Beyond Vaccines: Asia’s Uneven Recovery, What does the future hold for Asia?

In the Asia Thinker Series (Beyond Vaccines), moderated by Associate Professor and Assistant Dean (Research) Alfred Wu at the Lee Kuan Yew School of Public Policy, Dr Park Cyn-Young, Director for Regional Cooperation and Integration, Economic Research and Regional Cooperation Department at the Asian Development Bank, Professor in Practice Bert Hofman, Director (East Asian Institute), and Associate Professor in Practice Terence Ho discuss the challenges, risks and opportunities and economic outlook in the post-vaccination phase.

 

Clockwise from Top left: Associate Professor Alfred Wu,  Dr Park Cyn-Young, Professor Bert Hofman, Associate Professor Terence Ho

Recovery: Challenging Times

While the vaccination rollout has been making progress with about 60% of ASEAN population, according to Dr Cyn-Young Park, Director for Regional Cooperation and Integration, Economic Research and Regional Cooperation Department at the Asian Development Bank, the region’s economic outlook is still tilted to the downside.

“The pandemic continues to present risks to the region, especially from the changes in the nature of the pandemic in the recent months. These continue to pose new challenges and perhaps even a threat to its overall rebound,” she added.But ripping the band-aid off quickly by hastening the vaccination rollout and re-opening may do a disfavour to many countries at this stage as well.

“Challenges such as prolonged COVID-19 with slower than expected vaccine rollout combined with the waning effectiveness of the vaccine, alongside the emergence of new variants, could hamper economic recovery as we have already seen in the past year.”

China’s recovery from COVID has been very fast according to Professor Bert Hofman at the LKYSPP (also a Director of East Asian Institute of NUS). In fact, it was the only large country in the world that showed positive growth in 2020. The recovery has been export and investment driven, but has been running out of steam lately, in part because of challenges in global supply hamper export growth, and in part because domestic consumption is still held back by China’s tight COVID controls.

China: A Change in the Making

China’s economic structure has been changing, he said, and that change may accelerate because of the country’s new economic strategy, which is affecting Asia and the rest of the world

He said that the Dual Circulation strategy—the core economic strategy of the 14th Five Year Plan—reinforces changes in regional and global supply chains.

 

In that strategy, China wants to rely more on domestic demand and onshore critical supply chains, but at the same time continue to open up for trade. China joining of RCEP demonstrates this.

 

China’s dependence on trade has come down quite dramatically from an imports-exports of goods and services from 60% of GDP in the mid-2000s to the current 30%. Also, the nature of its exports is changing, and it now consists more of intermediary goods—inputs into the manufacturing and exports in other countries. This is matched by China’s growing FDI in the region.

As international tensions with China grows, reducing the reliance on trade and choosing an internal source of circulation to manage the risks that come from possible global supply chain seems prudent.

“China’s application to the CPTPP suggests the authorities continue to pursue reforms. The “gold standard” trade agreement would require reforms in state enterprise, intellectual property rights, industrial policy, and subsidy policy.”

China’ appetite for these reforms, Prof Hofman adds, should become clear in the run-up the the 20th party congress of the Communist Party, which takes place by late 2022.

For this year, the rebound started very strongly especially export-, manufacture- and investment-driven, but it has now teetered because of the issues in the real estate and consumption that did not quite recover as strongly. One of the reasons for that is that COVID is still around. China, like other countries, still has to deal with renewed outbreaks which bring us back to control and stall on activities,” he said.

Risks: Hidden or Eventual

This is a point that Associate Professor in Practice Terence Ho at the LKYSPP echoes. He stressed that a key factor affecting Asia’s recovery is the trajectory of the disease itself, with uncertainty posed by new strains such as Delta plus.

Building on Dr Park’s point on geopolitical tensions, Assoc Prof Ho highlighted the challenges from trade rivalry as well as structural adaptation to climate change.

“The full costs of climate mitigation and adaptation have yet to be factored in.”

He says there is also one other significant challenge ahead for Asia.

