It’s the synergy of classic economics and human values which is needed to come out of this crisis.
The whole world is in the grip of an unprecedented pandemic - Covid-19, for the last 2-3 months. This is the biggest crisis that has fallen on humanity after the world war II. This pandemic is worse as we still don’t know the ‘the enemy’s objectives’, at least that clarity was there for the world wars! Dealing with any war is difficult, but knowing the enemy well is one important pre- requisite. But this time, we are yet to fathom. Therefore, the solution through a vaccine or antidote still eludes us. It has affected all dimensions of our lives – social, economic, behavioral and many times even psychological. How to come out of it and find the new equilibrium or new normal is what a lot of people are engaged in. Any attempt to mount a ‘united front’ to fight this pandemic is being resisted for a variety of reasons, and the main one is lacks ‘Trust’ amongst stakeholders.
The missing element
In these days of Covid -19, the most crucial trait of mutual trust is missing. We can see that in international relations between nations or leaders; even within a country there are different contradicting view points. We often hear accusations and cross accusations. No one is coming forward to take ownership which, in fact is a demonstration of trust. It’s turning out be costly as it delays a meaningful solution. The lack of trust is visible by the fact that not many countries want to collaborate to find a vaccine for this pandemic, which is terrible. (We do hear some bilateral efforts happening, some phone calls among leaders, but no official word.) This trust deficit is cascading into business / economic arena and that is causing equal damage to livelihood as it is doing to the life.
Stephen Covey, the acclaimed author and business speaker has written a book titled “Speed of Trust”. He talks about the importance of trust in our personal relationships as well as the criticality of it in a collaborative and interdependent world. The author points out that trust is the most important factor for human motivation which can lead to new findings and value creation. He elaborates on the need to move away from a ‘command and control’ structure to a more humane ‘trust and inspire’ framework to get the best out of human interactions. The book has sold millions of copies, but the world is yet to learn and practise much of it.
Trust as an operating philosophy has a critical role to play if we must come out of the economic crisis we are drawn into quickly. In the post pandemic world, we are likely to be more doubtful if not suspicious, of all our business interactions. Such dispositions are not going to help the economy or our social wellbeing. In business, leaders must go out of their way to ‘Exhibit Trust’ with all the stake holders – be it suppliers, partners, employees and even government. This will help to attain the speed and minimize cost. That is one way to be efficient - saving time and cost. If you can’t be trusted, then you are no different from a stranger and we know well that strangers hardly do anything together!
The shrinking world economy
The World Bank has already predicted a recession and concluded that the world economy will contract (by about 4 %) and there will be an across the board fall in GDP. Moody’s have slashed India GDP growth to less than 2.5 % from an earlier estimate of about 5.3%. This will make a significant part of our population slip into poverty. So, it’s even more important that we find solutions to this crisis with a sense of urgency. Otherwise, social unrest can’t be ruled out. On account of these factors, IMF has already relaxed fiscal deficit targets for many countries and especially for developing countries with huge population. In the case of India, the fiscal deficit is likely to go above 6 % of GDP against the planned 3.5 %. Even then IMF is willing to lend as it sees the importance of saving lives and livelihood after a complete lock down of economic and social activities. All policy and economic tools are at the disposal of the authorities. RBI has already moved to reduce interest rates, is adding liquidity to the system and has even deferred monthly payment on the borrowed capital. These are standard ‘medicines’ which are prescribed for an ailing economy, but this time the dosage is much stronger. But, is this enough to redeem ourselves? I doubt. Unless these measures are accompanied with more human centric and behavioral factors, the light at the end of the tunnel may turn out to be a mirage!
The synergy of capital and the correlation
One of the important factors of production from the classical economics theory is Capital. To my mind, capital has two critical dimensions – Monetary capital and Social Capital. Cash or money represents the monetary capital and Trust/confidence represents the social capital. Both must work in tandem to propel us forward. Many a times, we see that the synergy is missing. In the current crisis, a well synchronized effort is what is required. There are well established institutions to deal with the monetary dimensions of capital , but there is a lack of such institutional support for social capital.
There is empirical evidence and research data to support the close correlation between “Trust and GDP”. This has been a subject of study by many researchers. The most cited ones are by Guiso et al. 2006 and Algan & Cahuc 2010*. The below graph explains that higher the trust element in business environment/society, higher is the per capita GDP of that society.
As expected, many of the African and Latin American countries are low on Trust and so are their per capita GDP. The strong positive correlation is evident.
Now that we understand the correlation, it is clear that the human factors such as trust and the economic factors such as interest rate have to play in unison for us to get out of this challenging economic environment. In fact, Trust is the multiplier which can quickly propel us out of the current economic crisis.
This century, which just got out of its teens, has already experienced many more crises than a similar period. We started off with Y2K scare which luckily passed off rather peacefully. We had a major crisis with the 9/11 which was caused by some individuals leading to heightened security in all spheres of our life. Then came the financial melt down in 2008 which was caused by some firms (Lehmann brothers) resulting in more financial monitoring and controls on capital. Now, we have this pandemic, which some say, was caused by ‘a country’, affecting all human interactions and basic behavioral patterns established for centuries. We can see a gradual ‘up scaling’ of the origin of each of the crisis – from a group of individuals, to a few firms to a country. What’s next? I am even scared to think!
Trust - the antidote
Currently, the business/economic confidence is challenged by the psychology of fear which is further aggravated by the prevailing uncertainty. Unfortunately, fear spreads like a virus quickly and confidence / trust is almost like the elusive vaccine – hard to find! Therefore, it’s even more important that leaders make that extra effort to ‘Exhibit Trust’.
We can hope that with such
demonstration and affirmative actions, trust will gain momentum through small confirmations and spread across. This is the key antidote one needs to apply to the business environment along with the standard monetary and fiscal policy tools which are on the table already.
We have not paid much heed to Covey’s advice all these years. Here is a chance to combine the human/behavioral aspects with pure economic theory to address and benefit from ‘Speed of Trust’. There is an urgent need to demonstrate this trait in our collective actions to find a vaccine for this pandemic. A collaborative effort amongst nations, business leaders and pharma companies based on trust can save many more lives. Moreover, it leads to efficiency in terms of time and cost. If not now, when?
So, the Post Corona economic crisis is a real test for world leadership who can see the bigger picture and act. It is not a simple issue which can be left to technical economists to deal with. Injection of a high dose of trust in society & business circles is what will get the bed ridden economy back on its legs. To begin with, we wish to see the central government and provincial governments on the same page in their efforts to tackle the pandemic. Unfortunately, we see them trying to outsmart each other - in the US, Europe and even in India. We can’t keep the politics and associated ‘who gets the credit’ out of our working. A united effort will bring the much needed trust and an attitude of cooperation at the ground level. This can save scarce resources resulting in a more efficient operation. On the business front, Indian and foreign pharma leaders should work much more closely to develop a vaccine which should be affordable to the poorer section of the society. We need it quickly to save lives and livelihood. Even after the pandemic, a more collaborate engagement between nations and trust driven organizations are sine qua non if we have to get to a new equilibrium quickly. As the former US President, Harry S Truman has famously said “It is amazing what we can accomplish if we do not care who gets the credit”, so true. Trust is the antidote!
Ref: * Does culture affect economic outcomes – Guiso, Sapienza, Zingales 2006: Journal of economic perspective. # Inherited trust and growth – Algan Y & Cohuc P – The American economic Review 2010.
