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PS Say More


Andrew Sheng
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This week, Project Syndicate catches up with Andrew Sheng, a former chairman of the Hong Kong Securities and Futures Commission and Distinguished Fellow of the Asia Global Institute at the University of Hong Kong.

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 professionals. They must also reassure the public, guaranteeing that all people’s basic short-term needs – food, water, energy, and health care – will be met. And they must impose whatever measures are needed to gain enough time to prepare for systemic disruptions at all levels. Otherwise, a local systemic failure could drag everyone down.

In the medium term, governments must work to strengthen institutions – including institutional coordination – at home and in vulnerable countries. If a health system is designed to run at 90% capacity, it cannot cope with a sudden rise in need. China had the institutional depth to withstand the first-wave shock, at least so far. The advanced economies, with their robust institutions, will also be able to cope, to varying degrees. But developing countries with fragile institutions are simply not in a position to handle what is coming.

To prevent those failures from triggering reverse-shock waves – causing outbreaks in countries that had contained the virus – countries with the necessary resources and capabilities must help those that lack them. I am talking about global cooperation on an unprecedented scale.

The first pillar of this agenda is knowledge-sharing. Political and bureaucratic rivalries must not be allowed to continue hampering technical solutions.

The second pillar is economic intervention. The market cannot resolve such a multi-dimensional crisis on its own. The G20 should take the lead in devising shared solutions to address the shocks to production, distribution, and income.

Economic interventions must not follow the pattern of the response to the 2008 global financial crisis: monetary policy first, fiscal policy next, and maybe structural reforms later. This time, we must actually resolve the underlying causes of fragility and invest in global public goods. This may require us to consider seriously a form of global taxation, such as a Tobin tax (a small tax on short-term currency speculation proposed by the Nobel laureate economist James Tobin in 1972).

The third pillar of a resilience agenda is the abandonment of false binaries. This is not about capitalism versus socialism or state versus market. COVID-19 emerged not because of a specific practice in a specific place, but because of global phenomena: climate change and population growth, which have put unprecedented human pressure on the natural world. This produces new zoonotic diseases – from Ebola to COVID-19 – which spread from animals to humans.

We should have the humility to accept that, even with the best science, there is no such thing as perfect knowledge and optimal solutions. And we should have the wisdom to recognize that working together in an open and adaptive way vastly improves our chances of coping with new challenges.

PS: At a time when the United States and China are engaged in what you’ve described as a “cool war” – characterized by “an unprecedented combination of wide-ranging competition and deep interconnection” – is such cooperation possible?

AS: Absolutely. Hot or cold wars are false binaries. The real existential enemy has always been climate change, caused by excessive human consumption, in turn enabled by unlimited debt creation. If every developing-country citizen consumes like every Westerner, there will be no natural resources left and the planet will become inhospitable to human life. The American Dream of maximum freedom to consume cannot be for everyone; it can’t even be for Americans anymore. If the COVID-19 crisis doesn’t wake up everyone to this reality, nothing will.

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Sheng recommends

We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Sheng's picks:

  • The Arthashastra

    The Arthashastra

    This classic on statecraft, written in (it is estimated) the fourth century BC, begins with the premise that it is not only people’s material welfare that matters; spiritual good and aesthetic pleasures do, too. Some may consider Kautilya’s thinking to be even more ruthless than Machiavelli’s, but this is the most comprehensive and realistic system-wide classic that I have ever come across.

  • For a New West Essays, 1919-1958

    For a New West Essays, 1919-1958

    Polanyi’s classic work, The Great Transformation – which documented the social changes accompanying the rise of modern capitalism in the West – reflected far more systemic thinking than the neoliberal free-market model. It recognized that the market is part of the economy, which is part of society, which is part of our planet. This new collection of Polanyi’s essays embodies his wide-ranging and systemic thinking, including his genuine regard for the wellbeing of the masses. It is highly relevant today.

  • The Great Leveler: Violence and the History of Inequality

    The Great Leveler: Violence and the History of Inequality

    This book woke me up to how history has solved rising social inequality through violence, war, revolution, and pestilence. Inequality is built into nature, but excessive inequality is avoidable. When elites indulge in excessive greed, they sow the seeds of their own destruction.

From the PS Archive

From 2017
Sheng and Xiao Geng show how to unlock the potential of Chinese cities. Read more.

From 2018
Sheng and Xiao examine why it has been so difficult to identify the underlying logic of China’s development model. Read more.

Around the web

In an interview with the Institute for New Economic Thinking, Sheng identified the main driver behind the 2008 global financial crisis and drew parallels between financial and environmental excesses. Watch the video.

Sheng discusses the challenges and potential of financial governance for Yale’s International Center for Finance. Watch the interview.;
  1. op_twliu1_XinhuaXiao Yijiu via Getty Images_wuhancoronavirushospitaldoctor Xinhua/Xiao Yijiu via Getty Images
    Free to read

    Witnessing Wuhan

    Tracy Wen Liu

    While Chinese authorities have been projecting an image of national triumph over the COVID-19 outbreak there, the doctors and nurses on the front lines tell a different story. Having lived through hell, they see little to celebrate, much to mourn, and reason to remain fearful.


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