Taleb: “Stable” Countries Like Saudi Arabia And China Are Ticking Time Bombs

According to Nassim Nicholas Taleb and Gregory F. Treverton, appearances can be deceiving, especially when it comes to the stability of a nation. In their essay in Foreign Affairs, “The Calm Before the Storm,” Taleb and Treverton argue that what you see is not what you get when it comes to the apparent “stability” of the political system of a given country.

They argue that countries with relatively decentralized governments and a wide variety of political expression such as Italy or the U.S. are actually quite strong politically despite the perception of conflict and lack of national cohesion. The corollary to this is that a strong central government and the lack of political diversity you see in countries such as Saudi Arabia, North Korea, Venezuela and China actually makes these countries more fragile.

Economic factors and past experience also factor into an understanding of political fragility

Taleb and Breverton flesh out their argument by pointing out that both economics and past experience in dealing with shocks also figure into how politically strong or fragile a country is. The authors break down economics into two factors: diversity of the economy and amount of debt/degree of leverage.

They argue that political fragility “has five principal sources: a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks.”

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On the other side of the coin, countries with decentralized governments, diversified economies, moderate debt/leverage, political variability and who have experienced one or more political/economic shocks in the relatively recent past are strong enough to deal with greater shocks from various sources than more fragile nations.

Taleb and Breverton highlight that these five markers of fragility “function best as warning signals.” Just because a country has one or more of these criteria does not mean the government is in imminent danger of collapse, but they certainly can reveal if there is real reason to worry about a given country. The authors continue to say that countries that score poorly on several of the criteria are more worrisome, because “qualifying as fragile on two counts is more than twice as dangerous as doing so on one.”

Examples of a few fragile countries

Saudi Arabia is obviously fragile given it is highly dependent on oil, has no political variability and is very centralized.

“Its oil wealth and powerful government have papered over the splits between its ethnoreligious units, with the Shiite minority living where the oil is,” the authors point out in their essay, and argue Bahrain should also be considered highly fragile for the same reasons plus its repressed Shiite majority.

They continue to say that Egypt should be considered fragile, particularly as it has had only a cosmetic recovery from the recent revolution and its highly centralized and repressive government. Venezuela, which has a completely centralized political system, minimal political variability, an oil-based economy, and only their ongoing experience with surviving an economic shock, also falls into the highly fragile camp.

Understanding China…the Black Swan of Beijing

Taleb and Breverton conclude their essay with a discussion of “the puzzle of China.”

They start by asserting that China’s more than a decade run of strong economic growth makes it difficult to assess the future of the country. China has recovered surprisingly well from the huge shocks of the Maoist period over the last 35 plus years. That is, however, a long time ago and therefore less likely to protect the country against future shocks.

On the negative side of the slate they highlight that China’s political system is among the most centralized in the world, its economy is somewhat diverse, depends  on exports to the West, and its government has been taking on hundreds of billions in debt lately, leaving it more vulnerable to slowdowns in both domestic and foreign growth.

The essay ends with a sobering discussion of the increasing possibility of the Black Swan of Beijing: “Are the gains from past turmoil big enough to offset the weakness from debt and centralization? The most likely answer is no—that what gains China has accrued by learning from trauma are dwarfed by its burdens. With each passing year, those lessons recede further into the past, and the prospects of a Black Swan of Beijing loom larger. But the sooner that event happens, the better China will emerge in the long run.”

So what happens when the world’s second (or largest) economy has a political implosion? Only time will tell.

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3 Comments on "Taleb: “Stable” Countries Like Saudi Arabia And China Are Ticking Time Bombs"

  1. One of my mentors, Taleb, in his recent post in the Foreign
    Affairs, “Calm before the storm”, surprises me to some extent, as he has moved
    a step further from his last book “Anti-fragile” in delving with issues that
    nations are currently grappling with where he makes a strong connection with
    volatility as a source of resilience. I find it a bit odd as fragility of
    nations cannot be so easily equated with fragility of a given situation driven
    by impending structural risks, as the build-up of risks, mostly driven by
    excessive financialization, hold a distant proxy to the solidity that nations
    are built on through the generations of sacrifice and learning.

    I am particularly critical of the example that the authors
    draw about some ‘fragile’ nations who have high dependency on a central
    structure as opposed to a loosely knit de-centralized command and control
    structure. The best firms of the world are those which have a far more
    centralized control system while unified on a common vision and values. Most
    great countries, that the authors mention, are somewhat structured like the
    ageless firms, otherwise they would have withered away. India or China can
    never be fragile, to any extent, these nations are bigger union of peoples than
    the European Union itself, who have a way of coming together, that neither can
    be explained by the principles of fragility or by the simplicity of any number
    of arguments that we can give. They are anti-fragile, no matter what.

