During the World Economic Forum on the Middle East and North Africa (MENA) held in Morocco last October, Erwann Michel-Kerjan, managing director of Wharton’s Risk Management and Decision Processes Center, told attendees that competition for natural resources and economic growth will become the top risk facing governments in the region.

Fast forward to the start of the new year, when the region witnessed the ousting of Tunisian President Zine el-Abidine Ben Ali, who fled his country after street protests over poor economic conditions could no longer be contained by the military. Now, copycat protest movements are being attempted in neighboring North African countries, while Gulf countries, concerned about high rates of unemployment, are preemptively offering additional benefits packages to its citizens.

At the gathering in Morocco, Michel-Kerjan said MENA countries will pay an even higher price in the future than today if such risks aren’t mitigated, for two reasons. First, slightly more than half of the region’s 300 million inhabitants live in urban areas. While already facing an unprecedented degree of human and economic concentration, the overall population is projected to increase to 430 million by 2020, of which 280 million are expected to be urban. Second, the risks involving the assets that many MENA countries now rely on for economic prosperity have increased significantly. As a result, many more people are competing for limited natural resources, increasing the exposure of their countries to all types of catastrophes.

For governments to improve how they manage the changing array of risks, Michel-Kerjan proposes six steps:

• Determine the top 10 risks a country faces. While trying to get a grip on a seemingly never-ending risk landscape is daunting, one way for a country to start is by establishing a high-level commission to determine the key sources of national risk exposure over, say, a 12-month period. Countries that have already undertaken the exercise often identify water scarcity, energy security and underinvestment in infrastructure as "crippling risks." Terrorism or natural disasters will certainly be on the list.

• Understand risk interdependencies. Risks are becoming more interdependent. For instance, prolonged flooding or an earthquake has a major impact on agriculture, which then leads to a serious economic, health and social impact and can induce political risks. Furthermore, economic and social globalization means that risks can easily spread across nations i.e. a catastrophe in Country A can have a serious effect on Country B. Quantification of these effects ex ante is critical.

• Determine what national strategy exists, if at all, for government to deal with these risks. A transparent account of major local and national initiatives to tackle risks should be compiled. Many MENA countries are trying to improve how they manage risks, but their focus is often local or sector-based. To benefit from economies of scale, these efforts should be consolidated into a single national strategy.

• National leaders in MENA countries should compare their risk management strategies and identify best practices.Every year, the International Monetary Fund (IMF) helps G-20 countries assess how respective national and regional economic policy frameworks fit together. The peer review consists of a forward-looking analysis of whether policies pursued by G-20 countries are consistent with the global economy’s sustainable, balanced growth trajectory. A similar process could be developed in the MENA region with a number of global risks considered priorities by top leaders.

• Establish a cabinet-level national risk officer. Similar to a chief risk officer in the private sector, a national risk officer can serve as a country’s coordinator for comprehensive risk management, while concurrent initiatives by decision-makers ascertain risk tolerance and the resources required to prevent and mitigate risks.

• Design financial mechanisms to hedge the economic consequences of extreme events. If organized creatively across the MENA region, innovative financial solutions (such as post-disaster loans or catastrophe bonds) could provide a safety net to countries needing protection, while guaranteeing a high return on investment to dedicated investors. Ideally, richer countries, such as Saudi Arabia and Kuwait, might join as institutional investors.

Speaking with Arabic Knowledge at Wharton, Michel-Kerjan discusses today’s context in which these processes can evolve, while assessing the changing array of factors — including social media — that are critical for risk managers to understand in an increasingly interdependent world.

An edited transcript of the conversation follows.

Arabic Knowledge at Wharton: Some governments in the MENA region are accused of cultivating a level of social risk in their societies as a way to maintain control. What is your view?

Erwann Michel-Kerjan: This is a complicated issue because there is no "one-size-fits-all" way to manage social risks. Many countries in the MENA region have gone a long way to at least consider social risks in a more constructive manner than many did a generation ago.

As we do this interview, Tunisia’s President Ben Ali has just fled his country, after a month of mounting protests in the streets calling for an end to his 23 years of rule, which many have qualified as authoritarian. What happened there might turn into a wake-up call for many.

With the eruption of social media, the world is changing radically and much faster than ever before. Facebook, Twitter and most social media did not exist in 2000. The key questions for top decision-makers, royal families and rulers are: Are we ready for this? What will it change? The answer cannot be "not much."

