Mukti

Surviving the white crow

Posted in Bangladesh, democracy, economics, governance, macro, political economy, politics by jrahman on January 20, 2015

Nassim Nicholas Taleb popularised the term ‘black swan’ in his 2007 book.  It comes from the Latin expression rara avis in terris nigroque simillima cygno, meaning “a rare bird in the lands, very much like a black swan” — they didn’t have any black swan in Europe, and thought swans must be white.  That notion changed when the Europeans came to Australia.  Taleb pithily summarises his thesis as:

What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme ‘impact’. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

In Bangladesh, perhaps we could think about ‘white crow’ events — our crows are black, we think crows must be black, but of course there are white crows Down Under.

Taleb’s work gained much popular acclaim after the 2008-09 financial crisis.  The thing about black swans / white crows, however, is that they are hard to predict ex ante.  That’s Taleb’s first attribute.  As such, for analysts and policymakers, it might seem that Taleb has little of practical value to offer.

His subsequent work seeks to address this concern.  In a widely read Foreign Affairs article*, Taleb and a co-author argues:

Thus, instead of trying in vain to predict such “Black Swan” events, it’s much more fruitful to focus on how systems can handle disorder—in other words, to study how fragile they are. Although one cannot predict what events will befall a country, one can predict how events will affect a country. Some political systems can sustain an extraordinary amount of stress, while others fall apart at the onset of the slightest trouble. The good news is that it’s possible to tell which are which by relying on the theory of fragility.

…..

For countries, fragility has five principal sources: a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks.

How does Bangladesh look through the prism of Taleb’s theory?  I’d argue we should be at least concerned about the possibility of things falling apart, though there are also things to be hopeful about.

Let’s take these five criteria one at a time.

Centralisation is a problem because, to quote the authors, it ‘…decreases local risks, such as provincial barons pocketing public funds, at the price of increasing systemic risks, such as disastrous national-level reforms’.  They cite Switzerland, which has survived centuries, and the Soviet Union, which folded within the 20th.  They point to the highly centralised Arab autocracies.

Our own history seems to match their theory pretty well.  The first government of Bangladesh was a highly centralised one, based on the persona of one man.  And when that man was killed, things fell apart rapidly and messily.  The successor regime, once the dust settled, was hardly the epitome of liberal democracy.  The power in the Zia regime ultimately rested on the president.  But Zia was no Mujib, and the centralisation was nowhere near as extreme.  Particularly, consciously or otherwise, by the beginning of the 1980s, Zia had managed to create multiple avenues through which power could be exercised — there was the constitutional process, but the civil-military bureaucracy continued to wield tremendous influence, and a nascent corporate sector begun to emerge.  Zia’s assassination was not followed by the 1975-style anarchy — this is quite consistent with Taleb’s theory.

The thing is, over the past quarter century, we have gone back to centralising, and arguably, the regime of Mrs Hasina Wajed is even more centralised than that of her father.  If Taleb is right, we might be in serious trouble before we know it.

Things look quite worrying on the second criteria too, at least at the first glance.  The authors tell us that ‘For a state to be safe, the loss of a single source of income should not dramatically damage its overall economic condition’.  With garments accounting for the four-fifths of exports earning, it’s hard to argue that we have a diversified economy.  Fortunately, things might not be as bad as they look initially.  Prospects for the garments sector is quite bright — subject of a different post.  More importantly, there are incipient signs of diversification in our manufacturing basket.  Further, remittance and agriculture are two other important sources of growth in the economy.  I’d argue that taken as a whole, if political centralisation puts us in the red hot territory, economic concentration would be flashing amber.

Things look much safer — serene green — on their next criteria: debt, which ‘…makes an entity more sensitive to shortfalls in revenue, and all the more so as those shortfalls accelerate’.  As repeated IMF analyses show, Bangladesh appears to have pretty sustainable public finances.

Let’s not get carried away with relief, however.  We are back in the amber territory with the fourth criteria:

…genuinely stable countries experience moderate political changes, continually switching governments and reversing their political orientations. By responding to pressures in the body politic, these changes promote stability, provided their magnitude is not too large—more like the gap between the Labour Party and the Conservative Party in the contemporary United Kingdom than that between the Jacobins and the royalists in revolutionary France. Moderate political variability also removes particular leaders from power, thus reducing cronyism in politics.

Alternating power between two broadly similar parties — why, that sounds like the order we had in the 1990s, and not so much anymore.  Just like centralisation, we have gone backwards on this front.  Result, be afraid, be very afraid.

At least, we can end on a cautiously optimistic note:

The fifth marker of fragility takes the proposition that there is no stability without volatility a step further: it is the lack of a record of surviving big shocks. States that have experienced a worst-case scenario in the recent past (say, around the previous two decades) and recovered from it are likely to be more stable than those that haven’t.

Bangladesh did survive 1975.  However bad things get, we probably have seen worse.  Cold comfort, but comfort nonetheless.

 

 

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The calm before the storm: why volatility signals stability, and vice versa, Nassim Nicholas Taleb and Gregory Treverton, Foreign Affairs.

 

 

 

 

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