Toward A Robust Economic Recovery From COVID-19 In Asia And The Pacific
The coronavirus disease (COVID-19) pandemic has been a truly global shock to public health, causing one of the most severe global economic downturns since the Great Depression of the 1930s. Against this context, the 2020 ADBI Annual Conference brought together leading academics, think tank researchers, and policy makers to discuss the impacts of COVID-19 and its policy implications, with a focus on Asia and the Pacific. In the opening remarks, ADBI Dean Tetsushi Sonobe stressed the uncertainty ahead regarding the duration of the health threat posed by the pandemic, and that resolving this threat and harnessing economic recovery will depend to a large extent on how the international community responds. Keynote speeches focused on the policy priorities and longer-term implications for households and firms. ADB President Masatsugu Asakawa stressed the vulnerability of poor households and micro, small, and medium-sized enterprises (MSMEs) with “few resources to cushion the blow due to weak social safety nets, lower levels of financial access, and lack of health coverage.” Raghuram Rajan, Professor of Finance at the University of Chicago’s Booth School of Business, highlighted that corporations need to use the duration of the pandemic to focus on structural and solvency issues rather than on shorter-term liquidity concerns. He emphasized effective repair and reallocation “so that the recovery is stronger than it might otherwise be but also sustained over a longer period and is not affected by significant debt overhang and weakness in growth.” Drawing on these keynote speeches and in conjunction with discussions in the paper sessions and policy panels during the conference, the following key messages emerged.
Economic output in Asia and the Pacific, and globally, has contracted sharply during 2020 due to COVID-19, and some permanent output losses are likely, with the trajectory of gross domestic product (GDP) now on a lower path compared to the pre-pandemic era. While emerging Asian economies overall have experienced GDP contractions due to COVID-19 that are similar to the global average, East Asian economies are expected to have suffered somewhat less due to aggressive testing and contact tracing, which have helped to contain domestic outbreaks, as well as the avoidance of strict lockdowns. Larger initial output losses due to COVID-19 seem to be related to lower pre-pandemic GDP per capita, stricter lockdowns, higher deaths per capita, higher dependency on tourism, higher financial market liberalization, higher pre-crisis output growth, and more democratic regimes. For poor countries, lower economic resilience to the pandemic may be related to the higher economic costs of containment measures and the lower effectiveness of fiscal and monetary policy support packages.
COVID-19 has had disproportionately negative effects on households and MSMEs, particularly in poor and vulnerable countries. Lower employment and incomes have increased households’ financial distress. Firms have been directly affected on the supply side due to lower productivity and impaired supply chains and also on the demand side from reduced consumption related to lockdown restrictions. Service sectors relying on tourism have also been heavily affected by the pandemic, such as those in the Pacific island countries. For vulnerable households, social security protection needs to be enhanced during the pandemic to limit the effects of unemployment. Temporary social protection measures should also extend to vulnerable migrant workers who have may have experienced financial hardship due to the decline in remittances caused by the pandemic.
Support for MSMEs needs to be appropriately targeted to enable an effective reallocation of resources aimed at safeguarding and enhancing long-term corporate health. At the onset of the pandemic, support to firms was untargeted. Given the prevailing scarcity of resources, however, support to MSMEs at the current juncture should be directed toward those that are economically viable. This can take the form of easing access to financing, debt restructuring, equity infusions by the government, and subsidized credit/guarantees. Such a course of action would enable the most productive use of resources, while corporate repair should also aim to build synergies with the broader economic recovery agenda that centers on green investment and digitalization.
Digital transformation in the economy has accelerated due to COVID-19. The structural shift to digitalization has been ongoing for the past decade or so, particularly in Asia and the Pacific in the area of digital payments systems. Automation and the use of robots in manual employment has been brought more to the fore due to the pandemic. Although automation both displaces and creates jobs, there is a danger that accelerated technological change would increase income inequality between high- and low-skilled workers, with low-skilled workers in labor-intensive sectors experiencing lower relative wages and even unemployment. It is vital for policy makers to tackle the digital divide through appropriate investment in digital education and training so that lower-skilled and lower-educated workers are not left behind. Public investment in ICT infrastructure is also a key policy consideration in this context.
Economic recovery from the pandemic requires a comprehensive public health intervention that will support testing, contact tracing, and the quarantine of infected people, in conjunction with the rapid deployment of a safe and effective vaccine by mid-2021. While the pre-pandemic fiscal prudence of Asia and the Pacific has created fiscal space, the unprecedented fiscal stimulus packages introduced due to the pandemic may lead to potentially unsustainable sovereign debt profiles. Fiscal reforms, particularly on tax, as well as public debt restructuring may be necessary. National authorities should also be wary of the financial stability risks posed by a possible buildup of nonperforming loans and corporate debt, particularly foreign currency denominated debt.
The return to the new normal should be underpinned by green investment and a greener recovery, aimed at enhancing longer-term economic sustainability and resilience. One of the lessons from the recovery of Asia and the Pacific from the global financial crisis in 2008 was that while the macroeconomic policy response helped to stimulate growth, it came at the expense of rising inequality and increased vulnerability to climate change risks. The COVID-19 macroeconomic policy response needs to place the United Nations’ Sustainable Development Goals as the focal point, whereby economic growth objectives can be achieved in a sustainable, inclusive, and balanced manner.
Regional and international coordination is vital for sustainable economic repair and recovery. This is a cornerstone in supporting overall economic recovery on issues related to public debt restructuring, including relief for vulnerable and poor countries, and the repair of global supply chains. In addition, however, greater efforts in cross-country coordination and cooperation are needed for the development of vaccines and the production of medical equipment at the global level, as well as for preventative mechanisms going forward related to cooperative approaches on surveillance and early warning systems for other infectious diseases and viruses.
To see more about the conference, the video recordings and presentation materials of speakers can be found here.