Senior British civil servants have been busy in recent months developing strategies on how the British economy would cope if China invaded Taiwan. It is a little alarming to even ponder the implications of such a major military conflict, and the repercussions it could have.
t is only when you imagine such a potential war that the scale of the economic impact comes into view. The difficulties involved in moving goods around the world during Covid-19 would be magnified, not to mention the impact on the supply of computer chips, something in which Taiwan is heavily involved.
The recent shooting down of two Chinese balloons has got everybody spooked about spying, a military conflict or at least the heating up of what is becoming a new Cold War between China and the west.
The most alarming article I read was in the Financial Times, which cited Asian and western military sources as saying similar Chinese balloons are regularly flown over Taiwan to analyse temperature and atmospherics, which are needed to accurately set the trajectory of long-range missiles.
Our susceptibility to being spooked about unlikely but significant global tragedies has been heightened by what might be described as black swan events of recent years.
Unexpected
The term “black swan” was first coined by Lebanese-American thought leader Nassim Nicholas Taleb when he referred to unexpected global events that have a profound effect on society.
Unfortunately, the term has become overused and is applied to just about every possible negative scenario from foreign currency markets to stocks and shares.
To be a true black swan event, it must be unexpected. A Chinese invasion of Taiwan might not even qualify, given how much speculation there has been about it.
An undated file photo released by the Taiwan Ministry of Defence shows a Chinese PLA J-16 fighter jet flies in an undisclosed location. Photo: AP
A US Air Force general recently said he believed the US and China were likely to go to war over Taiwan in 2025. Generals do tend to see future conflicts all over the place, but it was still a startling comment.
The British decision to look at strategies for coping with the economic fallout of various possible events raises the question of whether we in Ireland should look at more scenario planning too.
I know of one economist employed by the Irish Government to research the implications of a British exit from the EU back in 2014 – two years before the referendum. And look how well the state handled that issue.
Ireland remains one of the most open economies in the world, which means when others do well, we do very well. When things go wrong, we can be affected very severely.
Fallout
How would we cope if the EU imposed economic sanctions on China, or the US became directly involved in a conflict with the Asian super-power?
Perhaps it is worth looking at the fallout from this kind of scenario and whether any decisions could be taken now to better prepare for, or even avoid, some of the worst impacts on the economy.
British Chancellor Jeremy Hun. Photo: Victoria Jones/PA
British chancellor Jeremy Hunt recently said the UK had come through “a decade of black swan events”. He listed the financial crash, Covid-19 and the energy crisis triggered by Russia as three examples.
All three were black swans and all three have been felt in Ireland. After the financial crash, banking regulation was greatly improved. There is also now a better understanding among politicians and health experts in Ireland of how to handle a global pandemic. But on the energy front, we have done nothing to safeguard our supply of fossil fuels and power generation in the event of a shortage. Renewable energy is developing, but will never be a 100pc solution.
Preparing for black sawn events seems counterintuitive. But governments deal with randomness all the time
Other black swan-type events could easily happen. One involves the effect of cyber attacks on key infrastructure. We saw the effect ransomware hits had on the HSE in 2021; in recent weeks, we have seen the impact on education at Munster Technological University.
Imagine something on a much bigger scale hitting international banking systems or a wider cyber attack on energy or healthcare providers.
There is a case for running through a range of scenarios on how this country would cope with something like that, as well as beefing up investment in cyber security.
Black swans are the proverbial “unknown unknowns”. On that basis, preparing for them seems counterintuitive. But governments deal with randomness all the time.
As Nassim Nicholas Taleb said: “We humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills and our failures to external events outside our control, namely to randomness.”
It took a lot of luck and some good policy decisions to find ourselves with billions of windfall corporate taxes in recent years
That randomness does not mean we cannot consider what might happen and try to be better prepared in case it does. One example of this is the management of the exchequer finances.
Luck
It took a lot of luck and some good policy decisions to find ourselves with billions of windfall corporate taxes in recent years. Having ignored the fact that luck played a part in temporary windfalls, we haven’t done enough that is worthwhile and lasting with the money.
It was only last year that the Government decided to set up a National Reserve Fund as a kind of rainy-day stash. This fund is set to have €8bn in it next year, and the debate is only opening up now in the Department of Finance about how it should be invested and allocated.
Should it be a pension fund and invested accordingly? Or should it be a liquid fund that can be tapped at short notice? Surely these are conversations that should have been nailed before it was set up.
When it comes to black swan events, I find it hard to believe we will not see another pandemic in my lifetime. The climate change crisis is only beginning to bite, and we are likely to see social upheaval and mass migrations triggered by its ravages in the years ahead.
The battle for limited resources, such as food, water and energy, could make the current immigration challenges look minor.
On housing, it looked like our leaders barely read the population projections and blamed the financial crash for not having enough affordable places to live. There is no time like now to start planning for the worst while hoping for the best.