- June 18, 2020
- Posted by: admin
- Category: Press/Events
The painful economic contractions and job losses of immense scale have understandably created great pessimism about the post-Covid-19 world. But Asia has been here before. During the 1997-98 Asian financial crisis (for those who are old enough to remember), it seemed at the time as if the world was crashing down on Asia. But even the worst affected Asian economies returned to stability and solid economic growth within a few years. This is not to downplay the headwinds that Asia will face, only to say that with the right strategies, those challenges can be overcome and new opportunities exploited profitably.
First, let’s acknowledge the challenges. The sheer scale of the crisis will certainly cause households and corporations to adjust their economic behavior in ways that might slow global growth. For example, households in the most affected countries may increase their savings which would slow consumption spending. Global companies may reconfigure their supply chains and some may even pull back from their production bases in Asia. Governments burdened with higher debts but under pressure to spending more on health care and social welfare may cut back on productive infrastructure investment and raise taxes. Some governments may even succumb to the temptation of trade protectionism that ends up hurting everyone.
But there is another more promising side to the picture. Most importantly, policy makers in Asia appreciate these dangers and are stepping up supply side reforms to ensure their economies can continue to prosper. Leading the pack is China, which is stepping up major initiatives that will deliver higher quality economic growth over time. These include reforms of the hukou system, which will boost labor and housing markets, acceleration of investment in advanced technology to reduce dependence on the West (the U.S. especially), creation of mega-urban regions, and “new infrastructure” spending on things like ultra-high voltage grids and connectivity. China, with about 16% of world output will be a source of dynamism, with spill over benefits for the rest of Asia.
Despite having to cope with a very difficult Covid-19 outbreak, India has found a new zeal for some of the reforms that many observers have been recommending for a long time. Several state governments run by Prime Minister Modi’s ruling party have announced sweeping reforms of labor laws, addressing one of the major bugbears for foreign investors. Efforts will also be made to make it easier for investors to secure land needed for new factories, addressing another obstacle to investors. In addition, if the promised reforms in the agriculture sector are carried through, India could see a radical transformation of its farming sectors into a new engine of growth.
Indonesia is also pursuing labor market reforms which will enhance its competitiveness. Moreover, the infrastructure push started by President Joko Widodo in 2015 is being expanded, while his reforms of the bureaucracy have helped create a more welcoming business environment. These are just three of many examples. Vietnam and the Philippines are also embarking on major reform initiatives.
Reforming countries will also be better placed to leverage off some of the more positive trends in the global economy. One is that production will continue to be relocated out of China. This trend had begun earlier as China’s immense economic success allowed it to enjoy higher wages and to move up the value chain. Now with trade and technology wars afoot, this trend will accelerate. As the business environments become more welcoming in India, Indonesia and elsewhere, it is now more likely that production relocation will boost the manufacturing sectors in those countries. There is no question that the post-Covid-19 world will be a challenging one. But Asian policy makers are putting in place strategies that will enable the region to better cope with those headwinds, while taking advantage of new opportunities that are the emergent new drivers of global economic growth.