Thought Leadership – Page 8 – Asia School of Business

One of the biggest learnings of the ongoing COVID-19 saga is the importance of leadership and the glaring gaps that it has exposed. In situations of global crisis, we turn and seek leadership at all levels, be it global, national, state, corporate, community, and even within our own family units. ‘Corona Times’ has really thrust the role of leadership into the spotlight and show the consequences of a lack of such.

On a national level, we see how crucial leadership is as different leaders and leadership styles manage the same problem with such vastly differing results. In business, we are starting to see the effects of lockdowns on enterprises and how they are coping with the new environment. Much of course is dependent on a company’s industry and financial standing, those with larger reserves and longer cash runways will theoretically have a better chance of weathering the storm and coming out of this crisis intact.

As lockdowns in most countries have gone into month 2 and beyond, some businesses have closed, some have downsized, others are in survival mode, but a few have pivoted, reinvented, and seem to be coming out stronger. While each company is unique and exists within its own context, the years to come will cite case studies of companies that came out stronger post COVID-19 and when analyzed, one of the common denominators between all these companies success would be the strength of collective leadership it had.

Nations can be forgiven for having inept or under-par leaders. This is due to inefficient systems and politics where the selection of leaders is done (mostly) via elections which in turn can be influenced by emotion, sentiment, and manipulation. However, in the corporate world, this should not be the case.

Decisions on leadership appointments (CEO and senior management) are rational ones, picking from a curated pool of top class, highly capable, and experienced candidates. So, if this is the case why can’t more companies with highly capable and talented CEOs and senior teams weather the storm, pivot, reinvent and find their way through this COVID induced crisis?

All Hands on Deck!

An argument is that senior leadership alone is not enough to pull a company through an economic crisis such as the one we are facing now. One man or even ‘a few good men’ cannot steer a ship in this ‘perfect storm’. It’s all hands on deck and requires the best crew with leaders in each and every department operating at near to maximum capacity to weather this storm.

In order to pull through, corporations need to have leaders leading and operating at each and every level of the organization. Collective leadership from top to bottom is what it required, not just inspiration from a CEO and the senior team.

The more leaders an organization has within its ranks, the higher its chance of survival as it will be able to adapt, pivot, and implement faster than others. How many leaders an organization has within at all levels is a vital determinant of whether a company can not only come out of this crisis, but come out stronger than before. So, given that companies need to have more leaders within their ranks, how do you fill that gap in the face of crisis?

Enter The Business School

Business schools were generally created to fill this gap. To create, develop and nurture top talent into the leaders of the corporate world. The top American Business Schools have been the breeding ground of business leadership talent that has seen American corporations lead global business and commerce since the turn of the 20^th century. It is the graduates of these schools which power the majority of today’s Global Fortune 500 companies.

In South East Asia, there is only a handful of institutions that are built on the proven principles of the American Business School model. The Asia School of Business (ASB) is one of the few, setup in 2015 as a one-of-a-kind collaboration between the globally renowned MIT Sloan School of Management and the Central Bank of Malaysia.

The vision is simple, to be a regional platform and hub which creates highly knowledgeable, principled, transformative, and market-ready leaders for corporations in Asia. The method? Integrating the MIT DNA and delivering it in-action within the heart of Asia.

Creating Leaders on the Go!

ASB offers 2 routes to creating leaders on the go for corporations in Malaysia and the region. First is the ASB MBA, an award-winning innovation of the MIT Sloan MBA, integrated and delivered in Asia, taking into account Asian business practices, perspectives, and culture. It blends theory with practice via the leveraging of companies within the region as knowledge partners and ‘classrooms’ to learn in.

The Working Professional (WP) MBA allows corporations to send their top talent (hi-potentials) into this program while keeping them in their current role. It is an integrated journey where candidates immediately implement MBA learnings within their organization while they are studying. The signature ‘Action Learning’ curriculum which is inherited from MIT requires a student to complete 4 specially defined projects in their own company within the 22-month duration of the course.

The candidate spends roughly 25% of their time studying and the remaining 75% at work, applying their learnings into action! These projects are defined and delivered using the MIT Action Learning framework and implemented with facilitation from a dedicated ASB Faculty member and business coach (seasoned ex-management consultants).

Major corporations like AirAsia (Malaysia), Sapura Energy (Malaysia), Phu Hung Securities (Vietnam), and Daiwa Steel Tubes (Japan), have sponsored their hi-potential employees for an ASB MBA in the inaugural cohort of 2019. They are reaping the benefits as the program makes their employees consultants in training, immediately applying their learnings and working on delivering solutions within their companies as soon as they step out of each class.

Group Learning & Development

Now, what if your organization needs to develop more than a few select (Hi-Potential) leaders and requires an aggregated shift in mindset and capability? The answer would be to get in touch with the Executive Education arm of ASB. On the 1^st of Jan 2020, the ICLIF Leadership and Governance Centre was integrated into ASB and is now known as the ICLIF Executive Education Centre.

The center offers a complete suite of leadership, management, and governance courses in an open enrollment or custom-built format. Courses can be as short as 1-day programs or a series of modules that accumulate to becoming an advanced certificate in management. For larger groups, the center can develop customized L&D curriculum to achieve strategic objectives of a company.

Plugging the Collective Leadership Gap

COVID19 is here to stay until a vaccine is developed and deployed to the global population. The new normal is unpredictable but what is certain is that the ‘old normal’ is past. To remain competitive, organizations should adopt a strategy to fill their ranks with capable leaders at all levels. The Asia School of business was setup to support corporations to achieve this.

The last time I drove the missus to town for our regular weekly shopping trip I actually counted the number of road signs that I saw on my side of the road between my house to the wet market. Admittedly there were a few that I had never noticed before this despite having plied that route countless times since we moved into the neighborhood in January 2009.

This is not an admission that I have been running through stop signs with impunity and endangering precious lives while pretending to be the Mr Magoo of Bangi but I have realized that if I had driven slower and paid enough attention to the road signs, I am convinced that my journey would be more pleasant for everybody especially the occupants of the car and kinder to the aging jalopy. The signs were put up for a purpose, which is to inform, to warn, and also to educate.

Feedback to me is the breakfast of champions. At home it tells me if I am giving enough attention to my daughter’s schooling, it provides a pretty timely indication if I have been less than disciplined in observing my diet or even if the tie matches the shirt! At work, it is even more critical. It tells us many things. It is a gauge that measures our performance and it can also mirror our behaviors quite reliably.

Just like the environment at home, the challenge is to position ourselves, or to create that very critical personal branding that says, “I welcome your feedback”. So how do we create this positioning?

First of all, there must be a strong enough relationship with our colleagues. This is maybe stating the obvious to some since no stranger is going to walk up to us and proceed with giving us feedback on our performance. However, I feel it cannot be overstated because in my work I have come across too many leaders who fail to do this. They may be too busy with the daily tasks that they fail to focus on creating and nurturing relationships with their people yet at most meetings or townhall gatherings staff are expected to share thoughts and feedback!

If the staff needs to be reminded, to be coaxed and cajoled for feedback then the culture of openness is not yet there. It is up to the leader to set the tone of the organization. If the leader is seen to be generous with his feedback then it follows that the staff too will learn to be easy with their feedback. It is a good idea to begin by sharing positive feedback a few times to make people accustomed to the idea of giving and receiving feedback.

Once there is a comfort level amongst staff with regards to feedback sharing, quickly find opportunities to ask permission from staff if he or she can be given feedback for improvement. The staff identified at this point must be one who is open and comfortable enough to receive such feedback. The positive experience of the conversation may be used to showcase the benefits of sharing feedback.

Throughout this time the leader too must find opportunities to ask for feedback from staff about his own performance. One will be amazed at the results. To maximize the effectiveness of feedback shared there must be a set of criteria observed. The easiest of these is timeliness. Timeliness ensures that the receiver is given the information about her performance as soon as possible.

This also allows her to benefit from it quickly without having to wait until the next time she has a discussion with the leader before she is given the feedback. This is even more imperative if the feedback is one for behavioral improvement. It would be quite damaging both to the person and to the organization if the person continues to project the wrong behaviors any longer than necessary.

