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Moderator:  Calla Wiemer (calla.wiemer@acaes.us)

Economics of the Pandemic, 2020 (Part III): Monetary Policy

 

Asia's response to the pandemic has rested largely on fiscal policy with monetary policy playing a facilitating role to varying degree. Fiscal policy is the subject of the second post in this series. The first post looks at factors influencing the impact of the pandemic on GDP growth, specifically, infection incidence, mobility loss due to transmission mitigation measures, and export decline.

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Economics of the Pandemic, 2020 (Part II): Fiscal Policy

 

Asian economies have been hit differently by the pandemic and have responded differently by way of fiscal and monetary policy. The first post in this series traces differences in economic impact to differences in infection incidence, mobility loss due to transmission mitigation measures, and export decline. This post on fiscal policy and the next on monetary policy look at macro policy responses within the context of policy space.

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Economics of the Pandemic, 2020 (Part I): Covid Cases, Mobility Loss, and Exports

Why have the economies of Asia fared so differently under the pandemic? In 2020, the economy of the Philippines contracted by 9.5 percent and that of India by 8.0 percent. Meanwhile, Bangladesh achieved growth of 3.8 percent, Taiwan 3.1 percent, Vietnam 2.9 percent, and China 2.3 percent.

This post looks at three channels through which the pandemic impacted economic activity: infection incidence; mobility loss due to transmission mitigation measures; and export decline. Subsequent posts consider fiscal and monetary policy responses.

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The Complicated Question of COVID-19 vs The Economy

The logic is straightforward that policy interventions that seek to break the chain of COVID infection also lower economic activity. Frictions in value creation result from limiting operations for dining and entertainment outlets, curtailing travel, or in general making mobility more stringent. Such disruptions destroy jobs and businesses. Longer term, human and social capital will deteriorate through school closures and reduced business and personal contact . In this reasoning, there is a tradeoff between social safety and economic performance. Call this the stringency effect. The dilemma for policy-making then is a choice between COVID safety and economic prosperity where one comes at a cost to the other.

In reality, however, this tradeoff is offset by an opposing force. Even absent stringency effects, COVID-19 is simultaneously a negative supply shock and a negative demand shock because output will fall from ill health and mortality in the workforce. With heightened concern over COVID, consumption will decline due, for example, to: heightened job insecurity and lowered consumer confidence; increased savings; and lowered propensity to take vacations or eat restaurant meals. Increased risk aversion will depress entrepreneurial activity and reduce investment. In this reasoning, combating the pandemic helps lift economic activity. The higher is social safety, the greater is confidence that life will return to normal, and thus the higher will be economic growth. The correlation here is positive between social protection and economic prosperity. Call this the shock effect.

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Is It Tantrum Time Again?

   

In May 2013, Ben Bernanke, Chairman of the US Federal Reserve Bank, hinted at the possibility of the Fed reducing (“tapering”) its purchases of government bonds sooner than previously expected, leading to a reassessment of the likely path of US monetary tightening. Market turbulence and economic volatility in emerging market countries (EMs), including those in Asia, quickly followed. Capital inflows turned to outflows, leading interest rates to rise, asset prices to decline and—despite a run-down of foreign reserves—exchange rates to depreciate. This event came to be known as the Taper Tantrum.

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The 'New Fiscal Consensus' As Per Blanchard & Subramanian Interpreted for Southeast Asia

The 'new fiscal consensus' holds that major advanced economies have the fiscal space to go big on stimulus and should do so in response to the pandemic. In a recent webinar sponsored by the Ashoka Centre for Economic Policy in Haryana, India, Olivier Blanchard made the case for the new fiscal consensus and Arvind Subramanian then responded on the relevance for emerging market economies such as India. This post extends elements of their analysis to the major emerging economies of Southeast Asia: Indonesia; Malaysia; the Philippines; Thailand; and Vietnam.

