The Black Swan event in India – Boon or Bane?

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Is there an emergence of the Black Swan event in India? In the latest Reserve Bank of India bulletin, an article titled “Capital Flows at Risk: India’s Experience” called for maintaining enough liquid reserves to weather the event known as the Black Swan event.

This report is authored by Reserve Bank of India (RBI) Deputy Governor Michael Debabrata Patra along with Harendra Behera and Silu Muduli. The article suggests that India could experience a series of capital outflows of up to Rs 7,80,000 crore, which could lead to significant global risk.

A Black Swan event is an event that was unexpected and unprecedented at the time it occurred. In layman’s terms, it’s something that has to happen. Sometimes settings such as time, place, location, etc. may differ, but the event may likely have occurred in the past.

How did the term black swan metaphor emerge?

There was a belief in Western society that all swans were white. However, in 1697, Willem de Vlamingh, a Dutch explorer discovered a black swan. This incident was very unexpected and new to everyone and since then the word ‘Black Swan’ started to be used as a metaphor for all these events.

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Black Swan Theory of Events

Nassim Nicholas Taleb, 2001, presented the theories around the Black Swan event. According to Taleb, the “black swan theory” refers only to unexpected events and their dominant role in history, which have significant magnitude and consequences. These incidents collectively play a much larger role than regular events.

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Later in 2007, his book, “The Black Swan: The Impact of the Highly Improbable”, made the theory well known. This book focuses on the development of such systems and methods that will help to cope with events by resisting their effects on society.

Taleb listed three elements the event must have to be known as the Black Swan event. Each Black Swan Event must:

i) Have the ability to expose drastic and far-reaching consequences

(ii) be unpredictable and unexpected, and

iii) Usually accompanied by hindsight bias, meaning that once the event has passed, many people think the event was predictable. It is only because they are now aware of the event and the probable results.

Black Swan Event Examples

1) Fall of the Soviet Union, 1991– On January 1, 1991, the Soviet Union was the largest country in the world, covering nearly one-sixth of the Earth’s land surface. But within a year, the greatest country in the world had ceased to exist.

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These are the reasons behind it:

i) The political reason– On March 11, 1985, Mikhail Gorbachev was appointed General Secretary of the Communist Party of the Soviet Union (CPSU). He introduced the policies of meaning glasnost, openness to foster dialogue, and perestroika meaning restructuring, which introduced quasi-free market policies in government-run industries.

But this had an opposite effect, glasnost opened the barriers to criticism of the entire Soviet functioning. As a result, the government lost control of both the media and the public sphere, and democratic reform movements gained ground throughout the Soviet Union.

By the end of 1989, Hungary had dismantled its border with Austria, Solidarity came to power in Poland, the Baltic States began to take decisive steps towards independence, the Berlin Wall had wobbled and the curtain of iron had collapsed.

ii) The economic reason– During the 1990s, the Soviet Union’s economy was the second largest in the world, but access to basic consumer goods remained a problem.

It was also a time when the Soviet Union’s black market economy accounted for more than ten percent of the country’s GDP. Economic stagnation has severely affected the country with falling oil prices. Inflation has hit the country hard.

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iii) Military reason– Defense spending has always been high in the country. Even when the country’s economy lagged, the military was well funded.

Involvement in Afghanistan was another main factor in the break-up of the USSR Until the government controlled the press, the effects of the war remained muted, but with the introduction of glasnost, protests began to take place across the country.

iv) Nuclear explosion– On April 26, 1986, the reactor of unit 4 of the Chernobyl power plant (currently in Ukraine) exploded. The amount of radioactive impact was 400 times greater than the explosion of the atomic bomb in Hiroshima. According to Gorbachev, Chernobyl may have been the real cause of the collapse of the Soviet Union.

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2) Terrorist attacks of September 11, 2001– In 2001, 19 militants associated with al-Qaeda hijacked airlines and coordinated four suicide bombings that destroyed the World Trade Center. It is the deadliest terrorist attack in American history.

About 2,700 people were killed in New York, 40 in Pennsylvania and nearly 184 at the Pentagon. More than 400 police officers and firefighters were martyred and the 19 terrorists died.

The first hijacked plane crashed into the North Tower of the World Trade Center in New York, and the second plane quickly followed 19 minutes later and crashed into the Center’s South Tower. Now everyone knew America was under attack.

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The third plane crashed just outside Pentagon City and the last in the Pennsylvania countryside. This loss left a huge void in people’s hearts. In response to this, in September 2001, President Gorge B Bush announced a $25 million bounty for information leading to the murder or capture of Osama bin Laden.

U.S. intelligence eventually located him in Pakistan, and on May 2, 2011, on orders from President Barack Obama, the U.S. military shot and killed Obama.

3) Global financial crisis, 2008– In 2008, the US real estate market collapsed, leading to a severe global economic crisis. It started in 2006 when house prices started falling for the first time after several decades.

At first, real estate agents were happy with this situation, but borrowers were not repaying loans to banks. In 2007, banks started panicking about losses, and to control this they stopped lending to each other.

This led to a drop in demand for goods and services and as a result, developed countries were badly affected.

4) Terrorist attacks of 11/26, 2008– It was an unexpected event for the whole country when a series of terrorist attacks took place and lasted almost four days in Mumbai, India.

Terrorists attacked several places in Mumbai, including 2 luxury hotels, a Jewish center, a train station, a restaurant and a hospital. They killed about 170 people, Indians and foreigners, and about 300 people were injured.

The burning walls and domes of the Taj hotel remained ablaze for two days and three nights. On November 28, 2011, all venues were secured by Mumbai police and security forces except for the Taj hotel. The following day, the National Security Guards (NSG) conducted Operation Black Tornado to eliminate all remaining terrorists at the hotel and eventually ended the attacks.

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All of these events were unexpected and unprecedented. These incidents had a huge negative impact on the world and thus became known as the Black Swan event.

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