The second criterion is being specific. This perhaps poses a greater challenge to Malaysians generally especially since we are so accustomed to our meaningless “interesting la”, “can la” or what, to me, is the single most disturbing of all : “boleh la” replete with the all too famous non-committal tone that usually accompanies it. Being Malaysians we were not trained to be direct, in fact, we are made to believe that being less than direct is actually a virtue in certain situations.

However, in helping a colleague or a subordinate understand with clarity on how and which part of her performance needs improving, the feedback giver must be as specific as possible. She needs to know what was the behaviour observed, its impact on the observer, and, if it is feedback for improvement, a suggested alternative for her future reference as well. I have observed that keeping the impact limited to the observer helps in keeping the interaction focussed.

There is no issue about how “others” might be impacted because the giver has made it clear that he is sharing how he himself felt about it. And I have also noticed that following a conversation such as this, the staff will make an effort to seek feedback from others about her performance, starting with people she is most comfortable with and perhaps, even from those she does not yet consider to be her close friends.

The third and last criterion is ensuring that the feedback given is balanced between the positive and the negative or between the ones for recognition and improvement. This is not to say that for each recognition feedback there must also be a feedback of the improvement variety to follow suit. Or vice versa. This is not about keeping tabs of the types of feedback given either. Instead, it is about the state of mind of the giver.

He must always find the windows of opportunity to share feedback of both types as and when they present themselves. To always be observant about the performance of the team because negative behaviors if left unchecked would wreak untold damages to the performance and image of the organization. On the other hand, the great performance left unrecognized long enough will somehow fizzle out or fall through the cracks.

Leaders should always be aware that the main objective of sharing feedback is to prevent the wrong behaviors from being repeated and to nurture an environment that promotes the right behaviors being practiced until they become part of the organizational culture.

So the question is, are we doing enough to promote this culture?

Muhammad Sabri Rawi’s skills as a leadership development expert spans almost two decades. Sabri’s forte includes Leadership & Learning industry design, development & delivery of leadership training courses. He has distinguished himself as a Mastercoach from years of honing his skills in leadership training in multiple industries which include pharmaceutical, manufacturing, plantation, automotive, oil & gas, FMCG, GLC and the public sector.

He can be contacted at sabri@asb.edu.my.

If you are interested to know more about our exciting Executive Education program click here.

The future depends on leaders getting more from ourselves and our people. “What can you do with a single grape?” asked Professor Richard Wolfson of Middlebury College, arguably the best physics instructor in America. Back in 1998, I was still a premedical undergraduate student. I have since tried the question with corporate participants in leadership training rooms.

The usual answers remain the same “You can eat it”, “Make wine”, “Dry it into a raisin”, or “Plant it” etc. Dr Wolfson then gave his answer “One grape can run the entire New York City for a full day.” What did he mean? Everything runs on energy. For thousands of years, humans have been perfecting ways to ‘extract’ as much of it as possible from resources.

This is just like an organization trying to get as much ‘useful work’ from its assets, including people. Eating the grape is obviously one way to extract energy. But turning that same grape into electricity for hundreds of skyscrapers? That’s another level of efficiency.

Some key questions to ponder are; How much energy is there in everything (and everyone)? Have we gotten all that we could get?
Or is there more?

In 1905, Albert Einstein published the most well-known equation in the world: E = mc2. Energy and matter convert – and within small mass lies great energy. It challenges mankind to think of energy conversion in a whole new dimension. For example, energy extracted by an average power station needs 1,000-1,500 train bogies of coal each week. A nuclear plant, however, only needs a starting mass of 1 truckload per year to generate the equivalence.

That is 10 million times more efficient. E = mc2 tells us that if we could extract ‘everything’ from the grape, it could run the whole city for an entire day. Following that same logic, could we get even more from our people? Is there some ‘hidden’ potential within us? What can a single person do if we only knew how to unleash our leadership energy?

Here is a recent example of such a phenomenon.

- A single Person helped 67 million people to lead a good life with sustainability
- A single Person led 67 million people to focus on good deeds; instead of grabbing whatever and whenever they can
- A single Person turned 67 million people from fighting to embrace each other
- A single Person united 67 million souls into one

Unleashing Leadership Energy:

1. Leader as a catalyst.

The King’s leadership is very simple ‘lead by example’. My western friends find it difficult to comprehend what monarch in the current era of capitalism would journey the land for 70 years to visit the poor? Why touch people on an individual basis when you could command the attention of the entire nation? In one recount, the King literally ‘ducked through barbwires’ to find water for an unknown remote village.

Some may think it was position power. “Oh, He is the king so leading was easy. Just give orders and people would do them. That’s how top-down authoritarian system works anyway”. If being a leader were that easy, then wouldn’t the world be full of them?

2. Resonance effect.

The King caused waves of good deeds. When a person takes on tasks with fearless purpose perseveres against obstacles and resistance – it affects people. When we see good deeds, they inspire us to do good things. Like how yawning spreads a room, the mirror neurons inside our brain begin to imitate.

King Bhumibol’s quote in 1996:

“…Honest people can make others become honest. Goodwill is infectious. It is true that dishonesty may corrupt honest people. But if honest people are steadfast in their honesty, it will be difficult for dishonest people to turn them. It is therefore imperative that honest people remain strong…”

3. Nuclear reaction.

There is greatness within all of us. Dr. Wolfson explained Einstein’s secret of using a single grape to feed the whole city of New York. “Shift your focus from ‘extracting’ to ‘igniting’”, he said. “Einstein revealed that within small mass there is great energy”. Mahatma Gandhi, Dr. Martin Luther King Jr., Nelson Mandela and His Majesty King Bhumibol Adulyadej the Great of Thailand, all are leaders who ignited the nuclear power inside their people.

With His passing on 13th October, I have a friend who recently stood in line for 15 hours straight from 5:30 am to pay respect inside the Royal Palace. She finally got in at 8:30 pm. The first person in line was there at 6 pm the day before. That is the kind of human energy that can run entire cities for days – and organizations for years.

A single person initiated chain reactions that created better futures for almost 70 million people.
That is what the King of Thailand did with his ‘one grape’.
What are you doing with yours?

Dr Thun Thamrongnawasawat (Tan) is one of the foremost experts on dissecting complex management and business models and cascading them for easy implementation by companies across different industries. His innovative B.A.S.E. model has inspired numerous organizations to transform. He’s the author of the Brain-BASEd Leadership book series (2013-2016), a bestselling The Leadership Journey (2018) and a regular newspaper columnist. In 2015, Dr Thun was the recipient of World HRD Congress’s “Global Coaching Leadership Award” and named “Consultant of the Year” by the Ministry of Industry, Thailand.

He can be contacted at thun@asb.edu.my.
If you are interested to know more about our exciting Executive Education program click here.

Earlier in March this year, the 32^nd ASEAN Capital Markets Forum (ACMF) Chairs’ Meeting was held in Hanoi, Vietnam, to finalize actionable recommendations under the Roadmap for ASEAN Sustainable Capital Markets, the concept of which had been endorsed by the 5^th ASEAN Finance Ministers and Central Bank Governors’ Meeting just over a year ago in April 2019.

It was during this ACMF Chairs’ Meeting in Hanoi where four students of the Asia School of Business (ASB) presented their findings and recommendations to the heads of capital market regulators in the ASEAN region. ASB was commissioned by ACMF, with support from the Asian Development Bank (ADB), in the Fall of 2019 to undertake an initiative that would further explore the opportunities for the ACMF to facilitate and mobilize private sector capital for the financing of sustainable projects via the capital markets in ASEAN.

ASB had taken this unique opportunity to allocate the project to its senior class students interested in capital markets and sustainable development. Students from the MBA Class of 2020 – Duncan Marwick (South Africa), Janice Tan Ying (Malaysia), Rajiv Chawla (India), and Zoe Victoria Tate (United Kingdom/Netherlands) – volunteered and were selected to embark on this journey to produce a roadmap as an ‘Action Learning’ project during their 4^th Term at ASB.

These four students were on the road attending different platforms in the region to comprehensively engage with high-level stakeholders from all three sectors – public/private/non-profit – so as to gather as much data and insights as possible in formulating a universally-acceptable set of recommendations.

