Pandemic, terrorism, and now, a war…How vigilant firms sense turbulent times

?One would surely agree that the recent months have been “turbulent”. ??Consider that , after a global and on-going covid-19 pandemic, we are witnessing a major war whereby Russia has been invading Ukraine, as a large remake of the invasion of Crimea about 8 years ago. ?And if terrorism risks have somewhat peaked in 2021 (as the risk of the Islamic State seems to be more decentralized), the jihadist ideology is far from being under collapse. Terror, -if less present in our developed market territories- is still much being played, against Iraqi, Somalian, and Afghan citizens.

Turbulences are coming in and out, --and ?are a fact of life to be accommodated for. This requires a powerful resilient plan, composed of an ability to anticipate the turbulent periods, and of an agile organization and strategy to readjust course of actions during those turbulent times.??Those capabilities are however not that easy to master. Sensing turbulence for example is complex as emotion and factualization may sometimes collide. Distant war may not affect us emotionally, but war has dramatic effects on those locally affected. Terrorism in our backyard is emotionally challenging, but some terrorist acts kill much less than a pandemic for example.

In this article, we first focus on “sensing” turbulence, that is how a company becomes vigilant. We plan a companion article that is looking at mastering operating capabilities for resilience.

1. THE IMPERATIVE OF SENSING TURBULENCE

Turbulence needs to be sensed to the extent that they may be disruptive, and that are more than pure Black-Swans, - in which cases, they are extreme outliers that can not be really spotted per se. ?The fact is that major turbulences such as pandemic and wars are often disruptive, and frequency is larger than thought, which entails that sensing and preparing for turbulence is of high relevance.

You said disruption?

Zoom: Impact on lives

The death toll from war, pandemic and terrorism rarely stand for more than a few percent of the total?million deaths happening every year. But the fact is that those deaths are not natural, or planned. ?

a)???The covid pandemic, because of its global nature, has had the largest toll on lives.?Officially, the covid-19 pandemic has cost lives into the millions[1], but the official 6 million fatalities may be understated by a factor of 2-3 ?(Wang, et al. 2022).[2]

b) War; Last year terrorism attacks killed a few thousands[3], while the existing conflict in Ukraine may be building into the ten thousands casualties. This ?level of casualties in 3 weeks is as large as casualties form ?the entire 8 years of the start of the Ukrainian conflict. Relatively speaking, in Ukraine, it is indeed more damaging than the pandemic (about 4500 covid casualties in same 3 weeks).

c)???Terrorism;. In Mozambique, the Islamic insurgents invaded the city of Palma in Mozambique leading to 150 casualties in about 15 days; in comparison, 75 people lost their lives from covid in 2 weeks time. The airport bombing in Kabul killed 183 people on 26 August 2021, but for about 15 people dying every day officially from covid-19.

Zoom: impact on livelihood

Stress

The dangerous nature of turbulences like war and pandemic inevitably ?build large amount of stress. In fact, majority of citizens claim they are fearing of being affected by a pandemic or by war/terrorism- an expression of fear that that is larger than other many more probable events, such as being diagnosed with a cancer.[4] ?

a)???Covid: Turbulence may remain rampant, adding to stress. The covid-19 has gone to a variety of waves by now, and might remain endemic[5]; China has recently resorted to aggressive lockdown of major cities such as Shenzhen to avoid the spread of a new omicron wave.

b)???Terrorism: There have been close to 200,000 terrorism incidents in the world, and about 2500 conflicts?in the 50 years. ?Conflicts among built u along the increased penetration of radical groups such as the Islamic State, and Al Qaeda. In 15 years, the Islamic State has penetrated more than 50 countries worldwide, or a rate twice faster than Al Qaeda[6]. Along the way, the Islamic State was responsible for a growing part of terrorism casualties, spread in many countries such as Iraq Syria ,Lebanon, the Philippines, Sri Lanka, Tajikistan, or Tunisia. ?Europe has witnessed lower attacks, but Europol statistics still suggest that Europe remains under some, mostly jihadist threats,?and that countries such as France, Germany, or Austria have been the most targeted recently[7].

?Democracy backsliding

Outside of stress, major turbulences may cause democracy backsliding.

a)???War and terrorism: Research ?by Getmansky and Zeitzoff (2014)[8] have demonstrated that war and terrorism threat materializes into a large propensity for extreme right voting.

b)???Covid-19. “Democracy backsliding” has been noticed through measures imposed during covid-19 (Edgell and her colleagues, 2021)[9]. In Europe, for example, countries such as Hungary and Poland have registered numerous violations of the democratic rules in force[10].

