Davos tells the world to be optimistic, the world does not care.

The one-word conclusion one could take from the Davos' World Economic Forum (WEF) 2011 meeting from last week would be "Optimism" because that was what every big corporation CEO and every government leader were continuously saying, but everybody knows saying something a lot of times does not make it more real than saying it for the first time. 

For sure this optimism cannot be based on the Global Risks 2011 report that the World Economic Forum published because the data shown there is quite worrying. Let us have a quick look at this data.

Economy drivers. And obstacles

One of the most user-friendly  parts of the reports is the Barometers section. Here you can see which are the geo-politic-socio-economic factors that could put the economy at risk in 2011 clearly classified in two fields by low-medium-high impact. The two classifications are Perceived Likelihood of happening in the next ten years and Perceived Impact in billion of US dollars. 

Among the risks listed you can find the main two that are causing civil unrest across the world and specially in the Middle East lately:  Extreme commodity price volatility and Food Security. The barometer however, sets the likelihood and economic impact of both in the medium level. It is happening right now so they were clearly too optimistic about it. On the other hand, there is also Geopolitical Conflict listed, and in this case the impact level is appropriately set to high and the likelihood is set to medium. Can you see where the correlation with these three takes us?

The thing I love the most about economics is its interconnected nature, every action or event can have its effect in the whole economy, nothing is isolated. Similarly to a car engine, a single malfunctioning piece can break down the whole thing and a single enhancement can make it work smoother and faster. Well, the WEF's barometer risks are highly correlated, so we must find a way to atack the underlying problem to avoid the subsequent risk. 

The world does not care about Davos' optimism

For the Extreme commodity price volatility and Extreme energy price volatility risks we can find several correlated risks among the list that should make it have a high impact status, but that would be an uncomfortable truth though... The risks are Demographic Challenges, which talks about the aging population in industrialized countries becoming more dependent on Social Security help, plus the young population worldwide struggling to find a way to progress in their career. This risk takes us directly to another worrying one: Economic Disparity. With a high likelihood and a high impact on the economy, this risk is closely linked to the Demographic Challenges one. The problems for the young population to find a job are creating social tensions and the increasing gap between upper and the lower, usually unemployed, social classes is  fueling crime rates and the aforementioned civil unrest. Another factor adding to the problem is the above mentioned Food Security, which explains the problem of rising food prices (naming directly Economic Disparity) due to a myriad of facts like a decreasing surface area dedicated to food farming because of the biofuels surge, ever-increasing world population, natural disasters and speculation. Speculation is not mentioned directly although it clearly comes implicit in the point mentioning 'Market Distortion', I am sure they simply chose not to write that word for political correctness.

Credit: WEF Risk Report 2011

The list of factors linked to forthcoming Geopolitical Conflict also goes worringly on, with factors such as Fragile states,  Global Governance Failures, Global imbalances and currency volatility, Weapons of Mass Destruction and Terrorism. All of these factors talk about rising populism and discomfort with the political classes, competitive currency devaluation affecting normal trade and relationship between states, the lack of unified politics leadership to solve global problems and a very low level of trust between countries.

Looking at the report I have problems finding reasons to be optimistic... The pivotal point this conglomerate of risks orbits around is Economic Disparity, but how can you avoid it when every other indicator paves the way for this and for political conflicts? Unified action from all participants would be needed, and as Nobel-prized economist Nouriel Roubini pointed out some days ago, there is a frightening lack of global leadership going on, G20 is becoming G0, a totally lifeless 'decision group'.

Apart from the absence of leadership, what can clearly be seen here is a total lack of will to change the current situation, proved by WEF's optimism in the actual circumstances despite all the risks that THIS same circumstances are creating. The strangest thing maybe that they themselves are reporting about them...