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Executive Action February 2006 Facing the Risks Global Security Trends and Canada The Conference Board of Canada forecasts that over the next 15 years, the world will grow increasingly interconnected, complex and turbulent. Globalization will create rapid and expansive shifts in the geopolitical, economic, social, environmental and biological landscape. While change, growth and integration will increase opportunities for wealth and well-being, they will also create new channels for risk and insecurity. Canada s prosperity and strength are linked to our openness and engagement in an increasingly interdependent world. Our growing interconnectedness will bring a healthy flow of capital, trade, people and knowledge; it will also bring conflict, violence and uncertainty. Three major areas of risk will arise from the trends dominating the world in 2020: 1. conflict risks based on violence, including conventional threats (such as wars) and new or non-conventional menaces (such as terrorism); 2. social and health risks, including increased vulnerability to disease and crime; and 3. economic and technological risks and insecurities arising from globalization and the shift to market-driven decision-making processes, including disruptions to economic and resource infrastructures, greater disparities between the rich and the poor, and weakened global governance. Our growing interconnectedness will bring a healthy flow of capital, trade, people and knowledge; it will also bring conflict, violence and uncertainty. This is the fourth in our series of Executive Action reports on the findings and recommendations of Performance and Potential 2005 06. The first report, Canada Continues to Lose Ground in Global Rankings, appeared in November 2005. The second, Canada and the New World of Integrative Trade, came out in December. The third, Pursuing Sustainability: Global Commodity Trends and Canada, was published in January 2006. The fifth and final report on Canada and aging populations will appear in March 2006. CORPORATE FINANCE AND RISK MANAGEMENT

CONFLICT RISKS The Conference Board anticipates that by 2020, the geopolitical landscape will have shifted significantly, creating tensions, ruptures and hot spots that will have an impact on global, as well as Canadian, security. While a major global conflict is not likely, changing demographic, economic and political realities will put pressure on existing structures and relationships. The rise of Asia will have momentous security implications. A very cold peace will prevail and skirmishes may erupt between the larger powers and their smaller neighbours. Most Asian political systems will probably be in transition, with few consolidated democracies and a whole slew of political hybrids oscillating between authoritarianism and more liberal political arrangements. While the region will be rife with tension, its political institutions will have a limited ability to deal with them. China s exploding economic growth is heightening internal social and political pressures that the Chinese government will have difficulty managing. As China s economy surges forward, the gap between rich and poor will continue to grow. The human development index for Shanghai has climbed as high as Portugal, but the index for China s poorest regions is as low as the African country of Gabon. Inequality will fuel resentment and more social unrest. Whether the Chinese government can manage these pressures remains to be seen. It will be increasingly pushed from two directions: China s new middle class and wealthy will likely demand a stronger political voice and reform of the country s political institutions to align with the market-based economy, whereas regions and individuals left behind by China s rapid industrialization will probably demand a bigger share of the pie. Political stability in China is fragile and will become even more fragile in the coming years. Asia s rise will also heighten global competition for natural resources particularly energy. There will be an emphasis on protecting and securing access to vital resources, which will create potential risks of conflict and further raise resource costs. Higher prices for primary products are not always an unmitigated boon for producing countries. Resource dependence in underdeveloped ones is strongly associated with poor governance, corruption, instability, civil war and state failure. Many weak states will become weaker, while some stronger ones will struggle. Terrorism will likely remain a significant danger. Encroachments on privacy, some restrictions on civil liberties and a higher degree of leeway for security agencies will become important security concerns in liberal democracies. A significantly larger number of states and non-state organizations will have access to extremely powerful weapons of mass destruction (WMDs). While balances of power will limit the use of WMDs in traditional conflict situations, the risk of dangerous accidents will increase. The global governance deficit will not be able to offset the security risks stemming from inter-state wars, weak states, terrorism and WMD proliferation. Asia will not be adequately reflected in existing international institutions, and the United States may often take unilateral action, further weakening the credibility of