Risk Assessment: United States - Report Example

Risk Assessment: United States Name: Tutor: Course: Date: Table of Contents 1.0 Risk Assessment: United States of America 5 1.1 Introduction 5 1.2 Risk assessment 5 Figure 1: Risk assessment matrix 6 Table 1: Qualifying risks in terms of probability 6 Table 2: Classifying risks in terms of Impact 6 1.3 Country Risks: United States 7 Table 3: Country risk categories- United States 8 Table 4: Risk Assessment Table: United States 11 1.4 Fault Tree Analysis 15 Figure 2: Fault tree analysis of risks-United States 15 1.5 Risk Mitigation Plan 17 Figure 3: One percent GDP allocation to the risks 17 1.5.1 Economic risks 18 Figure 4: Economic risks 18 1.5.2 Political and security risks 19 Figure 5: Political and security risks 19 1.5.3 Environmental and health risks 20 Figure 5: Environmental and health risks 20 1.5.4 Socio-cultural risks 21 1.6 Conclusion 22 References 23 List of Figures 1.0 Risk Assessment: United States of America 5 1.1 Introduction 5 1.2 Risk assessment 5 Figure 1: Risk assessment matrix 6 Table 1: Qualifying risks in terms of probability 6 Table 2: Classifying risks in terms of Impact 6 1.3 Country Risks: United States 7 Table 3: Country risk categories- United States 8 Table 4: Risk Assessment Table: United States 11 1.4 Fault Tree Analysis 15 Figure 2: Fault tree analysis of risks-United States 15 1.5 Risk Mitigation Plan 17 Figure 3: One percent GDP allocation to the risks 17 1.5.1 Economic risks 18 Figure 4: Economic risks 18 1.5.2 Political and security risks 19 Figure 5: Political and security risks 19 1.5.3 Environmental and health risks 20 Figure 5: Environmental and health risks 20 1.5.4 Socio-cultural risks 21 1.6 Conclusion 22 References 23 List of Tables 1.0 Risk Assessment: United States of America 5 1.1 Introduction 5 1.2 Risk assessment 5 Figure 1: Risk assessment matrix 6 Table 1: Qualifying risks in terms of probability 6 Table 2: Classifying risks in terms of Impact 6 1.3 Country Risks: United States 7 Table 3: Country risk categories- United States 8 Table 4: Risk Assessment Table: United States 11 1.4 Fault Tree Analysis 15 Figure 2: Fault tree analysis of risks-United States 15 1.5 Risk Mitigation Plan 17 Figure 3: One percent GDP allocation to the risks 17 1.5.1 Economic risks 18 Figure 4: Economic risks 18 1.5.2 Political and security risks 19 Figure 5: Political and security risks 19 1.5.3 Environmental and health risks 20 Figure 5: Environmental and health risks 20 1.5.4 Socio-cultural risks 21 1.6 Conclusion 22 References 23 1.0 Risk Assessment: United States of America 1.1 Introduction This report provides a detailed assessment of risks that affect the population, environment, government and the reputation of United States of America. Every country around the world experiences certain risks that could be adverse to its progress and stability. In assessing these risks, it is important to understand their probability and frequency of occurrence so that appropriate action is taken. While probability shows the likelihood or chances of the adverse events occurring, frequency depicts the nature of occurrences of such events within a specific time range. Risk assessment involves identifying risks, quantifying or qualifying then providing effective actions or remedies from future occurrences. Ordinarily, actions to risks include transfer of risk, avoidance, inclusion and acceptance. The readiness of a country to handle risks will depend on its capacity in terms of resources and machinery to reduce the impact on human lives and environment. Although United States is one of the leading economies in the world, it is susceptible to a number of risks that threaten its image and stability as a nation and people. In this report, ten risks are identified and assessed based not only on their likelihood and frequency of occurrence but also their potential losses to the industry, nation, people and the environment. 1.2 Risk assessment Risk assessment is systematic evaluation of potential risks in an undertaking or a projected activity. When carrying out country risk assessment, it is important to classify them as high, medium and low risks. In the risk assessment matrix, high risks appear in red color while moderate risks are represented by yellow color. Moreover, low risks are depicted by green color as shown in the figure below. Figure 1: Risk assessment matrix These risks are also qualified under different probabilities and levels of impact as shown in the two tables below. Table 1: Qualifying risks in terms of probability Rank Description Probability 1 Under exceptional circumstances, the event occurs once every 500 years. Extremely Unlikely (EU) 2 The event has little opportunity of occurrence between 100 years and not more than 500 years with no recorded or expected evidence. Very Unlikely (VU) 3 The event is capable of occurring and little evidence of occurrence in less than 100 