Since the early 2000s, Hong Kong economist Andrew Sheng has offered
the most insightful commentary on Chinese political economy that I've
been able to find. In this interview he describes the new global
condition of cascading system-wide shocks, or what Ian Goldin calls
"systemic risks" (the key concept of The Butterfly Defect, now hailed
as a prophetic book). Still more importantly, Sheng points out how the
Chinese leadership is likely to use big data and AI analytics in order
to analyze and plan for the knock-on consequences of major sectoral
shocks, as they reverberate both within the national frame and
throughout the interconnected world. Such developments could be the
most crucial innovations to arise from the current crisis. Like anyone
with a brain, Sheng stresses the need for international cooperation
to prevent, or recover from, the most destructive consequences. For
him, "the COVID-19 outbreak is perhaps the biggest wake-up call in

The weird thing is the feeling of deja-vu that creeps over you while
reading this. Just yesterday, North and South American, European,
African and Asian officials coordinated through global bodies such
as WHO to analyze, manage and quell epidemic outbreaks such as SARS
or Ebola. True, they did nothing to stem the continuous production
of such risks through wildly accelerated globalization. But neither
did they abandon international institutions, wantonly destroy vital
government services, publicly scorn scientific expertise or propagate
conspiracy theories through their Twitter accounts. The US Republicans
and the British Brexiteers are obviously the super-spreaders of that
pandemic. Yet in face of it, like any other massive contagion, we all
have to think a little more about our own roles in maintaining public
health. Do you too feel sharp pains in the chest when an authoritarian
state starts looking more competent than former democracies? Try a
little dose of Andrew Sheng - it might be good for everyone. - BH


An interview with Andrew Sheng

This week, Project Syndicate catches up with Andrew
Sheng, a former chairman of the Hong Kong Securities
and Futures Commission and Distinguished Fellow of the
Asia Global Institute at the University of Hong Kong.

Project Syndicate: You recently wrote that, in China, COVID-19 has
already led to a "massive re-orientation of priorities, such as
innovative ways of dealing with business cash flows, survival of
[small and medium-size enterprises (SMEs)], job disruptions, and
restoring key supply chains." Should we expect the government to
revise its policy approach in the wake of the crisis? What might the
most significant changes be?

Andrew Sheng: The COVID-19 outbreak is perhaps the biggest wake-up
call in history, threatening both individual lives and entire
economic and social systems. It is truly a "viral" crisis, not only
because of the pathogen in question, but also in terms of information
transmission. Never have so many people been alerted so fast to new
developments in any large-scale shock.

There is one chart - which I call the "shock and shift" chart - that
has gotten particular attention, as it illustrates the importance of
"flattening the curve." When a highly contagious pathogen like the
COVID-19 coronavirus hits suddenly, it can quickly overwhelm a health
system, resulting in a higher death toll and social panic. But when
measures are taken to slow the spread of the virus, the situation
becomes manageable.

When COVID-19 first emerged in China, the country was not able to
prepare. (Other countries did have that opportunity, but few took
it.) But Chinese leaders and residents quickly stepped up for what
Xiao Geng and I call "China's COVID moment." The government imposed a
draconian lockdown, confining more than 700 million people to their
homes for more than eight weeks. As anxious and uncomfortable as they
were, people recognized that the community's collective survival
was at stake and accepted the unprecedented measures. But China -
including its policy approach - will never be the same.

The COVID-19 pandemic has highlighted a fundamental shift in the
economics paradigm: we now exist in interactive and interconnected
"complex adaptive systems," where shocks are both exogenous and
endogenous. The fact is that, when it comes to a systemic shock
like the COVID-19 pandemic, the market cannot solve everything. The
marginalist neo-classical framework does not prepare policymakers for
very large external and internal shocks to systems that do not return
to equilibrium. In times of crisis, the state must ensure that the
community's interests come first.

In the case of COVID-19, that means, for example, ensuring that
any vaccine or treatment is distributed widely (and affordably);
supporting those whose livelihoods are decimated, such as hourly
service workers and SME owners; and repairing broken supply chains.
Otherwise, interconnected failures will continue to cascade through
the entire (global) economy.

Of course, China has long emphasized the state's role in maintaining
stability and promoting prosperity, just as it has long engaged in
complex adaptive systems thinking. But the COVID-19 stress test will
push the government to adopt an even more system-wide approach, based
on the understanding that when one part of the system is disrupted,
the entire system - including production, distribution, payments, and
income - will be= .

