Thought Leadership – Page 9 – Asia School of Business

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.

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A lot of people are asking, How long will Covid-19 last?, Is the shutdown worth the cost? and Will we have shutdown, after shutdown? Nobody can answer the How long? question, at this stage. In this note, we ask what bounds we can put around that number, depending on the approaches we take.

The simplest answer to How long? is until we get a vaccine or treatment, or until we get to “herd immunity” or we get the reproduction number below one. There is a lot of promising work on vaccines, but a vaccine that works may be a year or 18 months away.

Herd immunity is the threshold level of immunity that a population needs to reach, for the disease to die away over time. It is the natural consequence of a pandemic that is left unchecked. The shortest path to herd immunity is to just let it rip; overwhelm the medical system by a factor of about 100 times what we have seen in Italy; and let hundreds of millions of people die needlessly. We want to be very clear: that isn’t something we would advocate.

The second and much preferred approach is to “flatten the curve” of new cases to within the capacity of the medical system. The numbers suggest that a flat curve, near capacity, is years long. But, without a vaccine, the real power, in terms of How long? and the economic pain, is likely to be in good habits and good systems, to get the reproduction number below one. To see why, it is useful to work through the numbers.

How long is the flat curve?

A lot has been said about slowing the rate of new infections, to a level within the capacity of the health system. First, let’s think about how long it takes to get through a flat curve, at the capacity level of critical care beds. That isn’t where we want to be, because we also want to have capacity for the usual illnesses. But a flat curve, at capacity level, gives a lower bound on the length of the flat curve. Below is a graph, from Statista, showing critical care beds by country. We are assuming critical care beds to mean a bed with a ventilator and medical staff with the required protection.

Image source: Statista.com

Those are the countries with the most beds, at various times during the decade before Covid-19. These beds are way below the level needed to manage an uncontrolled surge of Covid-19 cases, even in the best-equipped jurisdictions. We think Malaysia has a bit below 5 beds per 100,000 people. Let’s assume that countries can buy more ventilators, convert operating theatres into critical care beds, train or reassign medical staff, and provide protective equipment to be able to run them safely. Lombardy, in northern Italy, is reported to have doubled their critical care bed capacity in a short time. Let’s work with 10 beds per 100,000 as a round number.

Image source: Statista.com

Suppose the goal is to give all critical patients (4.7 per 100, from the Statista chart below) access to a critical care bed. Let’s assume one critical care bed can serve three patients per month, or 36 per year. To provide for all of the patients who become critical, without being overwhelmed, would take 13 years (4.7% critical/0.36% per year).

‘Years’ is an order-of-magnitude estimate, meaning it is subject to a high degree of uncertainty. The critical rate is probably overestimated, because there is evidence of mild and asymptomatic cases, that haven’t been measured, in part for lack of testing capacity. A large number of uncounted mild cases implies a lower critical rate and a shorter time to get through the flat curve. If there is one unmeasured case out there for every measured one, then our 13 years is cut in half. On the other hand, we haven’t accounted for the 14% of severe cases, or for the critical care beds for other uses. Those imply a longer flat curve.

But so far, we have assumed that everyone gets the disease.

Herd immunity

Over time, the number of people who have recovered from the virus increases. The duration of immunity, after recovery, is uncertain. Evidence from SARS suggests at least a couple of years, but there isn’t good data for either SARS or MERS. Herd immunity is built on the idea that, as more people become immune, it becomes more difficult for the virus to spread. Immune people break the chain of infection. This shortens the flat curve. What share of the population needs to become immune for the spread to fall to a rate at which the disease dies out?

The answer varies according to the rate of spread. Epidemiologists talk about a “basic reproduction number”. The basic reproduction number is the average number of new cases caused by each new infection, left unchecked. Measles is very contagious: on average, one case spreads to 10 to 20 other people. For Covid-19, one case is estimated to lead to 1.5 to 4 new cases. Most early estimates are around 2 or 3. If you get infected with Covid-19, on average, you pass it on to 2-3 people, who each pass it on to 2-3 people, and so on. That basic reproduction rate is the rate of spread at the beginning of the outbreak, before measures are taken. As more people become immune, the actual rate of spread naturally falls, because immune people break the chain.

