legal or cultural restrictions on women increase, the pool of human capital available to the private sector becomes narrower and shallower. As a result national productivity, a fundamental engine of prosperity, is impaired. It comes as no surprise that the most competitive economies in the world - those that have been better able to operate on the boundaries of the technology frontier - are also those in which women have been given the greatest opportunities.

Countries that are committed to phasing out the multiple human rights violations that are implicit in the confinement of women to the status of second-class citizens will be less prone to the social and political tensions that often accompany injustice. The GEGI makes very clear the benefits of greater gender equality for improved government effectiveness, greater rule of law, higher levels of political stability and enhanced competitiveness.

PILLAR V

Business Environment Resilience

Like the businesses that operate in it, a business environment thrives on efficiency and established rules.

The quality of a country’s business environment reflects not only the ease with which firms can enter and operate in the national economy, but also generally indicates the extent to which a country’s institutions are functioning effectively. Like the individual businesses that operate in it, a national business environment thrives on efficiency and transparent, fairly applied rules.

In general, regulation is the major avenue through which governments can influence the business environment in their country. Unfair or excessively burdensome regulation, taxation, or registration requirements can hamper growth and encourage the underground economy. This, in turn, undermines the tax base and ends up limiting the ability of governments to collect the revenues necessary to address vital social needs. Governments not able to deliver reasonably effective public services to their populations will be more vulnerable politically and this will reinforce other risks.

More specifically, the establishment and maintenance of property rights is a core mandate of the modern state. Property rights determine the terms of peaceful competition for scarce resources in markets. An effective regime gives individuals and businesses the exclusive right to employ their resources as they see fit, and protects them from expropriation.

PILLAR VI

Environmental Vulnerabilities

Our future is threatened as non-renewable resources become increasingly scarce and expensive, while normally renewable resources are consumed beyond their rates of regeneration.

The Environmental Vulnerabilities pillar highlights the many risks that result from both damaging the complex systems that have allowed life to evolve and failing to mitigate against the resulting environmental catastrophes. The speed with which these threats are increasing is producing existential threats to human society at the global level, while the fundamental challenge of transforming the foundations and aspirations of our civilization to reduce these risks warrant giving this pillar a high weighting in future editions of the GCRI.

The disastrous impacts of climate change, from extreme temperature events and more severe natural disasters to melting ice caps and rising seas, are already occurring. Since the human and economic costs of such catastrophes can be truly staggering, every effort should be made to design low-carbon resilient infrastructures, provide early warnings, anticipate necessary displacements or evacuations, and ensure adequate emergency responses with these risks in mind. Unfortunately, the momentum of environmental mishaps and other dire climate-related consequences is only increasing and some aspects of it are already irreversible. As a result, it is all the more crucial that those risks still within our power to attenuate must be met with rapid action in mitigation and adaptation policies within the next decade.

PILLAR VII

Exogenous Vulnerabilities

Although not stand-alone pillars, a set of indicators grouped under the subheadings of demographics, health, and security are crucial components for the GCRI, capturing a range of indicators that are relevant for a proper reading of important risk factors. The extent to which a country faces security threats is perhaps one of the most obvious catastrophic risk factors at the international level. Such threats include actions of overt aggression such as war, rebel attacks, coups, and terrorism. They also include domestic security threats such as organized crime.

Migration is a global phenomenon and a process with far-reaching implications for origin and destination countries alike. Worldwide, the number of migrants continues to grow rapidly, reaching 281 million - 3.6% of the global population - in 2020 according to UN figures.

Nuclear peace rests upon three major foundations: strategic stability, normative restraint. and nonproliferation. Although the end of the Cold War enabled progress in nuclear arms reductions, stability has eroded since. All of the nuclear-armed powers are now engaged in nuclear modernization efforts involving new weapon systems that could further undermine stability. One approach to nuclear de-risking is to educate national leaders and their advisors on the consequences of any use of nuclear weapons and instill a belief that nuclear dangers require states to act with extreme caution. Regarding policy, nuclear-armed states must commit to the goal of disarmament.

More generally, the absence of an effective system of collective security as called for in the UN Charter means that countries continue to allocate vast resources to the maintenance and modernization of military establishments. Much of this expenditure is "unproductive" according to the IMF, meaning that it does not contribute to enhance productivity and competitiveness. Reductions in national military spending could thus be re-allocated to other ends, including education, public health, infrastructure and other productivity-enhancing areas, thereby giving rise to a real “peace dividend.”

Conclusion

This first publication of the Global Catastrophic Risk Index sheds light on the complex risks facing countries globally. The findings are unique as they demonstrate not only that no country is free of risk, but also that policymakers globally have often failed to take collective action against systemic and environmental risks.

There is the obvious correlation between the general level of development and vulnerability to catastrophic risks, with poor countries with weak or failing governments and low investment in human capital clearly much more at risk. More surprising is the much smaller difference with respect to environmental risks, showing that these largely planetary risks threaten countries more equally and must be addressed globally.

Future editions of the index will attempt to broaden country coverage as far as data availability allows, particularly to include small island developing states known to be particularly vulnerable. There is still considerable potential to enhance and update data, and include new indicators deemed to have meaningful descriptive power.



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