?Zoom: economic activity

Finally, turbulences are creating a large series of socio-economic disruptions, that ?are material in aggregate ?Those disruptions include breaks in supply chains (covid), large migration by the million (Ukraine), significant volatility in commodity and energy prices (Ukraine), and direct economic sanctions towards the war starters, but which can fire back on other countries (such as Russian sanctions, and effects on prices inflation in gas):

a)???Covid 19 led to a shrinkage of more than 20% of economic activity in the first months of the pandemic announcement, essentially driven by the imposed lockdown. Stock markets also crashed by same amount in the first week, even if stock market managed to recover quickly in a matter of weeks, Still, only 40% of large companies have manages to recover the same profit trajectory after at least 2 years into the pandemic[11], and we now see major rampant inflation as a consequence of those liquidity leverages and continued tensions in supply chain.

b)???War may have comparable effect to covid-19 depending on duration and intensity, of the conflict. At current Ukrainian death tolls, a conflict lasting 6 months might lead to a permanent GDP shrinkage of 5 points in the Ukraine economy [12].?If the conflict last 1 year, the toll on GDP is as large as the collapse of the Greek economy during the 2008 financial crisis. ?The perpetrator suffers an impact, depending on the level of sanctions and how it insulates from the sanction. As an example, Russia grew 2 points less than the worldwide economy for the 3 years after the first attack on Ukraine by 2014[13].

In general, acute conflicts have direct economic impact that are as large as large pandemic. In the last century, war s threats with direct effect on US has decreased the S&P 500 by an average of 3,5% -- Pearl Harbor attack in 1941 by the Japanese aviation against US led to a daily dip of the S&P by about 4,4%, while the Cuba Missile Crisis shrank the index by 2,7% [14].

c)???Terrorism may create the same magnitude of impact. While exceptional, the 9/11 terrorist attack on the US led to a daily drop of 7%?of the S&P in the US, and cost about $US 40 billion to the US, ?according to recent estimates by Bardwell and Iqbal, (2021)[15]. One week after the Madrid train bombings in March 2004, Spain's stock market was down more than 3%. Iraq suffered the most from terrorist attacks in the last 15 years, with an estimated economic depletion of 10% of GDP effect every year from 2010 to 2020[16]. ?Iraq’s Sinjar massacre, which resulted in 953 people dying, and 5 more?than 5000 being abducted may have cost more than $US 4 billion.

Black-Swan, or not?

Black swan are extreme events, possibly 10 times the standard deviation to the mode of ?events distribution—(3 times still happens 0,1%; ten times is so in freqeunt we can’t plan). Are turbulences rare or more frequent than thought? To see that, let us define a threshold of major turbulences, and assess its frequency

Threshold

One “live” metric may be whether the turbulence may match one of the top causes of death.?Taking a country of 10 millions, the average of the top 5 causes of annual deaths will have a 10 times more risk of loss, and will imply 35 deaths a day, One “livelihood” metric is the size of jump on the stock market- one of 3%?change in stock index is also ten times more impactful than the affect variance in stock returns.

Frequency

a)???Covid had reached the benchmark of 35/10 million a day during the recent waves peak in developed countries confirming it can be disruptive. But contrary to beliefs, an event like the covid may still happen 1,7% a?year, according to a recent study published in the Proceedings of National Academic Sciences[17].

b)???War and terrorism . Likewise, if one looks a war or terrorism, the list of the top 100 worst violent deaths in the world reach the casualty metric too[18], but here again, the probability it happens in one country is low, but material in distribution theory or, between?1-2% on average.??Using statistics from Baker and colleagues at NBER (2020), jumps above 3% in the stock markets and links to war and major terrorists events have been limited ,but still around 5% a year [19].

THE PRACTICE OF HIGHLY VIGILANT FIRMS

The above leads us to conclude that war, terrorism and pandemic are disruptive, but with enough low occurrence, that can and should be traced.