Blanchard explained that to preserve a stable debt/GDP ratio, the following condition must hold:

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East Asia's Fiscal Response to Crisis, Then & Now

When the last global crisis hit in 2008-09, the major economies of East Asia, but for one, had ample fiscal space to respond, and took advantage of that. This time around, the positioning is more mixed and the threat potentially much greater.

In Asia, the shock of the Great Financial Crisis (GFC) was inflicted mainly through export loss and capital flight. Domestic financial systems remained sound and productive capacity intact. A quick shot of fiscal stimulus was just the remedy to tide an economy over until global trade rebounded and financial capital returned. Use of such a strategy shows up in Figure 1 as a sharp increase in the debt-to-GDP ratio in 2009 for Malaysia, China, Vietnam, Thailand, Korea, and Taiwan, with the ratio then declining or stable in 2010. Two countries – the Philippines and Indonesia – saw no increase in their debt ratios in 2009, riding out the crisis without recourse to fiscal stimulus.

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Stringency, Mobility, and Economic Activity under Covid-19

Co-Authors: Shiela Camingue-Romance; Irfan Qureshi; Shu Tian.

To halt the spread of Covid-19, Asian countries have imposed varying forms and degrees of restrictions, ranging from nationwide lockdown – e.g., India and Malaysia – to much more targeted policy responses – e.g., Japan and Korea. The diversity of restrictions across the region reflects the diversity of technological, administrative, and other country-specific factors. For example, Korea did not have to resort to stringent restrictions because it has a technologically advanced contact tracing system. But the Korean experience is unlikely to be relevant to countries that do not have advanced technology and strong administrative capacity.

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Abenomics: A Retrospective

With the August 28 announcement by Prime Minister Abe of his intention to step down from his position within weeks, his record in a number of areas will inevitably face scrutiny and evaluation. Here, I lay out, in brief, my views on his government’s macroeconomic policies, which quickly became known as Abenomics. Like most governments, his had both successes and missed opportunities. But Japan clearly has changed as a result of his economic policies. And the debate around Abenomics anticipated issues that remain highly relevant in the current global policy debate.

The context

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Small Business Is Bleeding in the Pandemic: Evidence and Policy from Bangladesh

Co-Author:  Monzur Hossain

Small businesses in Bangladesh are usually started out of necessity and operate informally. They generally lack access to bank credit, possess little capital, and sell their output locally. The very nature of these small businesses makes them extremely vulnerable to the shock of COVID-19.

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Can Japan Learn to Work from Home?

Japan has, for several decades, experienced a toxic combination of an aging and shrinking population, slow growth, and very large fiscal deficits and debt. Looking forward, Japan’s potential growth is expected to approach zero, in large part owing to its demographic profile (see IMF).

These interrelated issues have led policy-makers in Japan on a search for meaningful structural reforms to raise potential growth and offset the impact of eventual fiscal adjustment. One area that has received significant attention has been the Japanese  labor market, which is characterized by low female labor force participation; a significant duality between heavily-protected workers and “non-regular” workers with few protections and lower productivity; and limited flexibility regarding working conditions and modalities (Figure 1).

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How to Kill Entrepreneurship—Limit LGBT Freedom: The Impact of Discrimination in Brunei

The news from Brunei Darussalam is grim. The small Southeast Asian, oil and gas-rich country, has announced plans to implement a new legal code that, among other things, calls for amputation for those convicted of theft and for death by stoning for homosexual acts. After an international outcry, the Government has delayed the imposition of the death penalty, but it maintains the laws as the presumptive legal framework.

These laws violate basic human rights, but from experience, I realize that this argument doesn’t seem to be convincing to everyone. As a development economist, I then thought, what are the economic costs of this? Particularly, I wondered if there was likely to be an impact on the broader economy of restrictions on the lesbian, gay, bisexual, and transgender (LGBT) community. As I discuss below, the answer is, ‘yes, over the long-run, a lack of freedom for the LGBT community is associated with a less entrepreneurial economy—a less dynamic economy.’

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