“Policy makers should work together to quickly limit the pandemic—the longer the containment period, the more difficult and prolonged the recovery will be. Strong income and employment protection are critical to support the most vulnerable and avoid long-term economic scarring.”
-ADB BRIEFS No. 133, May 2020: An Updated Assessment of the Economic Impact of COVID-19
Using analysis from the Global Trade Analysis Project (GTAP) model, the Asian Development Bank (ADB) recently published an Updated Assessment of the Economic Impact of COVID-19.
This new report states that globally, without intervention, projected impacts range from $5.8 trillion for a short-term (3 month) containment scenario to $8.8 trillion in a long-term (6 month) containment scenario, or roughly 6.4% to 9.7% of global GDP.
These new estimates are “more than double the World Bank’s 16 April 2020 estimate of a 2%–4% decline in global GDP, and higher than the IMF’s April 2020 World Economic Outlook estimate of 6.3% decline in global GDP.”
With regard to Asia Pacific, impact is estimated at $1.7 trillion (6.2% of regional GDP) under a 3-month containment scenario, and $2.5 trillion (9.3% of regional GDP) under a 6-month containment scenario, with the region accounting for 30% of the overall decline in global output.
The table below shows sub-regional figures:
However, it is important to note that with proper policy response, short-term containment impact could be reduced by 30% or $1.7 trillion, while the long-term containment impact could be reduced by 40% or $3.4 trillion
(As an aside: with the WTTC currently projecting a worst-case scenario for tourism globally to be 197 million jobs at risk and potential US$ 5.5. trillion in losses just for tourism alone, in the context of the ADB report, this further highlights that strong tourism interventions could contribute to larger economic mitigations.)
To discuss how to create regional cooperation for such vast economic enablement and regional policy coordination, I reached out to Dr. Cyn-Young Park, paper author and the Director of the Regional Cooperation and Integration Division in the Economics Research and Regional Cooperation Department of the Asian Development Bank (ADB).
Please tell us a little bit about yourself Dr. Park and your work and areas of focus.
CYP: I’m the Director of Regional Cooperation Integration in ADB’s Research Department. My interest has been generally on dynamics of the regional integration, and also how Asia can make progress in terms of cross-border movement of goods and services. I also focus on investment laws and how countries can work together to maintain the economic and financial stability to manage better this cross-border movement towards the inclusive and sustainable growth of the region.
Shifting to COVID: the global economic losses due to COVID-19 projected in your most recent paper are stark, ranging anywhere from $US 5.8 to US$ 8.8 trillion. In your opinion, what is the most troubling aspect of these projections?
CYP: At least for me, what is most important in that projection is the figure of unemployment. In fact, countries that have experienced quite a significant slowdown in their businesses, partly due to direct impact of COVID, but also the country’s efforts to contain the spread of the virus and then also quite stringent lockdown measures, means that many businesses may not be able to recover fully from this impact. Further, as the COVID situation gets prolonged, it will have an implication on increasing unemployment. When this type of job losses are large and significant, and then it gets prolonged, people will not only lose income, but also sources of more things like training and their investment in education. There are a lot of challenges in preparing for their future work ability as well. So this unemployment figure is actually quite significant, not only just the short term kind of income losses, but also other losses and investment in the future.
Different experts are saying there is not going to be a return to the past normal, and we’re instead going to be looking at a “new” or “next” normal. From an economic perspective, what parts of the pre-COVID economy do you think will be left behind or not factor as heavily into the post-COVID era?
CYP: Countries have already experienced quite a significant impact on the labor-intensive manufacturing sectors due to the social distancing and lockdown measures. Thus labor-intensive manufacturing will suffer quite significantly in the post-COVID recovery, and traditional services that also involve a large number of workers in less sanitary or less protected environments will also suffer in the post-COVID world.
Looking at it from the other perspective now: what areas of the economy do you think will really benefit or grow in the post-COVID era?
CYP: COVID made people actually engage more in online activities, and companies and also many public agencies are now switching to digital platforms. So technology and digital transformation will really accelerate. You know, this is an unusual situation we’re in, and while this trend of digitalization was already pulling us gradually, COVID has provided this opportunity for any sort of agency or individual to try out many different digital platforms. Thus digital transformation is actually happening and accelerating, and this is going to be a part of our new normal.
