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What COVID-19 taught us about risk in a complex, inter-connected world

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A new UN report has shed fresh light on the ways that the COVID-19 pandemic unleashed cascading risks, particularly on vulnerable people, worldwide.

From the mangroves of West Bengal to the vast archipelago that makes up Indonesia, and from the bustling port city of Guayaquil, Ecuador, to the tropical shores of southern Togo, systemic risks from the COVID-19 pandemic have been exposed in stark human terms.

Millions of people who were already struggling to make ends meet, often working in the informal economy in agriculture and surviving below the poverty line, had to contend with a host of new risks that they could not possibly have foreseen.

These included joblessness, debt, civil and domestic violence, children’s education derailed, and opportunities severely diminished. In many locations, women suffered disproportionately due to pre-existing gender biases in society. 

Taken together, these human experiences are not just a catalogue of suffering from places in the world that are not often in the headlines. They also bring into sharp focus a very real challenge: how to better understand and manage the cascading, systemic risks that resulted from COVID-19 as it spread across borders.

Life-threatening domino effect

The report, “Rethinking risks in times of COVID-19” shows how, in each of these four locations – part of five field studies carried out in 2021 by the UN University’s Institute for Environment and Human Security (UNU-EHS) and the UN Office for Disaster Risk Reduction (UNDRR) – a clear picture emerges of a domino effect, resulting from the outbreak of COVID-19, that rippled across societies far beyond the immediate effects of the pandemic itself.

This starkly illustrates that our world is interconnected through systems that come with associated, volatile risks that have revealed, and reinforced, vulnerabilities across society.

In the Ecuadorian port city of Guayaquil, for instance, families already living in overcrowded housing suffered more from stay-at-home orders than those in more favourable living situations.

The city’s health-care system reached a tipping point in a matter of weeks after the first case was detected in February 2020, resulting in a high number of corpses being left unattended in hospitals and care homes, as well as on the streets. The images of bodies accumulating in the streets that circulated in the global media were among the first to show what happened when COVID-19 arrived in densely populated urban areas.

A complex, fragile web

Yet before COVID-19, the interconnectedness of such risks may not have been immediately obvious in our daily lives. Nor was the systemic nature of these risks, meaning how they affected, or can potentially affect, whole societies beyond the initial problem.

For one thing, we have tended to think about systemic risks in relation to what happened as a result of the 2008 financial crash, where the failure of big banks rippled across the global economy, leaving millions out of work and sparking a global economic recession.

Other examples can be seen in how climate change, natural hazards and, more recently, the global consequences of the war in Ukraine have brought home how our world relies on a complex, often fragile, web of interdependent factors that, if destabilized, can have devastating effects on whole societies. For example, Ukraine and Russia are both key global cereal and fertilizer producers. One of the ripple effects of the war can be seen in rising global food prices, resulting in higher costs of living for those who can afford it and pushing those who cannot deeper into food insecurity. 

Time for a broader perspective

The emergence of COVID-19 has forced a broadening of perspective on systemic risks. The good news is that it has expanded understanding of these risks, and how to address them.

Hazards and shocks can emerge from outside and within the system. Exposure to them can be indirect, meaning that effects can be felt in places that are not directly affected by the hazard — in this case, COVID-19 — but end up being affected as a result of interconnectedness. Finally, the vulnerability of one system can also turn into a hazard or shock for other interdependent systems.

What, then, are the actions that can be taken to improve risk management, given that traditional approaches fall short in more complex settings?

One is to understand how things are connected. The cascading effects originating from COVID-19 made it possible to spot the interconnections that exist in many such systems and to assess whether a system is functioning as intended.

Another is to identify the trade-offs implicit in policy measures: several measures to combat COVID-19, such as school closures, stay-at-home orders or travel restrictions, had widespread effects.

This highlights the need to assess and evaluate possible trade-offs and cascading effects involved in introducing such measures, because they can have unexpected repercussions and can exacerbate existing societal vulnerabilities.

