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Economist and writer Richard Davies has been here before—quite literally, and many times.
As an economist at the Bank of England from 2006 to 2011, Davies advised U.K. negotiators at the G20 and IMF meetings that organized the EU’s response to the 2008 financial crisis. He was later a senior advisor to the U.K.’s finance minister during the runup to the 2016 Brexit vote.
Apparently that wasn’t enough economic chaos for him. After leaving government, Davies started the global tour that became the book Extreme Economies, a collection of nine case studies published in the U.S. in January. Davies wanted to learn how economies succeeded in adapting—or failed to adapt—to hard times, a mission that took him from post-tsunami Indonesia to post-industrial Glasgow.
“I looked for places that should have failed,” says Davies, “but ended up with a working economy; and places that should have thriving economies, but failed.”
Not surprisingly, Davies has been thinking a lot about the coronavirus pandemic, its economic consequences—and the outlook for recovery. He recently took time out from caring for his newborn twins to share some of his most important insights.
Markets need governments, and vice versa
“You have to use markets, but you can’t let markets run amok,” says Davies. His time in Panama’s Darien Gap region, where an unregulated scramble for wood has led to catastrophic deforestation, helped convince him of the importance of that balance.
“The prime example right now is the market for PPE [medical protective equipment],” he continues. “Some governments are just directing it, and not letting price signals work, which is causing huge mess-ups. And if you go to the other extreme and just let markets run, you wind up with the price gouging we have here in the U.K.”
“An aggressively Friedmanite, fully libertarian model is clearly wrong,” Davies argues, invoking economist Milton Friedman. “But the Bernie Sanders extreme isn’t going to work either. Economics is about [asking], ‘Where can we let markets run untrammeled, and where should we control them?’”
Inequality threatens everyone
For Extreme Economies, Davies visited places that illustrate where global trends could take the rest of us. To study where growing inequality could lead, he went to Santiago, Chile, where the gap between the ultra-rich and working people is profound and deep, stalling not only social mobility, but innovation and economic growth.
Davies sees coronavirus as a global wake-up call on inequality and its consequences. “We’ve realized that the nurse is as important as the doctor, and that the Amazon worker providing stuff to the nurse is also massively important,” he says. “I think that’s a good thing. The inequality debate…is going to be huge after this, because we recognize that interdependence.”
Trust is our greatest asset—and it’s at risk
Davies argues that “social capital” is perhaps the most overlooked ingredient in successful economies, especially those recovering from a shock. Darien’s lawlessness and Santiago’s inequity have hampered their local economies by fueling distrust and alienation among residents, while the strong community in Banda Aceh, Indonesia, helped that city bounce back quickly from near-total destruction by a 2004 tsunami.
“Social capital works by making other types of capital – financial, physical – go further,” he says. “It’s about sharing things. If you’ve got high social capital, one bit of physical capital goes further. You can have localized credit systems, so financial credit can go further. Communities where social capital is higher are going to be much better off in their ability both to manage this pandemic, and to recover from it.”
In an earthquake or a war, Davies says, communities can gain social capital because they’re drawn together by a common enemy. But he worries that the specific contours of the coronavirus crisis are a threat to the very thing we most need to recover from it.
“We’re not seeing the wartime mentality,” he says. “Actually we’re seeing masses of criticism,” such as scattered anti-lockdown protests in the U.S. “One of my fears for this crisis is that it’s actively eroding social capital, or national sentiment more broadly.”
The informal economy is vital
Davies’ book also examines the surprisingly vibrant Zaatari refugee camp in Jordan. There, Syrian refugees run clothing shops, pet stores, and pool halls that do bustling business—outside of the restrictive aid systems set up by the NGOs that oversee the camp.
“I used to think the informal economy was a niche thing,” Davies says. “I now think most [economists] are literally measuring about half of what’s going on.” That means that official numbers like GDP, and the models used by economists and central banks, won’t capture the full consequences of coronavirus, especially in the developing world.
But Davies has also found that informal systems are key to post-crisis recovery. After a crisis, he says, “opportunistic locals will react lightning- quick, much faster than [agencies like] the IMF. If you can just get buying power into people’s hands, they will go out and buy what they need, and if it’s not there, they’ll organize an entrepreneur from a neighboring town to get it in.”
Money will change
Many governments worldwide have acted swiftly to try and get that buying power into people’s hands. But the U.S., with its small-business bridge loans and expanded unemployment benefits in shocking disarray, is emblematic of the need to upgrade the formal financial systems of many countries.
“A modern crisis response tool,” says Davies, “would be a bank account that the government knew we had, and at any moment it could be topped up with a certain amount of money. Because getting the markets to work for you by injecting a load of spending power is where aid works really well.”
Less formal financial innovations also tend to thrive under extraordinary circumstances. “In times of crisis,” Davies says, “People are able to very quickly build new currencies, and new financial arrangements.” One chapter of Extreme Economies, for instance, explores the economy of Louisiana’s Angola penitentiary, where dollars are barred and canned mackerel serves as currency.
Davies speculates that a serious global financial shock could also encourage the adoption of homegrown local currencies like the Bristol Pound, or of cryptocurrencies. He also sees promise in local credit unions, and in “really unorthodox things” such as lending circles.
“What’s going to be the five year legacy of this?” asks Davies. “Testing, of course. But a more subtle legacy might be some real new ideas about how we as communities can target our funds in the most effective way.”
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