Viewing the Coronavirus Epidemic as a Black Swan Event
By William Tucker
Columnist, In Homeland Security
In a recent Forbes article, contributor Jack Kelly called the recent outbreak of coronavirus in China a “Black Swan” event. For the uninitiated, a Black Swan event — a phrase coined by Lebanese-American academic Nassim Nicholas Taleb — is “an event, positive or negative, that is deemed improbable yet causes massive consequences.”
Referring to the recent coronavirus outbreak as a Black Swan event may be a bit premature. Admittedly, it may indeed turn out to be a Black Swan; however, the political or economic impact of the virus is not yet measurable.
We may have a better idea over the next few weeks of the impact Chinese quarantines have on supply chains or the pressure the central government in Beijing may face from its handling of the outbreak. However, it is just too early to tell at this juncture.
The Three Attributes of a Black Swan Event
In his 2010 book “The Black Swan,” Taleb describes three attributes of a Black Swan event: “First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”
Taleb also notes that, “In general, positive Black Swans take time to show their effect while negative ones happen very quickly — it is easier and much faster to destroy than to build.” The coronavirus outbreak is certainly a negative event that has quickly dominated our attention, yet we have not seen its full political or financial impact. As the impact becomes measurable, our assessments of this event should be adjusted accordingly.
Natural Disasters and Epidemics Are Inescapable Facts of Life
We know that natural disasters happen, yet we cannot always accurately forecast when or where they occur. We also understand that earthquakes, hurricanes and tornadoes will invariably occur somewhere, and we know that these events vary in magnitude and cause death and destruction despite our attempts to mitigate the effects. Perhaps they are not as deadly as they were in the past, but there are other ramifications.
The same goes with this strain of coronavirus. Just like any other natural disaster, we know that virus outbreaks can occur without warning. However, we cannot always predict where an outbreak will occur or how devastating it will be.
Just because a virus does not kill as many people as it did in the past does not mean that it is not damaging to a population. Our cities are larger and more interconnected; as a result, attempts to quarantine people to prevent the spread of the disease will have outsized impacts on governments and economies. It’s not always about mortality rates, but other social issues as well.
Coronavirus Has the Potential to Cause a Deep Political and Financial Impact
The outbreak of the coronavirus comes at a terrible time for China. Over the past few years, Beijing and Washington have fought a trade war that has slowed Chinese economic growth.
Though the U.S. and China recently signed an agreement to alleviate some of the trade imbalances, it is not clear that China can fulfill the obligations to which it has agreed. Part of the agreement requires China to purchase more U.S. manufactured goods, but the Chinese economy doesn’t appear able to absorb these required purchases.
These economic setbacks may lead to social instability as Chinese citizens may see stagnant wages or perhaps unemployment amid economic contraction, however slight. Government missteps that prolong dealing with the coronavirus outbreak would only serve to deepen economic problems.
Western companies may look for stability outside of China, further causing economic and social disruption within the country. While moving companies and reestablishing supply chains takes time, but if a company’s Chinese employees are under government quarantine and unable to work, businesses must adapt to the labor shortage. If that adaptation requires moving to another country, then those businesses will relocate.
China’s problems have been described in previous posts, and these problems are somewhat manageable within the status quo of globalization. That Washington would eventually push back against Chinese action is another scenario that was increasingly likely and the U.S. has indeed done that. Even this action by the U.S. government would only serve to strain the Chinese government, not break it.
But the essence of a Black Swan event is that it has massive consequences. Washington’s actions against Beijing have had an impact on China, certainly. However, the outbreak of a new virus strain, as Mr. Kelly points out, possesses the potential for a Black Swan event with even deeper repercussions.
It is important that to view a Black Swan event not as a single, isolated outcome, but rather an event compounding other, already existing problems. A single drop of water cannot be held responsible for a flood, and the coronavirus is but one drop of water. Perhaps it has the potential to break the levee, but we have not yet reached that point.
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