To benefit from the demand for Asian exports, rapid and widespread vaccination – particularly in light of the Omicron variant – is needed to stop the divergence in economic recovery paths among Asia’s economies.
Economic recovery from the pandemic in advanced economies last year translated into increasing demand for exports from developing economies in Asia. Compared to 2020, when exports from the region comprised mostly of pandemic-related goods and electronics from a small subset of economies, external demand for Asian goods became more broad-based—ranging from machinery and vehicles to textiles and footwear—thus benefitting more economies in the region.
Our research found that due to uneven vaccination coverage and renewed outbreaks the rise in external demand has led to a two-track recovery.
The economies that forged ahead in 2021—like the People’s Republic of China, the Republic of Korea, and Singapore—share two key features. First, they are export-oriented, so naturally better-placed to benefit from the rebound in international trade.
Second—and a factor more in control of policymakers—these economies were able to successfully contain COVID-19 outbreaks or rolled out vaccines rapidly. While the first feature is important, the second is proving to be the difference that defined recovery paths.
Indeed, slow progress on vaccination or ineffective containment are the common characteristics shared by economies lagging behind, which have been largely unable to capitalize on the global recovery.
The reason is that wider vaccination coverage reduces the severity of the disease—and thus, hospitalizations and deaths. As such, the need to impose mobility restrictions becomes gradually less stringent as vaccine rollouts progress. This is shaping containment policy in highly-vaccinated economies—with the significant exception of the People’s Republic of China which, owing to its “zero-Covid” strategy, continues to react quickly by tightening restrictions in response to new outbreaks.
In contrast, where vaccination coverage is relatively low, governments are forced to tighten restrictions if COVID-19 cases rise. As well as imposing severe constraints on contact-intensive activities, this results in disruptions to manufacturing and other export-sensitive sectors—for example, by causing labor shortages or factory shutdowns.
One instructive example of these dynamics in 2021 is export-oriented Viet Nam, which effectively contained the pandemic and benefited from buoyant demand for its exports last year. However, due to low vaccination coverage, Viet Nam had no choice but to resort to lockdowns when COVID-19 outbreaks started spreading last summer.
This had a considerable impact on its exports. For instance, garment and footwear exports plunged by, respectively, 18.6% and 44% year-on-year in September, while the Ministry of Agriculture and Rural Development estimates that produce exports will drop by around 30% year-on-year in the second half of 2021.
A counter-example is provided by Malaysia, which ramped up its immunization program since early June last year, so that by mid-October it achieved the target of inoculating 90% of its adult population. Mobility restrictions were then gradually relaxed for vaccinated workers, allowing businesses to return to full-capacity production. As a result, after moderating in June and July, in August exports growth accelerated to 18.4% from a year earlier.
Malaysia’s experience is also indicative of how vaccination progress can eventually unshackle the tourism sector from the pandemic chains. With new COVID-19 cases and deaths plummeting, on 11 October the Malaysian government was able to lift interstate and international travel restrictions for fully vaccinated residents and by mid-November took steps to partially reopen to foreign tourists.
Given all this, how could the Omicron variant impact recovery in developing economies in Asia?
This new virus strain has the potential to dent growth and reinforce uneven progress in the region. While seemingly less lethal, the Omicron variant is significantly more transmissible than the previous strains. As a result, many economies in the region may need to resort once again to tighter restrictions—particularly those where vaccination coverage is still low.
Moreover, recovery prospects in tourism-dependent economies may worsen substantially, as indicated by the immediate reimposition of international travel restrictions to stop the spread of Omicron—by several governments in and outside the region, including Malaysia’s.
Amid the uncertainty spawned by the emergence of new virus variants, widespread vaccination remains the main path to a complete, broad-based and sustainable recovery in the region in 2022.