Recap: Asia’s Covid-19 Challenge: Bracing for the Impact on Economic Development
The economic impact of Covid-19 on the global economy will be significant, particularly in Asia. Dr. Yasuyuki Sawada, chief economist of the Asian Development Bank (ADB), and Dr. Scott Morris, senior fellow at the Center for Global Development, joined the Asia Program on May 4, 2020 to assess how deep the downturn will be in the months ahead and how the region’s economies can recover once the health crisis has abated.
Dr. Sawada focused on four issues highlighted in the ADB’s latest Development Outlook report. Firstly, the ADB expects growth to fall to 2.2 percent in 2020 but bounce back to 6.2 percent in 2021 if the pandemic is successfully contained. Secondly, he pointed out that the economic downturn will be broad-based and affect the region's two largest economies—namely China and India. Thirdly, significant risks remain, and the projections are therefore susceptible to the effects of the pandemic. Finally, good government responses, including increased health spending and fiscal stimulus, could support growth.
The ADB's forecast assumes the pandemic will be contained by the end of this year and normal economic activity will return next year. However, the Bank anticipates five significant risks: the virus spreading to ADB developing member countries; a longer time to contain the pandemic; a larger economic impact on the global economy than currently expected; the possibility of additional financial turmoil and crises; and fundamental, long-term changes to the global economic landscape. Additionally, a retreat in globalization could prove detrimental to international economic relations.
Since ADB's initial assessment of the impact of the coronavirus on March 6th, there have been three significant changes. In March, most cases were concentrated in the People’s Republic of China, but it has now become a global pandemic. Additionally, the deployment of containment policies has changed and expanded with the adoption of community quarantine and travel bans. Lastly, the data for China that has emerged is worse than expected, and the first quarter numbers for the United States and European countries indicate a broader global economic downturn. As such, the negative impact of the pandemic is likely significantly higher than the ADB’s initial projections assumed, and the agency will be releasing revised estimates this summer to reflect those changes. Dr. Sawada now anticipates the global economy’s contraction to have doubled since the initial projections, but appropriate government responses such as increased health spending and direct interventions on income and revenue can soften the impact by approximately a third.
He argued that smarter lockdown strategies could avoid the trade-off between containment of the virus and the health of the economy, while using big data can help governments determine when and how to reopen the economy.
Dr. Sawada also discussed the trade-off between containment and economic activities, the pandemic’s impact on poverty, the likelihood of economic crises, the effectiveness of countermeasures, and the timing for economic reopening among factors to be considered moving forward. He argued that smarter lockdown strategies could avoid the trade-off between containment of the virus and the health of the economy, while using big data can help governments determine when and how to reopen the economy. He also urged governments and multilateral institutions to develop strategies to avoid additional economic crises.
Scott Morris reaffirmed Dr. Sawada's remarks and noted that forecasts remain difficult to make in these uncertain times. Dr. Morris highlighted a handful of risks facing the economies in Asia and the rest of the world. Firstly, emerging market countries displayed vulnerabilities, particularly on the debt side, even before the pandemic started. For example, Mongolia, Sri Lanka, and Pakistan all face significant external debt risks. Among low income countries, the Pacific countries, Afghanistan, and Laos remain burdened by high debt. It will be even harder for these countries to manage the economic recessions caused by the pandemic and deploy effective policy countermeasures. Dr. Morris also pointed out the possibility of poverty shocks in Asia and beyond. Recent data suggests that households in Bangladesh already experienced a 77 percent drop in income. The impact on trade also remains uncertain—in April, South Korea reported a 25 percent drop in trade on an annualized base.
Meanwhile, the flow of remittances has been hurt by the pandemic as well. Dr. Morris pointed out that Asia is more dependent on money sent by migrant workers back to their home countries than other regions. The economic downturn in major economies, including the United States, will have a severe impact on workers, especially low-waged workers who have to support their families at home. Moreover, the overall fiscal capacity of countries will be at risk. Large economies have the capacity to implement massive fiscal stimulus plans, but that is not an option for a large number of developing countries. Those countries will have to work with multilateral organizations like ADB to be prepared to step up and provide crucial support to their citizens.
It remains in question whether the major governments of the world will recognize the need for coordinated and mutually supportive actions or will throw up barriers and continue implementing protectionist policies that further constrain economic performance.
Lastly, there are risks to the various international approaches to resolving the crisis as governments may choose divergent policies to respond to the pandemic, coordinate with each other, and support multilateral organizations. There have been encouraging signals within the first round of responses in Asia, but some major governments have carried out protectionist or autarkic actions. It remains in question whether the major governments of the world will recognize the need for coordinated and mutually supportive actions or will throw up barriers and continue implementing protectionist policies that further constrain economic performance. Dr. Morris stressed that governments should manage national-level challenges in a way that is neither at the expense of other countries nor against the multilateral framework.
Dr. Morris also emphasized the important role multilateral development banks play in the course of the pandemic as they are critical actors and sources of finance for developing countries. Social safety nets are weak in many countries that are dominated by informal workforces or weak stimulus programs, and Dr. Morris argued that institutions and donor governments should grapple with how to quickly address those issues in real time as the crisis continues.
The views expressed are the author's alone, and do not represent the views of the U.S. Government or the Wilson Center. Copyright 2020, Asia Program. All rights reserved.
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The Asia Program promotes policy debate and intellectual discussions on U.S. interests in the Asia-Pacific as well as political, economic, security, and social issues relating to the world’s most populous and economically dynamic region. Read more