The Sydney Opera House resumed the live performances and the city of Melbourne recently hosted the Australian Open tennis tournament with fans (mostly) in attendance. Japan is back to planning for the delayed 2020 Summer Olympics, while China is focusing on the 2022 Beijing Winter Games. Having first been hit by COVID-19, Asia is also resets first. On the first anniversary of the pandemic, is the region back to good health?
The best answer is that it’s too early to know for sure. The pandemic has exacerbated existing long-term problems: slowing productivity growth, increasing indebtedness, aging populations, increasing inequalities and managing climate change. A new IMF staff document examines how the region can overcome these multiple challenges.
If past experience is any guide, this pandemic will have lasting effects. A glance past recessions in advanced economies reveals that, on average, five years after the onset of a recession, output is still almost 5 percent below its pre-crisis trend and is unlikely to ever catch up.
The COVID-19 pandemic has been a perfect storm, destroying jobs, exacerbating poverty and inequality and creating a problem of public and private debt, especially for countries and businesses already previously in fragile financial situations. This unprecedented economic disruption has the potential to leave lasting scars for years to come, resulting from the persistent decline in capital stock, employment and productivity.
Asian labor markets have suffered, with soaring unemployment, falling participation rates and job losses concentrated in low-wage industries and among women and youth. The poorest and most vulnerable have been disproportionately affected, revealing serious gaps in social protection and exacerbating already high inequalities in advanced and emerging countries in Asia.
Public and private debt hangover
In the aftermath of the pandemic, many countries will face a high public and private debt burden – perhaps too much to handle for some. Sovereign debt is a problem in small states. Tackling this problem will require more focus on revenue mobilization, public finances and debt management, with support from multilateral partners and debt relief that will provide some breathing space.
In large emerging markets, the main problem could be record private debt. More and more businesses are not generating enough income to pay off their debts. Government support helps keep them afloat, but a big wave of business bankruptcies could ensue when that support is withdrawn and without further intervention. This vulnerability can be particularly acute in Asia, if conditions in global financial markets tighten during the recovery process, causing capital outflows and additional pressure on the corporate sector.
To address this vulnerability, countries should strengthen private debt resolution frameworks, ensure the availability of adequate financing and facilitate access to risk capital to accelerate the reallocation of resources to growing sectors.
Measures for unconventional times
Most countries have provided significant fiscal and monetary support to cushion the blow. Many – especially emerging and developing economies – are making greater use of unconventional monetary policies to ease pressure on banks and borrowers.
India, Sri Lanka and Nepal announced debt service moratoria and targeted lending programs to help households and businesses. Financial regulatory requirements relating to equity and liquidity coverage have been relaxed. Malaysia and Thailand provided additional liquidity to companies through central bank lending operations, while Indonesia and the Philippines resorted to large-scale asset purchases.
While justified, these more aggressive policies inevitably carry risks, which will increase as they are used. Policymakers would be wise to focus on reducing distortions and developing clear exit strategies for unconventional measures adopted.
To avoid longer-term economic “scars”, Asia needs to accelerate economic reforms to boost productivity growth and investment, enable an adequate reallocation of resources between sectors and support workers affected by the transition. The package could include well-targeted hiring subsidies and worker retraining programs; infrastructure upgrades; simplify business processes; and reducing the regulatory and tax burden.
These actions need to be combined with a broader effort to improve social safety nets to bring workers into formal systems, while supporting vulnerable people with targeted conditional cash transfers.
A greener future
Paradoxically, the COVID-19 shock also provided a glimpse of what a better future might hold for Asia. The temporary reallocation of energy-intensive sectors, such as airlines and transport, offers an opportunity for job creation in more productive and cleaner sectors. A well-designed carbon tax package and complementary product and labor market policies could support capital reallocation and workforce retraining.
This would benefit the global fight against climate change, as Asia-Pacific has some of the biggest emitters and polluters of carbon dioxide, and could lead to better health conditions for local people, better jobs and more people. resources to meet development needs.
Reforms in healthcare, social safety nets, labor markets and the business sector will help mitigate the effects of the pandemic and address long-term pre-existing problems facing the region. Asia must remain agile and innovative to emerge from the crisis in a sustainable, greener and more equitable way.
* About the authors:
- Chang Yong Rhee is the Director of the IMF’s Asia and Pacific Department. Prior to joining the IMF, Mr. Rhee was Chief Economist at the Asian Development Bank (AfDB). He was the AfDB’s main spokesperson on economic and development trends, and oversaw the Department of Economics and Research.
- Katsiaryna Svirydzenka is assistant to the director of the Asia and Pacific department. Previously, she worked as an economist in the Asia-Pacific Regional Studies Division and before that, in the Emerging Markets Division of the Strategy, Policy and Review Department.
Source: This article was published by MFI Blog