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How resilient could Western economies be to the crises ahead?

Through interviews with company, university, and nonprofit leaders, Deloitte Switzerland assessed the Swiss economy’s potential weak points to future pandemics, geopolitical tensions, and climatic events, and developed a template to help evaluate a Western economy’s resilience.

Céline Neuenschwander
Ralph Wyss

A global pandemic may have been considered unlikely before 2020 and a conventional war of aggression in Europe could have been just as unlikely before 2022. Such events test our countries’ economic resilience and expose the weak points in what may sometimes be painful ways. We live in a highly developed yet fragile system that depends on very particular factors, many of which are intertwined. The question at hand is how to consider systematically assessing and improving the resilience of these economic factors and of our economies as a whole. Countries can start by assessing which types of crises may be most disruptive and which economic factors they impact most.

Deloitte Switzerland developed a methodology to help assess what effects a global pandemic, geopolitical tensions, or an increase in extreme climatic events would have on eight major factors that are necessary for the functioning of a typical developed economy: nutrition, health care, public safety, energy supply, telecommunications, financial market infrastructure, critical resources, and logistics. The intention was to develop a template to help evaluate a Western economy’s resilience—the ability of an economy to deal with, recover from, or fully avoid an external (nonself-inflicted) shock.1

We focused on Switzerland’s economy for this exercise, and we conducted 18 interviews with external experts from associations, public service organizations, universities, and companies—many with direct responsibility for ensuring Swiss resilience. The interviewees estimated the impact of the three crisis scenarios on each of the eight economic factors, ranking the crises’ impact on a scale from 0 (complete elimination of the given economic factor) to 100 (remains essentially stable). For all of the scenarios, we looked three to five years into the future. Each scenario could be possible, but we didn’t analyze or ask about its respective probability.

While not definitive, the results of this small study reveal some major differences in the resilience of the eight economic factors regardless of the type of crisis. The financial market infrastructure, for example, appears to be encouragingly resilient. And although the energy supply—a much-discussed topic at present—exhibits certain vulnerabilities, the basic supply could be largely maintained. Meanwhile, health care was found to be somewhat less resilient and could be severely limited in the global pandemic and geopolitical tension scenarios. And due to its dependency on an on-site workforce, logistics also could be very vulnerable, especially in the pandemic scenario.

When much of the world’s workforce stands still—or stays home sick

What we found is that, compared to the other two scenarios, a global pandemic poses the greatest challenge to the Swiss economy’s overall resilience. Many economic factors still depend heavily on the availability and employability of people, and if the workforce is sidelined en masse by illness (not to mention social distancing guidelines and restrictions), the economic factors could be greatly affected.

We examined a scenario in which a pandemic is prompted by a respiratory virus that isn’t life-threatening but leads to a serious illness lasting several weeks and to potential long-term effects, infected people lose their immunity after three to six months, and a sustainable vaccination isn’t yet available.

Our scenario posited that Switzerland’s international connections and business activities have made the country a hotspot for the virus. Around 50% of the working population is working primarily from home. Under appropriate precautions and in exceptional cases, on-site work is also permitted. Companies and events with a high potential for infection are prohibited by the authorities from operating during the winter months (“lockdown”). On average, around 25% of the working population is sick and unable to work—with the proportion distributed evenly between those working from home and those working on-site. Large parts of the population question the official measures, while others consider them inadequate. There are great tensions between the respective camps.

All eight economic factors are dependent on people, and people would be getting sick in such a pandemic scenario, limiting the economy’s crisis defense potential—even though Switzerland and the world as a whole have learned a lot from the COVID-19 crisis. Unsurprisingly, this is especially pronounced with health care services, and this pandemic scenario also would have a high impact on logistics.

The palpable economic dangers of geopolitical tensions

Current events are demonstrating once again just how damaging geopolitical tensions can be to countries’ resilience. And according to our analysis, this scenario ranks second for its deleterious effects on the eight economic factors we studied.

