Gareth Vaughan on a green future v an authoritarian future, ancient hunter-gathers & modern day anxiety, debt relief for poor countries, Billy Te Kahika in the South China Morning Post, the teeny tiny EU unifier

This Top 5 COVID-19 Alert Level 1 special comes from interest.co.nz's Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

The day has finally arrived that we JAFAs join the rest of the country back in level 1. It's nice to be back, I must say. Here's hoping we can all stay there...

1) Envisioning the international order in 2030, after COVID-19. What sort of world will it be?

Writing for Project Syndicate, Harvard University professor Joseph S. Nye, Jr. outlines what he describes as five plausible futures in 2030 post-COVID. These are; The end of the globalised liberal order, a 1930s-like authoritarian challenge, a China-dominated world order, a green international agenda, and more of the same.

A green international agenda is the most upbeat of the five options touted, and here's what Nye says about that one.

Not all futures are negative. Public opinion in many democracies is beginning to place a higher priority on climate change and environmental conservation. Some governments and companies are re-organizing to deal with such issues. Even before COVID-19, one could foresee an international agenda in 2030 defined by countries’ focus on green issues. By highlighting the links between human and planetary health, the pandemic accelerates adoption of this agenda.

For example, the US public notices that spending $700 billion on defense did not prevent COVID-19 from killing more Americans than died in all its wars after 1945. In a changed domestic political environment, a US president introduces a “COVID Marshall Plan” to provide prompt access to vaccines for poor countries and to strengthen the capacity of their health care systems. The Marshall Plan of 1948 was in America’s self-interest and simultaneously in the interest of others, and had a profound effect on shaping the geopolitics of the ensuing decade. Such leadership enhanced US soft power. By 2030, a green agenda has become good domestic politics, with a similarly significant geopolitical effect.

In contrast Nye's "1930s-like authoritarian challenge" sounds grim. And unfortunately I don't think it's beyond the realms of possibility.

Mass unemployment, increased inequality, and community disruption from pandemic-related economic changes create hospitable conditions for authoritarian politics. There is no shortage of political entrepreneurs willing to use nationalist populism to gain power. Nativism and protectionism increase. Tariffs and quotas on goods and people increase, and immigrants and refugees become scapegoats. Authoritarian states seek to consolidate regional spheres of interest, and various types of interventions increase the risk of violent conflict. Some of these trends were visible before 2020, but weak prospects for economic recovery, owing to the failure to cope with the COVID-19 pandemic, increase the probability of this scenario.

2) Are ancient hunter-gathers to blame for our modern day economic anxiety?

Andy Haldane, chief economist and member of the Bank of England's Monetary Policy Committee, often says interesting things. And a recent speech entitled Avoiding economic anxiety, was no exception. He looks at where the UK economy is heading and highlights the darkest storm clouds as; the rising number of COVID infections and the accompanying re-tightening of some lockdown restrictions across the UK, the threat from further job losses including from the looming closure of the Coronavirus Job Retention Scheme, and risks from the transition to the UK’s new trading arrangements with the European Union at year-end.

Those are some pretty dark clouds. Nonetheless Haldane argues perceptions of these risks among UK household and businesses are exaggerated. A factor he cites for this is behavioural biases received from our long lost ancestors.

If the public do have an exaggerated sense of the risks they face, what might be its source? Psychological studies suggest it may reflect behavioural biases inherited from our hunter-gatherer past. Humans tend to over-estimate systematically risks that are systemic or existential to lives and livelihoods. This “dread risk” causes excessively cautious behaviour, sometimes with harmful side-effects – as when the exaggerated fear of flying after 9/11 caused more people to drive.

 These exaggerated risk perceptions are often amplified by others’ words and actions. Caution is contagious. What often then emerges is a “popular narrative”. These narratives have been found to be an important driver of collective behaviour in financial markets and the economy. Behavioural biases at times of existential risk, spreading contagiously, can result in pessimistic popular narratives detached from reality. At times of stress, a global game of Chinese Whispers can generate unduly negative expectations.

I think the prevailing popular economic narrative, among businesses and households currently, is unduly negative. It has emphasized recession and risk over recovery and resilience. It has resulted in good economic news (of which there has been plenty) being discounted too readily, and fearfulness about the future being accentuated. Let me give a few simple examples.