The Roadmap provides a strategic direction and recommendations for the creation of a sustainable asset class in ASEAN to support ASEAN’s sustainable development agenda for the next five years so as to mitigate the social and environmental risks linked to climate change. The document sets out recommendations under four priority areas, namely strengthening foundations, catalysing products, and enabling access to under-served areas, raising awareness and capacity building, and increasing regional connectivity.

Deputy Chief Executive of the Securities Commission Malaysia (SC Malaysia), Datuk Zainal Izlan Zainal Abidin, thanked ASB and the students for their significant contribution towards the development of the Roadmap. “On behalf of the ACMF, I would like to express my appreciation for the efforts put in by ASB in delivering this collaborative work.

It was inspiring to have the students, tomorrow’s leaders of the world, take part in this important ASEAN initiative, which charts the path for the future in which sustainable finance will play a key role.” SC Malaysia is co-chair of the ACMF Sustainable Finance Working Group and served as a facilitator in the development of the Roadmap.

As expected, these findings and recommendations were not something that materialized overnight. For these four students, it was certainly not the typical 3-month ASB Action Learning project conducted in 1 academic term. Due to the extensive and complicated nature of this topic, this initiative was extended through to their 5^th and final term before graduation, making it a 7-month endeavor.

Under the continued attention and guidance of ASB’s renowned faculty in Central Banking – Professors Gabriele Ciminelli and Hans Genberg – the students had committed themselves to go above and beyond their required curriculum, taking in significantly added workload to digest their schedules on top of academic studies and post-graduation job search, resulting in the successful delivery of this Roadmap document.

“This project gave us deep exposure to the highly relevant and urgent topic of sustainable finance, which is a growing area of significant interest to our generation and more to come. The opportunity to engage with global leaders, navigate complex multilateral relations, and present our final report to high-level representatives from the 10 ASEAN member countries provided the team with an unparalleled MBA learning experience that we would not have had otherwise. We are grateful to ACMF, SC Malaysia, ADB, ASB, and all others who provided mentorship and guidance to ensure the delivery of a successful project,”

Duncan Marwick (MBA Class of 2020)

ASB Professor of Finance and Director of Central Banking, Dr. Eli Remolona, congratulated the students and said, “Our students worked hard on this 5-year roadmap. They helped develop it through extensive discussions with major stakeholders. We hope that this will contribute meaningfully to shaping ASEAN capital markets that support a sustainable future.”

The Roadmap was originally planned to be presented at the 6^th ASEAN Finance Ministers’ and Central Bank Governors’ Meeting in April this year, but that has been postponed to a later date due to the ongoing COVID-19 pandemic situation. ASB President and Dean, Professor Charles Fine, commented that “ASB is honored to have taken part in this regional initiative and we are truly proud of our students and the faculty who supported them through the School’s Action Learning program.

I believe this world-class, professional work that has been delivered in and outside the classroom demonstrates the level of excellence we ask of our students. It is also a reflection of the strong commitment that ASB’s faculty and staff have to offer its students, external partners, and ultimately, the community which we take part in trying to make a better place.”

A digital copy of the Roadmap has recently been made available to the general public and can be downloaded from here.

If you are interested to know more about hosting an Action Learning project with ASB, please contact actionlearning@asb.edu.my.

The issue at stake

It is not easy for most central banks to lend to small businesses, even when they wish to do so. Indeed, during the COVID-19 crisis, this is something they have been called upon to do. Central banks are geared up to lend to governments and to banks, but not to lend to small businesses. The reason they exclude small businesses is the need for good collateral, which most small businesses lack. What then can central banks do in this situation?

What many central banks have done is give commercial banks the incentives to do the lending. Bank Negara Malaysia, for example, provides regulatory relief, which allows small borrowers to postpone principal repayments, without the banks having to report the loans as non-performing assets. The Bangko Sentral ng Pilipinas allows banks to count loans to small businesses against the reserve requirement. These are good incentives to get banks to lend to small businesses. The policy issue at stake, however, is whether there is a way for central banks to provide the money directly for such lending. Can they do so in a simple way?

The hurdle

The hurdle many central banks face is that they operate under a rule promulgated by Walter Bagehot in 1873. In his classic work, Lombard Street, Bagehot said, “… a central bank should, in a crisis, lend freely, against good collateral.” That rule has been enshrined in the laws under which mamy modern central banks operate. The U.S. Federal Reserve, for example, is subject to the so-called “Section 13 (3)” of the Federal Reserve Act, which states that the Fed lend only against good security, even in “exceptional and exigent circumstances.”

The loan-pooling SPV

Nonetheless, in response to the COVID-19 crisis, the Fed has essentially been able to lend to a large number of small businesses. The mechanism it uses is called the Main Street Lending Program (MSLP). The legal device that allows the Fed to meet the good collateral requirement is a Special Purpose Vehicle (SPV) that pools the loans together. Indeed the use of this device at the Fed has become almost routine. It is used for the Fed’s other crisis-related programs, namely the Primary Market Corporate Credit Facility (PMCCF), the Secondary Market Corporate Credit Facility (SMCCF), and the Term Asset-Backed Securities Loan Facility (TALF).

How does the SPV provide loans to small businesses? An SPV is a legal entity that is created for a specific financial purpose. The Fed creates such entities as its subsidiaries. In the MSLP, as shown in the diagram below, the Fed gathers from several banks a large pool of their small business loans, but choosing only those that satisfy certain criteria. This pool of loans is then placed in an SPV as its assets. With those assets serving as collateral, the Fed then lends to the SPV, which can then pay the banks for the loans in the pool.

Here the Fed does not lend directly to small businesses. It lends to them through the SPV. In practice, the banks know the loan eligibility criteria in advance and they make loans in anticipation of selling them to the SPV. The banks hold on to a residual of about 15% of each loan, so that they retain “skin in the game.” Pooling the loans in the SPV then allows the risks of such special crisis loans to be managed separately from the rest of the banks’ loan portfolios. As the small businesses repay their loans, the SPV repays the Fed.

Managing the risks

What makes the SPV’s assets count as good collateral? The short answer is risk management. Here the fiscal authorities also need to play a role. The ministry of finance would put just enough equity in the SPV to absorb likely credit losses. At the same time, the small business loans that go into the pool are chosen so that their risk characteristics are well understood. This means the risks of the pool as a whole can be carefully analyzed and managed. The analysis would tell the central bank how much equity it would need from the fiscal authorities.

The analysis would provide estimates of the average probability of default of the loans and the average loss given default. More importantly, the analysis would provide estimates of the correlations of defaults in times of stress. These estimates then lead to the calculation of the “value-at-risk,” which is the highest amount that could be lost from defaults for 99% of the time. In the case of the Fed’s MSLP, this amount is calculated to be 12.5% of the size of the SPV. Hence, for the pool of loans to be considered good collateral, the U.S. Treasury provides $75 billion in the form of equity in a $600 billion MSLP.

Keep it simple

While not all emerging market economies have the laws that permit SPVs, some do. Two jurisdictions that already have the legal framework for SPVs are Malaysia and the Philippines. In these countries, the central bank could already set up SPVs to provide loans to small businesses during a time of crisis. It is the SPV structure that allows the central bank to meet the “good collateral” requirement. Yes, the national government would need to agree to provide a small equity backstop. When the government is providing crisis funds anyway, the central bank’s SPVs would serve to leverage up those funds.

Should the central bank decide to set up an SPV for purposes of lending to small businesses, it should keep the structure as simple as possible, as it is for the Fed’s MSLP described above. At present, SPVs suffer from a poor reputation because of their role in the 2008-2009 global crisis. In that episode, subprime mortgages were bundled up in SPVs, the risks of which were misrepresented by lenders and underwriters. The more complex the structure, the easier it was to deceive investors. The belated recognition of the actual risks helped to precipitate the crisis. It is telling, however, that other loan-pooling SPVs with simpler structures, such as Collateralized Loan Obligations (CLOs), emerged from the crisis largely untainted. The lesson from all this is that the SPV technology itself is not the problem, but it pays to keep the structure as simple as possible.