As stated by Day and Schumaker in their recent Sloan management review (2020)[20], ?top company performers stay ahead of others during turbulent times by knowing where to look for warning signs and how to explore their environment. The most vigilant ones have built a systematic approach to determining where to look and how to explore. A few best practices include:

a)???Strategically scoping the environment beyond comfort zones. For instance, the Ukraine war launched by Russia has been hinted a few times, from the early invasion in 2014, to the modus operandi of Russia in other conflicts, and the prescient statements made by the Russian president around Ukraine. Terrorism from the Islamic state has decreased possibly due to covid, but is likely to bounce back , after the rise of failed states in Central Asia and Africa.

b)???Build a playbook to opportunities linked to those turbulences. Covid-19 could anticipate the importance of digitization, and the further scaling to automation. ?

c)???Critical analysis of weak signals. ?The fact that Russia interfered to influence US election, the fact that cybersecurity threats were exploding, and that Russia was testing some modes of war in Syria, were enough of signals, which, albeit weak, would have been a war might be coming.

d)???Broad scoping. Companies that are hyper-vigilant are often broad in their scope. It can be major pandemic, or political tensions and war. But companies are also now the ones that are building their vigilance linked to important topics linked to ethics, cybersecurity, or now, sustainability and green planet.

? jacques bughin, march 21, 2022

Notes:

[1] worldometer coronavirus - Rechercher (bing.com)

[2] Wang, H., Paulson, K. R., Pease, S. A., Watson, S., Comfort, H., Zheng, P., ... & Murray, C. J. (2022). Estimating excess mortality due to the COVID-19 pandemic: a systematic analysis of COVID-19-related mortality, 2020–21.?The Lancet.kill

[3] List of terrorist incidents in 2021 - Wikipedia

[4] 1/3 of people fear of cancer, while about 1/3 will catch in their lifetime, with a probability of surviving now higher than 50%. Today, deaths from cancer are 150 times more than from war and terrorism. Given war, of course, risk of death may be large, e.g. it was possibly 10 times more to die as civilians during the heavy war period of Afghanistan in the 80’s than from cancer; today, it is more in the range of 10 to 20%, thus cancer death is 5 times more likely under civil war like than under major international war.

[5] The Forever Virus: What Science Says About the Future of COVID (newsweek.com)

[6] Miller, E. (2016, August). Patterns of Islamic State-Related Terrorism. START Background Report.

[7] Terrorism in the EU: terror attacks, deaths and arrests in 2020 | News | European Parliament (europa.eu)

[8] Getmanski, A., and Zeitzoff, ?T. (2014). Terrorism and Voting: The Effect of Rocket Threat on Voting in Israeli Elections.?American Political Science Review,?108(3), 588-604.

[9] Amanda B. Edgell, Jean Lachapelle, Anna Lührmann, Seraphine F. Maerz, Pandemic backsliding: Violations of democratic standards during Covid-19, Social Science & Medicine, Volume 285, 2021,

[10] Jacek Lewkowicz, Micha? Wo?niak, Micha? Wrzesiński, ?COVID-19 and erosion of democracy, Economic Modelling, Volume 106, 2022

[11] Bughin, J., Berjoan, S., Hinterman, F., & Xiong, Y. (2021).?Is this Time Different?: Corporate Resilience in the Age of Covid-19. iCite-International Centre for Innovation, Technology and Education Studies, Université libre de Bruxelles.

[12] We estimate this from Mueller, H. (2016). Growth and violence: argument for a per capita measure of civil war.?Economica,?83(331), 473-497 and Mueller, H. (2013). The economic cost of conflict.?Work. Pap., Int. Growth Cent., London.

[13]The impact of Western sanctions on Russia and how they can be made even more effective - Atlantic Council

[14] Cutler, D. M., Poterba, J. M., & Summers, L. H. (1988). What moves stock prices?, NBER

[15] Bardwell, H., & Iqbal, M. (2021). The economic impact of terrorism from 2000 to 2018.?Peace Economics, Peace Science and Public Policy,?27(2), 227-261.

[16] Iraq’s Sinjar massacre, which resulted in 953 people dying, and 5more?than 5000 being abducted may have cost more than $US 4 billion. See Bardwell, H., & Iqbal, M. (2021).

[17] Intensity and frequency of extreme novel epidemics | PNAS

[18] List of battles and other violent events by death toll - Wikipedia

[19] Baker, S. R., Bloom, N., Davis, S. J., & Sammon, M. C. (2021).?What triggers stock market jumps??(No. w28687). National Bureau of Economic Research. 11% of jumps cases are linked to unrest events in the US , but the distribution of events follows a power law per country.

[20] Day, G. S., & Schoemaker, P. J. (2020). How vigilant companies gain an edge in turbulent times.?MIT Sloan Management Review,?61(2), 57-64.