One of the examples he cites is the recent release of the UK's second quarter Gross Domestic Product.

A particularly revealing episode is associated with the notable spike in the pessimism ratio on the 12 August. This was when the Office for National Statistics published second quarter GDP figures for the UK. These showed a huge fall of over 20% in GDP, the largest quarterly fall on record by far. This, understandably, was one of the top three new stories on the day. 

Yet the irony is that the only news in this release was GDP growth for the month of June, the final month of the quarter. This saw an almost 9% rise in activity, by far the largest rise in any month ever and above market expectations. Yet negative media headlines outnumbered positives by many multiples. Positive economic news was media-filtered into an extreme negative event.

This filtering of good news, and accentuation of the bad, is a familiar pattern of human behaviour at times of stress and uncertainty. Psychologists call it “catastrophizing” – discounting the best and fixating on the worst, whatever the balance of risks. It is a well-known problem among people suffering anxiety or depression. Economy-wide, the result has been collective dread risk, fanned by contagious pessimism.

3) World Bank boss wants debt relief for poor countries.

World Bank president David Malpass is pushing for debt relief in the world's poorest countries against the backdrop of COVID-19. Speaking to the Frankfurt School of Finance and Management, Malpass highlighted "the rapid growth of new official lenders, especially several of China’s well-capitalised creditors." Malpass highlighted them as not fully participating in "debt rescheduling processes that were developed to soften previous waves of debt."

This comes after the Debt Service Suspension Initiative, a moratorium on debt payments by poor countries proposed by the World Bank and International Monetary Fund and endorsed by the G20, G7 and Paris Club, took effect on May 1. Malpass says this initiative means 43 countries are benefiting from an estimated US$5 billion in debt-service suspension from official bilateral creditors. But he wants more done.

Many more steps are needed on debt relief. One avenue is to broaden and extend the current debt initiative so that there is time to work out a more permanent solution. The World Bank and the IMF have called on the G20 to extend the DSSI’s relief through the end of 2021, and we are highlighting the need for G20 governments to urge the participation of all their private and bilateral public sector creditors in the DSSI. Private creditors and non-participating bilateral creditors should not be allowed to free-ride on the debt relief of others, and at the expense of the world’s poor.

Debt service suspension is an important stopgap, but it is not enough. First, too many of the creditors are not participating, leaving the debt relief too shallow to meet the fiscal needs of the inequality pandemic around us. Second, debt payments are simply being deferred, not reduced. It doesn’t produce light at the end of the debt tunnel. This is particularly apparent in today’s low-for-long financing environment. The normal time value of money simply isn’t working, so the creditors’ offer of a deferral of payments with a compounding of interest often means that the burden of debt goes up with time, not down. The historical use of net present value equations in debt restructurings has to be scrutinized for fairness to the people in the debtor countries.

The risk is that it will take years or decades for the poorest countries to convince creditors to reduce their debt burdens enough to help restart growth and investment. Given the depth of the pandemic, I believe we need to move with urgency to provide a meaningful reduction in the stock of debt for countries in debt distress. Under the current system, however, each country, no matter how poor, may have to fight it out with each creditor. Creditors are usually better financed with the highest paid lawyers representing them, often in U.S. and UK courts that make debt restructurings difficult. It is surely possible that these countries—two of the biggest contributors to development—can do more to reconcile their public policies toward the poorest countries and their laws protecting the rights of creditors to demand repayments from these countries.

Several steps are needed. First, as I mentioned, full participation in the moratorium by all official bilateral and commercial creditors, to buy time. Second, full transparency of the terms of the existing and new debt and debt-like commitments of the governments of the poorest countries. Both creditors and debtors should embrace this transparency, but neither has done enough in this regard. Third, using this fuller transparency, we need a careful analysis of a country’s long-term debt sustainability to identify sovereign debt levels that would be sustainable and consistent with growth and poverty reduction. This degree of transparency and analysis would also be strongly beneficial for the public commitments of developed countries, such as outlay projections for public pension funds. Fourth, we need new tools to push forward with the reduction of the stock of debt for the poorest countries. The World Bank and IMF are proposing to the Development Committee a joint action plan by the end of 2020 for debt reduction for IDA countries in unsustainable debt situations.

