What is Contagion?
Covid 19 is an example of extreme contagion. It is the spread of viral diseases from one person to another that then engulfs the world. The harm to the world has been immense.
Contagion, however, is not limited to illnesses and diseases. In 2008 the US economy and financial markets imploded due to excesses in the US housing market. OK, you might say. That’s in the US; why should we bother? Why indeed did we in India also suffer terribly due to financial problems thousands of kilometers away in another country? The one-word answer is contagion. Commercial and monetary distress spread from the US to the rest of the world in a manner just like a virus.
The spread of financial viruses also occurs domestically. In 2018 when IL&FS failed to repay its debts, the entire Indian financial system was also affected.
To understand the risks of international and domestic financial contagion in a deeper manner, we need to explore its causes and personal and economic interdependence in more detail.
Due to people and companies’ interconnectedness, what happens in one country or with one institution affects other countries or institutions. For example, if the US economy slows down, less is spent by consumers on textiles and by US corporates on IT. This then affects Indian exporters such as Arvind or TCS. If Arvind and TCS suffer, so does their hiring and bonus payments and in extreme cases, they may also result in layoffs. In this manner, the common Indian is affected. There is a network of connections and what happens to one part of this network affects all other parts. Problems “spillover” from one company to all other connected companies.
This Interdependence of people and businesses in all parts of the world is not a new feature. Mumbai has a beautiful Rajabai Clock Tower in the Fort area, near the High Court and the old University buildings. Construction of the clock tower was completed in 1878. A large amount of money required for its construction was donated by a broker and cotton merchant, Premchand Roychand, and the tower was named after his mother, Rajabai.
During the American Civil War (1861 – 1865) Britain sourced its cotton from India at a high premium. This allowed many cotton merchants and investors to make massive fortunes and spilled over into speculative excess in Indian stocks and companies. Premchand made a fortune and also initiated new real estate schemes (mostly related to Mumbai’s Backbay reclamation area). Premchand is often known as the original “Big Bull” of Indian stock markets.
Premchand became the hero of many speculators. Dinshaw Edulji Wacha, a contemporary of Premchand, wrote that “Scores after scores of men would be seen in turn going in and out of the precincts of Premchand’s bungalow (Premodayan). He was never said to be in bed till past midnight, and for each [visitor] he always had a word of comfort and encouragement.”
When the American Civil War came to an end in 1865, Premchand and many other big traders were found to have substantial outstanding positions in cotton. Britain switched back to getting supplies from the US. Cotton prices collapsed, and Premchand and many others went bankrupt as they owed millions to banks and financial institutions. Fortunately, Premchand eventually recovered. However, the lesson of the risks of contagion was clear even in the 1860s, and we should not forget this.
There are a few other aspects of Premchand we should also always remember. Despite his misfortune, Premchand kept his word and repaid every debt he had taken and honored every philanthropic commitment he had earlier made. Thus, the Rajabai Clock Tower came into existence. Premchand was also a great believer in the education of girls and donated to many girls’ schools, all of which are still flourishing.
Interdependence is a fundamental law of nature
While the above story is concerned with the downsides of Interdependence, it can also affect us positively. When other countries and economies do well, so do we. And when we do well, we contribute positively to the health of the world.
On a personal level, interdependence is not just to be accepted but cherished. The great American civil rights leader, Dr. Martin Luther King, said, “Whatever affects one directly, affects all indirectly. I can never be what I ought to be until you are what you ought to be. This is the interrelated structure of reality.”
We should also keep in mind the words of the Dalai Lama who said, “Interdependence is a fundamental law of nature. Even tiny insects survive by mutual cooperation based on an innate recognition of their interconnectedness. It is because our own human existence is so dependent on the help of others that our need for love lies at the very foundation of our existence. Therefore, we need a genuine sense of responsibility and a sincere concern for the welfare of others.”
© Kaikhushru Taraporevala