Davos Forum warns of income inequality

LONDON — The gap between the rich and the poor is the most likely threat to the global economy in coming years, the World Economic Forum said Thursday in a risk assessment ahead of the gathering of political and business leaders in the Swiss ski resort of Davos.

The Forum, which hosts the annual gathering, said income disparity in the wake of the global financial crisis is the “most likely risk to cause an impact on a global scale in the next decade” and warned of a “lost generation” of young people that could stoke tensions in society.

“The generation coming of age in the 2010s faces high unemployment and precarious job situations, hampering their efforts to build a future and raising the risk of social unrest,” the Forum said in Global Risks 2014, which was compiled with contributions by 700 global experts.

The warning from the Forum comes amid signs that the global economy has finally gotten over the worst that the financial crisis has thrown at it. The U.S. has begun to rein in some of the extraordinary monetary policies it put in place to get the economy out of recession and avoid a repeat of the 1930s. The countries that use the euro currency are past the worst of their debt crisis. The World Bank, in a report this week, went so far as to say the global economy has “turned a corner.”

However, the costs of the global financial crisis, which has left its mark on all corners of the world, are not expected to disappear overnight, and next week’s meeting is likely to face criticism from groups campaigning against poverty and globalization.

Adrian Monck, who is the head of communications for the Forum, defended the gathering, noting that inequality and wealth gap were now on the agenda for discussion.

“It’s important that people have that brought to their attention and that we mobilize people around those issues,” he said.

Philip Jennings, General Secretary of the labor group UNI Global Union, said the risk report “should act as a wake-up call” to those attending Davos.

“These are global issues we can do something about: we can twist the global economy back into shape — this includes a new commitment to create jobs, address income inequality and falling living standards,” said Jennings, whose organization represents 20 million workers from over 900 unions.

“Since the global financial crisis it’s been a race to the bottom in jobs, wages and living standards,” he said.

John Veihmeyer, chairman and CEO of KPMG’s Americas division, said it’s “absolutely understandable” that income inequality was revealed as a major risk and that fixing and improving education systems around the world is a key, if not sole, way to narrow the differences.

In large parts of the developed world, the imbalance between government spending and tax-based revenue will likely mean budget restraint for years to come at a time when economies are trying to gain traction.

“Many young people today face an uphill battle,” said David Cole, chief risk officer at Swiss Re, a reinsurance firm that contributed to the Forum’s risk assessment. “As a result of the financial crisis and globalization, the younger generation in the mature markets struggle with even fewer job opportunities and the need to support an aging population.”

In a number of countries, particularly in those at the forefront of Europe’s debt crisis, youth unemployment has risen to extremes. Greece and Spain have nearly 60 percent of their under-25s out of work.

As well as creating uncertainty in households and stifling consumer spending, sky-high youth unemployment also denies workers skills and experiences, depressing an economy’s long-term potential and increasing tensions in society and between generations.

Those tensions have come to the fore in recent years, leading to many Western governments getting the boot at the ballot box, but have so far been largely contained.

And though the developing world has been spared much of the economic pain that befell the advanced economies, Swiss Re’s Cole said they too have big issues, particularly a lack of skills in the workforce, which has to be tackled by governments and business alike.

In the developing world, pent-up tensions have led to the overthrow of regimes, most notably in the Arab world. However, popular protests have also erupted in fast-growing economies like Brazil and Turkey, highlighting how governments need to be mindful of the demands in society at a time when money appears to be plentiful.

“People are just not going to stand for it anymore,” said Jennifer Blanke, chief economist at the World Economic Forum. “It’s really eroding at the social fabric.”

Other risks identified in Thursday’s report include extreme weather events, cyber-attacks and a significant decline in the quality and quantity of fresh water.

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