In search of a lasting recovery
The Covid-19 pandemic has caused severe social and economic damage, setting back development gains by years. It has also exposed the lack of preparedness of many countries for dealing with such a shock.
Job losses, a sharp reversal of progress in poverty reduction, school closures and heightened inequalities will leave long-term scars in the region.
According to the Economic and Social Survey of Asia and the Pacific 2021, the developing Asia Pacific region experienced a 1% contraction in gross domestic product in 2020, when the equivalent of 140 million full-time jobs were lost, and another 89 million people were pushed back into extreme poverty.
Severe disruptions of economic activity and education likely caused a significant setback to human capital accumulation and productivity, said the United Nations Economic and Social Commission for Asia and the Pacific (Escap), which launched the report last Tuesday.
While we have seen substantial policy responses to cope with the severe impacts of the crisis, many countries might struggle to sustain such support. And the focus of policymaking so far has been primarily on economic growth, neglecting critical investments in people and in building resilience, the UN agency said.
The good news is that trade and output declined less than feared at the start of the pandemic. While most regions of the world recorded large declines in exports and imports, Asia was the sole exception, with export volumes up 0.3% and imports down a modest 1.3%.
Global trade contracted 5.3% last year, but that was far better than the initial forecast of 12.9% made by the World Trade Organization (WTO) in April 2020, when half the world's population was under lockdowns. Similarly, global GDP shrank by 3.8%, better than the 6.1% contraction predicted last June by the International Monetary Fund (IMF).
The more encouraging figures reflect the success of monetary and fiscal support on a far greater scale and in more countries than the response to the 2008-09 financial crisis. Those policies helped prevent a larger drop in global demand. Fiscal policy boosted personal incomes in advanced economies, allowing some households to maintain relatively high levels of consumption, supporting exports.
At the same time, lockdowns and travel restrictions caused consumers to shift spending away from non-traded services and toward goods. Innovation and adaptation by businesses and households kept economic activity from falling too much. Manufacturing supply chains were able to resume operations, and many people shifted to remote work, generating income and demand.
The WTO now forecasts an 8% rise in world merchandise trade this year after the 5.3% contraction in 2020. It predicts trade growth will slow to 4.0% in 2022, noting such a pace would still leave trade below its pre-pandemic trend.
Escap, meanwhile, projects a reasonably strong rebound of 5.9% this year for developing Asia Pacific economies on average, followed by growth of 5% in 2022.
In Thailand, a consumer recovery is already under way, according to Fitch Solutions. Real household spending, which contracted by 1.9% in 2020, is targeted to grow 2.4% this year, and the outlook is more robust in the second half, assuming a significant proportion of the priority population is vaccinated by late 2021. Pre-Covid spending was 4.9% in 2019.
Despite the better-than-expected outlook, short-term risks from pandemic-related factors will persist. These include insufficient production and distribution of vaccines, or the emergence of new, vaccine-resistant coronavirus strains.
Over the medium to long term, public debt and deficits could also weigh on economic growth and trade, particularly in highly indebted developing countries.
Given all the uncertainties and downside risks, near-term macroeconomic policies need to prioritise pandemic control and back an inclusive recovery. Policymakers also need to keep an eye on the broader risk landscape including the potential for natural disasters and financial crises.
It is understandable that initial responses to the pandemic were focused on mitigating its immediate harmful impacts, but building up defences against future shocks will require more forward-looking policies, economists say.
The transition toward more resilient and sustainable economies should become an integral pillar in the post-pandemic economic recovery phase.
A spirit of multilateralism and collaboration is also essential. Asia Pacific is ideally positioned for regional cooperation to complement the global effort to ensure more progress in Covid-19 vaccination programmes. Further regional alliances, such as the Regional Comprehensive Economic Partnership (RCEP) free trade agreement, could also open new economic opportunities and strengthen the region's resilience.
Acting Asia Focus Editor
Acting Asia Focus Editor