ADB economists Irfan A. Qureshi and Matteo Lanzafame answer questions about the ability of Asia’s economies to bounce back from the pandemic, and how governments should respond to new global economic headwinds.
The COVID-19 pandemic hit economies hard and Asia has not been spared. In general, though, Asian economies performed better than most others outside of the region.
Economies in Asia’s developing countries generally fared well during the COVID-19 pandemic. In 2020, the region’s economy contracted for the first time in 60 years but, at -0.8%, GDP growth was only slightly negative—quite a feat when compared to the deep recessions in other parts of the world, including in the United States (-3.4%), the Euro area (-6.5%), and most other emerging economies.
Moreover, growth bounced back strongly in 2021, with regional GDP expanding by 6.9%, led by the export-oriented economies including the People’s Republic of China and the Republic of Korea. Again, this was better economic performance than that experienced by most of the world.
It is also worth noting that over the last two years, strains in the region’s economy have been relatively less pronounced than those experienced globally. For instance, supply disruptions have been less severe and inflationary pressures remained manageable in much of Asia.
However, these regional averages mask a divergent recovery across economies, which were affected to varying degrees by the pandemic. Economies that are highly dependent on tourism, and where vaccine rollouts lagged, emerged more slowly from the economic slump in 2020.
Economic resilience refers to an economy’s ability to withstand a shock or disturbance and recover quickly from it. That is why economies where the COVID-19 crisis was less pronounced and shorter are said to have been more resilient. This is one example of economists’ habit of borrowing terms from other sciences: in physics, the term resilience refers to the capability of a strained body to recover its size and shape after deformation.
Developing economies in Asia have become progressively more resilient over time, owing to several factors—including prudent fiscal and monetary policies that have enabled them to develop buffers; flexible exchange rates that act as shock absorbers; sound macroeconomic fundamentals; and export-oriented and diversified economic structures fostered by increasing integration in global value chains. But this progress has not been uniform across the region, and some of the most fragile economies still have much space for improvement in these areas.
The two main drivers of Asia’s economic resilience were effective pandemic containment and strong export performance. Other factors included a prompt and sizable policy response, although with some variation across economies.
Several large regional economies managed to keep the pandemic in check for most of 2020-2021, by using different strategies—from the zero-COVID approach adopted in the People’s Republic of China, to a high reliance on test-and-trace methods in the Republic of Korea and Singapore.
Better pandemic containment meant less severe labor shortages and disruptions to manufacturing activities, so that factories could continue to operate, meet requests from domestic markets and respond to burgeoning external demand. It also resulted in a smaller rotation of demand from goods to services in the region than experienced elsewhere, thus putting less pressure on the supply side of the economy and value chains.
Solid export performance was the second common factor underpinning growth across the region. Contrary to early predictions, international trade rebounded strongly after the initial plunge in 2020. The massive government fiscal stimulus unleashed in the US and other advanced economies boosted demand for imports of pandemic-related goods—such as masks, protective equipment, medical devices—but also electronics and other durables.
Unhindered by pandemic restrictions and highly integrated in global supply chains, the region’s export powerhouses—including the People’s Republic of China, Republic of Korea, and Singapore—were uniquely placed to benefit from the rebound in global demand for manufacturing goods. As vaccination coverage increased last year, both inside and outside the region, the global recovery gathered pace and demand for the region’s exports became more broad-based, both across sectors and economies—supporting the regional recovery. In this sense, Asia’s resilience mirrors the resilience of global trade.
Incidentally—together with low prices for staple foods such as rice and pork, and significant slack remaining in the economy— the upstream position of several Asian economies in global value chains helped shield them from the disruptions and associated inflationary pressures so common in many other economies. This allowed monetary authorities in the region to maintain an accommodative stance, thus supporting growth.
Policymakers should continue monitoring with vigilance this difficult and rapidly changing macroeconomic environment. If challenges to growth do materialize, they should use the tools at their disposal to deal with them.
Even as the world economy decelerates, developing economies in Asia have continued their recovery in the first part of this year—with the important exception of the People’s Republic of China, which instituted lockdowns in response to outbreaks under its zero-COVID policy. As more economies in the region switch to a “living with COVID” strategy and continue reopening, growth should remain solid, buoyed by recovering services activity and a revival in foreign tourism.
Furthermore, the region’s macroeconomic fundamentals remain robust. In particular, the high degree of integration in global value chains is a structural advantage for the region, which will allow for a fast pick-up in exports and economic activity once the current global headwinds abate. Overall, therefore, the risk of stagflation—a combination of high inflation and stagnant economic activity—appears to be much lower in Asia than elsewhere.
But, while we expect it to continue being resilient, the region’s economy will not be immune to a protracted global slowdown. In particular, if growth in the United States and the People’s Republic of China falters this year, the boom in exports experienced by developing countries in Asia since 2020 may wane. And we are also likely to see greater turbulence in financial markets as the U.S. federal reserve continues to raise interest rates.
Thus, despite concerns over limited fiscal space and rising inflationary pressures, authorities should not rush to tightening liquidity through interest rate increases. While stating resolutely their intention of keeping inflation in check, regional central banks should continue tightening their stance only gradually, so that there is a low risk that a sudden liquidity squeeze may choke the recovery. And governments should take steps to enhance the mobilization of domestic resources, to lessen their fiscal tradeoffs. Where fiscal space is available, fiscal consolidation plans could also be halted or slowed to support the economy, if need be.
Developing economies in Asia have weathered the COVID-19 crisis better than most others outside the region. Asia’s economic resilience rests on robust macroeconomic fundamentals, but also sound policies—and prudent policymaking will also be needed to navigate the current challenging global economic environment.