4) International media starts paying attention to blues guitarist, conspiracy theorist & politician Billy Te Kahika Jnr.

...videos on the Advance NZ Facebook page have amassed more than 5.3 million views, according to data from social media tracker CrowdTangle.

They are stunning figures for a new political entrant in a nation of just five million people. They exceed the 2.8 million views for New Zealand’s main opposition National Party and 5.2 million for Prime Minister Jacinda Ardern’s Labour Party.

Advance NZ’s Facebook posts have also generated far more activity than those of the two mainstream parties. Advance NZ’s posts have been shared 148,000 times, compared with fewer than 110,000 combined for the mainstream parties, according to the CrowdTangle data.

The image to the left comes from Advance NZ's Facebook page. The AFP article appears to draw on this David Farrier article that first ran in his Webworm newsletter. Farrier, a former TV3 journalist, and his offsider Dylan Reeve are doing a sterling public service in keeping tabs on, and explaining, New Zealand's conspiracy theorists.

In his article Farrier tracks Te Kahika's Facebook posts from mid-February. It's an interesting journey. In mid-March Te Kahika urges his friends and family to take care and be vigilant and careful about coronavirus. But then things start to change.

May 11

Billy gets excited about the idea of protesting.

It’s been 50 days since he was advocating for a rush to level four to stop the spread of Covid-19.

He now thinks the crisis is about “mandatory vaccinations and control”, noting that “if you don’t vaccinate you will lose your freedom”.

This is not true.

5) How a "teeny tiny little thing" achieved the unthinkable and unified the European Union.

The COVID-19 crisis has achieved something that neither the Global Financial Crisis nor the subsequent Greek sovereign debt crisis managed to. Unified the European Union (EU). Ian Bremmer, president and founder of political risk research and consulting firm Eurasia Group, talks to European Central Bank (ECB) president Christine Lagarde about this. Bremmer notes the EU's corona bonds, which see the European Investment Bank selling collective EU debt, have broken one of the EU's oldest taboos by mutualising debt across the continent.

Here's Lagarde.

"The crisis is phenomenal, it's monumental, it's unlike anything else that we've ever seen before and as the saying goes, never waste a good crisis. And in very surprising ways I think the Europeans have actually applied  that to the letter....If you look at the way in which Europe  was always criticised, and was always regarded as this unfinished  business that could not possibly organise itself, well in the face of the crisis all members of the EU, 27 different member states, decided finally to jointly borrow on the markets in order to help those member states that were most severely hit by the crisis. And to help not in the form of cheap loans if you will, but in the form of pure grants, which was something that was just not expected and that had been fiercely debated and objected against. So this crisis was the catalyst to a move that is really a signal of solidarity, of understanding where it hurts and how we can all collect ourselves from this crisis in a better shape than when we entered into the crisis.

In explaining why it was this particular crisis that brought the EU together, she notes the trigger wasn't the banks, the bursting of a share market bubble, or bad behaviour of policy makers.

It was actually this teeny, tiny little virus that went around from one country to another in almost instant time. So the fact that everybody was in the same boat, that it was going to hit without distinction of behind which border you were, what your wealth was, I think created a sense of anxiety, vulnerability, the fear of the unknown and the fact that at a narrow, small level, the defence would probably not be strong enough. So I think it really revealed to many of the Europeans the fact that altogether and by operating together, we would be stronger against this teeny, tiny little thing that was killing and creating so much havoc.

However, the Financial Times reports that the ECB has launched a sweeping review of its pandemic emergency purchase programme (PEPP), which some policymakers believe could lead to contentious changes to its other asset-purchase programmes.

The review will assess the impact of the flagship bond-buying scheme that the ECB launched in response to the coronavirus crisis in March and expanded to €1.35tn in June, two of its governing council members told the Financial Times on condition of anonymity.

They said important questions for the review would be to consider how long the Pandemic Emergency Purchase Programme should continue and whether some of its extra flexibility should be transferred to the ECB’s longer running asset-purchase schemes.

“Having that extra flexibility has been very useful,” said one council member. “We should look at all bits of the toolkit very carefully. We will have a good discussion, a good debate, and I don’t know where we will end up.”