years. Unlikely (U) 4 Regular incidences of the event recorded in the last 10 years. Likely (L) 5 High level of incidences recorded in the last one year. Very Likely (VL) As shown in the table above, risks are ranked from extremely unlikely (EU) to very likely (VL) based on the frequency of occurrence within a given time or period. On the other hand, these risks whether occurring less or more frequently have certain levels of impact to people, society, industry and the environment. This classification is as shown in the table below. Table 2: Classifying risks in terms of Impact Rank Description Impact 1 One individual is killed. Minor injuries to not more than 4 people. First aid provided to victims or casualties. Economic costs of the loss are less than US$200,000. Localized and simple contamination. Recovery is within 48 hours. Disruption to community services and infrastructure is localized. Very Low (VL) 3 About 4 to 8 fatalities are recorded. The affected persons require urgent medical attention and hospitalization services. Mass displacement of people in 2 and 8 days. Little function within the society. Inconvenience to the community. The economic costs range between US$ 200,000-$1million. Low (L) 5 Estimated 8 to 20 people killed. Significant injuries and/or displacements. Over 8 days of displacement to a large section of the population. Over 4000 people are evacuated. Extended duration or localized effects of heavy contamination and destruction. Estimated economic costs range $1million and $2 million. Moderate (M) 7 Between 20 and 50 people are killed. Over 16,000 are evacuated and about 100 are seriously injured. Heavy contamination extended over long durations. Economic costs exceed $2million to $7million. Most emergency services not available. Community is poorly functioning. High (H) 9 More 50 people are killed. About 20,000 displaced or evacuated. Significant numbers have injuries. Economic costs exceed $7million. Prolonged loss of critical services. Significant disruption and serious damage to infrastructure. Very High (VH) From the table above, risks to a country could be more frequent and have high impact which poses grave danger to human existence. 1.3 Country Risks: United States United States is one of the world’s major economies with a combined GDP of $13.419trillion and high per capita GDP (Focus Economics, 2016). It is a federal republic with an estimated 319 million people. Although it is politically stable, it faces high corporate tax rate and public debt. Fortunately, it has large oil and gas reserves and relatively low labor unit costs and high data transparency. In the recent past, the nation has experience high default rates of student loans and bloated balance sheet of the Federal Reserve. Country risks are classified into three categories; economic, political and security, health and environmental risks. Table 3: Country risk categories- United States Risk Description Economic risks Public debt: In the 2015 fiscal year, public debt stands at 125% ($22.5 trillion) of the GDP (Amadeo, 2016). Large investors contribute to the spiraling public debt in the form of bonds, notes and treasury bills. The public debt-to-GDP ratio is almost tipping at 77 percent. Investors start to demand higher interest rates from bonds and notes. Components of auto-expansion such as auto loans, business growth and housing become more expensive to business owners. Debt holders will have a tendency to avoid US debt. Large budget deficits increase fiscal spending (Tepper, 2016). Weak productivity: In 2015, more than 800,000 workers left work. Increase in wages could be escalated by less supply of labor. Likelihood of increased bankruptcies due to tighter lending conditions. In the first quarter of 2016, bankruptcies rose by 1.1% which was the highest since the recession of 2008/09 (Global Edge, 2016). Household consumption: Expanding consumer debt and the housing bubble is unhealthy and unsustainable. Asset prices are highly inflated with many investors basing their investments on speculations (future expectations) instead of basic financial health. Compared to nations in the global economy, US economy is declining in terms of business competitiveness, production and manufacturing. Increase in interest rates could be a result of dollar value drops. Mortgage equity withdrawal will result from low cost of credit (Global Edge, 2016). Utilization rate of production capacity is likely to stagnate due to erosion of profits and decrease in new orders in the industry. Political and security risks Transfer /Capital controls: The US government imposes restricts the activities of private agents in moving funds out of the country. It has the lowest transfer risk scores compared to countries in Africa, Middle East, Eastern Europe and Latin America. Cash-sniffing dogs are been employed at the airports to control outward movement of cash. The US may find it difficult