Prof. Eli Remolona is Professor of Finance at the Asia School of Business. He sits on the Board of Directors of the Bank of the Philippine Islands and is Adviser to the Academy of Finance in Hong Kong. He has been Associate Editor of the International Journal of Central Banking since 2005. Before joining the ASB in 2019, Eli worked for the Bank for International Settlements (BIS), where he was Head of Financial Markets and Editor of the BIS Quarterly Review, from 1999 to 2005, and then Chief Representative for Asia and the Pacific, from 2005 to 2018.

Before joining the BIS, Eli was Research Officer at the Federal Reserve Bank of New York. For 14 years, he was engaged in FOMC briefings and research on issues in international finance, financial markets and sovereign risk. Eli has taught at Williams College, Columbia University, New York University and the University of the Philippines. He holds a Ph.D. in economics from Stanford University.

He can be contacted at eli.remolona@asb.edu.my.
If you are interested to know more about our exciting Master of Central Banking program click here.

This blog is a thought piece and synthesis informed by the ASB webinar “Marketing for a New Normal” held 29 April from 3:00pm to 3:45pm. This features insights from Willem Smit, Assistant Professor of Marketing at ASB, as well as from guest speakers: Arun Menon, Managing Director of IPSOS Malaysia and Jocelyn Pinto, Manager, Data Strategy and Analytics at ADA.

No firm can accurately predict what the “new normal” will be, but there are ways to get ahead of the curve in finding out what that a new post-COVID reality looks like. In a race against the clock, it is very tempting to act quickly, but before jumping into action, marketing professionals and brand managers need to ask for themselves the following elementary questions first:

Consumers staying at home: what is going on? What does the data tell us?
Post-COVID when they come out of their homes: will there be a “new normal”?
How should companies respond to a rapidly changing customer reality?

To give up-to-date market insights into these elementary questions, we have leaders in customer intelligence, global market research company IPSOS and the regional’s largest data-driven agency ADA, share their current consumer observations. Based on their observations and evidence-based recommendations from Marketing Science, we as a panel distilled the following eight lessons for preparing for different future scenarios of a New Normal.

Question: What is the best marketing strategy for a firm facing a recession?

Recessions and downturns are not new and have been a topic of study for a long time. To systematically learn from what we have learned from those past experiences, we turn to Marketing Science, and specifically to empirical studies examining the survival and success of firms and brands going through recessions, downturns and crises. We find two clear Don’ts for marketing strategy in a downturn.

Lesson 1: Don’t cut marketing spending.
While everyone including your rivals are affected by a recession, it is important to stay competitive. Cutting your marketing budget during a recession is not a good idea as it harms your long-term performance. Studies have shown that it is critical to keep “share-of-voice” in the marketplace as firms which reduced spending experienced a signifiant loss in market share coming out of the recession.

Lesson 2: Don’t use price promotions.
It makes sense to become lean and cut the regular price in a recessionary market, as many more consumers have become more price sensitive. However, if you don’t have enough resources to sustain a lower price level and you can only afford a temporary reduction in price, don’t do price promotions.

Once you have to return prices to the higher original level, you will disappoint and lose customers in the long run. Furthermore, the effectiveness of price promotions very much depends on consumer sentiments. When people are generally not in a good mood, promotions lose much of their effectiveness as advocates of a certain product or brand.

Question: Is this [recession] going to be a “normal” recession?

If this downturn was comparable to previous ones, it would be easy to base our expectations on the experiences from our recent past. The 11 post-World War recessions in the US lasted 8-11 months on average. But is this going to last 8 or 12 months?

Lesson 3: Understand this true uncertain nature of the COVID-19 downturn.
Given the unique nature of the COVID-induced nature of the recession, it was initially expected that it would be a V-shaped recession: a quick dip followed by a rapid economic rebound. However, flattening the curve is taking longer than expected in most countries; While China seemingly managed to do it in 7 weeks, other countries may take longer.

In this unique downturn, the exogenous factors are unprecedented. In the sense, the turbulence and risk is one of true uncertainties, as described by the famous economist Frank Knight: an uncertainty of an “unknowable distribution.”

Lesson 4: Increased variability requires a higher need for continuous market intelligence.
Now that globally a V-shaped rebound has become unlikely, and the COVID-19 uncertainty has introduced a “period of forced experimentation” during which consumers, firms, schools, governments and other stakeholders had to adopt digital technologies, rethink work practices (WFH), design 6 ft procedures, managing clogged-up global supply chains, etc.

So many changes in such a compressed amount of time. Therefore, it is important to know where these new directions are leading to, over time. Yet, it is not possible to gather information about the market by means of our traditional information channels. We are faced with empty streets, consumers at home and businesses split in essentials and non-essentials. There are fewer places to make in-person observations to sense what is going on. However, market research companies and big data firms can fill the gap for these insights and help make this “new reality” less opaque and more transparent by making the distributions more knowable.

Question: What is going on with consumers staying at home. What are they doing and thinking about in this lockdown situation?

Lesson 5: Discover new consumer moments for brand connection without being opportunistic.
While the world is self-isolating, society and people do not live in isolation. IPSOS research shows that home-bound consumers are finding ways to stay connected and communicate. Observable changes are the rise in popularity of topics like managing mental health, celebrating life events virtually, and finding new activities to do in quarantine among others.

These new conversations have led brands to revaluate and reactivate their purpose, relevance, and ways of engaging with their consumers. In order to place themselves strategically and meaningfully in the midst of the chatter, brands must remain authentic and faithful to their identity. Brands need to find the right tone and story to tell within the context of COVID-19 which has revolved around being caring and compassionate. It is also important to remember not to pander too much to your consumers and retain a level of authenticity when engaging. Finally, understand the personally groups in your market and create a strategy for how to reach out to them meaningfully.

Lesson 6: Understand the different consumer responses to COVID-19.
A study conducted by ADA of over 400,000 applications yielded insights into eleven types of “COVID-personas”. Each persona represents a type of mindset as shown through their app-behaviors consumers use the most.

While some personas are more financially minded, others are health-conscious and searching for apps to support their physical and mental health. Another type is more forward thinking, traveling in their mind to places abroad and hoping to go on a trip soon again. What these personas really highlight is the fact that people are in different mental space in current times and this underscores the importance of brands in reaching their customers with the relevant messaging.

Question: When consumers come out of their homes, will they see a new normal?

Two extreme perspectives on the New Normal prevail. The first view is that a new normal will emerge as a result of an intense period of “forced experimentation.” More working remotely, more online shopping, both digital and distance have become new norms post-COVID.

The opposite point of view is that people are hard-wired and will go back to normal and return the old ways of doing things before COVID-19. This view strongly believes that life experiences and activities such as in-person classes, grocery shopping will come back at the same level and virtual options will stay limited.

Question: How should companies respond to a rapidly changing reality?

Lesson 7: Personalize your marketing to the new COVID-19 personas.
Absolutely crucial for marketing professionals and their firms is to understand and cater to each unique persona differently and strategically. To spread a same message too broadly to hit all personas at the same time makes the brand tone-of-voice sound too generic and unable to resonate with people’s varying mindsets especially in the context of COVID-19. Worth noting across all personas is that they all react in different ways which makes it doubly important to remain relevant to consumers.

Lesson 8: Anticipate the phases your consumers are going through.
The path towards regaining momentum post-COVID will be gradual and go through different phases. IPSOS research in China on post-lockdown communities showed that some residual feelings of uncertainty and fear may still affect consumer behavior. Taking advantage of these changes in consumer behavior can be done by anticipating and creating engagement phases.

This starts with the “preparation phase” where the consumers are re-familiarizing themselves with your brand, followed by the “adaptation phase” in which consumers adjust to the limitations of their context and what they can buy. Now consumers are moving into the “anticipation” phase where they are looking forward to releasing lockdown measures. Once a sense of predictability has been established, consumers and marketers enter into experimentation where the desire to explore new things fuels creativity and innovation.

This applies to how consumers create new food options, for instance, out of what they have and brand creating new aspects to their products to spur greater creativity. The last phase is expectation. Both consumers and marketers must accept that the road ahead will still be rife with changes which requires greater agility and creativity to be able to respond to the next six months.

