Condivergence: Termites of the economy

This article first appeared in Forum, The Edge Malaysia Weekly, on July 19, 2021 - July 25, 2021.
Markets are ecosystems and economic termites are part of the economic system, just as real termites form part of the biodiversity of nature. Thus, can economic termites be totally eradicated, or do we just need to make sure that they do not eat up the whole system?

Markets are ecosystems and economic termites are part of the economic system, just as real termites form part of the biodiversity of nature. Thus, can economic termites be totally eradicated, or do we just need to make sure that they do not eat up the whole system?

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Most of us think about termites negatively. They eat up all the wood in our house and things fall apart. We spend money poisoning them and may end up poisoning ourselves.

A fiscal expert whom I have admired for a long time, Dr Vito Tanzi, formerly the head of the Fiscal Affairs Department of the International Monetary Fund, has written a brilliant book called Termites of the State: Why Complexity Leads to Inequality (Cambridge University Press, 2018). Vito’s book is actually an analysis of the economic role of the state since the Second World War, but he uses the term “termites” to describe how complexity has created corruption and inequality for the majority of the population.

There are three types of economic termites. Termites of the state are “various elements that enter into the political system and that corrupt, or distort, the legitimate economic role that governments try to play”. Termites of the market distort “the legitimate function of the market”. Then regulatory termites enter into “the passing and in the application of the laws, and in the functioning of the public administrations after policies have been enacted, creating governance problems and contributing to administrative abuses including corruption”.

Today, we recognise that markets are ecosystems and economic termites are part of the economic system, just as real termites form part of the biodiversity of nature. All systems decay and grow at the same time. Termites help to hasten the decay of dead plants and, at the same time, build very complex nests or mounds that even have their own air-conditioning systems. They have been around for a long time because they have a symbiotic relationship with the environment. Thus, can economic termites be totally eradicated, or do we just need to make sure that they do not eat up the whole system?

Humanity created institutions to solve social problems. But all institutions grow and decay. There is an Asian saying that family businesses do not usually last more than three generations — the grandfather builds the business, the father holds the business, and the children eat or destroy it.

This is similar to an iron law of state-owned enterprises. The first-generation managers work with dedication and integrity to build it, the next generation maintains it, and the third generation corrupts it. Then the cycle of organisational transformation begins anew. We see this in politics. Politicians who stick around long enough often find their legacies fall apart before their eyes.

Moving from local to global, things become even more complex in scale, scope and speed. Nation-states have grown in number, population and complexity. In 1945, there were only 51 members of the United Nations with a population of two billion, mainly because many territories were part of colonial empires, which gobbled up disparate tribes and less-defined states.

Today, there are 193 countries with a population of 7.8 billion, because democracy has allowed countries to split up into smaller states. Quite a few are failed or failing states that cannot be economically viable. On the other hand, we all recognise that there is no global government to provide global public goods, so we have a very imperfect system of national governments trying to cope with global public “bads” such as pandemics, global pollution, terrorism, illegal migration, international crime and climate change.

Even at the national level, complexity has created inequality and corruption. Free markets and widespread technology have not solved inequality. Growing the size of government from roughly 10% of GDP around 1900 to 30%-35% of GDP today has not solved these problems either. Many politicians and civil servants think that social problems can be solved by passing more laws and regulations.

Using the US Federal Register as an example, the number of pages of federal laws and rules has grown from 15,932 in 1951 to 185,984, with roughly 7,000 to 8,000 significant rule changes every year. That excludes laws and rules passed by local governments. I challenge any serious banker who claims to have read Basel III regulations fully. All CEOs of banks and financial institutions delegate these to specialist lawyers and compliance officers, many of whom are hired from the financial regulatory agencies.

The scale of complexity has made the public more confused, ignorant and distrustful of the political and social system. There are those who think that technology is the solution, but who owns Big Data and has the money to invest in artificial intelligence (AI)? Only the big companies and big governments. In the US, the private sector has to fill up 23,000 federal forms alone, not counting state government forms. Growing bureaucracy is a systemic issue also for private companies.

The American systems-thinker R Buckminster Fuller (1895-1983) invented the concept of Spaceship Earth in which humanity struggles with a critical path between mutually assured nuclear destruction on the one hand, and climate warming and environmental collapse on the other. In his last book, he felt that the world is being controlled by a Grunch of Giants (1983), which stands for GR-UN-C-H, or annual Gross Universe Cash Heist, that receives annual dividends of over one trillion dollars.

In today’s terms, the Credit Suisse Global Wealth Report 2020 showed that global household wealth grew to US$399.2 trillion from US$117.9 trillion in 2000, averaging 6.6% growth per annum. The top 1% of the world’s population owned 43.4% of total wealth; the top 12.4% owned altogether 83.9%; whereas the rest (87.6%) owned less than 16.1%. This is a very unfair and skewed world.

How unfair can be seen from the power of these giants and the harm caused by them. According to the Carbon Majors Report 2017, just 100 fossil fuel companies have accounted for 71% of the world’s greenhouse gas emissions since 1988. These companies spent billions in lobbying and campaign funds denying climate change. According to Statista.com, the top 100 global companies are worth US$44.4 trillion in market capitalisation in 2021, equivalent to roughly half of world GDP. Companies are controlled largely by institutional investors, but 10 of the largest asset management companies manage US$31.8 trillion in assets, so even if the shares are owned by millions of investors, the actual management is by a handful.

Thus, global problems are not those of the majority, but a tiny minority who control the military, industry, finance and media levers of the world. This is true at the national as well as global level. I do not personally believe that there is a conspiracy of global Illuminati (secret elite), but these economic termites control the system without necessarily acting together. Just as termites do not have a central mind, they collectively act in a way that seems coherent in terms of pattern. Small wonder why so many people believe in conspiracy theories because the outcome is that a small minority is getting richer and the rest feel that the system is rigged against them.

The collective action trap that we all have is “how do we collectively act to protect ourselves from the elite that is supposed to protect us from such predatory action”? Until the arrival of US president Donald Trump, it was assumed that bipartisan electoral democracy had all the checks and balances. Today, with the US struggling to control its own political damage and with the Europeans trying to cope with more and more fractured politics resulting in complex coalitions, it is not surprising that faith in democratic politics has been shaken.

In essence, do we live with termites as a fact of life, or can we eradicate them? Since real termites are probably going to outlive humanity, this suggests that we should try to control them rather than aim for eradication. Healthy trees are more immune to termites. Old and dying trees are eaten by them. So how do we keep the trees (metaphorically our society and economy) healthy?

This is the “Big” question that no one has a good answer for yet. If the best economies and political systems are also struggling, it is not surprising that each society will have to find its own answer. There is no longer a “first best” model to copy.

My personal view is that we need to be more open-minded and have a bottom-up social conversation to see where we can find the social consensus on how to keep our society and nation-state healthy. How to engineer this is another story.


Tan Sri Andrew Sheng comments on global issues from an Asian perspective. The views expressed are wholly his own.

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