to tax, inflate the currency or borrow from lending institutions (Giambruno, 2015). Several countries like Vietnam, Saudi Arabia and Brazil with banking regulations will affect foreign US businesses that are required to withdraw funds after several months of sales. The held funds will decrease in currency value leading to loss of money by the business. Terrorism: From the terror tragedy of twin towers on 11/9/2001 to mass shootings at nightclubs and universities, the US is experiencing a surge in terrorism related activities. The US foreign policy in the Middle East seems to aggravate the existing belligerence on the inability of some Arab nations to engage in peaceful negotiations with rebel movements and extremist groups. The US fight against terrorism lacks the trust and goodwill of the Arab nations who wants Guantanamo prison closed, Iraqi sectarian war stopped and Abu Ghraib prison tortures brought to the fore (Jones, 2015). Environmental and health risks Heat wave: Places with high concrete concentration and those lacking forests and streams likely to affect more than 1 million people. North East US likely to gain 2.60F making the days to be very hot. Hot summers will have serious negative effects on labor productivity, mortality and health. Heat related mortalities may result in more than 20,000 deaths per year (Bloomberg et al., 2015). Extreme precipitation is more likely with rising temperatures to affect US agriculture. Alaska is threatened by melting ice while Hawaii is expecting sea level rise of 0.8-1.2 feet above the global average Sea level rise: Major cities like Miami and New Orleans built on porous limestone and below sea level respectively will experience rise in sea levels. Losses of up to $682 billion in property are at risk in Florida (Bloomberg et al., 2015). Communities and industries along the coastlines are under threat of rising sea levels. Sectors such as manufacturing, agriculture, utilities, transportation and construction will experience reduced labor productivity of 3.1% by 2100. Storm surge: Typhoons and hurricanes have been common in the recent past. This poses immediate economic risks to residents of California, Florida and Louisiana. Hurricane Sandy and Hurricane Katrina are some of the worst disasters in the United States. Up to 73% of the average yield loss will be experienced in the American Midwest (Bloomberg et al., 2015). Pollution: California leads among communities with worst air pollution. About 47% of Americans live under unhealthy levels of particulate pollution or ozone. California metro area has the highest levels of air pollution. The US steel plant in Pittsburgh and Cleveland still generates highest levels of pollutants (Sauter et al., 2015). Increase in ozone layer pollution is related to population density and automobile exhaust. About 140 million Americans are likely to experience cardiovascular problems, difficulty breathing, aggravated asthma and premature death (Poppolo, 2014). Socio-cultural risk Low fertility rate: In the past few years, the US birth rate is 59.6 births in every 1000 women (Gobry, 2015). This is attributed to reduction in teen pregnancies and the choice to have fewer children. Yet, it is not a sign of cultural health and confidence in the future. More entitlements are going to older people in the form of pensions (Park, 2016). Declining fertility rates likely to threaten the US economy and void in the workforce. Table 4: Risk Assessment Table: United States ID# Risk Impact Effects Likelihood Risk score [Impact × Likelihood] Responsibility Actions recommended 1 Public debt Moderate Bonds begin to attract low S&P rating. Higher likelihood to default in debt. Difficulty in refinancing the existing debt. Less money spend on government services as more goes to refinancing existing debt. Very Likely The US Federal Reserve Renegotiate existing trade deals. Always keep the debt small enough to maintain interest rates low and large enough to drive economic growth. 2 Weak productivity High Skills mismatch as people with low skills levels become less productive. Many baby boomers retiring impeding long-term growth. Reduction in corporate after tax profits by 4.7% annually. Business face increased financial costs. Likely Private sector, Employment bureaus, Department of Labor Federal reserve to tighten monetary policy. Lending conditions should be tightened by commercial banks. 3 Household consumption High Investors likely to move their money to the stock market (bonds) to avoid depreciating dollar. Labor costs expected to increase. Likely Marketing departments, State Department of planning, private sector Depreciate the dollar for manufacturers to make sales from cheap exports. Cushion the mining and energy sectors from low commodities prices. Reduce on unconventional oil production practices. Encourage greater domestic consumption on low risk sectors like transport, clothing and textiles and the automotive sector. 