The COVID-19 pandemic dragged the global economy into a near shutdown, and into complete disarray.
While Asian economies were also hit hard, they are expected to show stronger resilience to the impacts of the pandemic than economies in most other regions. It stands a better chance at economic recovery than others on account of growth in China, low oil prices and strong global tech demand. There is also scope to attract capital inflows as the global hunt for yield gains momentum.
That said, the Asian Development Bank, in its latest outlook, expects Developing Asia to see a contraction of 0.7% – a first in 60 years, on account of the pandemic. But select Asian economies such as China, Taiwan, Bangladesh and Vietnam were forecast to remain outliers in this outlook. These countries were expected to register relatively strong growth in 2020. The region, as a whole, will show some recovery in 2021, but if the pandemic continues, and there are recurrent waves, this growth outlook could be further hit.
Within Asia, the ASEAN region has continued to perform reasonably well. The fastest growing sub-region in ASEAN is the CLMV bloc, as it was relatively more successful than other regions in containing the virus outbreak. It is on track to outpace growth in the five larger ASEAN economies, but this growth will depend on an uptick in trade, tourism and investments.
Vietnam, in particular, showed a remarkable turnaround after restrictions around the pandemic were lifted in late April in the country. Overall, the economy was on track to record 2.3% real growth in 2020 before picking up to 7.8% in 2021. While manufacturing, retail sales and domestic tourism saw an uptick in the country, small and medium enterprises (SMEs) were severely affected. An estimated 60% of Vietnam’s SMEs lost half of their revenues owing to the economic impacts of the pandemic.
Similar stories have played out in economy after economy across the region, as SMEs have borne the brunt of the economic impact of the pandemic, given the paucity of resources at their disposal, and the difficulties they face in accessing credit.
Thematically speaking, in a post-pandemic world, the role of governments is expected to expand. The pandemic has demonstrated in no uncertain terms that across the region, people are reliant on their governments as the providers of last resort. The pandemic has ensured that in the years to come, governments will have a greater role to play in the lives of their citizens.
And while governments assume a wider role, they could transfer a share of risks over to insurance companies, especially at the crossroad of insurance services, technology and COVID-19.
One of the other themes that played out on Unravel was that of socio-economic implications that Asia will need to cope with. Poorer economies have been stretched to their limits. They typically have insufficient healthcare infrastructure, and do not have the resources to quickly prepare for the surge in COVID cases. Compounding matters is the economic impact of the pandemic, which means government revenues have taken a further hit, making the task of investing in the provision and delivery of healthcare an even bigger challenge. This could result in a lost decade for many poor economies. South Asia stands to be the worst affected, and a generation’s worth of efforts on poverty reduction in this sub-region could potentially be lost due to COVID-19.
The global retreat from globalisation has provided a great opportunity for ASEAN by strengthening intra-regional relations based on its centrality and open regionalism. As the pandemic intensified, the need to have a regional and international response to it was made abundantly clear. ASEAN economies and leaders led from the front in this respect, vowing to keep supply chains open and uninterrupted.
While Brexit was a major setback for the European project, the signing of the Regional Comprehensive Economic Partnership (RCEP) on 15 November 2020 signalled a step towards greater economic collaboration, and demonstrated the region’s commitment to lowering barriers to trade.
The Asian mega trade pact made it abundantly clear that the region’s economies will continue to collaborate. The RCEP accounts for around 30% of the world’s GDP and 26% of its trade, and it is estimated to add $209 billion to global GDP and $500 billion to global trade by 2030. In addition to its obvious economic benefits, it clearly underscores Asia’s strong commitment towards an open, inclusive and rules-based trade and investment regime.
India’s withdrawal from the RCEP was a dampener, but the doors have not been shut on it yet. Pressure from domestic constituents has resulted in India choosing to sit out of the RCEP for the moment, but it is not in the best interests of the Indian consumer. In the long run, it is also not perhaps in the best interests of Indian manufacturing competitiveness on the global arena, experts argued on these pages. The trade pact would have eventually resulted in Indian manufacturers having access to larger markets, increased competition (which would boost productivity) and greater foreign direct investment (which would bring in new skills and technology).
In fact, India’s protectionist measures are expected to hit domestic consumers hard. The country’s spat in June 2020 with China cast India’s growing economic nationalism into the spotlight. Its adoption of an inward stance came at a time when it should have been looking out, which could damage the country’s long term economic prospects.
Moreover, India hasn’t benefited from manufacturing activity shifting out of China, as was widely expected, at least in India. In fact, most businesses that moved manufacturing operations out from China, shifted to other economies – predominantly Vietnam. India will need to quickly address the numerous problems it faces by letting go of its protectionist stance that many in political and business circles seem to endorse.
The Chinese government, meanwhile, acknowledged the need to shift to a more sustainable growth model. Its new five-year plan calls for a continued focus on sustainable growth and a push towards greater technological self-reliance. The manufacturing behemoth is prioritising “dual circulation” – meaning a commitment to continue to reform and open up amid harsher external conditions.
The pandemic has demanded an extraordinary economic response, and by some accounts, Asian regulators have heeded that call. For example, going forward, we are likely to see the introduction of more radical policy responses – such as the blurring of lines between monetary and fiscal policies, with a Keynesian-style fiscal expansion being employed alongside unconventional monetary policy.
2021 will see Asian economies pick themselves up and drive global growth once again, but from a particularly low base. How well the economies eventually bounce back will be dependent both on policy response to the pandemic, and most importantly, how the spread of the virus plays out over the course of the Northern Hemisphere winter.
We can only have our fingers crossed, and our masks on.