Risk within, Risk unseen ; fat tail risk that could arise suddenly and unexpectedly.

What are the unseen yet stealthily rising sovereign, socio-political, geopolitical , financial and related challenges coming at us ? The following note was a result of that...............

Threats Beyond Borders, And Within A surprising number of elections and political transitions is scheduled to occur over the coming months. An incomplete list includes Russia, China, France, Greece, USA, Egypt, Mexico, and South Korea. At first glance, these countries have little in common. Some are well-established democracies; some are authoritarian systems; and others are somewhere in between. Yet, for all of their differences, these governments and the individuals who will lead them face many of the same challenges. Three stand out.

The first is that no country is entirely its own master. In todays world, no country enjoys total autonomy or independence. To one degree or another, all depend on access to foreign markets to sell their manufactured goods, agricultural products, resources, or services or to supply them. None can eliminate economic competition with others over access to thirdcountry markets. Many countries require capital inflows to finance investment or official debt. Global supply and demand largely set oil and gas prices. Economic interdependence and the vulnerability associated with it is an inescapable fact of contemporary life. But economic dependence on others is not the only international reality with which governments must contend. It is equally difficult if not impossible for countries to isolate themselves from terrorism, weapons, pandemic disease, or climate change. After all, borders are not impermeable. On the contrary, globalization the immense flow across borders of people, ideas, greenhouse gases, goods, services, currencies, commodities, television and radio signals, drugs, weapons, emails, viruses (computer and biological), and a good deal else is a defining reality of our time. Few of the challenges that it raises can be met unilaterally; more often than not, cooperation, compromise, and a degree of multilateralism are essential. A second universal challenge is technology. George Orwells vision of 1984 could hardly have been more wrong, because the hallmark of modern technology is not Big Brother, but decentralization. More computing power can now be held on a desktop or in a persons hand than could be gathered in a room only a generation ago. Moores Law, thus named after Gordon Moore, the founder of INTEL along with Bill Noyce, said that transistor capacity thus computing power shall roughly double every two years. This has held good for almost 3 decades now.As a result, people everywhere now have more access to more sources of information than ever before. making it increasingly difficult for governments to control, much less monopolize, the flow of knowledge. Citizens also have a growing ability through mobile phones and social networking to communicate directly and discreetly with one another. One consequence of this trend is that authoritarian governments can no longer wield control over their citizens as easily as they once did. Technology is, no doubt, one explanation for the uprisings that we are seeing in much of the Arab world. But modern technology also has implications for well-established democracies. It is far more difficult to generate social

consensus and to govern in a world in which citizens can choose what they read, watch, and listen to, and with whom they talk. A third widespread challenge that awaits emerging leaders is the inescapable reality that citizens demands increasingly overwhelm the capacity to satisfy them. This was always true in the so-called developing (and often relatively poor) world. But now it is also the case in the relatively well-off mature democracies, as well as among those countries that have been growing fastest. The emerging markets like China and India provide no social security net to their citizens or any equivalent of Medicare or National Health Service. The absence of the same has meant no entitlement society ahs sprung up. Yet. A growing combination of awareness, income inequality and industrial growth implies that pent up demand for health and pension service is lagging behind in the BRIC nations. Economic growth is slower in many cases than the historic norm. This is readily apparent for much of Europe, Japan, and the US. But growth is also slowing in China and India, which together account for more than one-third of the worlds population. Unemployment rates are high, in the US and Western Europe, and especially among the young and those nearing the end of their careers (but who are still expected to live for decades). This is widely known and frequently discussed. The potential of destroying the tax base via political activism sits as a glaring example in Europe today. Less acknowledged is the massive and growing threat of a demographic spread. A dearth of young and employable. The massive population of China and India combined will need huge employment generating ability for the demographic dividend they seem to enjoy, especially in India. The absence of a social security net, disparity in employable skills and hangover of corruption alongside growing inequality will lead to social-political tensions which will create formidable challenges. More worrying still, much of this will translate into long-term unemployment. The net result of these economic and demographic shifts is that a growing share of national income is now being directed to provide health, pensions, and other forms of basic support, while a declining percentage of citizens in nearly every society is now working to support a growing number of fellow citizens. This rising dependency ratio is made worse by widening economic inequality; as more wealth is concentrated in fewer hands, the promise of everimproving standards of living for most people may not be fulfilled. Together, these three trends a loss of economic and physical autonomy, the diffusion of information technology, and slower growth against a backdrop of larger and older populations will create enormous political challenges in virtually every country. Demands are mounting at the same time as the ability of governments to satisfy them is diminishing. The leaders who will take power after this years transitions will confront this fundamental reality. Leaders will also have to confront the byproducts of increased nationalism, populism, and, in some cases, extremism. Hostility to immigration and economic protectionism, already visible, can be projected to increase.These developments within countries will make more difficult the challenge of generating global consensus on how to meet threats beyond borders: as governing successfully at home becomes more difficult, so will governing abroad. For citizens and leaders alike, tough times lie ahead.

Shamik Bhose Executive Director Commodity & Currency & Interest rate futures Markets Microsec Commerze Limited Www.microsec.in ; www.commoditylive.in

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