“Herd immunity” is the threshold that brings the actual reproductive number below one. For those who like equations, the herd immunity threshold is 1-1/R₀, where R₀ is the basic reproduction number. For measles the threshold is high: 90-95% of the population. For Covid-19, a reproduction number of 2.5 means a threshold of 60%. But it might be as big as 75% or as small as 33%. If the reproduction number is less than 1, the threshold is zero and disease fades away.

This is interesting for two reasons. First, we won’t all get Covid-19, although a lot of people fear we all will. Second, herd immunity reduces the “How long is the flat curve?” answer. It takes my all-of-us-get-it estimate of 13 years down to around 4 to 10 years. I am still hoping for a vaccine!

But that is still an incomplete story…

The power of habits: soap and kindness

The basic reproduction number is the rate of spread at the beginning of the outbreak before measures are taken. Handwashing, cleaning surfaces and physical distancing all reduce the rate of spread. If one case only spreads the virus to 1.5 others, on average, rather than three, then 9 years becomes 4 years.

There is evidence that asymptomatic cases are responsible for a significant share of the spread. Combined with evidence that droplets travel a long way, it is increasingly being recommended that we all wear a mask in public. Even homemade cloth ones are reported to protect others pretty well. That is kindness: I wear a mask for you; you wear a mask for me. Nike might make one saying, Just wear it. If masks reduce the reproduction number in half again, then the effective reproduction rate goes from 1.5 to 0.75.

At a reproduction number of one, all of the power of the exponential spread is gone. Below one, the power of the exponential curve starts to work in our favour: the virus dies away more and more quickly. Soap, masks and physical distancing are potentially powerful ways to reduce the reproduction number. These changes are cheap and can be aided by varying degrees of “nudge”, to make it easier for people to make responsible decisions.

Good systems

By identifying, tracing and isolating active cases, public health surveillance systems arrest the spread of the virus and further reduce the effective reproduction number. Technology is on our side. Testing is improving fast and online systems can aid self-reporting and contact tracing.

Travel has been a powerful way to spread the virus, both within and across borders. There are large externalities (costs to others) in the world of coronavirus, that make a case for systems to keep cross-border travel safe. Cross-border spread was disproportionally driven by the well-to-do travelling set, but disproportionately, the people who lost their jobs have been low-income service sector workers, with less access to healthcare. Countries are putting systems in place to prevent cross-border spread. The cost of international travel will be higher for a while, with testing and quarantine. (User pays. Take some work with you and book your quarantine online.) Korea is harnessing technology to make it easier. The reproduction number can be smaller again.

Large gatherings have provided environments where the reproduction number can go way up: one person can pass it directly to many. Parties, weddings, religious gatherings, business meetings, conferences and education have all been implicated. We are learning how to gather in ways that reduce reproduction rates – for example, online, in bigger spaces, in smaller groups, with masks and hand sanitizer provided and symptomatic people staying home. There is a lot of scope to reduce the reproduction number for gatherings.

Combine good habits with good systems, then even the high estimates of the basic reproduction number might be transformed into an effective reproduction number of less than one. How far the reproduction number can be reduced, once shutdowns stop, remains to be seen. But for sure, good health is good economics. The best way to save businesses and jobs is to maintain a reproduction number below one.

We work in higher education. Our challenge is to find safe ways to both travel and gather in groups. A reproduction number below one can be our guide. These changes are cheap, when compared to the alternative of shutdown and travel bans.

A new normal

When community spread accelerates, a stay at home order from the government is an effective way to reduce the reproduction number to well below one, But shutdowns are disastrous for the economy, at least in the short term: people lose their jobs and companies fail

Flatten the curve. Then what?

After stay-at-home orders are lifted, what might the new normal look like? If the reproduction number is above one, we risk repeated surges in cases and the risk of repeated shutdowns. If the reproduction number is below one, the disease dies out. At some point on the curve, we can propose a calibrated return to work, taking into account value (eg jobs), demographics (eg vulnerable groups), and the basic reproduction number for that activity. Low reproduction number activities might be eased first. Activities involving large groups, might come later, and only when they can show how the effective reproduction rate will be kept to below one. Then innovation will bloom, and the basic, cheap solutions like masks, soap and good systems become opportunities. Because of externalities, some activities will need to be regulated.

