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PS Say More: Andrew Sheng

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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

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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 spiral.

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...

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