Conclusion

There is no playbook for marketers on how to deal with a global recession caused by a global pandemic. Critical is to avoid taking unproductive and ad-hoc responses to a downturn. Don’t cut the marketing budget and don’t start giving price promotions, because the length of this recession can be unpredictably long. The first step is to intensify market intelligence capabilities to learn quickly from keeping the fingers on the pulse of new evolving developments.

The lessons and principles are a result of keen observations, analysis and detailed inquiry into how people are navigating the “new normal” and are by no means the golden rule of marketing in a recession. However, it pays to always lean into the observable shifts in people and society to ride the wave of these changes and use these to your advantage as a marketer in the midst of uncertain times.

These changes include the rise of new interests, personas and mindsets shaped by the environment created by the pandemic. This also means marketers must discover new and creative ways of authentically engaging with the different consumer responses to COVID-19 with a keen awareness of their mindsets, behaviors, and even process as we collectively navigate the inevitable new normal.

Willem Smit is Assistant Professor of Marketing at the Asia School of Business and International Faculty Fellow at MIT. His expertise is on marketing strategy; his scholarly work has been around the theme of “Marketing Strategy Heuristics in search of superior performance”, in particularly on the newly revolutionized and digitized decision environments for marketers.

After earning his PhD from the Rotterdam School of Management, Erasmus University, Willem became a research fellow at IMD, where he also designed and delivered executive development programs for multinational companies in the telecom, pharmaceutical and consumer-packaged goods industries. Before joining ASB, Willem has taught at various schools in the Asia-Pacific region: NUS National University of Singapore, SMU Singapore Management University, TongJi University, Hult Shanghai, and MIT affiliate Malaysia Institute for Supply Chain Innovation.

He can be contacted at willem.smit@asb.edu.my

Send us your enquiry now at contact@asb.edu.my to develop and design a customized program for your organization.

How building an entrepreneurship ecosystem could bring jobs and wealth to the community.

What will the future look like after COVID-19? The pandemic has revealed that the world’s economic and social infrastructure is not prepared to contend with the unprecedented crisis or looming recession. In the United States, the Small Business Administration expects half of the 30 million small businesses to close and lose 47 million jobs due to the pandemic, leaving 32% unemployment this year¹.

The US is not alone, every other country is bracing for a similar challenge. This will affect every one of us, no matter where we live or what we do. Not only will families and individuals suffer from the inability to support themselves through basic needs, but it also affects businesses.

Large and small corporations struggle or fail due to a lack of customer consumption, leaving behind areas that once had high commerce and a thriving job market into clusters of job-deserts. Businesses could take months to years to recover from losses, deepening the cycle of unemployment, poverty, and breakdown of social structure. Per Okun’s law, for every 1% rise in the unemployment rate, the GDP, the revenue created by a nation, could drop by 2%.

The expected rising unemployment would have a devastating effect on any state. This affects government spending, corporate profits, personal incomes, and the quality of life of the citizens. Every nation will be navigating these uncharted waters, facing severe crises, which some economists predict will last much longer than that of 2008.²

Can We Bring Lost Jobs Back or Create New ones Anytime Soon?

How can corporations and governments help at this time? Most of these jobs will not return in the same form immediately after the virus is defeated. Corporations will not invest and hire until there is confidence in the market, so job growth may trail the resurgence of the economy. Governments, on the other hand, could launch large infrastructure programs to create short-term jobs to reboot the economy.

But these may include few high-paying, skill-based jobs that are essential to creating the momentum of sustainable job creation. Nations have already started announcing large stimulus packages to reignite the economy and employment. Typically a lot of it goes to help failing corporations and to support those who lost their jobs. But how do we create sustainable jobs with this stimulus fund? Can the funds be invested to create ‘jobs that create jobs’?

Entrepreneurs to the Rescue

Innovation Driven Entrepreneurs are a significant source of employment. They use creative approaches to solve existing or future problems faster, cheaper, and better with new tools and technologies. Companies like Uber and Airbnb solved age-old problems in creative ways with technology and minimum capital (they did not buy a million cars or hotel buildings). While producing extraordinary outcomes.

Moreover, they created hundreds of millions of jobs while solving an existing problem and creating wealth for all the stakeholders. MIT’s Bill Aulet and Fiona Murray made a strong distinction between a Small Medium Enterprise (SME) and an Innovation Driven Enterprise (IDE).³ An SME is defined as a company with a local business with limited growth potential, like a restaurant, and an IDE can scale fast to solve the same problem globally and grow significantly larger.

While SMEs use local skills and resources, IDEs can reach around the world to hire talent. When SMEs show linear growth, IDEs often grow at an exponential scale and create a more significant number of jobs than SMEs. These better-paying jobs spawn more secondary jobs and businesses locally, such as restaurants, dry cleaners, and taxi services. In this time of critical need for creating jobs, innovation-driven entrepreneurs are the catalysts we should seek to create.

This breed of entrepreneurs is usually multi-disciplined and analytical critical-thinkers who look for opportunities that could be scaled to reach customers far and wide. They work in close teams that are diverse in skills and culture. They are self-learners who are not afraid to learn from failures and build their confidence to face future unknown challenges.

My experiments with university students demonstrate that innovation-driven entrepreneurs can be created through interventions that cultivate their mindset and skill set. The boot camp conducted in 2014 at Mar Baselios College of Engineering and Technology, Trivandrum, India, to teach these skills and attitudes successfully turned a third of the participants into first-time tech entrepreneurs.

They inspired others to join them to build a thriving innovation and entrepreneurship ecosystem on campus. From this ecosystem emerged 21 ventures in a matter of four years (Fig. 2). All from a college that had one student startup in the previous twelve years since their founding. (Fig 3).

Figure 2: The number of student startups at MBCET significantly increased after a five-week Bootcamp on innovation and entrepreneurship in 2014.

Figure 3. The ecosystem at MBCET created the center to nurture innovation and entrepreneurship.

Build an Army of Entrepreneurs, Startups Will Follow

Joshua Lerner wrote that the majority of the entrepreneurship initiatives for building the next Silicon Valley in different regions in the world have failed.⁴ The current entrepreneurship programs primarily focus on creating next startups. The problem with measuring success based on short-term outcomes, such as the number of startups created, funds raised, and company valuation is that we are not focused on creating and training entrepreneurs of tomorrow but on startups for today.

Here, the young entrepreneur who is the engine of a startup is expected to perform miracles in her first attempt while essentially learning to walk. Thus these top-down programs often are not working to potential because they are not harvesting entrepreneurs from a larger population. The focus of these programs is on creating hit songs, not nurturing singers.

On the other hand, the entrepreneur’s primarily quality is a mindset of:

- vision, where she sees problems as opportunities in disguise
- drive, to bring together resources she doesn’t possess to gainfully execute on her vision
- empathy, to understand her customer’s challenge deeper to create the right solution.

Entrepreneurship is also a skill set of:

- system-thinking, the ability to break down a problem, understand the behavior of the parts
- problem-solving, of creating a method to address the problem that is acceptable to all the stakeholders
- value-capturing, of making an impact while creating wealth.

Can these qualities be taught? I truly believe from the experiments I have conducted that entrepreneurs can be forged from the average population.⁵ It may take several cycles to learn and practice these qualities, not unlike learning anything else. But, yes, it can be taught, and it is easier to learn at a younger age. The stimulus funds for rebuilding after the pandemic should be seriously considered for creating innovation-driven entrepreneurs from the bottom-up to change communities by creating high-value jobs.

Building Ecosystems for Innovation and Entrepreneurship

To paraphrase the proverb, it takes an ecosystem to raise future innovators and entrepreneurs. The conventional top-down concept of an ecosystem consists of supportive players such as active investors, government agencies, researchers and academics, and industry that demand innovation.

The bottom-up ecosystem suggested here consists of:

- Community: Made of similar thinkers, makers, entrepreneurs, mentors, and peers,
- Resources: Access to equipment, materials, talent, learning tools, and
- Space: A safe place to meet, exchange ideas freely, and work on projects in teams.

These bottom-up ecosystems are robust because they are created and run by inspired players who are also participants and beneficiaries. While the top-down approach creates structures, policies, and funds required to build companies; the bottom-up approach is trying to transform individuals by building skills and confidence required to create entrepreneurs.

