In your 2016 book "The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore," you use the image of a gray rhino to represent "a highly probable, high-impact threat". These problems are so obvious we ought to be responding to them, but we aren't. Could you give us examples of such gray rhinos that the world has faced in the past.
Unlike the black swan, which by definition is only visible in hindsight, the gray rhino is something we can see ahead of us. The Argentine and Greek debt crises inspired the gray rhino concept. In both cases, economic indicators were flashing warning signs. Argentina and its creditors missed the opportunity to restructure the country’s debt in an orderly way and paid a steep price. Greece and its creditors, by contrast, met and worked out a deal to reduce the debt and move forward without descending into chaos.
Would you say that the current Covid-19 pandemic is a gray rhino? Could the policymakers worldwide have responded better to the crisis?
Pandemics are what I call a recurring gray rhino. We know what they look like because we have seen them regularly, we have a good idea of what to do to protect ourselves, and yet so many warnings from public health and policy officials that the world was unprepared went unheeded. The novel coronavirus
spread rapidly in China, and then in Italy, it became a near-term threat right in front of us, pawing the ground, snorting and getting ready to charge. Yet so many policy makers failed to act quickly to stem the spread of the virus, and especially to ensure that health care workers had enough personal protective equipment. And then of course are the impacts of the virus on the economy, increasing inequality, intensifying asset bubbles, rising bankruptcies and their knock-on effects, delaying education and affecting child care options.
There is a belief that the pandemic may compel countries to look inwards and accelerate the trend of de-globalisation. What are the likely long-term consequences of this playing out for the global economy and global finance in the coming years? Will it make poor countries, poorer? Countries such as India, for instance, are increasingly touting the benefits of ‘self-reliance’ as a panacea to current ills.
We have already begun to see changes in supply chains because of the pandemic, but that includes diversifying production not just bringing it home. Supply chain shocks can happen anywhere in the world so it’s bad risk management to put all your eggs in one basket. Globalisation patterns will change because of this new supply chain thinking and because of the economic nationalism that too often accompanies economic downturns. I am allergic to the “beggar-thy-neighbour” protectionist aspect of the trade disputes we’ve been seeing lately.
At the same time, we need to re-think trade patterns in terms of climate change and the carbon footprint of everything we produce and consume. The world would be better off if we were not shipping pears grown Argentina to Thailand for packing and then to their final destination in the United States. So, producing more for local or regional markets makes sense. That said, Adam Smith’s specialization still matters: some countries are much better at making some things than others, and we should take advantage of that.
Climate change seems to be the next big threat looming on the horizon, with the potential for much greater damage than the current pandemic. Have governments done enough to tackle the issue?
Governments have not done nearly enough to tackle climate change. I must push back on the idea that climate change is slow moving and something that will happen in the future. Increasingly violent storms, prolonged droughts, rising sea levels, raging wildfires, and severe impacts to plant and animal populations, together are evidence that it is here right now. To respond we need to stop subsidizing fossil fuels; support conversion to clean energy for buildings and transportation; change consumption habits; and properly price climate related externalities.
What are some of the gray rhino situations that businesses face today in the US and elsewhere?
There are so many. Digital disruption. Succession planning. Economic inequality that suppresses consumption. Human capital and re-skilling. The socio-economic impact of new technologies. Governance and decision-making shortfalls. But these are just suggestions: businesses should be asking themselves what their gray rhinos are.
Studies show that firms with good corporate governance were more profitable, had higher stock market returns and dividend pay-outs, and less risky investments than those with weak governance structures. Have we covered enough ground on this front over the past few years?
We have a long way to go. Many company boards still merely tick boxes, doing a risk analysis for the sake of saying they did one rather than evaluating what the firm has done to prepare and mitigate risks and holding leadership accountable. But more and more investors are recognizing that good corporate governance pays off and challenging companies
that fail to bring in diverse board and leadership teams, that allow excessive executive pay, or that fail to disclose their environmental and social risks – all of which are egregious corporate governance failures.
Will having more gender-diverse boards help curb risk-taking in companies?
Research shows that women are more risk aware than men, make better risk decisions under times of stress, and are better at evaluating their risk decisions in hindsight. Having women on boards helps to provide fresh perspectives if the board values them and is not practicing tokenism. There may be a “chicken and egg” dynamic at play here. Do companies
perform better because more women are on their boards, or do companies choose women to join their boards because they are better performers and recognize the value women bring? It also helps if women – and for that matter, the mix of men on the board — have diverse points of view in terms of professional experience, risk attitude, and other factors. Research also shows that men may change their risk behaviours if women are present.