    The central piece of Taleb’s argument is hinged on the shock
    absorbing capability of nations, those who have withered more shocks are less
    fragile, those who have far higher volatility in their political economy have
    higher chances of fending off “Black Swan” events than those who have never
    faced ripples and impacts of impending storms in their economy. This makes
    sense, absolutely, but it does not get into the core of the problem. Risk
    events on a country or an economy come in so many myriad of possibilities, the
    latest one that makes most of the headlines, the Greek bail-out, is just one of
    the many events that marauds the landscape of possibilities. Economic slump
    followed with a fractured polity that is indecisive and lack of vision in
    leadership are some of the fundamental reasons. When economic prosperity is
    restored, the problem could still remain as profligate spending ‘beyond means’
    could get better off the ability to fend off a ‘tail-risk’ event; the best
    example is one where asymmetric pay-offs are seen in commodity exporting
    nations where a price-shock sends a powerful signal to an otherwise noisy world
    of futures.

    Taleb and Treverton, have some strong points, but miss on the
    aspect of core values of nations. The Swiss example of village economies is in
    sharp contrast to the centralization in Saudi Arabia or the volatility in
    Lebanon (which Taleb gives a salutary treatment), while the Japanese reference
    to ‘lost decade’ and their apparent referendum to ‘high-debt’ perhaps misses to
    find the connection between diversity of values that these nations are made of
    and the denouements we seek to exenterate. The virtues of volatility hold good
    supremely as does the solidity of economic prosperity, the goodness that Taleb
    sees in unsteady-steady middle economies like Lebanon is as good as the rock
    solid economies we see in Western Europe or the Nordic states, who have
    demonstrated ageless wisdom to keep to their core values of sustainability.

    Sustainability has assumed many different forms, from the
    erstwhile borderless world to the new borderless we have seen progress of unity
    in purpose in nations demonstrated in many different forms. But economic
    dirigisme has played a central role in determining the course, which may not have
    been unique. The direction that the capitalist economies have resorted to have
    been different in different times in history, and the confluence that inter-dependence
    through trade has brought in as opposed to hegemony or imperialism have changed
    the way the world has progressed.

    Economic dirigisme has assumed different forms, one that has
    allowed reconstruction of post-war Germany or the rapid progress in economies
    like China is very different from the noisy pastures that were taken up by
    Italy (which Taleb admires); it is completely different in the case of India
    which started off on socialist traditions in the decades following independence
    but had to change course when economic headwinds forced it to reform and
    liberalize.

    It is again economic dirigisme that has prompted the change
    of structure in the entire European Union itself that found value in a monetary
    union that incentivized trade flows on the basis of comparative advantage
    alone. Taleb is silent on the European Union, where the Union as a whole fends
    of volatility and is rock solid while its smaller economies could be in trouble.
    Do we assume that here is referring to the decentralization of power which
    makes it anti-fragile as a whole but fragility could be mounting for each
    individual country in the nation?

    The reference to volatility in making claims that it spurts
    anti-fragility is somewhat awkward as it is volatility of commodity prices that
    make oil producing nations rather vulnerable and those like Emirates have found
    value in diversifying into other economic dirigisme like tourism and
    hospitality that is so far withdrawn from the perils of volatility that it was
    distraught with. Volatility in income streams is what every economic entity is
    so rightfully concerned that the entire management of risk is formulated to
    fend off and that is the core idea of anti-fragility. By de-risking those
    portfolios that are influenced by the vagaries of commodity cycles by
    diversifying into the ones that are immune to such volatility is how most firms
    have created natural hedges.

    Output of nations that are linked to commodity prices in dollars
    have the economic dirigisme to depreciate their currency to the dollar to fend
    off the brunt of economic malaise. This is very basic economics we are talking
    of. Those nations who have the wherewithal to create a balance between their
    domestic and the external sector have far better resilience to withstand shocks
    of all kind; reliance on the external sector alone could be very punishing.
    India, although the size could be still small in economic relevance, is far
    more resilient therefore.

  2. One of my mentors, Taleb, surprises me to some extent, as fragility of nations cannot be equated with fragility of a given situation when impending risks mount, as the build-up of risks, mostly driven by excessive financialization holds a distant proxy to the solidity that nations are built on through the generations of sacrifice and learning. I am particularly critical of the example that the authors draw about some fragile nations who have high dependency on a central structure as opposed to a loosely knit de-centralized command and control structure. The best firms of the world are those which have a far more centralized control systems while unified on a common vision and values. Most great countries, that the authors mention, are like that, otherwise they would have withered away. India or China can never be fragile, to any extent, these nations are bigger union of peoples than the European Union itself, who have a way of coming together, that neither can be explained by the principles of fragility or by the simplicity of any number of arguments that we can give. They are anti-fragile, no matter what.

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