Like an earthquake, the damage is most severe in the epicenter, but
the effects reverberate outward in waves (and may then reverberate
back inward). The COVID-19 crisis first caused a production shock in
China. This then formed into a demand shock - a sharp reduction in
consumption in China and the rest of the world. The next phase was a
massive decline in income that could produce a vicious deflationary

All of this has shifted the mindset of Chinese leaders: they must now
plan for system-wide shock waves, ensuring that they can adapt to
rapidly changing and dynamic or reflexive conditions. Given China's
position at the frontier of artificial intelligence and big data
analytics, its leaders will most likely rely increasingly on these
tools to understand better the implications of system-wide shocks (in
terms of both the Chinese and global systems).

The agent-based models China is now using are multi-disciplinary and
multi-level models - what the nuclear physicist Qian Xuesen called
"open giant complex system" models. They remain crude, but with enough
data and adequate AI tools - which China is collecting and developing,
respectively - one can search out "knowable unknowns" and provide
better options.

PS: What about everyone else? Globalization, you say, means that,
"Every country must work to build its resilience, or no one will be
safe." What are the pillars of such a long-term agenda?

AS: One shocking aspect of the COVID-19 crisis is the denial, blame,
and prejudice accompanying it. We are all in the same boat - a single
interconnected world facing a highly contagious new virus that does
not respect borders. Saying that those sitting on the other side of
the boat are villains who deserve all the pain and loss makes little
sense; assuming that such statements will protect you from pain and
loss makes even less. If one side of the boat sinks, the entire boat
goes down.

What all governments should be doing is, first and foremost, ensuring
that their hospitals are well equipped - including with a sufficient
supply of COVID-19 testing kits - and staffed with appropriately
trained medical professionals. They must also reassure the public,
guaranteeing that all people's basic short-term needs - food, water,
energy, and health care - will be met. And they must impose whatever
measures are needed to gain enough time to prepare for systemic
disruptions at all levels. Otherwise, a local systemic failure could
drag everyone down.

In the medium term, governments must work to strengthen institutions
- including institutional coordination - at home and in vulnerable
countries. If a health system is designed to run at 90% capacity, it
cannot cope with a sudden rise in need. China had the institutional
depth to withstand the first-wave shock, at least so far. The advanced
economies, with their robust institutions, will also be able to cope,
to varying degrees. But developing countries with fragile institutions
are simply not in a position to handle what is coming.

To prevent those failures from triggering reverse-shock waves -
causing outbreaks in countries that had contained the virus -
countries with the necessary resources and capabilities must help
those that lack them. I am talking about global cooperation on an
unprecedented scale.

The first pillar of this agenda is knowledge-sharing. Political and
bureaucratic rivalries must not be allowed to continue hampering
technical solutions.

The second pillar is economic intervention. The market cannot resolve
such a multi-dimensional crisis on its own. The G20 should take the
lead in devising shared solutions to address the shocks to production,
distribution, and income.

Economic interventions must not follow the pattern of the response to
the 2008 global financial crisis: monetary policy first, fiscal policy
next, and maybe structural reforms later. This time, we must actually
resolve the underlying causes of fragility and invest in global public
goods. This may require us to consider seriously a form of global
taxation, such as a Tobin tax (a small tax on short-term currency
speculation proposed by the Nobel laureate economist James Tobin in

The third pillar of a resilience agenda is the abandonment of false
binaries. This is not about capitalism versus socialism or state
versus market. COVID-19 emerged not because of a specific practice in
a specific place, but because of global phenomena: climate change and
population growth, which have put unprecedented human pressure on the
natural world. This produces new zoonotic diseases - from Ebola to
COVID-19 - which spread from animals to humans.

We should have the humility to accept that, even with the best
science, there is no such thing as perfect knowledge and optimal
solutions. And we should have the wisdom to recognize that working
together in an open and adaptive way vastly improves our chances of
coping with new challenges.

PS: At a time when the United States and China are engaged in what
you've described as a "cool war" - characterized by "an unprecedented
combination of wide-ranging competition and deep interconnection" - is
such cooperation possible?

AS: Absolutely. Hot or cold wars are false binaries. The real
existential enemy has always been climate change, caused by excessive
human consumption, in turn enabled by unlimited debt creation. If
every developing-country citizen consumes like every Westerner,
there will be no natural resources left and the planet will become
inhospitable to human life. The American Dream of maximum freedom to
consume cannot be for everyone; it can’t even be for Americans
anymore. If the COVID-19 c= risis doesn’t wake up everyone to
this reality, nothing will.