Thinking through the numbers provides a basis for thinking about exit strategies. Having a sense of the numbers, even if on a back-of-the-envelope basis, helps to give us perspective. It helps us to see the power of individual actions – we can take the power out of the Covid-19 curve. It helps us to see a light at the end of the dark tunnel of the heart-breaking news about areas that are well beyond care capacity, and people losing their jobs. It helps us to plan for a future, where the reproduction number is low enough to make stay-at-home orders isolated events. It helps us to plan for the worst, and to hope for a vaccine or effective treatment.

Professor Anella Munro is part of our Master of Central Banking team. Before joining ASB, she worked at the Reserve Bank of New Zealand, the Bank for International Settlements (Hong Kong office) and the Asian Development Bank. Her research interests are international macroeconomics, macro-prudential policy and international finance. She has a BSc in Electrical Engineering from MIT and a PhD in Economics from the University of Oxford.She can be contacted at anella.munro@asb.edu.my.

Professor Eli Remolona sits on the Board of Directors of the Bank of the Philippine Islands and is an Adviser to the Academy of Finance in Hong Kong. Prior to joining ASB, he had long careers at the Bank for International Settlements and the Federal Reserve Bank of New York. He has taught at Williams College, Columbia University and New York University and has been an Associate Editor of the International Journal of Central Banking since 2005. Eli holds a PhD in Economics from Stanford University. He can be contacted at eli.remonola@asb.edu.my.

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The term helicopter money, once a metaphor for how monetary policy might be conducted, has become commonplace in the current environment where governments are introducing stimulus measures to counter the devastating effects of the Coronavirus pandemic on economic activity and wellbeing more generally. The term was invented as a thought experiment by the Nobel Laureate Milton Friedman in an essay published in 1969.

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated’

Friedman’s purpose was to discuss the short- and longer-run effects of monetary policy in normal times. Recently the idea of helicopter money has been extended to refer to policies that aim to revive sluggish economies or prevent economic meltdowns in times of crises. This note is an attempt to clarify some of the issues that need to be considered in this latter context:

How should transfer of purchasing power be accomplished? By direct money transfers to individuals or households; By lowering taxes; By price subsidies; etc.
What is the intended purpose of the policy? To shore up aggregate demand; To focus on individuals who have lost jobs as a result of the current pandemic; To keep firms from bankruptcy; etc. To be sure, these objectives are of course not independent of each other.
Who should be the recipient of the ‘helicopter drops’? The entire population as in Friedman’s example; Only those who lost jobs; Only those with an income below a certain amount; SMEs generally; etc.
Which official sector agency should be in charge? The central bank; the Central (Federal) Government; Local Governments

The analysis will show that helicopter transfers should be well targeted, and that the fiscal authorities should be in charge. Let’s deal with each of the issues in turn.

Helicopter money by any other name …
Distributing purchasing power can be accomplished by different means. For an individual who has a job and pays income taxes, a direct transfer of 100 dollars is essentially equivalent to a one-time tax cut of the same amount. But for the unemployed who has no income and therefore pays no income tax, the two methods are vastly different. For this reason, the direct transfer appears to be preferable.A subsidy to retailers in exchange for a commitment to lower prices on (essential) goods would increase purchasing power of customers. This type of measure is already practiced in some jurisdictions in the case of petrol, for example. To do it on a grander scale is likely to be a practical nightmare, and the room for abuse would likely to be substantial.Those who are skeptical about the government’s ability to increase purchasing power by direct transfers, tax reductions, subsidies and the like sometimes argue that ‘there is no such thing as a free lunch’, so that the government transfers of any type essentially takes purchasing power from some individual and gives it to someone else. The aggregate effect is therefore null as the transfer has to be paid by someone. This misses the point that in a time of high and increasing unemployment, an increase in spending by one individual means increased income for someone else who in turn will spend more. Incomes for everyone will increase. So, even if it isn’t completely free, the lunch is very low cost and highly beneficia.

