Crisis Management in Economics and Politics

by KASPAR VILLIGER

Published: 12 May 2020

Shocks

Shocks such as wars, revolutions, pandemics and the collapse of empires are violent events that drive states, social systems and economies to the very limits of their ability to adapt. They are highly unpredictable and in hindsight can turn out to be a blessing or a disaster. Although the plague killed over a third of the population in the 14th and 15th centuries, the enormous shortage of labour provided peasants in Western Europe with higher wages, greater prosperity and more freedom. The tragedy of the Second World War resulted in the subjugation of the Central and Eastern European states by communism, but in the West it enabled the creation of the democratic Federal Republic of Germany and the stable, peaceful structure of the European Union. The implosion of the Soviet Union was followed on the one hand by the successful democratisation of Central and Eastern European states, and on the other by the emergence of new dictatorships in Central Asia and the resurgence of an authoritarian, nationalist state of Russia. Coronavirus represents a shock that has the potential to cause one of mankind’s greatest historical crises. Even if it proves possible to limit the number of victims of the infection by means of controlling people’s behaviour and movement, and administering drugs and vaccines, we can still expect enormous long-term damage in real, financial and social terms, the political consequences of which are highly uncertain.

Crises in normal life

Crises occur in every country time and again. More recent examples in my country were the collapse of Swissair and the bailout of the major bank UBS. These have the potential to cause enormous damage, but they are ultimately limited. Coronavirus is different: No area of life, from schools and hospitals, small and medium-sized businesses, to football clubs and large corporations, remains untouched. These have all ended up with crises of their own that have to be overcome. This amounts to a crisis of a completely different scale. But some of the lessons learned from managing limited crises are also useful in managing the crises that coronavirus is currently causing. First of all, I am talking about the management of limited crises such as these.

Anyone who assumes responsibility in a crisis will first be praised for their courage. However, if the crisis is not overcome in a manageable timeframe, goodwill starts to erode and the person managing the crisis begins to be perceived not as a firefighter, but as an arsonist. Demands for withdrawal are loud, first in private, then in the media. And yet: Management is never more interesting than in times of crisis. But the challenges are enormous – The difficulty of gaining a picture of the situation in such a chaotic environment. The pressure of having to make decisions on the basis of inadequate information. The need for accurate information, which far exceeds the quantity of substantial and reliable sources of such information. The uncertainty as to whether the measures taken will be sufficiently effective. The never-ending criticism. And finally, the fear of not being up to the challenges.

Every crisis is different. But three phases can be recognised in most crises: Emergence, confusion and coping.

The emergence of the crisis

crisis begins with a shock event: A plane crashes, a factory blows up, or coronavirus emerges. This has one single advantage – It is immediately clear to everyone involved what has happened. The organisation switches into crisis mode almost by itself. Creeping crises, on the other hand, are perfidious, diffuse and difficult to identify, for example a bank whose earning power is slowly melting away or a state with debt that’s gradually getting out of hand. Initial signs are often subtle. They can trigger unconscious repression mechanisms that lead to people instinctively covering up shortcomings, or even starting to simply come to terms with them. You think you don’t have to rush into anything. Maybe the adversity will pass by itself, and in view of the adverse circumstances perhaps things aren’t really going so badly after all. Under such circumstances it is difficult even for a capable manager to motivate employees to take drastic measures.

The phase of confusion

In the phase of confusion, the main problem is that the person responsible is not yet in a position to make a conclusive assessment of the shortcomings themself. Generally, one can expect to be first confronted with internal cover-up or trivialisation campaigns. Many of those involved first think of self-protection or simply shy away altogether. Furthermore, it is not yet possible to overview and weight all elements of the crisis. Nevertheless, one usually has to take action, because even non-decisions can have far-reaching consequences. At the same time, an avalanche of media research sets in. Every detail, whether true or fabricated, becomes proof that the worst suspicions are justified. Because those responsible do not know everything themselves, an accusation of systematic cover-up can arise. A real spiral of mistrust forms, which can go so far that one’s own justified arguments collide with a wall of collective denial of knowledge. There is only one thing to do here: Don’t be impressed, head down and power through!

In this phase, the boss must first break down the layers within the organisation that block the flow of mainly bad news, and mercilessly do everything possible to get all the facts on the table. It is particularly important not to jump to hasty conclusions and not to give any euphemistic information to the public, however much the temptation may arise.