4 Transfer risk/Capital controls Low Leads to careless money printing, sky-high debt and runaway government spending. Unlikely US Treasury Government to impose explicit taxes to discourage purchase of foreign investments or transfer of money abroad. Regulate ownership of foreign bank accounts and ownership of foreign currencies. 5 Pollution High Exacerbates drought conditions. Around 1.6 million residents are living with asthma in Los Angeles alone. Dust storms and wildfires. Likely Department of environment and forestry Public health officials to prepare for pandemics of unknown or low probability. Clean power plants. Cleaner burning fuel and more efficient vehicles. Supreme court to uphold environmental regulation of coal-fired power plants. 6 Heat wave High Reduced labor productivity especially in the South East and South West. Strain on the energy system Unlikely Disaster preparedness units, Ambulances, Hospitals Install air conditioning systems. Households to pay insurance premiums to cushions families from fire and accruing hospital bills. 7 Storm surge High Average annual cost of coastal storms likely to increase along Gulf of Mexico and Eastern Seaboard by $2-3.5billion. Losses from hurricanes expected to rise to $7.3 billion. Likely Hospitals, US Army corps, Marines, utility companies Active participation of American business community. Provide information on climate change. Mitigate effects on agriculture through crop switching, seed modification and triple cropping. 8 Terrorism High Extremist groups likely to avenge the presence of US forces in the Middle East. Widespread ideology of US domination and exploitation of oil resources by Muslim countries. Increased anti-American sentiments and counter attacks on the US soil. Very Likely State department, US Supreme court, Department of defence Reduce spending on war policies and increase on infrastructural development and education. Review relations with moderate Middle East countries like UAE. End Palestinian-Israeli conflict. Engage political and diplomatic solutions to end terrorism instead of military force. 9 Sea level rise Medium Losses of up to $682 billion in property are at risk in Florida. Communities and industries along the coastlines are under threat of rising sea levels. Reduced labor productivity. Likely Utility companies, department of environment, department of meteorology Erect strong walls on areas falling below sea level. Legislation of issues relating to global warming. 10 Low fertility rate Medium The government will allocate more funds to pensioners instead of education and youth employment. Steady influx of immigrants to fill the falling birth rates. Very Likely US Bureau of Statistics, Department of planning Accommodate population aging. Introduce paid maternity leave and government benefits to families with children. Provide child tax credits, tax free child savings accounts and family savings account. Reduce local and state regulations to make housing cheaper. From the risk matrix table above, the most critical risks are public debt, storm surge and terrorism. This is because their risk scores are high indicated with ‘Red’. On the other hand, risks with low scores were transfer risk and heat waves. This shows that the US government and some of its departments have a huge role in tackling political and economic risks. The risk assessment provided some actions to be applied in handling some of these risks. Human and monetary resources are required in handling some of these risks to ensure that it does not pose grave harm to the population, economy and environment. While the US has been steadfast in combating environmental risks, some of the economic risks require massive financial resources to trigger household consumption and support public projects to improvement on employment rates. 1.4 Fault Tree Analysis Figure 2: Fault tree analysis of risks-United States From the figure above, four categories of risks were identified; economic, political and security, environmental and health, and socio-cultural risks. Under economic risks are public debt, weak productivity and household consumption. Political and security risks include transfer risk and terrorism. On the other hand, environmental and health risks are heat wave, storm surge and pollution. Finally, socio-cultural risks comprised low fertility rates. The ‘National Loss’ is 65.47% which is quite high. This is because these risks have high likelihood of occurring and have greater impact on US industries, people, and the environment. Specifically, economic (0.213) and political/security (0.2125) risks have significant impact on the population and United States reputation. The probabilities of these risks were obtained from other related risks. For example, public debt is a contribution of private equity funds and foreign borrowing. Being an OR-gate, the mathematical expression is as follows; OR-gate