The personal touch denied by impersonal borders

Dr Eric Crampton
7 December, 2021

Distance was supposed to be dead. The first dot-com boom promised an end to distance’s tyranny. And technological substitutes for face-to-face communication have developed considerably since then.

The tyrant remains undefeated for a simple reason. Tech alternatives for business communication and interaction are not always good substitutes for meeting people in person. Instead, they are often complements to those interactions. Rather than replacing in-person meetings, they can make them more valuable.

Mistaking complements for substitutes can be costly when it comes to policy. But we will come back to policy.

Before Covid, agonizing over conference and business travel was commonplace. Universities seeking to reduce academics’ travel expenditures would ask whether conferences might be held online instead. Activists would point to the carbon cost of business travel. And fiscal hawks would highlight travel by Parliamentarians and officials.

Covid forced an end to most of it. Like it or not, meetings shifted online.

Something was lost in the process.

Last week, the National Bureau of Economic Research published work by Jennie Bai and Massimo Massa valuing the ‘soft’ information that is hard to share by Zoom, Skype or Teams.

Bai and Massa looked at stock market funds.

Before Covid, some funds were mainly driven by quantitative analysis. Their managers relied on spreadsheets and algorithms when making decisions. Whether a potential investment was next door or halfway across the country made relatively little difference.

Other funds relied more on soft information. Managers of those funds did not ignore the quantitative side but augmented it with local knowledge. Data from balance sheets matters. But you can also learn a lot by talking with people in and around the sector. Those funds’ investments focused on firms and sectors closer to home.

As Bai and Massa explain, both investment strategies can work well. If one type of investment outperforms the other, money will flow into the better-performing type of fund. That process continues until both strategies yield comparable returns.

They calculated the geographic preference of different investment funds, checking whether they tended to invest more than would be expected in businesses headquartered close to the fund management company.

And the geographic distance of a fund’s headquarters relative to the companies in which it invested showed no correlation with that fund’s returns – as predicted.

Until Covid hit.

Lockdowns in the United States were not as stringent as a New Zealand Level 4. But forty-four of fifty US states experienced some form of lockdown, and local counties imposed their own restrictions.

Bai and Massa tracked, month by month, whether the zip code where a mutual fund is headquartered experienced a lockdown.

They added cell phone data that tracked changes in individual mobility. If foot traffic reduced by at least 30%, that provided an additional indicator. In the absence of a government-mandated lockdown, simple prudence will tell people to stay at home when the Covid forecast looks risky.

Foot traffic to bars, restaurants, fitness centres and other places where soft information might be exchanged were of particular interest.

Putting it all together, they found that mutual funds that invested more heavily in nearby companies, pre-Covid, took a substantial hit.

Compared to a fund that held the average mix of investments by location, a fund whose investments were more distant from the fund’s headquarters saw substantially higher returns during lockdown.

Imagine a fund whose investments were, on average, closer to home. Compared to the average fund, that fund invested in companies headquartered one standard deviation closer to the fund’s headquarters.

Lockdown reduced that locally oriented fund’s return, relative to benchmark, by 0.29% per month of lockdown. Using reduced foot traffic as measure instead of government-imposed lockdowns, the more locally oriented fund’s return dropped by 0.42% per month, again compared to the benchmark.

If foot traffic around places like cafés and bars, restaurants, drinking places, fitness centres and bookstores dropped by at least 30%, funds with a local focus took a hit.

The kinds of soft information that those funds’ managers had relied on became far harder to get.

Every possible way of getting that information through Skype, Zoom or Teams would have been explored. Millions, if not billions, of dollars under management were at stake.

It just could not provide a substitute for face-to-face interactions.

The results should not be surprising. Economists have long thought informal ‘water cooler’ conversations important for economic performance. So, it is great to have hard data on a soft phenomenon. Every one of us who has had to justify in-person meetings, pre-Covid, knows the difference. There are things that can be conveyed at conference dinners, or over beer after the official meeting, that simply cannot be done any other way.

Zoom chats can be good for maintaining existing networks, for a while. But those connections erode. And it is harder to form new ones through a webcam and headset.

It is an important insight for understanding the full consequences of New Zealand’s border restrictions.

Border restrictions have been essential to the country’s pandemic response. Our initial lockdown eliminated Covid. Border controls prevented substantial new outbreaks for some sixteen months.

The government has announced that border easing is on the horizon, after what will have been about two years of Fortress New Zealand behind closed borders.

Even if the new Omicron variant does not waylay plans for reopening, the fortress mindset may be tough to break.

Immigration decisions seem designed to frustrate travel rather than mitigate risk. Families split by the border may have to wait another year.

And a looming immigration policy reset casts a surprisingly long shadow over the Wellington bureaus and the businesses who depend on their decisions.

Even primary schools’ ability to enrol full-fee paying international students may be affected. A Ministry of Education consultation document proposes rather sharp restrictions.

The Ministry worries that international primary and intermediate school students might not be paying their own way. The Ministry simultaneously, and incongruously, worries about inequities when schools in richer neighbourhoods seem more attractive to lucrative international students. They also warn that the 5,000 or so young international students, many of whom billet with Kiwi families, put undue pressure on housing markets.

It is not a sign of a bureaucracy that is considering reopening to the rest of the world and that has viewed border restrictions as a necessary evil during a global pandemic. It is instead a sign of a Wellington bureaucracy that views foreign travellers, migrants, students and investors with deep suspicion if not hostility.

The fortress mindset will need to change.

Connections forged and maintained through in person interactions are difficult to replace.

Today’s international student may be tomorrow’s link into an international trade network.

Making temporary work visas onerous deprives local businesses of the expertise that can only be shared face-to-face.

And international investors not already put off by Overseas Investment Office processes may be completely deterred if visa processing continues to be pushed out. Bai and Massa’s work showed, rather convincingly, just how important that face-to-face contact can be in assessing investment opportunities.

Distance’s tyranny worsened considerably these past twenty months. It should not last a second longer than necessary. If Omicron proves a more substantial challenge, border systems able to safely accommodate far greater numbers of travellers must be priority for 2022.

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