What is the intended purpose? and 3. Who should be the recipients?
The Coronavirus pandemic is on course to create unprecedented increases in lay-offs, unemployment, bankruptcies, and other economic dislocations. Which of these should be the primary target for ‘helicopter money’?The primary objective of government transfer should be to ensure that individuals who have lost their jobs are able to meet basic needs such as paying for food and necessary medicines, rent, utility bills. We can think of this as a humanitarian objective of preventing the temporary, but potentially protracted, effects of the pandemic from leading to permanent hardship due to malnourishment, deterioration of health, and homelessness. This implies that transfers should target the unemployed.If the intention is to shore up aggregate demand in the economy more generally, a universal transfer scheme may be tempting. But this is likely to be inefficient because a transfer of 100 dollars to a high-income household is not likely to have the same effect on aggregate spending as a similar transfer to a low-income household that lives from pay-check to pay-check. In other words, the transfer should target households that are likely to spend most of it. This quite apart from the fairness aspect of transfers to high- versus low-income families.What about lowering payroll taxes to keep firms from laying off employees? Such tax relief would help offset some of the loss firms face when demand dries up, enabling them to keep operating longer. It would also encourage firms that are doing well to hire additional workers, even if temporarily.But lowering payroll taxes has two drawbacks. One is that it would not be of any help for individuals who have lost their unemployment, and the second is that when demand is insufficient, firms are not likely to regain employees even if payroll taxes are reduced. The first of these drawbacks could be mitigated by making tax relief or an employment subsidy conditional on a commitment by the firm not to reduce its work force, but to address the lack of demand more targeted stimulus policies are needed.But what if the objective is to prevent an employer from bankruptcy? Would a payroll tax decrease not do the trick? It could help, but it would not be the most effective policy. A low-interest rate loan would be preferable as it would not have to be across the board, but could target firms that can show a need for such a loan to stay afloat. The loan could either be given directly by a government agency or by banks, in which case the government would provide a guarantee in exchange for some oversight on how the loans are allocated.Finally, a word about incentives. Will giving transfers to those who become unemployed not reduce incentives to work? This argument is specious in the best of times, but if it is used to refuse such transfers in times of crisis, it is both cruel and likely to aggravate the crisis. That said, authorities should at the right time establish an appropriate exit strategy.

Which official agency should be in charge?
In Friedman’s original helicopter money metaphor, it was the central bank that distributed the money to the public. But as we have argued, a ‘helicopter drop of money’ in the current situation is essentially a form of fiscal policy in most cases with intentional distributional effects. As such it should primarily be the responsibility of fiscal authorities. Involving the central bank would unnecessarily involve it in fiscal policy and distributional issues best left to be decided by elected officials. Central banks should not stand on the sidelines, however. They should make sure that the financial system is operating smoothly by providing market with liquidity through access to central bank funding. This is what central banks are attempting to accomplish by lowering interest rates in jurisdictions where there are already not at an effective lower bound, zero or otherwise. The recent decline in policy interest rates are best viewed from this perspective and not from a perspective of shoring up aggregated spending by households and firms. In times of heightened uncertainty, spending is not likely to respond significantly to lower interest rates.What level of government should be responsible for the transfer policy, central or local government agencies? This is a question that does not have a clear-cut answer. On the one hand, hardships and need may vary from locality to locality, and local authorities may be best placed to determine who is most at risk, and who, therefore should be most closely targeted with the transfer policy. But central authorities may need to coordinate and ensure that some local governments will not attempt to free-ride on neighbors. This could, for example, be the case when the place of work differs from the place of residence. In this case, which local authority should be responsible for providing necessary support for laid-off workers? In addition, the aggregate demand multiplier effect, whereby your spending is my income and vice versa, implies a central solution. Indeed, it would even call for international coordination of stimulus activities.

A quick summary.
- Extraordinary circumstances necessitate extraordinary measures. The metaphorical helicopter money drop mentioned some fifty years ago should be part of such measures. Not literally, but in the form of transfer payments to those most harmed by the coronavirus pandemic.
- Monetary transfers, preferably in the form of cash grants, should first of all target individuals who have lost their jobs as a result of the economic fallout of the pandemic.
- In addition, more general cash transfer should be considered as a way to shore up aggregate demand in the economy, and thereby limit the size of the inevitable increase in unemployment. These cash transfers should be skewed towards lower-income households which are more likely to spend them rather than high-income households whose spending is likely to be little affected.
- Suggestions that transfers associated with lost jobs will create incentives not to seek employment should be forcefully rejected as specious and cruel.
- Governments should consider guaranteeing low-interest loans to firms that are at risk of bankruptcy. The loans should be administered by the banking system.
- Fiscal authorities should take the lead in providing transfer payments. By intention, such transfers have distributional effects, and should therefore be the responsibility of elected officials, not central banks.
- Central banks should support governments’ efforts by providing the necessary liquidity to the economy to prevent finance from becoming a destabilizing source of its own.
- International cooperation will be needed both on the fiscal and monetary policies to limit externalities associated with demand spillovers and financial contagion.