Even though both top-down and bottom-up approaches are equally required to build a buzzing ecosystem, the current process consists mostly of the top-down one, which leads to a limited number of aspiring entrepreneurs entering the system. The bottom-up approach can significantly amplify it and help create a constant feedstock of aspiring entrepreneurs for the next phase.

We have created small maker labs in communities for the youth to practice the design and fabrication of technology products. After learning the basics of product creation, these youth seize the opportunity to create products to solve problems faced by their community. Subsequently, they realize the potential value of such products and learn to monetize it. For an individual to go through these experiences, she needs a nurturing environment and mentors, or an ecosystem.

Several of these new entrepreneurs may fail, but the ecosystem acts as the support system to help them recover and reboot. Bottom-up innovation and entrepreneurship ecosystems are cheaper to build and sustain. Such experiments of building entrepreneurship ecosystems, as done at Mar Baselios College in Trivandrum, have already shown significant results.⁵

Conclusion

The social upheaval that the COVID-19 pandemic leaves in its wake will last well beyond its health-related problems. Unemployment will rise as the prime factor that hinders rebuilding, leading to poverty and social unrest. A bottom-up approach that trains youth from communities in creativity, technology, problem-solving, and entrepreneurship creates local innovation and entrepreneurship ecosystems that can be built and sustained with meager investment.⁶

Such ecosystems have shown a broad impact on individuals and the community and they should be considered in the post-Covid rebuilding plans. Both the bottom-up and top-down initiatives are essential. While one builds entrepreneurs, the other helps build ventures. This approach helps in building a sustainable source of solutions to the overwhelming number of problems that will follow the pandemic. An army of innovators and entrepreneurs required to address this crisis can be trained. They could solve today’s challenging problems, generate wealth, and create jobs.

The views in this article are that of the writer and does not necessarily represent the views of Asia School of Business as an organization

References:

Jeff Cox, “Coronavirus job losses could total 47 million, unemployment rate may hit 32%, Fed estimates” CNBC (link)
Kenneth Rogoff, “Mapping the COVID-19 Recession”, Project Syndicate (Link)
Bill Aulet and Fiona Murray, “A TALE OF TWO ENTREPRENEURS: Understanding Differences in the Types of Entrepreneurship in the Economy”, The Ewing Marion Kauffman Foundation, 2013
J. Lerner, “Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed–and What to Do About It”, 2009
R Nair, W Smit, J Enrique Corpus, “The Ripple Effect of Maker-Training Impact: A Longitudinal Study among Young Latent Entrepreneurs in Rural India” Fab 15 Conference, 2019
R Nair, J Corpus, “Incubating Future Innovators and Entrepreneurs”, Asian Development Outlook 2020 (ADB) (ADO2020)

Professor Rajesh Nair is Professor of Practice, Visiting Scholar at MIT in ASB. He is a product designer, and entrepreneur with more than 25 years’ experience in the design of more than a hundred products and multiple startups in Boston area.

His research is in catalyzing innovators and entrepreneurs in communities from the ground up and to build local entrepreneurship ecosystems. He has conducted workshops on Making, Innovation and Entrepreneurship in different countries for students and professionals.

He is a practitioner of Design Thinking process. He founded three product manufacturing companies in the US and a nonprofit organization that promotes innovators & entrepreneurs among Indian youth.

He can be contacted at rajesh.nair@asb.edu.my
If you are interested to know more about our Innovation and Entrepreneurship Center click here.

The Three Cs: CALMNESS, COMPASSION, CONTROL

The Covid-19 pandemic has shaken the world – it has shaken governments, businesses, lives. In a world of lockdowns, isolation, and social distancing, we have had to learn to live and work differently, to learn to adapt to a new normal. In such a time of unprecedented change as this, how should we react? What emotional responses can we learn to cultivate during times of crisis?

CALMNESS

Our first response, when faced with threat is to either fight, take flight, or freeze. It is natural for our limbic brains to be driven by stimuli; to go into overdrive when faced with danger. Every day, we are faced with cognitive dissonance: the world is no longer safe, and we are bombarded by more bad news, forced to deal with our mortality. Anticipatory grief, this is the word coined for what we are feeling – we no longer know what lies before us, and we are fearful for our futures, mourning the end of the world as we know it.

But it is just at such a time as this, that we must take charge of our limbic brains. No one can make rational decisions when in panic mode. Hence, remaining calm is the most critical thing we can do to reassure our people, providing them clarity of vision, values, and purpose in a time of chaos. Anthropology ties this to the alpha trait as the way a leader behaves will trickle-down to his or her followers. It is natural to be impatient to make decisions in a time of crisis, to want to find solutions and “lead”, but rushing forward can be detrimental.

But how do we stay calm?

Acknowledge what we are feeling
One way is to acknowledge what we are feeling. Naming our feelings allows us to understand what we are experiencing and to learn to manage it. It helps us reframe our fears, moving from “Everything is going wrong,” to “This is what I can do about it,”. If we understand our limbic responses, we can recognize reactive behavior for what it is and shift to a more proactive stance, preventing ourselves from making poor decisions. Hence, self-awareness is necessary in order for us to learn to control our impulses.
Allow for considered decision-making
At a time when complex problems require us to bring clarity of thought to the table, it is also crucial that we engage our rational brain. But science shows that it is only possible to turn on our neocortex when we are calm, when our amygdalas are not in overdrive. That is why it is critical to take that deep breath before making rash decisions and leaping in. Deep breathing, mindfulness, and self-reflection can all help us to quiet our minds. Nevertheless, this does not mean that we much sit on our hands either. Doing nothing is not an option. Instead, it is about making “quick but considered decisions without being overly weighed down by policy, process or protocol”

COMPASSION

This does not mean that we should leave our feelings at the door, either. At times when people worry for their future, for their careers, for their lives, one key emotional response a leader can cultivate is compassion. A subset of empathy, compassion is not just the rational understanding that someone is in distress, neither is it about being so emotionally rooted in someone else’s pain to the point of paralysis. Instead, it is the ability to sympathize with the suffering of others and to be moved to help them.

But what does it mean to be compassionate?

- Forgiving Yourself and Others
  For one thing, it is learning to forgive yourself. As Lee Lung Nian, CEO of Citibank Malaysia, said during ASB’s first webinar titled, “Sharing Asian Leadership Practices During a Time of Crisis”, it is about understanding that the decisions we make are not perfect. ASB Professor, Michael Frese, calls it an “exercise in humbleness” – realizing that we are just as capable of making mistakes as the next person. It is about understanding our vulnerabilities and forgiving ourselves for our shortfalls; it is about understanding our limitations and accepting them as part and parcel of being human.
- Two way communication and support
  As Mr Lee also states, it is at times like this that we must overcommunicate. People need to feel love, and it is vital to engage with them often. But communication is not a one-way street. Instead, as Sabri Yusof, a Senior Lecturer at ASB says, it is about being open, honest, and having meaningful conversations with others. Being compassionate requires organizations to be willing to listen to feedback, to understand pain points, and to find ways to eradicate and alleviate suffering, putting in place initiatives and policies to support their people.

CONTROL

We are used to fixing things, but this crisis has shown us that our capabilities are limited. Managing people has become that much more difficult when working from home is no longer an exception but a norm. In such an environment, leaders can feel as though they are losing control. So what can we do to feel in control again?

The answer is, in many ways, counterintuitive. Instead of striving to feel more in control, we can learn to let go of the need for it. This means understanding what we can and cannot influence, as well as admitting that things can go wrong despite our actions. It means accepting that although we may not have control, we still have choices – we can choose what thoughts, feelings, and actions to focus on.

- Agility
  As such, what is called for at times like this, is not control but agility. As Norlia Azmi, Chief People and Culture Officer at Permodalan National Berhad (PNB) said during ASB’s second webinar (A Balancing Act: Supporting Your People and Your Business), it is critical for us to remain agile as agility compels adaptability. Agile leadership means remaining fluid in our decision making and being able to pivot when necessary. By all means, do institute ways to monitor and manage things that fall within your sphere of control, but also be prepared to implement changes. Allowing adversity to disrupt the way we work can drive our creativity and lead to alternative solutions, changing the way we do things for the better.