is represented by; P(A) = P(B) + P(C) P(Public debt) = P(private equity funds) + P(Foreign borrowing) = 0.35 + 0.45 =0.80 On the other hand, low fertility rates could be a result of career advancement among women and low teen pregnancies. This is expressed by an AND-gate. P(A) = P(B) * P(C) P(Low fertility rate) = P(Low teen pregnancies) * P(Career advancement) =0.25*0.125 =0.03135 From the two computations above, it can be established that public debt has higher probability compared to low fertility rate. This implies that United States, as a government, should give more attention to reduction of public debt that increasing its birth rates. This also means that any budgetary allocation should be based on the impact and likelihood of the risk to the industry, people and environment. 1.5 Risk Mitigation Plan United states GDP in 2015 were $15.97trillion and remain the largest in the world (Focus Economics, 2016). The economy is dominated by service companies in healthcare, retail, financial services and technology. When 1% of the US GDP is to be allocated to these risks, then it means that 0.01*15.97 = $159.7billion will be spent. The individual allocation will depend on the risk score obtained from the Fault tree analysis. In essence, the allocation of the funds to economic risks will be; Economic risks; 0.325, Political and security risks; 0.324, Environmental and health risks; 0.302 and socio-cultural risks; 0.047 The proportion of allocation is as shown in the pie chart below; Figure 3: One percent GDP allocation to the risks From the graph above, 66% of the allocation will go to economic risks as well as political and security risks. This implies that greater attention should be given to US economy especially in the reduction of public debt and triggering public consumption through increased government expenditure. 1.5.1 Economic risks The economic risks identified were; public debt, weak productivity and household expenditure. The allocation for public debt will be $21.7billion, weak productivity ($20.35billion) and household consumption at $9.61billion. Figure 4: Economic risks The $21billion allocated to reduce public debt will be spread over one year and that will include; Repayment of debt owed to Japanese and Chinese multinationals Facilitating trade deals with European countries on individual basis Maintaining interest rates at a bare minimum On the other hand, $20billion will be required to ignite the weak productivity associated with seeking the right skills. Some of the measures to be undertaken in the next two years will be; Depreciate the value of the dollar Outsource work that can be done across the border Hire specialized workers into healthcare, manufacturing and hospitality Also, household consumption has been allocated $9.61billion to be spent in the next two years to improve sales of US products and services within and abroad. The money will be used in; Media advertising and marketing of US products Reducing the burden of automobile and student loans so that US consumers can shift attention to affordable new homes Improve commodity prices in the energy and mining sectors by depreciating the dollar 1.5.2 Political and security risks Political and security risks comprised transfer risk and terrorism. The budgetary allocation for these risks was $51.5billion. Specifically, terrorism claims a huge percentage of the allocation $40.29billion while transfer risk will be allocated $11billion. Figure 5: Political and security risks In the allocation above, the $40billion to be allocated in fighting terrorism within the United States and abroad will be spread within three years. This allocation will go to; Creating and enhancing diplomatic relations with Middle East countries Engaging local Muslim population to integrate with the larger American culture Fighting extremist groups in Syria, Iraq, Somalia, Sudan, Libya and Yemen Again, the $11billion allocation from transfer risk will go to legislation over purchase of foreign investments or transfer of money abroad as well as regulating ownership of foreign bank accounts. 1.5.3 Environmental and health risks Health and environmental risks are very significant to the US survival and existence. Continued damage to the environemnt implies that people’s wellbeing is at stake. To combat these risks, $48billion will be allocated to reducing pollution, heatwaves, storm surges and sea level rise. Figure 5: Environmental and health risks The allocation for fighting pollution will be the biggest in this category at $32.74billion and is spread over three years. These funds will be used to; Reduce consumption of coal and other forms of tradditional energy Investment in green energy such as solar, wind and ocean waves Tax credits for use of electric trains and cars within cities especially those in the state of California and Florida The second highest allocation ($13.2billion) in the reducing sea