international law and the opportunities for smaller countries to influence outcomes. The United States will continue to possess the most powerful military force in the world. Insulated from the main areas of inter- and intra-state conflicts, the United States will have opportunities to build provisional alliances, playing countries against each other to limit any unrestrained growth of power. CANADA: PARTIALLY SHELTERED Canada will be a taker, not a maker, of global security trends. Canada s shelter will not be perfect, but our stability, resources and geographic location will help to insulate us from the more traditional threats to world security that will exist in 2020. In 15 years, Canada will account for less than 2 per cent of the world s gross domestic product (GDP), only 1 per cent of the world s military expenditure and just 0.5 per cent of the world s population. Our role in global dynamics will be marginal. The global governance deficit will further frustrate any desire we might have to exert influence. However, our future demographic, economic 2 The Conference Board of Canada

The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. and military marginality does not have to mean irrelevance or impotence if we engage in focused efforts with highly competent people and excellent nationallevel institutional support. While we will have to adapt to and manage the impact of global trends, we might also profit from certain risks and insecurities. This is especially true in relation to the growing global competition for natural resources. As a massive producer of resources and energy, Canada will benefit immensely from rising prices. Paradoxically, higher global security risks will increase Canada s appeal to investors and lead to potentially greater profits and economic gain. While Canada has the resources and the ability to manage and contain the tensions that flow from resource dependence, the best scenario for Canada and Canadians is a stable world where commodity and energy prices remain high. Our proximity to the United States will increase the risk of a terrorist assault. In particular, Canada will be vulnerable to attacks meant to disrupt North American or global communication networks or oil and energy supplies to the United States. But the United States is unlikely to leave itself open to attack through Canada, so it will continue to take a strong interest in the security and defence of Canada s territory consistent with its own national security interests. Managing our relations with the United States will be a perennial source of concern, especially since the primary market for our resources will remain the United States. SOCIAL AND HEALTH RISKS The social implications of current global dynamics and integration will create new sources of insecurity for individuals and nations. The most important trend is the growing disparity between and within countries a gap that shows no signs of reduction despite the growing wealth produced by globalization. This being said, accelerated growth in Asia will make hundreds of millions of poor people richer and push global poverty statistics downward. GDP per capita will rise in most countries, and the absolute number of destitute people will fall. However, revenues in almost every country will become more concentrated, with small segments of the population capturing a growing portion of the wealth. State capacity to govern and provide services will also diverge widely. In the gaps created both within and between countries, two big security threats are likely to thrive: infectious diseases (including pandemics) and transnational crime (including drug trafficking). There is a growing consensus that a large-scale, and possibly catastrophic, flu epidemic is imminent. While it is not the only health crisis threatening world populations, it is the most menacing one. This long-awaited flu virus is expected to be so contagious that any attempt to close off borders and control migration would be ineffective. The consequences of a flu epidemic would be devastating. Between 180 and 360 million people could perish. Aside from the sheer dent in the global workforce, an epidemic of medium proportions would break global production chains, shatter trade and impede the delivery of services involving human contact. A widespread flu pandemic would throw the world into a sudden and possibly dramatic global recession. In the gaps created, two big security threats are likely to thrive: infectious diseases and transnational crime. While the pandemic would spread throughout the world, the impact would be highly skewed. Asian and African countries would be the hardest hit. A pandemic would also feed on and heighten existing inequalities. It would not only kill millions of people, it would have the power to close borders, destabilize economies and topple unstable governments. It would elevate the more traditional security risks and help shape a world where other threats could blossom. Criminal organizations do not need an epidemiological disaster to enrich their coffers. Current estimates put the worldwide value of criminal activities at between US$500 billion and US$1.5 trillion. This value is likely to increase in coming years, riding the many waves of globalization from increasingly efficient transportation and communication networks, to the perpetuation of pockets of extremely poor governance. Drug production and trafficking will remain the most significant illegal activity in the world, with transfer patterns shifting from the traditional south north routes towards a south south and south east orientation. The Conference Board of Canada 3