“Inflation is a growing concern. Firstly, the huge fiscal and monetary stimulus sent asset prices skyrocketing from mid-2020 - whether in property or equities. This has fuelled wealth inequality in many parts of the world, including Asia. With recovery in demand, there is now general price inflation precipitated by supply disruptions such as factory closures, labour shortages, energy blackouts and bottlenecks at ports. The prices of freight, semiconductor chips and energy have shot up, in turn pushing up the cost of finished goods as well.”

This poses a dilemma for monetary policy. “Is the inflation spike transient or likely to persist? There is a risk that tighter monetary policy tightening could derail economic recovery, but standing pat could allow inflationary expectations to become entrenched and force a sharper tightening down the road. Observers have already flagged the risks of stagflation.”

He highlights that there is another pressing issue many countries are contending with.

“Not just in Asia but around the world, the trade-off between lives and livelihoods will be sharper as economies open up and pivot from a zero-COVID strategy versus living with endemic COVID. Certainly, this has been the experience in Singapore,” added Assoc Prof Ho.

Inequality, he says, has also widened across and within countries.

“Within countries, COVID-19 has had an uneven economic impact across sectors and occupations. Lower-income workers have suffered disproportionate job and income loss, while wealth inequality has increased along with asset prices. Some have described this as a K-shaped recovery. Greater use of home-based learning may also disadvantage lower-income children and have implications on social mobility in the medium to long term.”

While many countries have strengthened social protection measures, there are questions on whether these are sustainable. He explained, “Fiscal deficits have grown with the crisis dragging on. Tighter monetary conditions going forward may constrain recovery and make debt servicing more expensive.”

“In this interconnected world, how the rest of the world fares will certainly impact Asia’s recovery,” he added.

Globalisation: A Stopgap?

To this, Dr Park says there are possible lifelines for Asia.

“International cooperation remains critical to contain the spread of the disease and to maintain recovery. Especially cooperation on disease control, research and production and distribution of vaccine,” says Dr Park.

She opined that with a re-organisation of global value chains, regional value will likely contribute more to the economic growth and recovery.

“Therefore, we need to have greater efforts to strengthen the connectivity as well as intensify the trade facilitation to maximise the dynamics of the regional value chain to recover from the pandemic induced disruptions from the global supply chains. Regional cooperation is also needed to mobilise finance for a more resilient post-pandemic future. Policymakers must refocus on the continued challenges over the medium- to long term. Such as the debt sustainability, rising inequality, frequent natural hazards and extreme weather events linked to climate change.”

An important imperative that all three agrees.

Dr Park also reasoned how this has been the slowest growth in six decades expected for developing Asian countries.

“The pandemic is also likely to slow global potential growth over the long term. Severe epidemics and recession tend to have lingering impact on labour productivity due to disability, health issues and education outcomes”

Digital: A silver lining?

But out of the pandemic conundrum that plagues Asia, Dr Park noted that it has brought about substantial digital opportunities.

“Shifting from offline to online and the continual opportunities have demonstrated that social normality can be achieved online,” she related.

These new business opportunities and economic value through digital platforms are a boon for the digital economy, according to Dr Park.

On the other hand, she also warned that without better safeguards, it could present blind spots as well to Asia’s re-opening momentum.“More investments in digital connectivity, human capital and digital skills particularly strengthening digital literacy and awareness are needed to unlock digital potential. And we have to prepare the rules and regulations of a framework that can nurture a digital ecosystem so that it provides support for digital businesses to thrive and so as to maximise the potential gains from the digital economy.”

Adding on, Prof Hofman says that adjustments on monetary policies will be necessary at some point. Between high debt and the spirit of productivity and innovation where this has been lacklustre for over a decade. And structurally, the problem would lie in demand rather than supply.

“How that can trickle through the global economy is that it is pretty hard to assess. There is a history of high inflation but there is sufficient mindset to keep an eye on that.”

To this, chairperson Associate Professor Alfred Wu at LKYSPP noted that digital infrastructure in particular in developing countries instead of developed countries holds a pivotal role.

Assoc Prof Ho says that policymakers in Singapore and across the world have their work cut out for them

“I see the challenges as how we can make economies and societies more sustainable, resilient and inclusive… Meeting these challenges, will depend on the quality of governance within countries, as well as effective regional and multilateral cooperation.”