level rise will be spread over two years. These funds will be used in the following ways; Erect strong walls on areas falling below sea level Legislation of issues relating to global warming Relocating people to higher points away from areas below the sea level such as Miami and New York Provision of early warning systems in the case of Hurricanes and Tornadoes Enlightenment of residents on construction standards to built homes and other structures intended to protect against storm surges Besides, $1.2billion will be allocated to combating heat waves that has affected the American Midwest in the recent past. The funds will be used in the next one year to; Install air conditioning systems at homes and offices Households to pay insurance premiums to cushions families from fire and accruing hospital bills Reduce high concrete concentration in urban areas to reduce heat surge Providing public water fountains and bath rooms for people to drink and take a bath Increasing forest cover in areas like Missouri and Kansas 1.5.4 Socio-cultural risks Lastly, $4.9billion will be allocated to increasing America’s fertility rate which is one the decrease and is likely to harm the future of the country. These funds will be used to; Media and publicity on the changing population dynamics and demographics in the United States Prevailing on people to accommodate population aging Introduce paid maternity leave and government benefits to families with children just as France is doing Provide child tax credits, tax free child savings accounts and family savings account Reduce local and state regulations to make housing cheaper 1.6 Conclusion This report has identified ten risks that are significant to the existence of the US as a nation and people. These risks were categorized as; economic risks, political and security risks, environmental and health risks and socio-cultural risks. Under economic were public debt, weak productivity and household consumption. Political and security risks involved transfer risk and terrorism while socio-cultural risks entailed low fertility rates. On the other hand, environmental and health risks comprised sea level rise, pollution, heat wave and storm surges. Based on risk assessment matrix, the report found public debt and terrorism as having high risk scores while transfer risk and heat wave had low risk. Moreover, more funds were allocated to terrorism, pollution, public debt and weak productivity because these risks affect a large section of the American population a pose grave danger to their existence. While pollution affects the health and lifespan, public debt and weak productivity threatens the economic standing and image of the US as the world’s leading economy. Furthermore, terrorism is causing panic in the US as more extremist groups coalesce around bigotry and religious falsehoods to end life and divide people into religious sectarianism. References Amadeo, K. (2016). What is the public debt? The Balance. Available at: https://www.thebalance.com/what-is-the-public-debt-3306294 Bloomberg, M.R., Paulson, H.M. & Steyer, T.F. (2015). Risky business: The economic risks of climate change in the United States. A climate risk assessment for the United States. Available at: https://riskybusiness.org/site/assets/uploads/2015/09/RiskyBusiness_Report_WEB_09_08_14.pdf Giambruno, N. (2015). Capital controls are coming. International Man. Available at: http://www.internationalman.com/articles/capital-controls-are-coming Global Edge (2016). United States: Risk Assessment. Available at: https://globaledge.msu.edu/countries/united-states/risk Gobry, P.E. (2015). America’s birth rate is now a national emergency. The Week. Available at: http://theweek.com/articles/642303/americas-birth-rate-now-national-emergency Focus Economics (2016). United States Economy Overview. Available at: http://www.focus-economics.com/countries/united-states Jones, M. (2015). US economic risks and strategies for 2007-2017: A policy white paper. Economics Journal, 2(3): 34-56. Available at: https://www.iim-edu.org/thinktank/publications/economics-journal/US-Economic-Risks-Strategies-2007-2017-Policy-White-Paper/index.htm Park, M. (2016). US fertility rate falls to the lowest on record. CNN News. August 11, 2016. Available at: http://edition.cnn.com/2016/08/11/health/us-lowest-fertility-rate/ Poppolo, M. (2014). Air pollution dangerously high for almost half of the US. CBS News, 30th April, 2014. Available at: http://www.cbsnews.com/news/air-pollution-dangerously-high-for-almost-half-of-us/ Sauter, M.B., Stebbins, S. & Frohlich, T.C. (2015). The most polluted cities in America. USA Today, Available at: http://www.usatoday.com/story/money/business/2015/08/22/24-7-wall-st-most-polluted-cities/32130565/ Tepper, T. (2016). Five things most people do not understand about the national debt. The Economy. Available at: http://time.com/money/4293910/national-debt-investors/ Read More