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The calm before the storm: Why volatility precedes stability, and Vice versa
Material posted: Publication date: 22-12-2014

In early 2011, when the Middle East has spread a wave of protests, the Assad regime in Syria was immune to these events. After receiving the reins from his father, Hafez, who was thirty years in power, Assad confidently led the country over the past 10 years. Many experts thought that a strong Syrian political regime, characterized by tight controls over society and the economy, will surely overcome the period of "Arab spring". In comparison with the neighboring country, Lebanon, Syria looked much more stable. The civil war lasted in Lebanon during the 70-ies and 80-ies, and the assassination of former Prime Minister Rafik Hariri in 2005 had plunged the country into even deeper chaos.

However, the results have led many to wonder: today, Syria is in chaos, in which Assad is fighting for the preservation of the regime, while Lebanon opposes the flow of refugees from Syria and other consequences of the civil war "in the neighborhood". Oddly enough, the mortality in Lebanon in 2013, lower than these figures in Washington. In the same year, the conflict in Syria has claimed 100,000 lives.
Why the Syrian regime that seemed so stable was so fragile, while Lebanon is suffering from mass unrest, looks sustainable? The answer is that before the conflict, Syria has demonstrated only a "pseudo-stability" for robust appearance concealed deep structural vulnerabilities.

Paradoxically, the mess in Lebanon signaled stability. Fifteen years of civil war led to the decentralization of power and led to a more balanced structure of power distribution in the country. Given the small size of Lebanon as administrative units, these factors ensured its strength. The same applies to the commitment to "open market" in the economy. In Syria, the ruling Baath party sought to control the economy, rejecting the natural chaos. This rigidity did Syria (and other Basistka States, such as Iraq) are more vulnerable than Lebanon.

But the main reason for the vulnerability of Syria was the lack of experience in dealing with riots and chaos. Countries that experienced "attacks" of chaos had immunity to its effects. Therefore, the best indicator of the stability of the state is not long-lasting stable political regime, and the experience of overcoming mild chaos in the relatively recent past. So, Nassim Nicholas Taleb in 2007 in his book "the Black Swan" writes: "dictatorships that do not have the shade of the fly thanks to negative stability like, say, Syria or Saudi Arabia, have a much higher risk of falling into chaos, than, say, Italy, which after world war II has long been immersed in a prolonged political turmoil".

It seems that centralization means a more stable Board. But this is only an illusion.

The difference between the fates of Syria and Lebanon suggests that the indicator of instability are underlying structural properties of political systems. Past experience can be extremely important in the prevention of cancer, crime or earthquakes. But it is not very suitable for analysis of complex political and economic events, especially for the prediction of "unlikely" events (tail risks), such as government or financial crises, which, it would seem unlikely, but are the place to be. Awareness of such risks comes too late, therefore requires a more sophisticated approach.

So, instead of trying to anticipate unpredictable events (“Black Swan” events), is much more productive to focus on how the system overcomes the mess. In other words, how brittle it is. It is impossible to predict what will happen in the future but you can predict how a crisis event may affect the country. Some political regimes can withstand the tremendous pressure, while others may collapse from the slightest difficulty. The good news is that you can define it using the fragility theory (theory of fragility).

The fragile system will not tolerate variability, instability, pressure, chaos and random events. They are aimed at peace and predictability that may not last for long. Therefore, time is the enemy of fragile systems. In addition, fragile objects react to pressure in a non-linear way. Speaking political and economic terms, the decline in the price of a barrel of oil to 30 dollars for Saudi Arabia is not confined to the doubling of negative consequences 15 dollar drop.

For States, the fragility is expressed in five aspects: centralized decision-making system, undiversified economy, a large external debt, lack of political flexibility and lack of experience of overcoming chaos. Based on these criteria, analysis of the world looks different. Unstable modes appear firmer and seemingly serene state timer with a clockwork mechanism.

The center cannot hold

It seems that centralization means a more stable Board. But this is only an illusion. With the exception of the military sector, centralization leads to structural weakening. Although centralization reduces deviations, it greatly enhances the effect of those deviations occurred. The mess is concentrated in infrequent but more dramatic episodes that are disproportionate to the total effect of all the small but frequent deviations. In other words, centralization decreases local risks, such as regional parochialism and corruption, but increases the price of systemic risks, disastrous for the entire national system.

