Economic dirigisme: Fending off the “Fragile” tag

Critiquing Taleb & Treverton

 

 

One of my mentors, Taleb, in his recent post in the Foreign Affairs, “Calm before the storm”, surprises me to some extent, as he has moved a step further from his last book “Anti-fragile” in delving with issues that nations are currently grappling with where he makes a strong connection with volatility as a source of resilience. I find it a bit odd as fragility of nations cannot be so easily equated with fragility of a given situation driven by impending structural risks, as the build-up of risks, mostly driven by excessive financialization, hold a distant proxy to the solidity that nations are built on through the generations of sacrifice and learning.

 

I am particularly critical of the example that the authors draw about some ‘fragile’ nations who have high dependency on a central structure as opposed to a loosely knit de-centralized command and control structure. The best firms of the world are those which have a far more centralized control system while unified on a common vision and values. Most great countries, that the authors mention, are somewhat structured like the ageless firms, otherwise they would have withered away. India or China can never be fragile, to any extent, these nations are bigger union of peoples than the European Union itself, who have a way of coming together, that neither can be explained by the principles of fragility or by the simplicity of any number of arguments that we can give. They are anti-fragile, no matter what.

 

The central piece of Taleb’s argument is hinged on the shock absorbing capability of nations, those who have withered more shocks are less fragile, those who have far higher volatility in their political economy have higher chances of fending off “Black Swan” events than those who have never faced ripples and impacts of impending storms in their economy. This makes sense, absolutely, but it does not get into the core of the problem. Risk events on a country or an economy come in so many myriad of possibilities, the latest one that makes most of the headlines, the Greek bail-out, is just one of the many events that marauds the landscape of possibilities. Economic slump followed with a fractured polity that is indecisive and lack of vision in leadership are some of the fundamental reasons. When economic prosperity is restored, the problem could still remain as profligate spending ‘beyond means’ could get better off the ability to fend off a ‘tail-risk’ event; the best example is one where asymmetric pay-offs are seen in commodity exporting nations where a price-shock sends a powerful signal to an otherwise noisy world of futures.

 

Taleb and Treverton, have some strong points, but miss on the aspect of core values of nations. The Swiss example of village economies is in sharp contrast to the centralization in Saudi Arabia or the volatility in Lebanon (which Taleb gives a salutary treatment), while the Japanese reference to ‘lost decade’ and their apparent referendum to ‘high-debt’ perhaps misses to find the connection between diversity of values that these nations are made of and the denouements we seek to exenterate. The virtues of volatility hold good supremely as does the solidity of economic prosperity, the goodness that Taleb sees in unsteady-steady middle economies like Lebanon is as good as the rock solid economies we see in Western Europe or the Nordic states, who have demonstrated ageless wisdom to keep to their core values of sustainability.

 

Sustainability has assumed many different forms, from the erstwhile borderless world to the new borderless we have seen progress of unity in purpose in nations demonstrated in many different forms. But economic dirigisme has played a central role in determining the course, which may not have been unique. The direction that the capitalist economies have resorted to have been different in different times in history, and the confluence that inter-dependence through trade has brought in as opposed to hegemony or imperialism have changed the way the world has progressed.

 

Economic dirigisme has assumed different forms, one that has allowed reconstruction of post-war Germany or the rapid progress in economies like China is very different from the noisy pastures that were taken up by Italy (which Taleb admires); it is completely different in the case of India which started off on socialist traditions in the decades following independence but had to change course when economic headwinds forced it to reform and liberalize.

 

It is again economic dirigisme that has prompted the change of structure in the entire European Union itself that found value in a monetary union that incentivized trade flows on the basis of comparative advantage alone. Taleb is silent on the European Union, where the Union as a whole fends of volatility and is rock solid while its smaller economies could be in trouble. Do we assume that here is referring to the decentralization of power which makes it anti-fragile as a whole but fragility could be mounting for each individual country in the nation?

 

The reference to volatility in making claims that it spurts anti-fragility is somewhat awkward as it is volatility of commodity prices that make oil producing nations rather vulnerable and those like Emirates have found value in diversifying into other economic dirigisme like tourism and hospitality that is so far withdrawn from the perils of volatility that it was distraught with. Volatility in income streams is what every economic entity is so rightfully concerned that the entire management of risk is formulated to fend off and that is the core idea of anti-fragility. By de-risking those portfolios that are influenced by the vagaries of commodity cycles by diversifying into the ones that are immune to such volatility is how most firms have created natural hedges.

 

Output of nations that are linked to commodity prices in dollars have the economic dirigisme to depreciate their currency to the dollar to fend off the brunt of economic malaise. This is very basic economics we are talking of. Those nations who have the wherewithal to create a balance between their domestic and the external sector have far better resilience to withstand shocks of all kind; reliance on the external sector alone could be very punishing. India, although the size could be still small in economic relevance, is far more resilient therefore.