The pace of Asia’s growth is likely to reach a historic low in over five decades of successful economic development and slow to a standstill – reflecting the economic hit from the Covid-19 pandemic.
This is the bleak forecast of the International Monetary Fund’s (IMF) April World Economic Outlook Report 2020, which expects that growth in Emerging and Developing Asia (hereafter Asia) could decline from 5.5% to 1.0% between 2019 and 2020, projecting a sharp ‘V-shaped’ recovery up to 8.5% in 2021.
Covid-19 recovery in Asia
The globalisation of the world economy and the advent of global travel have enabled the infection to rapidly transmit across Asia. It has also triggered an economic shock which has seen a slowdown in Chinese growth; disruptions to China-centered global supply chains in South Korea, Malaysia and Viet Nam; capital outflows from stock markets in both Southeast and South Asia; and falling remittances and tourism receipts in India, Pakistan, Sri Lanka and the Maldives. Moreover, large losses to jobs and livelihoods are occurring throughout the region.
Whether or not the IMF is right about Asia’s growth standstill in 2020 gives rise to two interesting issues.
1. A ‘V-shaped’ versus ‘L-shaped’ scenario
The IMF has unparalleled access to macroeconomic data through its representative offices in Asia, yet it is still difficult to assess the full economic impact of Covid-19 on the region. Monthly or even quarterly economic data is lacking for many Asian economies, and macroeconomic forecasting models are not geared up to analyse the disruption from the pandemic. Moreover, the IMF’s rather positive bounce back scenario for 2021 may reflect country offices needing to make somewhat optimistic country forecasts to ensure some debt sustainability. A sharp recovery depends on having fiscal room and business being able to take part.
In order to predict significant changes in economic activity in the Covid-19 context, I have been updating projections made in a 2018 ODI study which I co-authored on the medium-term outlook for Asia’s economic growth and the prospects for middle-income countries using leading indicators. This exercise has led me to suggest an alternative scenario to the IMF’s V-shaped Asian recovery given the depth of the economic downturn linked to the effectiveness in containing Covid-19 – also known as an ‘L-shaped’ trajectory.
An L-shaped scenario premises a long outbreak and a prolonged economic impact on Asia. In this scenario, Covid-19 continues to spread rapidly throughout the region; containment measures are only partially successful; new mutations of the virus could bring a second wave; and vaccine development takes longer than expected.
Moreover, in this trajectory, Asia’s growth could fall to 1–2% in 2020 and remain sluggish in 2021. This scenario is worse than the 1997 Asian financial crisis and the 2008-2009 global financial crisis, when Asian growth dropped to 2.8% and 7%, respectively. Meanwhile, global growth could slip to -1.0% to 0.5% in 2020. Combined, these predictions would constitute a lengthy economic recession in Asia.
But given the fast-moving pace of the pandemic, I argue that an L-shaped recovery scenario for Asia is more likely than the IMF’s V-shaped scenario.
Several factors facilitated Asia’s relative resilience during the global financial crisis: having a significant amount of Chinese and Japanese savings; restructured banks; a strong manufacturing capability; a youthful workforce in South Asia in particular; and a large middle-class of Asian consumers. These factors could in turn act in concert to boost Asia’s economic growth in the latter part of 2020.
Recovery, as previous crises facing Asia have shown, is likely to originate in East Asia, particularly China, South Korea and Taiwan. However, weak demand for Asian goods in Europe and the United States, rising protectionism globally and lengthy restructuring in supply chains could constrain Asia’s growth prospects in 2021.
2. The IMF’s recommendations
The IMF’s policy prescription – a combination of loosening monetary policy, flexibility in financial regulations, coordinated fiscal stimulus and increased health spending – seems insufficient to encourage growth for the benefit of those living in poverty in Asia. Clearly, mounting effective fiscal and monetary stimulus packages are necessary to offset the economic damage from Covid-19.
Richer countries like Malaysia and Thailand, for example, are planning to implement large stimulus packages equivalent to 16% of their GDP (subscription required). Southeast Asian countries such as these spent two decades after the Asian financial crisis building up their foreign reserves to deal with this type of external shock.
But poorer countries such as Pakistan and Sri Lanka – with debt to GDP ratios in excess of 80% – have limited fiscal space and foreign exchange buffers to follow suit. Instead, they will need to stabilise their macroeconomies through new IMF programmes, negotiate a delay in debt payments to bilateral and multilateral lenders, higher taxes and better revenue administration.
Improving over-stretched health systems in South Asia is equally important. Decades of under-investment in public health means a shortage of doctors, medicine and hospital beds to handle the Covid-19 pandemic. South Asia should target a gradual increase in public health spending to around 4% of GDP (which is about a 1% increase from today) as well as telemedicine. Furthermore, there is a need for basic income support schemes and emergency food supplies for people living in poverty who have been crippled by the economic downturn and prolonged lockdowns.
After addressing the immediate pandemic threat, South Asian countries should resist the temptation to stop at stabilisation and undertake pro-poor reforms to boost growth. Such reforms should address the complex issues of food security, targeted social safety nets, women’s empowerment, and small businesses. At the same time, the investment climate needs further improvement by reducing the bureaucratic barriers affecting businesses, strengthening anti-corruption measures and promoting market access through trade agreements.
Only time will tell whether Asia will see a V-shaped or L-shaped growth pattern after Covid-19. Putting in place an effective mixture of policy responses will help deal with the pandemic and build momentum for pro-poor growth in the future. The IMF should work with major Asian countries and other development partners to ensure success.