A third action is to focus on processes for systemic recovery while leaving no one behind. The interconnected nature of systems presents an opportunity for positive turning points, by creating positive effects. In the pandemic context, this was made real through the job creation that followed the provision of financial assistance from governments, charities and NGOs, or advances in digitalization following stay-at-home orders.

Today’s interconnected world is an evolving system, and disastrous events are often the results of systemic failures. The report shows that It’s time to develop a deeper understanding of systemic risks, how they trigger other hazards and shocks, often in unpredictable ways.

It also demonstrates that managing these risks needs to be properly embedded in how policymakers, planners, and other stakeholders approach risk management, with the aim of creating more resilient, equitable and prosperous communities and societies around the world.

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Vietnam’s Economy Forecast to Grow 7.5% in 2022

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Vietnam’s economic recovery accelerated over the last six months on the back of resilient manufacturing and a robust rebound in services. GDP growth is forecast to surge from an estimated 2.6 percent in 2021 to 7.5 percent in 2022, while inflation is projected to average 3.8 percent over the year, a World Bank economic update for Vietnam released today says.

Vietnam’s economy expanded 5.2 percent[1] in Q4-2021, 5.1 percent in Q1-2022, and 7.7 percent in Q2-2022, as consumers satisfied pent-up demand and foreign tourist arrivals picked up, according to the report,  “Taking Stock: Educate to Grow,” the World Bank’s bi-annual economic outlook for Vietnam.  

However, this positive outlook is subject to heightened risks that threaten recovery prospects.  Risks include growth slowdown or stagflation in main export markets, further commodity price shocks, continued disruption of global supply chains, or the emergence of new COVID-19 variants.  Domestic challenges include continued labor shortages, the risk of higher inflation, and heightened financial sector risks.

Given the nascent domestic recovery, the weakening global demand outlook, and heightened inflation risks, the report suggests a proactive response by the authorities. In the short run, on the fiscal front, the focus should be on the implementation of the Recovery and Development policy package and expanding targeted social safety nets to help buffer the poor and vulnerable from the effects of the fuel price shock and rising inflation. In the financial sector, close monitoring and strengthening non-performing loan reporting and provisioning as well as  adopting an insolvency framework would be recommended.

If upside risks to inflation materialize — with core inflation accelerating and the consumer price index moving above the 4 percent target set by the government — the State Bank of Vietnam should be ready to pivot to monetary tightening to quell inflationary pressures through interest rate hikes and tighter liquidity provision. 

“To sustain economic growth at the desired rate, Vietnam needs to increase productivity by 2-3 percent every year.” said Carolyn Turk, World Bank Country Director for Vietnam. “International experiences have shown that higher worker’s productivity can be achieved by investing in the education system, as an important part of a basket of investments and reforms. A competitive workforce will generate much-needed efficiency for Vietnam in the long term.”

The report argues that transforming the higher education system will be key to boosting Vietnam’s productivity and help achieve its goal of becoming an upper-middle-income country by 2035 and high-income country by 2045. To match average higher education enrollment levels in upper-middle economies,  3.8 million Vietnamese students would need to be enrolled in higher education institutions, almost twice as many as enrolled in 2019.

Reforms to Vietnam’s higher education system could help support development objectives, the report says. The increasing financial costs of pursuing higher education and the perception of diminishing economic returns from pursuing higher education have weakened demand. The system is further undermined by falling short of providing skills sought by employers, underinvestment by the state, and a weak and fragmented institutional structure governing higher education.

The report details suggestions for improving access to higher education, enhancing the quality and relevance of instruction, and making more efficient use of resources. Suggestions include expanding the use of digital technologies, enhancing the role of the private sector, and streamlining the regulatory framework.

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Financial education gaps are primary barrier to retail investing in capital markets

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New research from the World Economic Forum finds that 40% of non-investors have chosen not to invest because they do not know how or find it too confusing. Furthermore, roughly 70% of people would be more likely to invest, or invest more, with expanded financial education

Done in collaboration with BNY Mellon and Accenture, The Future of Capital Markets: Democratization of Retail Investing also finds that increased participation of retail investors in capital markets is a largely positive trend. Though some concerns about riskier investments remain, retail investors are showing themselves to be prudent investors using markets to build long-term wealth.