Centralization of the system suppresses internal differences. But this inability to cope with diversity, political or ethno-religious, increases the overall risks of the system.

In addition, centralization increases the chance of a military coup. For example, Greece was highly centralized, when a group of "Colonels" deposed the government in 1967 Italy, in turn, around the same time could be in this situation, so as to rend the social and ideological contradictions, but kept the regime through political decentralization and narrow geography.

Unstable economy

Another aspect is the lack of economic diversification. Economic concentration can be even more dangerous than political centralization. Economists, from Ricardo D. prove that the state should have its own specialization in the global market due to competitive advantages. But specialization makes the country more vulnerable to random events.

Thus, States, specialized in tourism tend to be more prone to instability (Greece felt that after the economic crisis, and Egypt – after the revolution), unforeseen events (hi after September 11), and even fashion trends, when the new replacing the older resorts (Tangier, Morocco).

Also danger represents the national economy, built around one product, for example, Botswana, is dependent on diamond production, or around one industry, as the automotive industry in Japan.

Another aspect related to the nature of economic systems, they are associated with debt arrangements and the leverage. The debt is arguably the most important criterion of fragility. Debt securities issued by government, are perhaps the most vicious type of debt, because they are not included in the capital; instead, they become a permanent burden. The country can't just go through the bankruptcy procedure, and this, ironically, is the main reason for the belief that their investments are protected.

The advantage of instability

The fourth condition of fragility is a lack of political flexibility. A truly stable countries experience moderate political changes, reflected by changes of government and a reassessment of the guidelines. Changes, providing stability, not too radical, for example, the transition of power from labour to the Conservative party in the UK. Moderate political variation removes certain leaders from power, allows to overcome nepotism. When the state is decentralized, the changes are more smooth, the municipalities rely on the distribution of powers of decision-making and ensure a pluralism of political views.

It is the political flexibility makes democratic regimes are less brittle than autocracies.

The fifth token is the lack of experience of overcoming great turmoil. Countries that have experienced the worst scenario in the recent past and has overcome them more sustainable than those that do not have such experience. In part, this thesis suggests the idea that countries, whose statehood is preserved after the chaos, become something that cannot be comprehended any other way. The challenge for States is instructive, they give experience for "post-traumatic" growth.

Look at Indonesia, Malaysia, the Philippines, South Korea, and Thailand - these countries survived the Asian financial crisis in 1997-98, but they were strong enough to survive and stimulate an impressive post-crisis growth.

The beautiful and damned

All five of these conditions is a kind of warning markers. They do not serve as proof that the country consistently – no methodology – but with the help of these indicators it is possible to conclude that a given country may experience difficulties in the future.

Saudi Arabia is a good example. The country is extremely dependent on oil, has no political flexibility and extremely centralized. Revenues from oil production and strong government smoothes contradictions between ethno-religious groups, as, for example, the few Shiites living there, where oil is produced. For the same reason Bahrain is considered a very fragile state, largely due to repressed Shiite majority.

Egypt should also be seen as an unstable system, taking into account their "cosmetic" restoration after the chaos of the revolution and of the centralized (and bureaucratic) government. The same can be said of Venezuela, with centralized power, and Russia, are still dependent on hydrocarbon production. This factor exacerbated the consequences of the Soviet era.
Some countries can be classified as fragile, but they aim at overcoming this. Greece has a huge amount of debt and has an inflexible political system, but it starts to conduct economic restructuring. Iran has an effective centralized government that does not have the flexibility, and the economy tied to oil and gas, but this mode is tolerant to some extent (although not explicitly) to political dissent. Although formally Iran is a theocratic state, unlike Saudi Arabia, it is based on an adaptive form of Islam that has the potential to modernize.
China is a real puzzle. Stunning economic growth makes the future extremely unpredictable. The country is quickly "recovered" from a major upheaval of the Mao period. The political system of China's centralized economy is dependent on exports to Western countries, his government recently borrows excessively, which leads to the danger of slowing domestic and overseas growth. Whether the experience of past shocks significant enough to offset the weakness from its debt obligations and centralization? Most likely, the answer will be negative. Every year these lessons of history recede further into the past and prospects "random events" are becoming more evident. But the sooner it happens, the stronger China will become in the long term.

Nassim Nicholas Taleb and Gregory F. Treverton, "Foreign Affairs", January-February 2015, issue 1 (94)


Translation: Medvedev Dmitry

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