Cash and Ash Crisis demonstrate global interdependency

The unpronounceable Eyjafjallajoekull volcano in Iceland has caused incalculable economic damage, but this is a blog on analysis so an attempt must be made.

6.8 million passengers were stranded and airlines – the immediate victims of the ash crisis – lost some $1.7 billion.  This is on top of the $9.4 billion they already lost last year, so airlines are begging for tax bailouts.  Shops at closed airports aren’t doing too well either.

But the impact is widespread.  Nissan, a carmaker, couldn’t import components.  The Kenyan flower industry is in disarray.  1,000 tons of cut flowers are exported to Europe by air every day.  This employs hundreds of thousands of people and is worth 20% of the nation’s economy.   On top of this, highly-perishable cash crops are being discarded.

One of the winners is Spain which became an embarkation point for goods that are being flown in and then trucked to the rest of Europe.  This is good news for a country on the verge of bankruptcy and with 20% unemployment.

Tourism around the world is disrupted as the complex interrelationship of networked travel falls apart.  Hotels first gained extra customers as passengers couldn’t go home and are now suffering empty rooms as people leave but others have cancelled their holidays.

Sports events were cancelled as competitors couldn’t travel.  South Africa, hosting the Football World Cup in less than two months, can only imagine the trauma if another eruption were to coincide with the event.

People are already looking for someone to blame and the Civil Aviation Authority is first in line.  This need to find humans to blame is an unhealthy preoccupation of human life.

We romanticise the planet but monsterify each other. 

The earthquake in Haiti in January killed 220,000 people and the one in April in China killed over 1,000.  Cyclones, tsunami, blizzards and other natural events have killed over a million people just in the last decade.  The economic impact is in the trillions of dollars.

This ash crisis is less aggressive but gives a very clear indication of how much the world is interconnected.  Wealth creation in Kenya depends on technologies and markets invented elsewhere.  Europeans can find alternative sources for flowers more easily than Kenya can find alternative markets.

All of these recent global economic crashes show how dangerous it is for economies to rely on single, highly risky, solutions to problems.

We need to diversify our risks. It isn’t enough to have one type of super-fast distribution system, or one type of energy production any more than one should put ones entire investment portfolio in one company.

Markets are naturally diverse and complex. Governments that intervene in these markets find it impossible to maintain this complexity while also being entirely in charge of it.  So they simplify.

In so doing they become overly exposed to the risks of a single industry.

The credit crisis wouldn’t have effected governments so badly if they hadn’t relied so heavily on taxes from banks to finance their promises.  Subsidies to airlines mean that alternative methods of locomotion languish.  The same is true of energy production.

Poor countries that are far away, like Kenya or South Africa, have promoted tourism or a handful of industries reliant on airlines or cheap energy.  This too is to put ones faith in luck rather than diversity.

The reason that so many liberal and free-market economists promote open markets, free of subsidies and trade distortions, is precisely because of the dangers of future uncertainty.  People are fallible and the planet is a very beautiful time-bomb which erupts at random moments.

Animals, like the cheetah, which are super-specialists run the risk of extinction when the circumstances which favour their adaptations change. The human species has done well because it is a generalist. 

To survive and thrive we need as many ideas as possible all competing for space and attention.