“Even amid market volatility, participation in capital markets can empower people to take ownership of their financial future,” said Meagan Andrews, Investing Lead at the World Economic Forum. “We’re just now starting to understand the new wave of retail investors and the power they are wielding in the market. It’s important industry leaders take steps to empower individuals so they can optimize financial decisions for their betterment, whether they currently invest or not.”

Based on a global survey of over 9,000 respondents from 9 countries and expert interviews, the report highlights the importance of enhancing personalized advice for retail investors and improving the reliability of information and investor protections. It also underscores opportunities to improve education, trust and access to increase inclusion in global capital markets.

With the current market volatility, industry players, policy-makers and others need to act now to ensure the benefits of investing are increasingly accessible worldwide.

“Global capital markets are undergoing a fundamental transformation, with more individual and retail investors seeking access than ever before in history,” said Akash Shah, Chief Growth Officer at BNY Mellon. “This research highlights opportunities for the entire financial industry to build the trust and transparency needed to empower and democratize market participation in underserved communities around the world.”

Trends of retail investors
The survey results provided critical insights into the factors and mindsets impacting individuals’ decisions to enter capital markets globally.

Notably, the survey found that individuals primarily look to capital markets to build long-term wealth, especially in emerging markets. Half of those surveyed were investing to save for retirement or to build generational wealth.

Retail investors are skewing younger, with Gen Z and younger Millennials investing at higher rates. Younger investors are much more likely than their peers to have received financial education earlier in life.

Meanwhile, non-investors are less confident they will achieve their long-term financial objectives and, when compared to investors, a higher proportion only learned about investing many years after entering the workforce. Their main reasons for avoiding financial markets were fear of losing money and because of an investing knowledge gap.

Generational wealth also plays a vital role in deciding to invest early. Respondents whose parents invested in the market reported that they began investing earlier in life compared to those with parents who did not invest.

The survey also revealed significant gaps in product awareness. For instance, surveyed investors noted they had a greater understanding of newer products like cryptocurrencies and non-fungible tokens (NFTs) compared to more traditional instruments like stocks and bonds.

Expanding the benefits of retail investing

There are many ways capital markets and global society can work together to grow wealth for more individuals in a responsible manner.

1. Financial literacy and improving investor education

Personal finance education – from setting a budget to learning how to secure one’s retirement – is integral to building wealth responsibly. Industry players should focus on increasing basic financial literacy, promoting responsible investment strategies and improving proactive retirement planning outside of pensions.

Providing information is not enough – content should be fit for purpose, with efforts to make it as understandable as possible. Both policy-makers and private sector actors need to improve their tactics to meet the desires of today’s investors.

2. Personalized, outcome-oriented advice for all

Solutions that financial institutions currently offer are often siloed and don’t always resonate with investors. Those at lower wealth thresholds are often left with few options to get financial advice: 80% of current investors state being able to speak with an adviser is essential to making an investment decision but only 48% are able to turn to a financial adviser or wealth manager for advice.

All investors should have access to the tools and guidance they need to be successful participants in capital markets. This should be inclusive of investors of all income and wealth levels. The industry must expand access to personalized advice and scale services to thrive to meet increasing retail investor demand – this must happen across all wealth brackets.

3. Collaboration and public-private partnerships

Increased collaboration across the industry, including public-private partnerships, will be needed.

Brokerages, wealth managers and exchanges are integral to this effort due to their proximity to retail investors and the speed at which they can enact change. From educational efforts to initiatives to lower the barriers to entry for retail investors, public-private partnerships will be essential.

“Increasing market participation and empowering retail investors has to include collaboration from all stakeholders,” said Kathleen O’Reilly, Global Lead, Accenture Strategy. “Financial institutions especially, from the C-suite to individual wealth managers, must play a critical role in offering relatable education efforts in addition to the investment products that will help investors become smarter and more confident.”

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Global economy: Outlook worsens as global recession looms

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Still reeling from the COVID pandemic and Russia’s invasion of Ukraine, the global economy is facing an increasingly murky and uncertain outlook, according to the latest report released on Tuesday by the International Monetary Fund (IMF).