Indeed, the changes will be important. Every citizen can now use the web to access vast amounts of information that’s available at any time of the day or night, post videos and documents, and coordinate actions with hundreds if not thousands of other citizens they might not even know. It has been [widely acknowledged] that [Barack] Obama was elected president of the United States thanks to use of social media. President Ben Ali was pushed aside by the same use of social media. This is new and this is happening now.

Arabic Knowledge at Wharton: What did last year’s bombing attempt by Al-Qaeda using courier mail en route to the U.S. to hide explosives demonstrate? The anti-terrorist system stopped the bombs, but not before they were shipped.

Michel-Kerjan: It demonstrates the risks associated with our highly interdependent world and the fragility of our infrastructure in [managing] catastrophe risks. The terrorists didn’t directly attack the Chicago or Philadelphia airports. They tried to use the limitations of our own network and turn them against us to kill many people and ignite fear. The bombing attempt was very similar to what happened with the Pan Am 103 flight, which exploded over Lockerbie, Scotland in 1988. In that instance, the bomb had been loaded on an airplane in a small airport in Malta — where security measures were very poor — and was transferred on to Pan Am 103 at London’s Heathrow Airport. The bomb was designed to explode at a certain altitude, which it tragically did, and 270 passengers and people on the ground died. In an interdependent system, we are only as strong as our weakest link.

Arabic Knowledge at Wharton: Are there any risks that can be dealt with jointly among MENA countries?

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Michel-Kerjan: We certainly discussed this at length [at the World Economic Forum in Morocco] this fall and will do so again this week [at the World Economic Forum] in Davos. There are many risks that not only could be, but also must be, dealt with at a regional level. Security, retrenchment from globalization, overregulation, financial and fiscal risks, access to key skills to support competitiveness and access to new markets, chronic diseases, natural disasters, and terrorism — the list is long. As the MENA region takes a more important place in world affairs, it faces many of the risks Western countries have had to deal with before them.

 

Arabic Knowledge at Wharton: Similarly, what sort of cooperation can be fostered between governments and private businesses to deal with risk in the MENA region? Are there approaches to be copied from the West?

 

Michel-Kerjan: I don’t think leaders in MENA should "copy" anything from the West. They have proven to be leading their countries in highly adverse conditions with a good measure of success. But, like everyone else, they could certainly make sure they know more about how the West has been trying to deal with catastrophe risks with great successes, but also immense failure. Learning from international experiences helps a country design solutions that would be most appropriate given its cultural, economic, religious and political characteristics.

 

A good example is the work I’m doing with the World Bank and the Kingdom of Morocco to design a national risk management strategy. It will include risks like earthquake and floods, but also agricultural risks and commodity price volatility…. This high-level initiative under the leadership of Nizar Baraka [Morrocco’s Minister Delegate to the Prime Minister for General and Economic Affairs] will make sure the country thinks and acts strategically with extreme events, reduces risk management costs, and improves the stability of the country. By doing so, we ensure that foreign investors see this country as a place where they want their capital to grow, for the benefit of many.

 

Arabic Knowledge at Wharton: How do you manage risk in a culture where many believe in fatalism and entrust their affairs to God’s will?

 

Michel-Kerjan: This is why MENA countries will never "copy" the West. There are major cultural differences one needs to respect. 

 

Arabic Knowledge at Wharton: Recent Wikileaks revelations were a double-edged sword for Arab nations, particularly the United Arab Emirates (UAE), with the release of embarrassing details about its diplomatic requests to the U.S. about managing Iran, alongside information that vindicated the country’s concerns about Israel’s involvement in the assassination of a Hamas member in Dubai. Could MENA countries mentioned by Wikileaks have formulated a better strategy to the leaks than simply ignoring them?

 

Michel-Kerjan: Wikileaks goes back to my earlier point about the rapidly increasing role and power of social media. You might not want to pay too much attention to it now, but that will not make it disappear. The desire for more transparency is growing everywhere. As for the UAE’s diplomatic requests you are referring too, it is not for me to comment on them.

 

Arabic Knowledge at Wharton: Some experts have suggested that it is time to shift the focus from managing risk in the Middle East to supporting emerging opportunities in these countries. Would you agree?

 

Michel-Kerjan: The two go together. You will not create sustainable value without managing the risks that come with growth. On the other hand, merely managing risks will never create value. Davos 2011 is clearly about that balance.

 

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The Middle East had great successes these past few years and there are major opportunities the region could seriously look at and act upon. This region has clearly the potential to play a much more important role in the future.