The confusion phase is also the phase of immediate measures. This may involve, for example, establishing special task forces, replacing teams that are less crisis-resistant or immediately closing down any sources of loss. The situation is aggravated by the fact that some of the employees in charge will primarily be concerned with self-protection and less with the situation as a whole during this phase.

The crisis management phase

In the coping phase, a careful assessment of the situation must first be made and what you want to achieve must be clearly defined. This alone is difficult because, firstly, there are always conflicting goals and, secondly, goals can never all be achieved simultaneously. Frederick the Great put it like this: He who defends everything, defends nothing. Once the objectives have been defined and prioritised, it is a question of organising crisis management both structurally and personally, defining responsibilities, developing bases for decision-making and orders, communication, controlling and consequences for staff. These are all extremely complex processes full of traps. It is worthwhile to work around simple principles. Consulting the basic command structure of a non-commissioned infantry officer usually suffices: Assess the situation, your own resources, goals, intentions and orders. It is astonishing how often even qualified managers do not take these simple principles to heart.

One important thing to note is that you cannot delegate the management of a crisis. It must be the captain themself on the bridge, and they must visibly assume responsibility. Years ago, an American general who had fought victoriously through the desert with ten thousand men in the second Iraq war told me his most important leadership principle: Control your ego! The captain can only care about the cause, never about themself. But no boss will do their job without a good team. Building a good team with capable people, including lateral thinkers and critical minds, and keeping them constantly motivated even in the event of setbacks, is a core task. Those who surround themselves only with yes-men will lose contact with reality and fail.

Players and communication

Flocks of fellow players, helpers, gawpers, freeloaders, profiteers, injured parties and controllers circle around every crisis. They all have their own agendas, some constructive, some selfish. Competitors are always trying to poach customers. Experts who always claim to know better are constantly chiming in, but are not responsible for anything. Some politicians will use the crisis to constructively improve the state’s regulatory framework, while others will use it as an instrument of electoral policy. The media have two particularly important and legitimate functions during crises – They inform and they keep a watchful eye on those responsible for crisis management. However, individual media outlets do not see themselves as objective reporters and constructive critics, but as players. They may even have an interest in keeping the crisis going, as this allows for longer-lasting campaigns for the benefit of circulation and ratings. They escalate, personalise, reduce people to scapegoats, and demand punishment.

A crisis of course affects all employees within a company in one way or another, who must all be given guidance and kept constantly informed. Not everyone will work constructively to the same extent to solve the problems. Some will try to cover up unpleasant facts, others will mainly protect themselves, others will already be looking for new jobs. It is important to quickly establish an internal network of constructive and impartial leaders. In this situation, the internal experts in individual areas, such as lawyers, risk managers and scientists, are of course important. Their competence must be drawn upon, but they do tend to overvalue their particular niche and to underestimate other equally important areas. They are often frustrated because they get the impression that their good ideas are not receiving enough response. Complex crises cannot be solved without outside consultants. You need their professional expertise. They can evaluate facts, prepare expert opinions and, as discussion participants and lateral thinkers, challenge management and the board of directors. But they cannot take responsibility away from management and they cannot replace leadership. You cannot delegate crisis management to consultants.

Of utmost importance is crisis communication. It is not only the facts that determine the outcome of a crisis, but also public perception. A perfectly stable bank, for example, would go bankrupt if all assets were withdrawn because of a false rumour. In large corporations or in state administrations, there is often communication chaos that does nothing to clarify open questions. Central management, tight coordination and maximum discipline are important. The top person responsible for crisis management must also communicate, but in careful doses so as to not burn themself out. They must always be aware that communication is a means of crisis management and not a means of self-expression. It is particularly important for communication to adhere to certain principles. I will quickly mention a few here: Truth and transparency; no whitewashing; put unpleasant things proactively and quickly on the table; no cover-ups; no promises that cannot be kept; only announce achievable goals; differentiate messages according to target groups, ensure the core content is always identical. These things are not all self-evident, since the temptation to whitewash and trivialise is omnipresent.

The ebbing of the crisis

Every crisis eventually comes to an end. A company may have gone under or may be flourishing once more, a state may have more or less solved its problems, or the attention of professional critics may be captured by a new scandal instead. If the person responsible has failed, their reputation in our society, which does not forgive failure, will be irreversibly damaged. But if they and their team have been successful and are celebrating the battle they’ve won, they may be horrified to learn that the mainstream opinion is that the crisis should have been handled very differently. One must also be able to bear that.