Professor Hans Genberg is a Professor of Finance at the Asia School of Business and is the Senior Director of Banking and Finance Programs of the Master in Central Banking Program. He has published considerably on issues related to exchange rate regimes, reserve management and capital markets development, having worked in senior roles at the South East Asian Central Bank (SEACEN) Research and Training Centre, the Hong Kong Monetary Authority (HKMA) and at the International Monetary Fund (IMF).

Hans also has extensive academic experience, having been Professor of International Economics from 1979 to 2008 and Head of the International Economics Department from 1989 to 1998 at the Graduate Institute of International Studies in Geneva, Switzerland. Hans holds a PhD in Economics from the University of Chicago.

He can be contacted at hans.genberg@asb.edu.my.
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Image courtesy by https://thebulwark.com/

In a move that surprised energy markets, Saudi Arabia decided to pump more oil and bring prices down, radically breaking negotiations within OPEC members and Russia over production quotas. The impact was immediately felt, with crude oil prices declining by up to 34% and leading several stock exchanges to a halt.

As an energy policy and business researcher, and professor of the ASB course “Energy: markets, policies and sustainability,” I have been asked by the media and other stakeholders on my thoughts of this move that surprised many. In particular, why this happened? And what does it mean for the global and Malaysian economy and energy industry?

WHY OPEC+ FAILED TO REACH AN AGREEMENT

With prices floating around $60 and below, Saudi Arabia and OPEC partners have been trying to get Russia’s cooperation to production cuts in order to bring prices up. OPEC is responsible for about 42% of world oil production and Russia, alone, for another 10% of the 100 million barrels of oil per day of world output. So to get Russia onboard with a new round of production cuts was critical for the cartel to bring prices up.

However, Russia preferred to not do it, fearful of cutting production would only cede market share to other producers outside of the arrangement, like companies that extract oil from shale in the United States or deep offshore from Brazil, where production has been booming. For many years, only Saudi Arabia showed leadership to lead production cuts and try to sustain an above-market price.

It does so with a big cost: maintaining idle infrastructure in terms of spare capacity, wells that are ready to produce but stay put, and losing market share to other producers who do not need to cut. Costs and risks disclosed during the Saudi Aramco IPO which we discussed in class, for example. What happened this weekend is that Saudi Arabia got tired of trying to sustain production cuts alone, without the help of another major producer like Russia, and decided to open the spigots.

It has happened before in the mid-1980s, in 2014, and now again in 2020. It is related to a fundamental problem of managing a cartel of producers: everyone benefits from higher prices, but benefit the most those who keep selling all they can while the rest reduce their output. Now, Saudi Arabia is punishing their partners by showing that if they do not come on board, the Saudis will flood the market with oil and the rest will lose. This is the supply side of this price shock.

COVID-19 AND A DEMAND SHOCK

To make matters worse, we are also living a demand shock. Already at the beginning of the year there were signs of an oil glut – excess capacity in comparison to a slower demand growth. After the Covid-19 outbreak, the situation only got worse. The International Energy Agency estimates that, for the first time since 2009, the oil demand will fall compared to the previous year.

The Covid-19 has been showing to be not just highly contagious for human health, but also to the globalized economy. Countries and firms are reacting to the virus by quarantining people, making them work from home, cancelling events.

These decisions are a direct hit to the transportation sector which is the most oil intensive. About 29% of all energy consumption is used by the transportation sector and almost all of it (96%) comes from oil. The longer the virus is among us and social distancing measures are adopted, the greatest the impact to a key consuming sector of the oil industry.

IMPACTS TO MALAYSIA

As an economy dependent on the oil industry, few sectors of Malaysia stand to win from a drastic fall of prices. Instead, the combination of economic slowdown from the Covid-19 and low oil prices will make it a tough year for the Malaysian economy.

