‘GRAPPLING WITH THE AGE OF UNCERTAINTY’
PRESENTATION TO THE MODELLING ECONOMIC NEWS FOR SCIENTIFIC
ENQUIRY COLLOQUIUM
WITS BUSINESS SCHOOL / UJ SCHOOL OF ECONOMICS AND THE COLLEGE OF BUSINESS AND ECONOMICS
PROFESSOR RAYMOND PARSONS & MR LODEWALT VENTER
UNIVERSITY OF JOHANNESBURG
7 SEPTEMBER 2023
THE GLOBAL UNCERTAINTY SCENARIO.....(1)
‘If I had to identify a theme at the outset of the new decade would be increasing uncertainty’ - Kristalina Georgieva,
Managing Director of the IMF, addressing the Peterson Institute for International Economics, January 17, 2020
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back in his 1977 book ‘The Age of Uncertainty’ John Kenneth Galbraith already alerted humankind to the strong
emergence and existence of ‘uncertainty’ in the modern world economy
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Galbraith’s basic theme at the time was to seek to contrast the great certainties in economic thought in the 19th
century with the great uncertainty with which problems were faced in the 20th century
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he outlined how he saw this ‘globalisation of uncertainty’ being largely linked to an interdependent world reinforced by modern communications - where an event occurring in one part of the world has a high chance of
having an effect on another part of the world
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several major events have occurred since then to further elevate economic and political uncertainty globally as
well as in SA
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THE GLOBAL UNCERTAINTY SCENARIO…..(2)
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more recent causes of rising global uncertainty include the international financial crisis (2008), the Eurozone
sovereign debt crisis (2009), the Arab Spring (2012), the migration crisis, the Brexit referendum (2016 -), Donald
Trump’s US Presidency (2017-2020), rising tensions between the US and China (2019-) and the Russia-Ukraine
conflict (2022-)
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these kinds of developments have prompted researchers and analysts over recent decades to increasingly
examine the economic, social and political effects of uncertainty. A vast and growing literature has emerged
from the increasing academic and policy interest globally around the cause, effect, measurement and definition
of policy uncertainty
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there is now a ‘World Uncertainty Index’ (WUI) created by the IMF and Stanford University for 143 countries to
calibrate rising levels of policy uncertainty in the global economy, although levels of uncertainty, of course, do
differ from country to country
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the WUI has been consistently high since 2016, reaching a peak during the Covid-19 pandemic and seeing a
resurgence with the Russian invasion of Ukraine and the associated inflationary developments. Its authors see
few episodes over the past 60 years where the level of uncertainty compares close to those seen in the past
decade
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A REMINDER ABOUT RISK VS UNCERTAINTY
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risk is a situation in which, although we do not know the outcome of a given situation, we can accurately
calculate the odds
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uncertainty is where we cannot know all the information needed in order to set accurate odds in the first
place
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the more an event is subject to unforeseeable or unpredictable contingencies, the greater the uncertainty
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risk is insurable; uncertainty is not
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policy uncertainty is, therefore, a broad class of economic risk where the future path of official policy is
highly uncertain, raising risk premia for business and individuals
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UNPACKING POLICY UNCERTAINTY - AND WHAT BUSINESS AND
CONSUMERS NEED TO KNOW, IS:
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who will take the policy decisions?
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what economic policy action will decision-makers take, and when?
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economic effects of policy actions – past, present and future?
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level of coherence and coordination in policy?
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induced by policy inaction or failure to implement?
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related to national security matters and other policy matters not mainly economic in character, e.g., pending
elections?
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WHY DO WE WORRY ABOUT ECONOMIC UNCERTAINTY?.....(1)
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it has now become well-known that high uncertainty reduces the willingness of firms to hire and invest and
consumers to spend. Yet is unavoidably a rather amorphous concept, as it reflects uncertainty in the minds
of consumers, business executives and policymakers about future events that may or may not occur
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it is inevitably a broad but increasingly important notion, embracing macro-concepts like GDP growth and
micro-phenomena like the growth rate of firms - as well as ‘shocks’ like elections, wars and climate change
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the theory of ‘irreversible choice’ under uncertainty, first developed by Ben Bernanke, in 1983 (subsequently
US Fed Chairman), provided the basic theoretical framework for understanding cyclical fluctuations in
investment and for assessing the effects on investment in general
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these studies of the impact of elevated economic and policy uncertainty argue that - if investment decisions
are ‘irreversible’ and would be costly to reverse - firms adopt a ‘wait and see’ attitude, which is likely to
reduce the investment and growth outlook
WHY DO WE WORRY ABOUT ECONOMIC UNCERTAINTY?.....(2)
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a valid criticism of many economic theories of business and consumer behaviour is that they are usually set
against a background of ease and safety. As outlined earlier events have steadily disputed this artificial
sense of security, especially in emerging markets, with economic consequences
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policy uncertainty is, therefore, a broad class of economic risk (unlike normal business risk) where the
future path of official policy is highly uncertain, raising risk premia for business and individuals
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while there are obviously other factors that may explain the weak performance of private investment in a
particular set of socioeconomic circumstances, it is difficult to ignore the cumulative theoretical and
empirical research on the phenomena of intensified economic uncertainty
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Empirically, it shows that when policy uncertainty is strongly present in an economy, it can lower
investment, employment and consumption. Elevated policy uncertainty then has tangible potential
consequences for an economy
HOW DO WE CAPTURE ITS DEFINITION?