The mother of all crises

The corona crisis now is not a normal, definable crisis with clear boundaries. It plunges everything that people do worldwide into individual crises, so to speak: States, companies, organisations, hospitals, schools, families etc. Crisis management becomes indispensable everywhere, on a large and small scale. The rules and requirements of crisis management as I have described them, apply. States, on the other hand, are facing challenges that we have only ever seen during major wars. They face a terrible conflict of objectives: They have to find an optimal compromise between focusing on people’s health and focusing on keeping the economy functioning. If they put the economy at the centre, they endanger human lives and risk losing the loyalty of the people. If they prioritise health alone, the economy threatens to suffocate with potentially dramatic consequences for jobs and the welfare state. Never before has science been so important in the search for the optimal path. But even science is not able to find the silver bullet beyond all doubt, because our knowledge of the virus is still incomplete. In order to bridge the time until a vaccine can be developed with as few deaths as possible and without overburdening intensive care units, most governments have shut down large parts of the economy. This has devastating consequences. Companies are going bankrupt, supply chains are being cut, unemployment is rising, consumption is collapsing and protectionism will continue to increase. It is not for nothing that the IMF is expecting the worst recession since the Great Depression. To alleviate this recession, the central banks have again opened their coffers wide and governments have resolved to provide gigantic aid packages. Although this will help for the moment, it has the potential to cause further damage in the long term. In view of the horrendous global debt situation, a subsequent normalisation of monetary policy is almost inconceivable, because interest rates that are reasonably risk-adequate would have to drive countless states into bankruptcy. What else is there? Monetisation of public debt with fiscal repression to expropriate creditors and savers? Hyperinflation? Direct expropriation by means of confiscatory taxation while suffocating all forms of economic incentive? A new dramatic financial crisis if confidence in the debt economy is lost? Or perhaps just years of muddling along with insufficient growth in the economy and productivity? Nobody knows the answer to this today. It won’t be easy.

Are authoritarian rulers better crisis managers than democrats?

The problems of many democracies in the aftermath of the financial crisis and the economic success of authoritarian states such as China or Singapore have led to democracy losing its role model effect. China and also Islamic states even consider democracy to be the worst of all forms of government, because it inevitably leads to chaos. There are also discussions about whether democracies or autocracies are better able to cope with crises such as the coronavirus crisis. Depending on its form, democracy has its shortcomings, and it is a difficult and often cumbersome form of government. It is not innate to humans and therefore never secure in the long term. It requires careful care. But one should not underestimate the advantages of democracies because of their shortcomings. It is the best form of government developed so far for ensuring a life of dignity for the people. Democracies are more prosperous than autocracies. The probability of involvement in wars is smaller. People can shape their future and that of their children more freely. The attractiveness of democracy for people is unmatched. For example, you won’t find queues of refugees at the gates of China, Russia or Iran asking to be admitted. Democracies have proven their ability to survive despite recurring major challenges. Often, for example during the world wars or the Cold War, their resistance and steadfastness have been underestimated. Nobel laureate Douglass North has shown that democracies with freedom of opinion, speech and research are better and faster able to solve emerging problems. Tim Besley of the London School of Economics concludes that the less controlled a state’s executive branch is, the greater the probability that it will experience a significant economic or political collapse. In a recent scientific publication, Daron Acemoglu and co-authors have demonstrated an economically and statistically significant positive effect of democracy on future economic performance. The main reasons for this are economic reforms, increased fiscal capacity, improved educational opportunities, a more efficient healthcare system, greater willingness to invest and less social unrest. You can twist and turn it however you like: Despite all bumpiness, despite all imperfections, despite all faults, despite all inefficiencies, democracy is superior to autocracies with regard to almost all factors of human quality of life. The question now arises whether this also applies to the management of a major crisis.