The hypothetical geopolitical tension scenario we examined was focused on the formation of geopolitical blocs and tensions between them, which have intensified in recent years, resulting in a risk of a nuclear military conflict. In this scenario, more powerful states are taking advantage of concerns about greater escalation to enforce local territorial claims. Sanctions are extended, severely restricting the exchange of know-how, important components, and raw materials between the blocs.

In Switzerland, our scenario posited that cyber and sabotage attacks occur on companies and critical infrastructure, and are intended to destabilize the country politically and economically. Sanctions and the growing fear of armed conflict lead Swiss companies to rearrange their international procurement and sales structures, potentially causing delays in delivery and supply bottlenecks in the short term. The population makes more “panic purchases” of shelf-stable foods. The migration pressure on Switzerland as a safe haven has continued to grow, which leads to tensions as residents’ willingness to help decreases as they focus on own welfare concerns.

It’s not surprising that this scenario could have significant impacts on economic factors. Information, telecommunications, and health care could be vulnerable, due to the global nature of supply chains. And energy supply resilience could decrease rapidly in the face of major geopolitical tension and greater bloc formation.

Public security was found to be largely crisis-proof, as in all scenarios. However, the army, as the last resort for maintaining public security, could have difficulties stemming from the rise of geopolitical tensions, as it could become difficult to procure weapons. Furthermore, throughout much of Switzerland, many institutions (for example, the army, civil defense, crisis teams, and the fire brigade) are based on the country’s militia system, which means that public duties or responsibilities rely on voluntary or part-time commitments from the citizens. While generally functioning well, services might become stretched in a prolonged crisis, as the voluntary or part-time militia members would need to return to their main occupations at some point.

The changing climate exposes short-term vulnerabilities

Extreme climatic events could affect Switzerland’s overall resilience only to a limited extent during the period we studied, since our analysis was focused on the short term (three to five years from now). That said, the economic effects of the climate scenario that our analysis revealed for Switzerland are still relatively low compared to the expected consequences over this period.

In our hypothetical scenario (based heavily on current events and projections, as with our other scenarios), extreme environmental conditions increase worldwide and will continue to occur more frequently. Political tensions intensify between states that are fighting over access to water, the sinking of land, and food shortages in certain regions of the world. Formerly fertile agricultural land in the Southern hemisphere is deserted, which increases the migratory pressure toward the North. The discussions about fair water distribution from the Alpine region exacerbate the political climate between states.

In Switzerland, our scenario posits that climate change is reflected in an accumulation of droughts and heavy precipitation. The permafrost continues to melt. As an Alpine foothills region, Switzerland still has sufficient water supply, but problems can arise with its nationwide distribution. Switzerland is sometimes under pressure from neighboring countries to regulate the retention of water in reservoirs, and to take their respective interests into account. Rivers sometimes carry so little water that river water cooling is endangered. The water level in the Rhine partly drops below the driving level. Conversely, the water levels rise so much that the height of the bridges becomes a restriction for ship navigation. The strong warming in the Alpine region and the retreat of glaciers and permafrost leads to increased rockfall. Transalpine transport and energy suppliers may be severely affected by this. In addition, the analysis revealed a pronounced weakness in securing food imports in this climate change scenario. This highlights the importance of domestic food production and emergency stocks—but they aren’t resilient to an unlimited degree either.

Shoring up countries’ resilience

By assessing the potential impact of crises and disruptions on each of the major factors or dimensions of a country’s economy, the country can work to shore up its overall resilience through targeted effort and investments. And some kinds of crises or disruptions are easier to prepare for. For example, our analysis shows that it could be difficult for Switzerland or another Western economy to become highly resilient to a global pandemic across all major economic dimensions, but geopolitical tensions are somewhat easier to prepare for.

Encouragingly, our study found that the Swiss economy (with a few exceptions) could be well-equipped to ensure at least basic public services and infrastructure during a crisis. However, the study also highlights that countries should take a broader approach to the issue of resilience, looking beyond economic factors like energy supply to better prepare for the diversity of the challenges that lie ahead.

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  1.  

    Stephane Hallegatte, Economic resilience: Definition and measurement, World Bank, May 1, 2014. 

     

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Cover image by: Adam Spannbauer 

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