Covid-19 triggered a medically-induced economic coma. As we awake we need to think through how we manage risks from international connectedness, while still capturing benefits from it.
We live in a globalised age of rich connectedness through ideas exchange, telecommunications, trade, people movement and financial flows. However, connectedness has downsides. Since at least Roman times, trade route development led to widespread plague and other epidemics. Colonisation of the Americas and elsewhere saw smallpox, influenza and other diseases wiping out most of the indigenous populations of whole regions. Intensive agriculture saw dense populations living close to animals, and more exposure to zoonoses.
At the most fundamental level, all life depends on a balance between autonomy and connectedness. From the monocellular level to the largest nation state, no being is fully autonomous, and all need connectiveness. However, life also depends on mechanisms that prevent rather than facilitate connectivity, such as blood-brain barriers. “Markov blankets” define the internal and external boundaries of a system such as a cell or multi-cellular organism. Life depends on maintaining boundaries, and viruses evolve ways of breaking through them, as seen with coronavirus.
At an ecosystem scale, biodiversity forms an ecological Markov blanket that breaks down as human habitation shrinks natural environments, “social distancing” between humans and animals diminishes, and zoonotic spill-overs occur. Too much connectivity can and does kill.
Globalisation has lifted millions of people out of poverty, benefiting workers and consumers. However, the Stopler-Samuelson theorem shows how production specialisation impacts on capital returns and wages. This means trade liberalisation creates winners, and also losers such as wage workers in import-competing industries. Globalisation can lead to more focus on foreign investor interests, and less on domestic working conditions or local environmental standards. It has facilitated large-scale tax arbitrage and evasion.
Covid-19 has accelerated the IT connections and telepresence needed for more distance learning and working. However, as we have observed with social media an increasingly connected online world can polarise and silo thinking. It can stifle the information flows and critical thinking that generates the diversity upon which memetic selection pressures act to generate new learning. Information networks are also very vulnerable to cyberattacks.
In the decades leading up to the Global Finance Crisis (GFC), local retail banks were progressively supplanted by globally-connected investment banks and financial firms that grew “too big to fail”. Subprime mortgages and complex derivatives proliferated, while there was a decay in the publicly-visible transaction records that linked derivatives to the real property underlying their value. Hyper-connectivity in the global financial system magnified risk and widened damage far beyond the epicentres in the world financial centres.
Globalisation has privileged efficiciency in production processes at the firm level over resilience at the economy-wide level. Global value chains (GVC) that once were configured within state or regional borders have become internationalised. GVC run on “just in time” principles mean countries become more specialised rather than retaining their own domestic productive capacity.
GVCs make countries dependent on each other, which in theory should foster peaceful cooperation. However, cooperation breaks down when system shocks such as Covid-19 see countries competing for critical resources such as medical equipment. The US has decided that “just in case” is a better strategy than “just in time” – there are now bills before Congress to re-shore medical supply chains in the US.
Agricultural sustainability depends on resilient productive systems that satisfice rather than optimise. Distance helps keep animals healthy in extensive grazing systems, and it is lack of distance which spreads contagion and sickens them in poultry cages and pig stalls.
Hyper-efficiency, connectedness to international markets and production maximisation forces farmers to stretch their production systems beyond their ecological limits. This is profitable in normal times, however storm and drought events and animal disease outbreaks can be catastrophic. Over the much longer term, production maximisation mines soil carbon and turns it into greenhouse gas.
However, regenerative agriculture, farmers keeping surplus hay and silage in the barn as a buffer, and ensuring well-nourished and healthier animals have shade and shelter can make farming resilient while still well-geared to international trade.
Balancing the benefits and risk of connectivity needs to be anchored in key future directions. The most important is to foster a sense of universal human interests that overcome small-minded nationalism and identity politics and which support public good science, critical thinking and cultural exchange that traverses borders.
We must foster requisite variety. That is, to manage the uncertainty and diverse challenges the world presents we need to have available a range of responses as complex and nuanced as the problems we may encounter. Requisite variety is needed in science, economics, social policy, business models, productive systems and biosdiversity. It is underpinned by a society’s pluralism and freedom of speech.
Standard, theory-based economic and statistical forecasting aims to optimize efficiency and gives little robust thought to resilience. We should distrust abstract models, even where they are empirically based. Business statisticians can forecast risks based on past observations, and investors can hedge or otherwise manage these risks. Economists can populate theoretical models with empirical data and forecast accordingly. However, these models are aids to thinking, not approximations to reality. They fail to account for non-linear events such as the GFC whose catastrophic impacts swamp their statistical probabilities.
Naïve and simplified statistical models are inadequate to guide us through complex reality. What is more meaningful is trial and error and Bayesian active inferential learning from the real world from those who face personal risks that sharpens their focus on what their senses are telling them and forces them to revise their assumptions accordingly.
Investing in “just in case” capabilities or buffers at the nation state level ties up money and may seem wasteful. However, we think nothing of investing billions in defence equipment that never sees action. Some resilience-focused or “just in case” investment can also deliver capability and outputs which deliver multiple benefits.
For example, we could fund New Zealand businesses to manufacture off-patent drugs and pharmaceutical ingredients, develop new vaccines, ICU and PPE products and create blockchain tracking technology. This could create new business opportunities, while also building skills that enable rapid and independent response to future health exigencies. Some of these capabilities might be flexibly applied to biosecurity as well as human health markets.
Tariffs to protect local production and build resilience against the risk of global value chains breaking down does nothing to foster innovation and they impose costs on consumers. Holding inventories to cover exigencies creates deadweight loss. What is needed is more flexibility in manufacturing and in repurposing.
This might mean a more agile and better resourced innovation system, and technologies which give us flexibility, while being where possible competitive in niche international and domestic markets. Such technologies well describe New Zealand’s past strengths in flexible production and industrial automation, and our emerging capabilities in areas such as wireless power and 3D printing that can enhance our resilience while also creating new, internationally-connected sources of advantage.