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in view of definitional challenges, it is not unusual to find researchers relying on different methods to
measure uncertainty. Some uncertainty ‘models’ are based on the volatility of key economic and financial
variables, whereas another common method is to include text-searching newspaper archives for references to
uncertainty.
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different academic and conceptual approaches to measuring levels of uncertainty exist but appear to deliver
similar results - the outcomes remain overwhelmingly convergent in assessing the growing importance and role
of uncertainty in an economy
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the basic challenge is to track uncertainty in a prompt manner - which requires a measure of overall
uncertainty in real time for different sources of economic and policy uncertainty. Models must therefore be
able to quickly respond to shifts linked to sudden ‘shocks or ‘surprises’ and captured at the level of business
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the literature has broadly converged on text-based measures of uncertainty, i.e., being forward-looking in
capturing ‘real time’ uncertainty - as perceived by businesspersons, economists and commentators when they
discuss the economic outlook
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CRAFTING A POLICY UNCERTAINTY INDEX (PUI) FOR SA.....(1)
The heightened role of policy uncertainty in assessing the SA economic situation was a recurring theme from:
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external bodies like the IMF, OECD, World Bank, and Credit Rating Agencies
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various economists
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business community
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government itself
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convergence of views on the impact of policy/political uncertainty
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‘The essential problem is that the talk and the action differ’
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CRAFTING A POLICY UNCERTAINTY INDEX (PUI) FOR SA.....(2)
Derived from international models, the quarterly PUI has three components:
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a news-based index using the frequency of references to policy-related economic uncertainty in leading SA
publications
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draws on expert opinion from a cohort of leading economists
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mobilise data from the BER survey of manufacturers who are asked whether the policy climate acts as a
constraint on doing business
These three elements then eventually compose the PUI, using 3Q2015 as the base of 50.
The net outcome is the balance between positive and negative factors in that quarter.
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CRAFTING A POLICY UNCERTAINTY INDEX (PUI) FOR SA.....(3)
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FIGURE 1: NWU Business School Policy Uncertainty Index
Source: NWU Business School PUIs (4Q2015 – 2Q2023)
UNPACKING SOME EMPIRICAL DATA.....(1)
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FIGURE 2: Policy uncertainty and investment
Source: Policy uncertainty, the economy and business
UNPACKING SOME EMPIRICAL DATA.....(2)
FIGURE 3: Policy uncertainty and investment cont.
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Sources: NWU Business School PUIs (4Q2015 – 1Q2023)
Stats SA via EasyData by Quantec
UNPACKING SOME EMPIRICAL DATA.....(3)
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FIGURE 4: Policy uncertainty and investment cont.
Sources: NWU Business School PUIs (4Q2015 – 1Q2023)
Stats SA via EasyData by Quantec
UNPACKING SOME EMPIRICAL DATA.....(4)
FIGURE 5: Value of announced projects and growth in fixed investment
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Source: Nedbank
UNPACKING SOME EMPIRICAL EVIDENCE....(5)
Stylised facts from a recent World Bank survey (2022) of business sales forecasts and uncertainty data in a
range of developing economies:
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firms reporting higher uncertainty made bigger forecasting errors
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suggests some countries may fail to develop and grow because their unpredictable business environment
encourages firms to ‘wait and see’ too much rather than to invest and improve their productivity
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there appears to be a negative relationship between uncertainty and GDP per capita in that employment weighted business uncertainty declined with GDP per capita
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generally, this research confirmed a robust relationship between economic development and the amount of
risk and unpredictability (i.e. uncertainty) that businesses perceive in their economic environment
CONCLUSION: IMPLICATIONS OF THE PUI EXPERIENCE…..(1)
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the recent emergence of policy uncertainty as a tangible element in economic performance - both globally
and in SA - fills a gap in the assessment of the policy environment and provides another analytical tool with
which to understand the policy environment
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global research suggests that uncertainty spikes are more synchronised in advanced economies than in
emerging markets and low-income economies
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it highlights the extent to which the universal element in the different proxies used to track levels of policy
uncertainty mobilises media reports and business responses in ‘real time’
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it has widened and deepened the analysis around the various drivers of uncertainty, as well as the economic
effects of policies in times of uncertainty
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the dataset can be explored to interrogate more specific policy avenues, such as the impact of differences
in uncertainty levels on foreign direct investment
CONCLUSION: SOME IMPLICATIONS OF THE PUI EXPERIENCE…..(2)
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a country’s policy environment can either offer the degree of predictability that minimises uncertainty for
business decision-makers, or it can instead operate in ways that elevate policy uncertainty
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although a robust relationship appears to have been established between policy uncertainty, investment
plans and economic activity, further research is possible on how firms may adopt defensive strategies to deal
with uncertainty.
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what empirical evidence suggests is that business can adjust to even weak policies, or it can work around
them. The impact of policy uncertainty is not a zero-sum game, and much, therefore, depends on the
perceived level of uncertainty by business
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open-ended, persistent and unpredictable policy stances nevertheless have a serious corrosive impact on
investment plans, especially irreversible ones
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in short, coping with uncertainty through offsetting economic behaviour, holding large cash reserves or
pursuing other compensating options may be an entirely rational response to the accepted reality of high
levels of policy uncertainty - whether globally or nationally
EASE OF REFERENCE:
https://www.brookings.edu/articles/measuring-business-uncertainty-in-developing-and-emerging-economies/
https://econ101.blog/home/policy-uncertainty-index/
https://www.nedbank.co.za/content/nedbank/desktop/gt/en/news/economic-news/research.html
https://sajems.org/index.php/sajems/article/view/4422/2576
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Thank You
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