Building economic resilience in a time of adversity
Black swans are rare, unpredictable, large-impact occurrences. The theory of complexity provides a good framework for understanding black swans and for learning how better to cope with uncertainty under the dynamics of open, complex adaptive systems. The paradigm of Complex Adaptive Systems (CAS) draws insights from multiple disciplines, ranging from evolutionary biology to quantum physics, computer science and Nobel laureate Ilya Prigogine’s dissipative structures in non-equilibrium thermodynamics. It marks a departure from the mechanical worldview of Enlightenment science associated with figures such as Isaac Newton, Galileo, Descartes Johannes Kepler and Francis Bacon.
The Institute of New Economic Thinking at Oxford and a study circle at the Bank of England led by Chief Economist Andrew Haldane, have been researching the British economy and financial system from the perspective of complexity theory. As a result, concepts such as tipping points, networks, contagion, feedback, and resilience are becoming part of the lexicon of financial and regulatory management systems.
It seems clearer by the day that the neoclassical open economy macroeconomics paradigm that has dominated economic thinking and policy over the last couple of decades has been found abjectly wanting. It has turned out to be a sophisticated form of quackery. Neoclassical economics has certainly failed in its predictive capacity to provide a basis for action under conditions of extreme uncertainty.
During a visit to the London School of Economics in November 2008, Her Royal Majesty Queen Elizabeth II asked the professors about the financial crisis: “Why did nobody notice it?” She was not a disinterested observer, having lost £25 million from her estimated fortune of £320 million. The dons were bewildered and embarrassed. No one had an immediate answer.
The novel coronavirus pandemic has exposed the fragility and vulnerability of national economies and national health systems. Within the space of a fortnight, nearly 20 million Americans have registered for unemployment. Thousands of firms have sued for bankruptcy. Global airlines have been grounded while industrial supply chains have been ruptured. Stock markets have lost trillions of dollars. Parallels are being drawn with the Wall Street Crash of 1929, the great financial Tsunami that led to the Great Depression.
Kristalina Georgieva, a Bulgarian national and Managing Director of the IMF, estimates that all but a few of the 189 member states of the Fund will experience falling standards of living in 2020. A study prepared by Andy Sumner, Professor of International Development at Kings College London, estimates that half a billion people in the developing world could be pushed back into poverty.
We understand that the IMF/World Bank Spring Meetings scheduled to start this week will be held through virtual teleconferencing. Having attended several of those jamborees myself, I know this is a big come-down. From my experience, many of the most important deals are made in the corridors and in the coffee rooms. This, alas, will no longer be possible.
From what we know from complexity theory, black swans are here to stay. What this calls for is the need to build up capacity for resilience, by which is meant the policy-induced capacity of an economy to overcome exogenous shocks. Nassim Nicholas Taleb has developed the concept of “antifragile” which underpins the capacity of some systems to actually profit from fragility. Some adversities can make peoples and institutions even more resilient than ever.
From the lessons of the current COVID-19 pandemic, economic resilience remains a big challenge for rich as well as poor countries. Who would have imagined that America, Britain, Italy and Spain would have fared so badly as they have under the current crisis? Why has China – the engine and locomotive of world industrial production – made such a remarkable come back? Why are they buying distressed assets all over the world? What are the lessons in terms of fostering economic resilience?
First, I believe that having a diversified economy is crucial. For rentier petrodollar states such as Nigeria, the pandemic has created a nightmare scenario. For better or worse, our fortunes are tied to the demand and supply of oil, the vagaries of the dollar and the shenanigans of the cruel sheikhdoms of Arabia. Whatever happens in the coming decade, it is evident that the hydrocarbon industrial civilization that has sustained the world economy for more than a century is on its way out. We must diversify or perish!
Secondly, it is clear that countries with robust fiscal buffers will tend to be more resilient. The indicators of fiscal buffers include national savings, external reserves and size of sovereign wealth funds. The UAE sovereign fund is worth $1.298 trillion while that of Singapore is worth $764 billion. Nigeria’s external reserves have fallen to $34 while our sovereign fund is worth a mere $2.9 billion. Our Excess Crude Account, which peaked at an impressive $18 billion, has just $70 million left in it.
Thirdly, fiscal discipline is imperative. Spendthrift nations who borrow to throw palm wine parties like Unoka in Achebe’s Things Fall Apart, will sooner or later become beggarly nations. Prudence requires that you exercise utmost discipline in public expenditure, with robust controls for how public moneys are spent. When you exercise fiscal discipline, difficult times will find you better prepared to weather the storms.
Fourth, most resilient countries are also those countries that have got the fundamentals right – ensuring that the overall macroeconomy is moving at an even keel, without unnecessary bottlenecks, structural imbalances and distortions that hamper long-term sustainable growth. This requires mastering inflation, price stability, the current account balance, the exchange rate, the national debt and financial system stability.
Fifth, we need to nurture improvements in the quality of policymaking. The capacity of leaders to design effective policies is crucial, aided by a bureaucracy that is highly professionalised and merit-based, with traditions of excellence and capacity to deliver. Forward-thinking and long-range planning as advocated by Israeli policy scientist Yehezkel Dror is highly advisable. Dror advocates strengthening “the Central Minds of Government” as a crucial ingredient of success under conditions of “acute adversity”. Inbuilt in this system is also the requirement of creating advance warning indicators and early warning systems that allow leaders to take pre-emptive and precautionary actions.
Sixth, there is the imperative of collective preparedness. This requires development of human capital, enhancement of technological capability and creation of elite consensus while expanding the possibility frontiers of collective welfare. Times of adversity require communities to fall back on their reservoir of social capital, which is the glue that holds people together in bonds of organic solidarity. Creating this sense of belonging and building hope is vital to overcoming adversity.
Finally, leadership is vital. It is times of adversity that provide opportunity for the best leaders to shine. Leaders inspire and lift up the citizens. The hold up the magic lantern that enables people to see beyond the darkness of the moment into a future of hope.
It is unfortunate that we in Nigeria are seeing only darkness at the top. When the national assembly demanded recently for a proper account of how N2 trillion off the so-called “conditional social transfers” were dispersed, the Office of the Accountant-General went up in flames a few days later. We are not fooled. This is not an act of God; it is an act of brazen arson. When the defunct Shagari administration was forced to investigate allegations of widespread of corruption, flames similarly engulfed buildings such as NITEL and Ministry of External Affairs. It is a red alert on our democracy.
I do not put my hope in government. My hope is in the indomitable courage and generosity of the great Nigerian people. We shall not only overcome; we shall prevail!