Globalization and technological progress will further enhance criminal activity by providing efficient transportation and communication networks. Corruption, poverty and weak law enforcement will make it easier for criminal networks to exploit governance holes. CANADA: VICTIMS AND VECTORS While Canada can be typified as a sheltered taker in the face of traditional threats, we will be poorly protected when we begin to confront non-traditional threats. This is partly because the ground on which those threats will develop lies within our boundaries. Canada will not escape the imminent pandemic, and unless the level of global preparedness improves, panic will reign. Estimates of the scale of fatalities vary widely, but in the worst-case scenario, an H5N1 avian flu epidemic could kill as many as 1.6 million Canadians. 1 An epidemic such as this would paralyze our manufacturing sector. Border disruptions would shatter integrated production lines and could last more than a year. Direct medical costs could surpass hundreds of millions of dollars. Canadian businesses and business organizations must be prepared to deal with a major flu outbreak to coordinate with government emergency agencies, reduce the risk of disease transmission in the workplace, and maintain essential business functions despite the potential for high employee absenteeism. 2 The Conference Board is currently surveying Canadian private sector organizations to see how prepared they are for an influenza pandemic. Health and social issues could represent the most important human security challenges for Canada. Health crises and criminal activity will worsen existing inequalities in Canada. Concentration of income and regional disparities will increase. The continuing challenges confronting Canada s public health-care system will create profound differences between those who can afford private care and those who cannot. Above all, the gap between the living conditions of Aboriginal people and the rest of the population will still exist and, in many areas, it will widen. Health and social issues could very well represent the most important human security challenges confronting the Canadian government and society. These challenges will likely pivot around the most marginalized groups and individuals in society as vectors, but especially as victims. Successful policy interventions will need to address social exclusion itself. ECONOMIC AND TECHNOLOGICAL RISKS As the world relies increasingly on market forces to allocate resources within and among national economies, different, and possibly greater, risks to our individual and collective well-being will emerge. Over the next 15 years, many of the world s economies will keep growing, but growth rates will vary greatly and the market itself will be in flux. Competition will enhance both prosperity and vulnerability. Specialization will increase rewards and risks of displacement. Technology and integration will allow us to take advantage of global opportunities and make us more vulnerable to accidental or intentional interruptions. Five trends will affect the economic and technological environment of the future: growth, innovation, specialization, liberalization and integration. All five are interdependent and have become collectively embedded in most conceptualizations of globalization. These five trends will feed off each other, with the consequences rippling and interacting at international, national and individual levels. An integrated, technologically advanced and marketbased global economy will create new opportunities. It will also generate risks and insecurities. As we become increasingly dependent on sophisticated logistics to move goods, capital, resources and information, we will be increasingly vulnerable to disruptions in flow and supply. There will be a strong incentive to protect the infrastructure of global supply chains, but competitive pressures to reduce costs could result in less redundancy, which could leave countries, corporations and individuals less diversified and therefore less protected against risk. It could also potentially weaken governments ability (or will) to confront, proactively or reactively, the major security risks or crises that arise. 4 The Conference Board of Canada

The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. CANADA: THE PROSPERITY DISPARITY While many global economic trends should enhance the overall prosperity of Canada and Canadians, their distributional consequences may well be less benign. As countries continue to grow, specialize and integrate, Canada s primary resources will be in greater demand, particularly in the energy sector. While this resource boom will lead to increased incomes and wealth, the resultant prosperity will not be distributed evenly, and the boom may also create economic and political pressures. However, the resource sector accounts for a falling share of Canada s economy, so this may limit the overall negative impact. Canada s service sector may also expand beyond its current two-thirds share of GDP. While Canada will increasingly specialize