PS: Shifting gears, you have called China's fostering of innovation
in - and competition among - dynamic urban clusters "the key to
developing and implementing more sustainable and inclusive economic
models." To what extent is the model applicable beyond China? What are
the preconditions for success, and which countries meet them or come

AS: At its most basic level, it is replicable everywhere. China
adopted an "open-door" policy, borrowing promising ideas from others.
It then used competition to encourage different cities, provinces,
and firms (including foreign firms) to experiment with different
adaptations, and pushed for the wider application (and further
adaptation) of "winning" models. When mistakes were made, leaders
would regroup, rethink, and try again.

The goal was always to find the best fit for local conditions, rather
than force the implementation of universal best practices. After all,
what works in the US, with its strong institutions, will not work
in countries without basic infrastructure. Exploiting comparative
advantages is essential. For example, Singapore had relatively few
natural resources but plenty of talent, so it focused on building
human capital.

But there is one more prerequisite to success: leaders and elites must
remember that they are stewards, not masters, of their communities.

PS: Some observers have argued that Chinese policymakers' early
missteps in responding to COVID-19 have undermined public trust in
China's leaders to such an extent that the one-party regime could be
called into question. But not you. What are the doubters missing?

AS: The Chinese public understands history. A leader is not judged
by one moment today, but by the results tomorrow. The Mandate of
Heaven - essentially the source of a Chinese leader's "divine right"
to rule - is Darwinian: the leader adapts to survive, or loses the
mandate. Everyone makes mistakes; the question is whether they can
adapt quickly enough not to be destroyed by them. And China's leaders
have adapted quickly to COVID-19. That is what will stay in people's
memories, assuming the government remains on the right path.

And there is reason to believe that it will. China's leaders are a
diverse group. Many have first-hand experience with the country's
poor. They know that, to retain their mandate, they must serve the
masses, not just elites. It is impossible to say exactly what reforms
this crisis will produce, but the effort to improve feedback and
consultation is definitely the right way forward.

PS: The US Federal Reserve slashed its benchmark interest rate
and unveiled emergency lending programs in response to the
coronavirus-induced collapse in business activity, and many
governments are considering fiscal measures as well. But how effective
is conventional macroeconomic stimulus likely to be when demand is
collapsing because people fear for their safety, and when much of the
disruption is occurring on the supply side?

AS: I disagree with the conventional macro approach. Measures like
quantitative easing - which did little more than paper over the
reasons for the 2008 financial crisis, while exacerbating inequality
and creating more debt risk - are woefully inadequate to manage a
systemic crisis like the COVID-19 pandemic.

The current disruption is on both the supply and demand sides,
which (including income) are deeply entangled systemically. Rather
than employ monetary and fiscal measures, a whole-of-government or
whole-of-society approach - much like what China is pursuing - is
needed. Different departments and agencies must develop potential
measures within their areas of expertise. The national government then
combines these options to develop a cohesive, system-wide strategy
before key measures are rolled out. There are bound to be losses
at the individual level, but ultimately, the damage must be shared

PS: Your 2009 book, From Asian to Global Financial Crisis, argues that
global finance is so interlinked and interactive that our current
tools and institutional structures are utterly inadequate to deal with
crises. Where has progress been made in the last 11 years, and what
tools remain most in need of upgrading?

AS: The world is so interlinked and entangled that siloed solutions
will never work. After the 2008 crisis, each separate group - central
bankers, regulators - wanted the power or tools to handle the problem
on its own. Over the last 11 years, rules have become increasingly
complex, even incomprehensible, and virtually every silo has remained
intact. As a result, no one is prepared to act collectively to tackle
systemic issues.

But the problem lies not so much in the tools as in the mindsets
of those who wield them. The mainstream economic paradigm remains
partial, marginalist, and mechanical. The crisis today is systemic,
stochastic (big change, not at the margins), non-linear, and
fast-moving. Some measures might turn out to help - even a broken
clock is right twice a day.

Yet, paraphrasing a joke I read on the Internet, COVID-19, like war,
is not about who is right, but who is left. What we need are effective
discussions that produce timely decisions on how to deliver good
public health and social services, on a system-wide basis. Those who
are part of the problem - including believers in the failed paradigm -
cannot be part of the solution.

PS: When you were ranked as one of Time magazine's 100 most
influential people, the Nobel laureate economist Joseph Stiglitz wrote
the blurb honoring your contributions. For whom you would like to
write such a blurb?

AS: I will always be grateful to Joe and Time Magazine for that honor.
Today, however, I will say that the real heroes are not the thinkers,
but the doers: the nameless doctor, nurse, or carer who has marched
selflessly into the fight to contain the pandemic. They prove that a
career in medicine is not about money or glory, but about protecting
communities and saving lives.

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