What are the signs that may indicate that a company may be about to go bust?
One perhaps surprising red flag that has emerged lately is irresponsible personal risk-taking or eccentric behaviour by CEOs, as we saw with Adam Neumann at WeWork. Another, less surprising, red flag is leverage. If a company cannot service its debts out of current earnings –a growing cohort that the International Monetary Fund has been flagging for some time now—it is in danger. Investors should pay attention to these indicators along with broader governance issues: diversity on the company’s board, executive compensation, and transparency about climate and other ESG related vulnerabilities.
ESG funds outperformed broader market indexes over the first half of the year. Some of this was because of their low fossil fuel exposure, but investors more and more are paying attention to how prepared companies are to foresee and weather risks. That means there will be an increasing premium on good corporate governance.
There is a belief that fiscal measures announced by the Indian government in the aftermath of the pandemic have been woefully inadequate. That the policymakers have held back the fiscal firepower fearing a sovereign ratings downgrade. Do you think this reluctance will ultimately backfire and do more harm than good to the Indian economy in the long run, as the country grapples with lockdowns and companies hold back investments in a bid to conserve cash?
It's too bad, though perfectly understandable, that sovereign nations cannot get a “free pass” on certain borrowing behaviours as citizens in some of them have. For example, credit bureaus in the United States have looked the other way at the first few months of mortgage forbearance during the pandemic. There’s a dance between debt and growth, in which the country risks a downgrade from too-steep economic contraction just as it risks a downgrade from rising debt. Most countries have concluded that the bigger risk is on the economic contraction side.
The important thing to remember about fiscal policy is that it’s important to use it where it will have the most impact on growth. Tax cuts for the wealthy, not so much. “Helicopter money” for people struggling to get by, on the other hand, will keep consumption going and trickle up through the economy. Clean infrastructure, energy, and transportation investments will reduce business and health costs in the future.
Many say a universal basic income (UBI) programme could help mitigate the looming crisis caused by dwindling job opportunities. UBI is also seen as an effective poverty-eradication tool, and countries such as Kenya, Brazil, Finland, and Switzerland have begun controlled UBI pilots. Do you think such a project would work in a country like India?
Germany has begun a pilot project as well, and former US presidential candidate Andrew Yang made it the centrepiece of his platform. So much fiscal stimulus in the past has focused on “trickle down” policies that don’t work; a focus on “trickle up” would be very welcome and could pull many people out of poverty in the blink of an eye. That said, a truly “universal” basic income would be cost prohibitive. I’d prefer something along the lines of a “targeted” basic income: something that could kick in as a safety net to hard hit sectors of the economy that suffer hits through no fault of their own, like the hospitality industry right now, or like workers who lose their jobs to technological changes. And anyone whose parents make below a certain threshold should get a disbursement so that they are not starting out as far behind; some people have called these “baby bonds”. India definitely would be a great candidate for a targeted basic income.
A few years ago, you had challenged traditional ways of thinking about citizenship, arguing that dual citizenship and other expanded definitions benefit both sending and host countries. Could you shed more light on the issue?
Like many Americans I had been taught, that earlier generations were more likely to stay than current ones. When I began the research for my second book I realized that newer generations were the ones who were more likely to stay. New communications technologies and cheap global air travel made that possible. I continue to believe that overlapping citizenships and connections are good for society and for the economy, especially in such a global world. Countries whose citizens emigrate quite rightly have rewarded those emigres for sending back remittances, sharing skills, and building commercial ties. I am so sad to see so many politicians demonizing foreigners and ethnic minorities and challenging people’s citizenship, as the neo-birthers have done with US vice presential candidate Kamala Harris.
How will artificial intelligence change the jobs dynamics the world over?
Artificial intelligence will replace humans with robots for the riskiest tasks, like the restaurants that are increasingly using robots to minimize human interaction and contagion risk. It will make it easier to do some jobs with less education: for example, accounting or paralegal work. It will put a premium on human skills like strategy, teamwork, and empathy. It raises major questions about the way we monetise care-giving jobs which require the best human characteristics but are not compensated appropriately for their importance to society.