in producing and exporting high value-added, knowledge-based services, Canadians may view this trend with mixed feelings. Even for those Canadians able to take advantage of the opportunities presented by the economic transformation, the emerging labour market will be both dynamic and demanding. Highly skilled workers may face greater short-term uncertainty and vulnerability to market pressures, even if the long-term prospects for rewarding employment remain promising. A growing reliance on technology, as well as the enhanced integration of communications systems, will also present greater challenges and risks to Canadians with lower levels of education and fewer resources. Income disparities may become more dramatic and entrenched. How governments tackle poverty and social polarization will influence our susceptibility to risks such as pandemics and criminal activity. POLICY IMPLICATIONS Sheltered within our continent, protected for the most part by our proximity to the United States, Canada will be more secure than most places in the world as we face traditional and emerging security challenges. Allocate resources strategically. The dominant sources of risk for Canadians will be the less traditional threats to human security, many of which will stem from events and developments occurring outside our reach. As we allocate resources to manage risks, we must weigh our choices carefully, creating a balance between costs and results. Investments in prevention, remediation, redundancy and collective security require broad debate and strong political direction. Enhance social programs that target vulnerable populations. There is some evidence that economic insecurity and poverty in Canada will be concentrated in distinct groups, particularly among Aboriginal people and recent visible minority immigrants. The consequences of their vulnerabilities will generate wider social ills that will affect all Canadians. As a result, sustained and comprehensive policies will have to target these vulnerable populations. Investments in prevention, remediation, redundancy and collective security require broad debate and strong political direction. Become more deeply engaged in select multilateral institutions. As an open, liberal and democratic society, Canada will never be, nor should we want to be, completely protected from global trends and influences. Our geographic location, wealth, education, stability and integration with the largest economic and military power on the planet will provide a degree of shelter and stability. But our limited weight and influence will hinder our ability to control global trends and events. The transnational nature of current risks to human security requires stronger intergovernmental coordination at a time when multilateral institutional arrangements are weak and global governance is increasingly constrained. In the end, ongoing resource constraints mean that Canada will need to set priorities and become more deeply engaged in institutions that serve our interests while making a difference internationally. 1 This is based on a prorating of U.S. estimates from Laurie Garrett, The Next Pandemic?. Foreign Affairs, Vol. 84, No. 4 (July/August 2005). 2 Kirsty Duncan, Business May Take a Big Hit, Toronto Star, Jan. 31, 2006. The Conference Board of Canada 5

Facing the Risks: Global Security Trends and Canada by The Conference Board of Canada About The Conference Board of Canada We are: A not-for-profit Canadian organization that takes a business-like approach to its operations. Objective and non-partisan. We do not lobby for specific interests. Funded exclusively through the fees we charge for services to the private and public sectors. Experts in running conferences but also at conducting, publishing and disseminating research, helping people network, developing individual leadership skills and building organizational capacity. Specialists in economic trends, as well as organizational performance and public policy issues. Not a government department or agency, although we are often hired to provide services for all levels of government. Independent from, but affiliated with, The Conference Board, Inc. of New York, which serves nearly 2,000 companies in 60 nations and has offices in Brussels and Hong Kong. Publication 172-06 255 Smyth Road, Ottawa ON K1H 8M7 Canada Tel. (613) 526-3280 Fax (613) 526-4857 Inquiries 1-866-711-2262 The Conference Board, Inc. 845 Third Avenue, New York NY 10022-6679 USA Tel. (212) 759-0900 Fax (212) 980-7014 www.conference-board.org The Conference Board Europe Chaussée de La Hulpe 130, Box 11, B-1000 Brussels, Belgium Tel. +32 2 675 54 05 Fax +32 2 675 03 95 The Conference Board Asia Pacific 2802 Admiralty Centre, Tower 1, 18 Harcourt Road, Admiralty Hong Kong SAR Tel. +852 2511 1630 Fax +852 2869 1403 2006 The Conference Board of Canada* Printed in Canada All rights reserved Agreement No. 40063028 *Incorporated as AERIC Inc. For more information please contact us at the numbers listed above or e-mail contactcboc@conferenceboard.ca. This publication is available through the Internet at www.conferenceboard.ca/edata.htm. Forecasts and research often involve numerous assumptions and data sources, and are subject to inherent risks and uncertainties. This information is not intended as specific investment, accounting, legal or tax advice. www.conferenceboard.ca