China is currently the power which won’t grow tired of proclaiming the superiority of its authoritarian system in crisis management. Nevertheless, it can already be stated that crisis management in democracies, despite the political noise that inevitably always accompanies it, does not fall short of that in authoritarian systems. On the contrary. Initially, the fatal tendency to cover up, trivialise or even deny the crisis potential was noticeable among “strong men” who want to lead authoritarian regimes or steer democracies towards authoritarianism. They lost valuable time until, pressed by the facts, they were forced to turn around and suddenly tried to transform themselves into tough and strong crisis managers. It is true that China prides itself on being the greatest example of outstanding crisis management. But there is much to suggest that it was the silencing and defamation of the first Chinese whistle-blowers and the initial prevention of decisive measures that made the global outbreak of the pandemic possible in the first place. For a long time, Singapore was considered the model of exemplary action in the crisis. But overlooking and neglecting the dangerous sources of infection in guest worker camps, which have now led to an extension of the lockdown with all its economic consequences, must be recognised as a serious mistake. In other authoritarian countries, such as Russia, the failure is obvious, and even weak democracies led by authoritarian heads of state are not performing well in this crisis. This is not surprising either. Heads of state acting in an authoritarian manner, who, for example, suffer from antisocial personality disorders, or who are only worrying about how to secure their own power, or who are primarily driven by hegemonic fantasies, or who only have the welfare of their own chosen nation in mind, are unlikely to orient their crisis management towards the welfare of all people in their country. Of course, the crisis management of democracies is also of very varying quality. Moreover, in a crisis, even democratic governments must be able to act quickly with emergency powers. But unlike authoritarian regimes, they are under observation by the opposition, the media and civil society. After the crisis, they must be held accountable, and if they fail they can be voted out. This forces them to be particularly careful and circumspect in crisis management.

Has the nation state survived?

For some years now, intellectual circles in particular have held the opinion that the nation state has been around for too long and is no longer able to solve the problems of this highly interconnected world. During the corona crisis, too, there are more and more voices saying that only a community of states can overcome it together. As correct as this opinion may be in theory, it is illusionary. On the contrary: Once again it shows that only nation states are really capable of acting. The first thing to note is that decentralised systems are more resistant to crises because the individual elements take responsibility for solving the problem themselves. Crisis management always means leading people in a defined area. This is not possible without this space also having borders. Such a crisis can only be overcome if the nation states with their institutions and processes do their homework. The fact that this does not lead to one-size-fits-all solutions is not a disadvantage, because when systems are in competition, better solutions are usually created than by centralised dictation. What if the world government is wrong? The trial-and-error method is unavoidable, especially in this crisis in which many questions have not yet been scientifically clarified. Even if, as mentioned, the nation state requires greater central leadership in a crisis than during normal times, it would be wrong to use it to stifle the freedom that states and municipalities need for their crisis management work on the ground. It is impressive what outstanding and creative work is being done in this crisis, not only in Germany and the USA, but also in my country, at the state and municipal level. Equally important is what civil society is able to achieve, which can only manifest in democracies with the necessary diversity and strength. I am thinking, for example, of companies from the most diverse industries spontaneously developing masks and breathing apparatus, of large corporations that are otherwise hostile to each other exchanging information and jointly developing medicines, of volunteers serving the community, or of the spontaneous formation of groups that go shopping on behalf of at-risk individuals.

Even if only nation states are really capable of doing the work necessary to combat such a crisis, better international cooperation would of course be highly desirable. If, for example, the heads of state that assemble at the UN, or other international organisations, were exclusively democratically legitimate politicians committed to the global common good, then constructive cooperation and the negotiation of globally viable solutions would be entirely conceivable. The reality is different. The majority of people in the world live under authoritarian regimes or in defective democracies. Many heads of state of defective democracies are even using the corona crisis to expand their position of power and abolish achievements such as independence of the judiciary, freedom of the press and equal opportunities for the opposition. This also has an influence on the work of international bodies. It is therefore not surprising, for example, that the UN Security Council simply fails in important crises.

But because the virus knows no borders and because mistakes in crisis management in one country can also affect another country, cooperation is essential despite the differing interests and systems of individual states. This need not conflict with national egos. We know from behavioural economics that communities consisting of both egotists and cooperators can create a culture of cooperation if the cooperators are willing to punish the egotists for selfish behaviour. It pays off for the egotists to also acquire a reputation as cooperators in order to avoid punishment. The same effect can play out between states, and following initial turbulence this is now happening on a wide scale. People show solidarity with those whose solidarity they can count on. For example, it is the right thing to do for states to take on patients from other states if they have free capacity, for medical material and medical equipment to be exchanged, or for richer countries to help hard-hit countries that are structurally weaker. Like-minded states also form clubs that can address specific common problems through deeper cooperation. A dense network of such clubs has formed, from the EU to large free-trade areas, from the WTO and OECD to the G20. But the basic unit which our world is based on, whether we like it or not, will remain the nation state. And there is something else the world is currently lacking, as one German leader recently put it: The position of leader of the free world is currently vacant.