First, the fiscal impact can be quite negative. In 2019, an estimation by the Ministry of Finance pointed out that every US$1 of oil price increase could add about RM300 million to the budget. The 2020 budget was designed with a forecast of a $62 oil price and Saudi’s decision led the barrel to be traded at $30s. Therefore, a drop of $30 would create a budget shortfall of about RM9 billion in one year.

This is almost half of the RM20 billion stimulus package recently launched. So you can face a situation of having less revenue from economic activities because the economy is slowing down (taxes), with the oil sector reducing its fiscal contribution, at the same time that there is more pressure to increase spending and reduce the effects of the Covid-19.

The low oil price also affects another large portion of the Malaysian economy: the oil and gas supply chain, from yards to service suppliers. Some Malaysian companies have successfully expanded abroad and are doing oil and gas jobs in many parts of the world, not only here. Low oil prices reduce new investments in exploration and production and lead oil operators to force contract renegotiation with suppliers to further cut operational margins. Therefore, suppliers in the industry can also be hit by this price shock, even if their order book is healthy.

CYCLICAL, BUT NOW UNDER LONGTERM THREAT

In the near term, the oil industry, and countries that rely heavily on O&G exports for their economy, will face a double shock of supply and demand. This will likely keep prices low for some time – unless OPEC partners come back to the table and bargain with Saudi Arabia to reduce production. In the medium-term, low prices reduce investment in exploration and production, putting into risk future capacity.

Every year, the global O&G industry needs to find and develop an additional 3 million barrels of oil per day just to compensate for the natural decline from aging fields. The catch is that it can take a considerable amount of time to bring new supply capacity to the market. For example, a deep offshore field can take up to 10 years from area acquisition to first commercial production.

With low oil prices, operators cut back investment now, and when demand start to ramp up again, the supply may be tight, a dynamic that can bring prices up again. That is why oil prices are so cyclical and this is a risky business. However, there are good reasons to think that we may start to depart from this “business as usual” scenario. A combination of declining prices and policy activism against climate change is making renewable sources of energy more competitive each day.

The rapid growth of electric vehicles (EVs), which are much more efficient than internal combustion engines (ICEs), along with declining battery cost, can radically transform oil’s golden market share which is transportation. A study by BNP Paribas calculate that the combination of falling cost of renewable energy generation from wind and solar and EVs (which are essentially “batteries on wheels,” providing a solution to the intermittency problem of renewables) can be drastic to the oil business.

The study calculates oil’s long-term break-even price to be competitive with EVs (in terms of how much mobility you can buy) to be between $11 and $20. If that proves to be true, the current oil price will turn out to be rather expensive than cheap.

In the ASB course “Energy: markets, policies and sustainability,” we cover the economics and politics of energy markets and the likely impacts of different scenarios. Our students come out of it prepared to react and become leader in their fields by recognizing how the energy industry is being affected by technological changes, geopolitical and policy pressures, and also seemingly surprising (but not unprecedented) events, like what happened this week following Saudi Arabia’s decision.

Prof Renato hails from Brazil and received his PhD in Political Science from MIT. He is a resident faculty member teaching the MBA program at the Asia School of Business.

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What do you get when you put a group of young professionals with a diverse set of mentors in a speed-dating format?

We were equally curious, so we decided to test this on Valentine’s Day this year, during our annual Ladies’ Lunch Event, a platform where we invite a group of young female professionals who are looking at advancing their careers.

The result? Beyond our expectations!

In general, participants captured a lot of values given the broad mix of mentors from different backgrounds, each bringing their own unique lessons to the table. In return, the mentors were equally energized by the conversations at the table, that uncovered different perspectives and challenges.

Here are my 5 key takeaways on “How to Future-Proof Your Career” from the session:

