Asia Economics Blog

Has the world passed peak globalization? The prospect doesn't bode well for Emerging East Asia to pursue trade oriented growth. But a three part series on "The Peak Globalization Myth" by Richard Baldwin on VoxEU suggests that broad generalizations about globalization's demise are premature. Findings are: the timing of any peaking differs by region; falling commodity prices have figured significantly in declining trade values; and the future of globalization lies in trade in intermediate services.

This post analyzes trade patterns at the economy level for East Asia with a focus on intra-regional trade and trade in intermediate services to assess prospects. The upshot is that developing regional supply chains and pursuing comparative advantage in intermediate services may offer promising opportunities.

Around 7,000 years ago in today’s East Africa, the donkey, equus asinus, was domesticated, marking a turning point in human productivity and mobility. To the present day, the donkey plays a vital economic role on the African continent, especially in remote and impoverished areas.

Around 3,000 years ago in today’s Dong’e County of China’s Shandong Province, an elixir for youthful vigor and feminine beauty, ‘ejiao’ (阿胶), or ‘donkey gelatin’, was concocted. The key ingredient in ejiao is donkey hide collagen.

Co-authors: Souleima El Achkar Hilal; Ian Nicole Generalao; and Rosa Mia Arao
 
This post draws from a paper presented in the ACAES session at the 2022 Allied Social Science Association Annual Meeting, program here. Youtube recording here.
 
The Covid-19 pandemic has had a devastating impact on labor markets worldwide, Southeast Asia included. There is clear evidence that the pandemic-induced job losses in the region have been highly unequal—disproportionately affecting the youth, women, low-skilled, informal, temporary, and casual workers.

Using the latest available Labor Force Surveys of Indonesia, the Philippines, Thailand, and Viet Nam, our analysis shows that youth and women bore the brunt of job losses. Young workers, who represent only 10–15% of the workforce in the four countries, accounted for a disproportionate share of job losses at 22–45% at the height of the pandemic’s impact on labor markets. This is due to their overrepresentation in heavily hit sectors like food and accommodation services, wholesale and retail trade, and “other services,” and because they were more likely to lose their jobs than more mature workers in these same sectors. Figure 1 gives details by sector.

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.’

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).

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.

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.

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:

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.

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.

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.

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.

Updated 2 May 2022 to incorporate full year data for 2021.

A previous post analyzing the economics of the pandemic for 2020 documented widely divergent experiences in Asia with respect to case numbers, mobility loss, and export impact, and showed all three of these factors to be systematically related to GDP growth. A follow-up post on fiscal policy found that those economies with ample fiscal space used it to ramp up spending, and a post on monetary policy showed central bank balance sheets expanding under supportive global conditions. In this post, we revisit the analytics using data for 2021.

The promise of development economics is that living standards can be raised significantly and sustainably. More than any other region, East Asia offered the hope that with the right policies, a country could reduce the incidence of severe poverty and, in some cases, provide for affluent lifestyles. Following Japan, buoyed by exports to the West, economies such as South Korea and Singapore grew their manufacturing sectors, transferring workers from low-productivity agricultural employment and raising overall living standards to that of the wealthier Western countries. Today, China continues this process, with the incidence of severe poverty falling from more than 66% of the population in 1990 to less than 1% in 2020 as it became the world's manufacturing center (World Bank).

The question for this note is whether the countries on the left-hand side of Table 1 are following the path of the Asian high-flying economies on the right-hand side. Can the poorer countries of Southeast Asia move up to the standard of living found in the group of more affluent countries? Can incomes converge at a high level across Southeast Asia? Some countries, including Malaysia and Thailand, have made this a national planning goal.

Against the blow of the pandemic, governments worldwide undertook expansionary monetary and fiscal policies. But by 2022, pressure was on to retrench as inflation reared up and government debt-to-GDP ratios mounted.

This post continues a series that applies the framework developed in Macroeconomics for Emerging East Asia (Cambridge University Press, 2022; RePEc) to analyzing monetary and fiscal policy. The series began with a trilogy of posts on the pandemic shock of 2020 and associated fiscal and monetary policy responses. There followed a post for 2021 in which the pandemic continued to figure as the main challenge to macro stability. This post for 2022 finds the pandemic subsiding with attention turning to the disruptive spillover of US monetary tightening and the need to re-establish fiscal sustainability.

US interest rate hikes in 2022 have drawn global capital away from the rest of the world to put downward pressure on currency values vis a vis the dollar. To defend their exchange rates, many Asian central banks have sold off reserves. A future post will provide an overview of the situation as data become more broadly available. For Taiwan, data already in hand reveal a surge in capital outflows. For the first half of 2022, net portfolio outflows reached $77 billion versus average full-year magnitudes hovering around $60-80 billion for most of the past decade. Even in the context of a rush of global capital out of emerging markets, the Taiwan case is extreme. Nevertheless, a modest accumulation of official reserves has continued to prevail on the balance of payments.

In recent years, emerging market countries—in particular, those in Asia—have been among the global economy’s star performers. Even during bad times, such as during the Global Financial Crisis, Asian EMs have seen their economies hold up better than most others.

For much of the COVID crisis, that story held true. Many Asian economies, such as Vietnam, Singapore and Taiwan, seemed to have COVID under control, while Asian EMs appeared to have significant monetary and fiscal policy room to help address any economic impact of the crisis. In April 2021, the IMF’s projections for growth in the region were extremely bullish, with a recovery to 8.5 percent growth in emerging Asia this year and 6.0 percent in 2022. Two months later, expected growth had been downgraded, to a still-healthy 6.3 percent and 5.2 percent over the same two years (see Table). The ADB was even more optimistic in its July 2021 projections, pointing to growth of 7.2 percent and 5.4 percent this year and next.

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.

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

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.