The World Economic Outlook Update July 2022: Gloomy and More Uncertain, highlights the significant consequences of the stalling of the world’s three main economic powerhouses – the United States, China and the major European economies.

“The outlook has darkened significantly since April,” said Pierre-Olivier Gourinchas, IMF Economic Counsellor and Director of Research.

“The world may soon be teetering on the edge of a global recession, only two years after the last one”.

The baseline forecast for global growth is for it to slow from 6.1 per cent last year, to 3.2 per cent in 2022 – 0.4 per cent lower than forecast in the last Outlook update in April.

Three key economies

With higher-than-expected inflation – especially in the US and the largest European economies – global financial conditions are becoming tighter.

In the US, reduced household purchasing power and tighter monetary policy will drive growth down to 2.3 per cent this year and one percent next year, according to the outlook.

China’s slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, with negative effects from Russia’s invasion of Ukraine continuing.

Moreover, further lockdowns and a deepening real estate crisis there has pushed growth down to 3.3 per cent this year – the slowest in more than four decades, excluding the pandemic.

And in the Eurozone, growth has been revised down to 2.6 per cent this year and 1.2 percent in 2023, reflecting spillovers from the Ukraine war and tighter monetary policy.

“As a result, global output contracted in the second quarter of this year,” said Mr. Gourinchas.

Inflation

Despite the global slowdown, inflation has been revised up, in part due to rising food and energy prices.

This year it is anticipated to reach 6.6 per cent in advanced economies and 9.5 per cent in emerging market and developing economies – representing upward revisions of 0.9 and 0.8 percentage points respectively. And it is projected to remain elevated for longer.

Broadened inflation in many economies reflects “the impact of cost pressures from disrupted supply chains and historically tight labour markets,” the IMF official stated.

Downward risks

The report outlines some risks ahead, including that the war in Ukraine could end European gas supply from Russia altogether; rising prices could cause widespread food insecurity and social unrest; and geopolitical fragmentation may impede global trade and cooperation.

Inflation could remain stubbornly high if labour markets remain overly tight or inflation expectations are too optimistic and prove more costly than expected.

And renewed COVID-19 outbreaks and lockdowns threaten to further suppress China’s growth.

“In a plausible alternative scenario where some of these risks materialize…inflation will rise and global growth decelerate further to about 2.6 per cent this year and two per cent next year, a pace that growth has fallen below just five times since 1970,” said the IMF economist.

“Under this scenario, both the United States and the Euro area experience near-zero growth next year, with negative knock-on effects for the rest of the world”.

Destabilizing inflation

Current inflation levels represent a clear risk to macroeconomic stability, according to the outlook.

Responding to the situation, central banks in advanced economies are withdrawing monetary support faster than expected, while many in emerging market and developing economies began raising interest rates last year.

“The resulting synchronized monetary tightening across countries is historically unprecedented, and its effects are expected to bite, with global growth slowing next year and inflation decelerating,” said Mr. Gourinchas.

Policy priorities

While acknowledging that tighter monetary policy would have economic costs, the IMF official upheld that delaying it would only exacerbate hardship.

And hampered by difficulties in coordinating creditor agreements, how and whether debt can be restructured, remains unpredictable.

He argued that domestic policies responding to the impacts of high energy and food prices should focus on those most affected, without distorting prices.

“Governments should refrain from hoarding food and energy and instead look to unwind barriers to trade such as food export bans, which drive world prices higher,” advised the IMF official.

Meanwhile, mitigating climate change continues to require prompt multilateral action to limit emissions and raise investment to accelerate a “green transition”.

Policymakers are urged to ensure that measures are temporary and only cover energy shortfalls and climate policies.

Teetering on the edge

From climate transition and pandemic preparedness to food security and debt distress, multilateral cooperation is key, said the IMF economist.

“Amid great challenge and strife, strengthening cooperation remains the best way to improve economic prospects and mitigate the risk of geoeconomic fragmentation,” he underscored.

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