Define the journey – but not too rigidly By defining one’s career aspiration and development goals in each phase, we will find that we actively set our own career’s journey. It does not mean a perfect 10-year plan, but rather a vision of who we want to become, which certainly helps to provide more clarity when faced with options. It also helps us become more conscious of our development goals. Without aspiration, life can be set on auto-cruise and sometimes, we might miss an opportunity when it is not defined. On the contrary, having too rigid of a plan might get us blindsided and will invite stress, since most things are out of our control.
Reflect – what gets measured, gets done Some business leaders swear by this approach: what gets measured (and calendared) gets done. An effective reflection will allow us to course-correct. The important part of reflection is the ability to honestly put the mirror in front of us, and ask ourselves for the lessons and modifications we need to employ at that stage. Having the courage to admit and pivot is a critical part of one’s career reflection.
Say “Yes” – and say “No” Our mentors shared their own experiences on saying “Yes” to stretched assignments that opened doors and opportunities within their organizations. However, it is equally important to learn how to say “No” in certain contexts where boundaries and priorities need to be set. The wisdom is in the ability to discern which ones we will say “Yes” or “No” to – which can be cultivated through experience.
Enlist support – in many forms In any journey, it helps to have a series of support to lift us, to guide us or simply, to be our cheerleader along the way. These are the roles of coaches, mentors, sponsors and informal networks we build throughout our professional (and also personal) life. Most times, there is no specific structure for some of these roles, though personally, I found professional coaching has been helpful to me at various points of my career to help bring me to the next level. Having sponsors had also helped create career advancements that I would not have otherwise accessed. A lot of us also enjoy the support of informal mentors and professional networks who can come in many different forms. These do not necessarily come through a specific program but rather, a mutually agreed arrangement. Some of these can even be short but still enriching.
Build your brand – and be yourself We also touched on building our brand in a broader sense. In my group, I advocated the approach of building our core competencies as part of our professional identity. Having these core competencies will help us in navigating the changing career landscape more effectively – it is also important that we identify transferable skills as we switch industries or as we build our own businesses.

More importantly, all of us agree with the same mantra: Be ourselves. To show up better as a professional, we have to have the courage to embrace all parts of ourselves, rather than conforming to society’s definition.

In closing, we are very grateful for these amazing and generous female leaders who joined me at the tables as mentors:

Suit Fang Chin, Independent Non-Executive Director, Bank Negara Malaysia (formerly Partner, PwC Malaysia)
Datuk Zunaidah Idris, Head of Dealing, SVP, Corporate and Institutional Business Group (CIBG) Public, Hong Leong Investment Bank Bhd, MGA Council Member
Lily Rozita Mohd Khairi, Shell Ethics and Compliance Officer Downstream Global
Shasha Kartini Ridzam, AirAsia Group Head, Global Affairs, Government Relations and Sustainability (currently, Obama Foundation Leader)

Thank you to all our participants who have shown such enthusiasm in sharing their experiences as well. We hope that through such platform, we have planted some seeds and shown you possibilities that you can take with you on your career journey. Stay hungry and keep going!

With fellow mentors Chin Suit Fang, Datuk Zunaidah Idris, Lily Rozita Khairi, and Shasha Rizam, and moderator, Alex Snedeker

Quotes from Participants:

“It was a valuable experience – it provided me clarity, inspired me to dream bigger and to move forward stronger!”
Khairul Alia, Talent Development and Succession Planning, Employees Provident Fund (EPF)

“The mentors today shared valuable real-life knowledge that inspired and challenged me.”
Siti Noorhana Saidin, Data Analyst; Lean In Malaysia Career Program 4.0 Graduate and Best Speaker

“Incredibly vibrant and supportive environment with generous and genuine exchanges!”
Chew Ai Hui, Investment Banking Analyst

“The job is easy, the people are not!”, is a title of a class taught by Prof Loredana Padurean, the Associate Dean at the Asia School of Business (ASB) in Kuala Lumpur, Malaysia. She stresses that for most businesses, the actual job is not as difficult as managing the people doing the job. Loredana and her mentor Prof Charles Fine, now find themselves in Malaysia heading the “Start-Up” Business school which is founded by the Central Bank of Malaysia and established in collaboration with the MIT Sloan School of Management in 2015.

It is a first for Sloan; never has it co-established a school and given so much of its DNA, resources and insights to another entity. The Dean of ASB, Prof Charles Fine, he himself a highly regarded and tenured faculty member of MIT Sloan has spent the last 5 years in KL, transferring not only his ample knowledge and wisdom, but also the culture and DNA of MIT Sloan to ASB.

When MIT Sloan accepted Bank Negara’s proposal to collaborate, Charlie (as he is fondly known) was the MIT faculty member tasked to build this extraordinary and unconventional business school in Kuala Lumpur. Fast forward 5 years and ASB will see its’ third batch of Full time MBA students graduate in April 2020, at their sprawling new 350,000 sqft campus on top of Bukit Perdana in the heart of Kuala Lumpur. The Full time MBA is a 22 month, fully residential program that transforms mid-management executives and grooms them to become the corporate leaders of today and tomorrow, with a strong focus on Asia-centric culture and values.