- Trust
  Another way to let go of control is to empower others. Initiatives to monitor and measure performance can be introduced, but they will never be foolproof. Hence, what may be more important is building a workforce that can harness intrinsic motivation to propel productivity. Distributed leadership allows us to devolve control, enabling people to self-lead and to pursue meaning and purpose in the work they do.The most successful organizations are the ones that propagate trust, tapping on their trust reserves when required. But how can organizations grow their trust capital? It all comes down to a company’s purpose, values and culture. Corporate culture is amplified during times of crisis, and here I would like to offer ASB as evidence. ASB aspires for low oversight and high independence. Believing in a more decentralized system that allows for individual accountability, what ASB’s Dean and President, Charlie Fine, prescribes to during times of crisis include the three other Cs which are made up of Communication, Collaboration and Coordination. This means overcommunicating to encourage feedback, building capacity throughout the entire organization, coordinating and collaborating between individuals and departments, and moving resources to where the need is greatest. Rather than micromanaging, it is about developing an accountable workforce where productivity arises naturally.Having said this, we must also remember that trust works both ways. As Puan Norlida says, as much as the organization must trust in its people, so must employees trust their leaders – trusting them to navigate uncharted waters, providing courageous leadership as they forge a path forward. And this is where authentic leadership matters once again. It is the leaders who have built credibility (fostering integrity and transparency while still delivering results) who will be the ones to garner trust during times of crisis. If there is one thing this pandemic has taught us, it is the importance of striking a balance between responding humanely while still delivering excellence, and it will be the leaders who can do both who will be the ones to lead us into the new normal.

Michele has 22 years leadership and management experience in the areas of human capital development, strategic thought, corporate finance, coaching, psychotherapy and education, both the public and private sectors in the UK and Malaysia. Having headed various roles in multinational organizations such as the Iclif Leadership and Governance Centre, UBS, HSBC, and CIMB, Michele brings with her a wealth of international business acumen, allowing her to provide critical insight into leadership and management practices.

Following a career change in 2014, Michele is also a certified psychotherapist, coach as well as EQ practitioner (certified by ICF and 6seconds, the largest EQ organization in the world). As such, Michele has provided leadership development and coaching services for clients ranging from the C-suites to young executives – all of them hailing from a wide range of industries such as Oil and Gas, Construction, Transportation, Finance, Telecommunication and small businesses. She has also practiced as a psychotherapist and counselor, working with patients suffering from depression, PTSD, anxiety, relationship issues, OCD and more. Michele is also member of the Malaysian Association of Psychotherapists.

A certified human capital strategist and instructional designer, she has also trained, facilitated and written on various topics including Managing Change, Emotional Intelligence, Cultural Transformation and Leadership. Michele has a BSc and a MSc from the London School of Economics, UK. She was also a Malaysian JPA, British High Commission and Citibank scholar winning various academic awards.

She can be contacted at michele@asb.edu.my.

Many of us are waiting for the day that our respective governments declare the ‘lockdowns’ over and we can continue on with life as we once knew it. There is however a misconception that everything will go back to normal anytime soon. A lockdown is not a cure, it’s a measure to ensure that the spread of the virus is curtailed, buying us time to find solutions while keeping the healthcare systems able to treat those who are in need.

Bill Gates argues that things will only get back to normal once a vaccine is developed which will take anywhere between 18-36 months. Mobilizing such a vaccine for the world population is also another challenge which will inevitably take more time. In reality, what will probably happen is a scenario of a ‘Socially Distant Economy’. A Socio-Economic reality where trade and commerce continue while controlling and managing the spread of the COVID-19 virus.

It is a fine balancing act between public health and economic disaster. The first step towards this ‘Socially Distant Economy’ is ensuring that the critical supply chains of food and medical services are kept operational and can meet the respective demand. While speaking in the ASB COVID-19 webinar series discussing critical supply chains, Prof Charles Fine, who serves as the Dean of the Asia School of Business & an authority in ‘Supply Chain Strategy’ , highlighted that the challenges are caused by both ‘not enough supply’ and ‘too much demand’.

Too much demand is caused by people increasing their safety stocks (hoarding) in the anticipation of no/limited supply, as well as movements in usage shifts as household consumption increases from more people staying at home. It is ok if a few families increase their consumption, but if all households increase its consumption by just 10%, it creates a major spike in demand on the larger scale.

On the supply side, lockdowns have caused bottlenecks in various points of the supply chain via inability to work, lack of mobility, closure of manufacturing, breakdown of logistics or even capital which is not able to flow. There are, of course, solutions to these problems but as the problems stems from government policy, the solution should also start from the same source.

Alok Mishra, CEO of a consultancy that helps MedTech companies build capabilities in strategy and marketing, argues that policy makers have a crucial role to play in ensuring that supply chains continue to function. In the same webinar which was moderated by ASB Senior Director of Corporate Development Zalina Jamaluddin, Alok who has vast experience in the medical supplies industry advocates that the medical supply chain is a critical function that must continue to work in our ongoing battle against COVID-19.

The medical services supply chain must be viewed holistically not only from a facility and equipment point of view but also from a human capital perspective. There are only a finite number of ready health professionals available and keeping them safe, able and willing to work is of utmost importance. Without them, all the facilities and equipment are rendered useless.

Governments need to pay attention to all the factors that enable the medical industry to operate and ensure that all the chains of supply leading up to it are allowed to run within the confinements of the lockdown. The question that arises now is how do you open up supply chains without the supply chains themselves being a potential cause for the spread of the virus.

Automation is of course what naturally comes to mind, but Prof Fine argues that the complexity and inter relation of modern supply chains makes it difficult to automate them in a hurry. Food supply chains are relatively heavy on manual labor and while automation can be introduced, it may take some time to do so. An immediate solution is to adjust work and processes to be ‘Socially Distance’ compliant and for industries to think about how they can protect their workers while keeping supply chains functioning.

A more data centric approach to assessing supply and demand may also help in determining what needs to be produced and in what quantities. For this, governments need to step in, collate and share such data with industry so that uncertainty is reduced. Governments also need to work closely with industry in identifying and then strengthening the weak links in the critical supply chains.

If this can be done, and with safety measures introduced, there is a chance that we may be able to strike a balance and create ‘Socially Distant Supply Chains’ that can feed the essential demand for food and medical services. It is then upon policy makers to look at other non-critical supply chains and see how they can be opened up safely as prolonged lockdown does not seem to be a sustainable solution.

The ASIA SCHOOL of BUSINESS holds a weekly webinar on topics in response to COVID-19.

Italy has been in the spotlight in recent weeks for having one of the worst COVID-19 outbreaks in the world. As the country is still fighting the pandemic, many have started worrying about its economic and financial implications.

The large size of Italy’s public debt stock – the third largest in the world – is fueling concerns that the government does not have room to support the economy during the COVID-induced crisis, without endangering the sustainability of the public debt.

The increase in government debt due to the COVID crisis

According to Banca d’Italia, Italy’s national central bank, the government debt was €2,409 billion, or about 136% of gross domestic product (GDP), at the end of 2019. ¹ The debt will increase considerably as a result of the COVID crisis over 2020. The government imposed a countrywide lockdown and ordered the closure of all non-essential businesses on March 8th and March 23rd respectively.

The lockdown, which is likely to last at least until the end of April, suppresses demand for goods and services, as consumers cannot go out and spend, and will result in lower revenues to be collected from transaction taxes for the government. At the same time, the closure of all non-essential businesses puts a break on production and reduces corporate and labor incomes. This will result in even lower revenues from income taxes.

In addition, the simultaneous collapse in demand and halt in production is destroying millions of jobs, increasing the pool of unemployed workers to whom the government pays an unemployment benefit. I estimate that the COVID-induced recession might result in about €42 billion less in tax revenues and about €11 billion more in expenditures on unemployment benefits, increasing the deficit by about €53 billion relative to a no-crisis scenario. ²

In addition to this “automatic” increase in the deficit, on March 17th the government approved a fiscal stimulus package to support the economy during the crisis³ . The Ministry of Finance estimates that these new discretionary fiscal measures will increase the deficit by an extra €20 billion (MEF, 2020). Finally, to estimate by how much the debt will increase in 2020, I also take into account the interest payments that the government needs to make on the existing debt stock.