Critically, the crux of your report highlights how strong policy intervention now can save billions of dollars down the line, reducing the impact from 30% to 40% whether it’s the three-month containment or six-month containment scenario. From a policy standpoint, what are some of the most important areas that governments in Asia Pacific should be focusing on right now to enable that containment?
CYP: The first priority should definitely be on the rapid containment of the pandemic. We actually show that as the containment period gets longer, the economic costs will grow even further. So this is not a trade off situation. Many people do argue that maybe the lockdown measures are too stringent and then that’s linked to poverty. But what we also see is that if the lockdown is not effective, and that it has not really fully flattened the curve, but we start relaxing the lockdown, then that’s going to actually lead another wave given this is a novel virus and people are not immune to it yet. So it is really important that we continue to make sure that the curve does flatten so we will be able to manage the virus in a way that really is going to be still more sustainable for our economic recovery. But at the same time, we also see the impact of COVID becoming more unequal in the economy. So protecting the most vulnerable groups with much better social, and then especially their health protection and programs is going to be very important. And in the meantime, given that this is going to be a longer battle to fight, it is important to support the continuity of businesses, especially the SMEs.
What are the important aspects of economic policy that should be the easiest to coordinate across borders to assist with recovery? How should this regional cooperation begin?
CYP: Well, many countries have already been fairly quick in making swift stimulus policies. There are many accommodative monetary policies, and also fiscal stimulus packages around the region and in the world. So providing this macroeconomic stability has been seemingly quite easy. This took place without formal coordination, but the countries have done it in a way that was seemingly coordinated. However, what I feel is that it is going to be quite challenging to steer exit from these stimulus economies to a normal economy, and how do we actually balance the need to provide the stimulus but at the same time it doesn’t lead to unsustainable growth in terms of our financial ecosystem. For example, the firms that are not solvent remain just sort of surviving on the stimulus packages, and then those will be quite challenging to manage going forward. So how we use this stimulus and how to steer the exit from the stimulus will be quite challenging going forward
Are you seeing this on an individual country level, or this is something that you think is going to impact cross-border trade as well?
CYP: What we see is a world that is much more connected than before. So, you know, we are only as strong as our weakest links. If we do not somehow make the level and standard of our weakest link upgraded and more stable, we will all fall together in terms of trade investment and business. So this time is really testing the need for cooperation. We need to also steer exit in a cooperative way as some countries open while some countries don’t. Then, of countries that do open, if they don’t really meet the standard of public health regulations, this can actually spread to other countries
As a leader of one of the region’s most influential development and financial institutions, what do you believe is the unique value add of ADB at this time for recovery and building into the next normal?
CYP: Well, the crisis in a way has made a lot of people think about the downsides of globalization. I don’t believe that we will be able to return to the pre-globalization period, but there will certainly be some anti-globalization backlash going beyond individual social distancing to nations that will begin distancing themselves with a more protectionist sentiment. As a regional institution, ADB is well-positioned to play a role of honest broker, and also the coordinator among nations with different positions and different priorities to come together and think about what’s actually best for everybody. Is it really better that we go back to the stone age and not talk to each other? Despite all the recent criticisms, globalization has brought us much more prosperity and helped us work together to make the world better. We want to stay on that track and try to make the impacts of globalization more inclusive, but maintain the growth momentum on a sustainable path. So, one country may feel like “if we stay a bit more kind of a protected or sheltered, we might be able to maybe resolve this much faster, or at least we won’t really get the virus attacking us.” However, we can’t really live without the global community anymore. I think the world is already moved past that “one country making one world” mentality – that era is already gone. We therefore need some regional institution to assist in driving that kind of a consensus even in a smaller group. It might be challenging to have a consensus in the bigger group, but with a bit more harmonized or homogeneous kind of group of countries, we may be able to build that momentum, again, talking together and then the reaching of consensus for a better world. I think ABB can provide that role coordinating among different countries in the region.
Any final comments on regional harmony in post-COVID Asia Pacific?
CYP: Everybody now has to have a long-term view and agenda. We really need to think of how to overcome individual differences, whether it’s a person or village or the country, and then think about what’s really good for everybody eventually after COVID. For example, trade frictions were there before COVID, but having accelerated as a response to COVID will really worsen the situation. So I do hope that countries do take a long-term view and again, we need to improve the weakest link in our communities to make a better future. So the collaboration and cooperation is going to be really a key to help these weakest links to overcome the barriers and difficulties. We should really try to work together to think longer term to what’s really sustainable and what’s really a much better and more resilient economy for everybody.