Develop top talent into business-ready C-levels

Charlie however felt that while ASB was churning out quality MBA graduates who were quickly gobbled up by top companies throughout Asia, he felt that ASB should also offer a solution to companies who wanted to develop their internal talent without losing them to a 20-month full-time program. Taking these corporate requests into account, Charlie was on a mission to develop an MBA program that could be done while working and yet, without compromising the ASB/MIT rigor and ‘hands-on’ approach to learning. After more than 1 year on the drawing board, ASB introduced the MBA for Working Professionals in 2019 and attracted a cohort of 18 students for its inaugural year.

The Working Professionals (WP) program, takes professionals out of their jobs for roughly 25% of their work time over a 22-month period. Students come into “Residency Weeks”, a 9 (nine) day stretch from Saturday to Sunday once every six weeks. On this 9 day stretch, students are placed in the ASB residence and peppered with classes taught by the MIT & ASB faculty. What is unique about this course is that students are not only encouraged but required to apply their learnings immediately into their working environments, supported by the faculty members and “business coaches”, who are industry practitioners and/or ex-consultants. ASB terms this as “Action Learning”.

While the WP program is definitely tougher and not for the faint-hearted, as balancing work, study and personal commitments is not easy, Charlie feels that those who come out of it have definitely gone through an intense stretch experience and the outcomes are truly transformative and tangible, with many evolving as principled leaders and next-generation management experts. Any company which is looking to promote and grow talent from within should look at what the WP program has to offer. The value proposition is quite unique, the sponsoring company gets to upskill and groom their highest potential talents, while keeping them productive whilst they study and then potentially locking down said talent for a few further years post-graduation.

On top of that, the candidates immediately contribute back to the company as soon as the MBA starts, due to ASB’s high emphasis on ‘Action Learning’ or taking what you learn and putting it straight into “Action!”. On the candidate’s side, they receive a globally recognised MBA which not only looks at technical skills but also professional development so that they not only know the job but can manage the people as well. Upon completion of the MBA, they would have been promoted to more prominent roles in their respective organisations and their market value and remuneration dramatically increase. Win-Win!

In delivering the WP program, ASB has developed a niche in transforming technical specialists into leaders in management. 70% of the inaugural cohort are technical specialists who have been sponsored by their companies to learn business, leadership, and management. This comes from the realisation that for technical-based businesses, hiring management talent unfamiliar to the technical operations of the company is not feasible. The only way to move forward is for the technical experts to rise into management roles where ultimately as Prof Loredana put it… “they know the job, and after completing the MBA, they know how to manage the people doing the job”.

The status of being a Start-Up Business School allows ASB to break away from traditional MBA methodology and delivery. Using the MIT curriculum and DNA as a guiding principle, ASB has in the past few years received accolades as being the most innovative MBA in the world (poets and quants) and recently was awarded the 2019 MBA Innovator Award winner for Early Stage Innovation category by the MBA roundtable, beating top global business schools in the process. So there you have it, a global business school right in the heart of Kuala Lumpur that not too many are aware of.

When asked why ASB has not been seen much on the local radar, Prof Fine says that the first few years since inception has been all about focusing on delivering a new, extraordinary and unconventional MBA of the highest standards. Now we have somewhat achieved this, Charlie says that ASB will be more prominent in the local and regional headlines as it ups it’s game and contributes more to the business fraternity in Malaysia, ASEAN and larger Asia.

We are four MBA Students coming from different countries namely, Philippines, Bosnia Herzegovina, India, and Kenya, studying at Asia School of Business (ASB) in collaboration with MIT Sloan in Kuala Lumpur, Malaysia. Action Learning (AL) is part of our MBA program where we get to work with different companies and provide concrete solutions to business problems.

In our 4th term, we worked with Mana Earthly Paradise to help increase their brand awareness and occupancy rate through a marketing communication strategy. To be able to work closely with the Mana team, we stayed in Mana eco-lodging for almost a month and it was truly a unique experience. In this article, each person from the team shares honest observations and insights from their experience staying at and contributing to Mana.

Read the full article here.

Category: Thought Leadership