AMECO, the database of the European Commission, forecasts interest payments to be about €59 billion in 2020. Taken together, these factors – the “automatic” increase in the deficit as a result of the crisis, the discretionary fiscal support package, and the interest payments on the debt stock – might increase the debt up to €2,524 billion by the end of 2020.

This will have a sizeable impact on the debt-to-GDP ratio. Using the forecast of Italy’s Finance Minister that GDP will contract by about 6% relative to 2019 (Reuters, 2020), I estimate that debt-to-GDP ratio will increase to about 152% of GDP by the end of 2020. ⁴

Implications for debt sustainability

Financial markets might struggle to absorb all the debt that the Italian government will have to issue this year. Besides the increase in the deficit discussed above, the government needs to repay an additional €255 billion of debt that matures this year (Osservatorio CPI, 2020). Since it is short of cash, the government will need to borrow again on capital markets to rollover this maturing debt. Overall, it might need to issue around €370 billion of new debt during the rest of 2020. ⁵

Fortunately, the European Central Bank (ECB) will help investors to absorb this mountain of debt. On March 18th, the ECB announced a new round of quantitative easing – dubbed the “Pandemic Emergency Purchase Programme” – through which it will purchase €750 billion worth of debt of eurozone countries secondary markets. This new round of quantitative easing is on top of previously approved measures.

However, not all of the funds of the ECB will be devoted to the purchase of Italian government debt. Osservatorio CPI (2020) estimates that the ECB might end up buying a total of about €215 billion of Italian government debt, during the remainder of 2020. ⁶ That is a huge amount, but it would still leave €155 billion of debt – a sum almost equal to half the GDP of Malaysia – to be absorbed by private investors.

In normal times, the government might not find it particularly challenging to sell €155 billion of debt to private investors. But these are not normal times. By various measures, uncertainty has increased to unprecedented levels. Fratzscher (2012) and other prominent economists have shown that investors tend to prefer “safe haven” and shy away from “risky” countries during uncertain times.

That seems to be the case also in the current context. According to EPFR, a popular data provider tracking trends in the investment fund industry, funds investing in Italian debt suffered outflows equal to about 2.5% of assets under management every week, on average, during the month of March Another factor that might increase the difficulty, for the Italian government, of placing €155 billion of debt on the markets is the competition from many other governments.

According to the International Monetary Fund, the other G7 economies (Canada, France, Germany, Japan, the United Kingdom and the United States) have announced fiscal support measures worth €3,417 billion. Most of that will be financed through the issuance of new debt, and it is on top of the debt that will be issued to cover the “automatic” increase in deficit resulting from the COVID crisis and to roll-over maturing debt.

Even if the markets will absorb all the Italian government debt to be issued in 2020, long-term sustainability might become a concern. Contrary to many other advanced economies, over the last three decades the Italian government has persistently collected more in tax revenues than it has spent on the economy. Yet, the debt-to-GDP ratio has increased from 102% in 1991 to 136% in 2019.

A contributing factor to that increase was the perverse dynamic of the Italian debt. Interest payments to be made on the debt stock were higher than the increase in nominal GDP, meaning that the debt-to-GDP ratio increased merely due to the rollover of debt. Data from AMECO show that this so-called “snowball effect” contributed to increase the debt-to-GDP ratio by about two and half percentage point of GDP, on average, for each year since 1996, when the data first became available.

Underlying the uniqueness of the Italian situation in the current environment of global low interest rates, Italy was the only advanced economy to experience a detrimental snowball effect in 2019. The new debt that will be added in 2020 will contribute worsen this debt dynamic even further, unless the interest rate on the debt decreases substantially. ⁷

There is a risk that at some point the government might find it politically difficult to collect enough tax revenues to finance interest payments, which in large part are a transfer of wealth out of the country, as about 30% of the debt is currently owned by foreign investors (Banca d’Italia, 2020). European leaders are holding videoconferences to discuss potential policies to deal with the COVID-19 pandemic.

They know that ensuring financial stability in Italy is a precondition to ensure stability in Europe overall. A range of different proposals have been made. We should hope that Italy’s exceptional situation will be recognized – any new debt that significantly increases interest payments seriously risks undermining the sustainability of the government finances.

Zero-interest-rate and long-maturity loans could be provided either through an intergovernmental arrangement or through the European Stability Mechanism, a Fund established by Eurozone governments in 2012 to deal with financial crises. Alternatively, the issuance of COVID perpetual debt, jointly guaranteed by Eurozone governments and to be purchased by the ECB, as proposed by Giavazzi and Tabellini (2020), could ensure debt financing with negligible interest payments.

Lessons for emerging markets

Italy’s plight offers useful lessons for Malaysia and other emerging markets. Italy’s debt-to-GDP ratio increased from about 37% in 1970 to about 95% in 1990, while GDP was growing more than 3% on average (Mauro et al., 2013). By the beginning of the 1990s, interest payments had become so high that the government had essentially given up fiscal policy as a tool to cushion the economy during shocks.

When the country was struck by the global financial crisis of 2008-2009 – largely an exogenous external shock – not only could the government not support the economy, but financial markets also became nervous about the sustainability of the debt. This precipitated in a sovereign debt crisis in 2011-2012, from which the economy was still reeling before being hit by COVID-19 – another exogenous shock.

Now, with investors again concerned about the sustainability of public finances, the government is dependent on the goodwill of its European partners to support its tanking economy and avoid unnecessary economic and human damage. The good news for emerging markets is that, for the most part, they are still the master of their own fiscal policy. They should not accumulate debt during periods of high growth, as the Italian government did in the 1970s and 1980s. Debt should be issued with extreme moderation.

During the good times, debt issuance should be limited to the financing of productive investment and governments should build-up meaningful budget surpluses to be used to support the economy when a shock hits.

The current COVID crisis reminds us of an important lesson: when times are good, it is wise save for the rainy days. External capital might become unavailable when it is most needed. It is imperative for Emerging Markets to never find themselves unprepared.

References:

Ahir, H, N Bloom, and D Furceri, “World Uncertainty Index”, Stanford mimeo (2018).
AMECO. European Commission. Economic and Financial Affairs. Database. Consulted 6th April 2020.
Banca d’Italia. “Finanza pubblica: fabbisogno e debito.” Statistiche (2020): February 14th.
EPFR. “Fund Flows Database.” Emerging Portfolio Fund Research. Database. Consulted 6th April 2020.
Fratzscher, Marcel. “Capital flows, push versus pull factors and the global financial crisis.” Journal of International Economics 88.2 (2012): 341-356.
Giavazzi, Francesco and Guido Tabellini. “Covid Perpetual Eurobonds: Jointly guaranteed and supported by the ECB.” VoxEU (2020): March 24th.
IMF. “Policy Responses to Covid-19.” International Monetary Fund. Database. Consulted 6th April 2020. https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19
IMF. “World Economic Databases. October 2019 Edition” International Monetary Fund. Database. Consulted 6th April 2020. https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx
Mauro, Paolo, Rafael Romeu, Ariel Binder and Asad Zaman. “A Modern History of Fiscal Prudence and Profligacy,” IMF Working Paper No. 13/5, International Monetary Fund (2013).
MEF. “Protect health, support the economy, preserve employment levels and incomes.” Italian Ministry of Finance (2020): March 19th.
Osservatorio CPI. “L’impatto sul finanziamento del deficit pubblico italiano del Pandemic Emergency Purchase Programme (PEPP) della Banca Centrale Europea.” Osservatorio sui Conti Pubblici Italiani (2020): March 19th.
Reuters. “Italy’s EconMin sees 6% fall in 2020 GDP as ‘realistic’ estimate.” Business News (2020): April 1.

Prof. Gabriele Ciminelli joined ASB in 2019. Prior to that, he worked for the International Monetary Fund from 2016 to 2019, where he was Projects Officer at the Research Department. His professional background is complemented by working experiences at the European Bank for Reconstruction and Development, and the European Commission. Dr Ciminelli’s research interests span the fields of international finance and applied macroeconomics. He holds a Ph.D. in Economics from the Tinbergen Institute and the University of Amsterdam.

He can be contacted at gabriele.ciminelli@asb.edu.my.
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