Countries in Central and West Asia Must Avoid a COVID-19 Race to the Bottom

In Central Asia, major reforms are needed for the economy to survive the pandemic. Photo: Laurentiu Morariu
In Central Asia, major reforms are needed for the economy to survive the pandemic. Photo: Laurentiu Morariu

By Guntur Sugiyarto, Werner E. Liepach

Governments in Central and West Asia must commit to reforms and get them right, or face a downward spiral. The costs of the crisis are already obvious in rising deficits and debt. There is no room for complacency.

The impact of the COVID-19 crisis on the economies of Central and West Asian countries should be of upmost concern. If we fail to overcome the adverse impacts, the countries could enter into declining trends in growth and overall productivity that lead to a race to the bottom, derailing all progress that has been made before.

The COVID-19 crisis could not come at a worse time when countries still need to deal with the adverse impacts of global trade turbulence and low oil prices. The crisis is truly global, affecting all parts of the world, including the trading partners of the countries in the region, which limits the scope of help that countries receive.

The impact of the crisis is very different from the previous two crises – the Asian Financial Crisis in 1997/98 and the global financial crisis in 2008/09. The pandemic has destroyed commodity and factor markets, as well as human capital, which could cause long-term damage.

The scale and magnitude of the crisis are also unprecedented, expected to be more than 5 times greater than the global financial crisis. Global GDP is expected to decline by 6% to 10%, and the drop could be larger if there are more waves of the pandemic with inadequate government responses.

The crisis completely brought down both international and domestic tourism, which countries rely on as a main source of foreign exchange.

It has also greatly affected migration and remittance inflows, with redeployment of migrant workers no longer guaranteed. Migration costs will also increase given the new health requirements and other measures, and huge problems faced by airline industries worldwide.

The Central and West Asian region is one of the main sources of global migrants. Tajikistan, Kyrgyz Republic, Georgia, and Armenia are among the top ten remittance recipient countries in Asia and the Pacific, contributing to more than 10% of the countries’ GDP. In fact, the contributions of remittances in Tajikistan and Kyrgyz are 30% or more of their GDPs respectively.

Finally, evidence from the past suggests that economies in the region have never been able to fully recover from previous crises. The overall economic growth and its accompanying productivity have declined in the aftermath of crises, revealing the weak fundamentals of the economies.

The average GDP growth rate prior to the global financial crisis was more than 9%, which was then brought down to less than 6% by the crisis, and further pulled down to around 4% by the low oil price crisis. Therefore, the business-as-usual trend suggests that growth might be further reduced to less than 3% in future.

Overall economic growth and accompanying productivity have declined in the aftermath of the crises, revealing the weak fundamentals of the economies.

These factors could result in a race to the bottom for countries in Central and West Asia. How do we ensure that this is avoided? The governments must introduce extraordinary reforms to match this unprecedented crisis. Reforms should contain these key elements:

First, deepening regional cooperation and integration. The region is among the least connected in the world, with some borders becoming bottlenecks for smooth trade, resulting in high costs. The latest example of regional collaboration in response to the COVID-19 crisis must be scaled up, including to other sectors of the economy.

CAREC 2030, a broad strategy for bringing the region closer, provides a platform for systematic engagement that can be adopted during the crisis and beyond. Moreover, the successful regional cooperation in the Greater-Mekong-Subregion provides some inspiration. In that area, trade between countries expanded by 103% per year, bilateral foreign direct investment flows increased by 3.2% annually, and the number of international visitor arrivals rose by 5.2% yearly.

Second, reviving domestic tourism. The opening up of the economies after the crisis should be encouraged by reviving the tourism sector, which can started with domestic tourism followed by regional and global tourism. This tourism sector is the lowest hanging fruit. It can even start at the beginning of the economic opening, in order to develop best practices on social distancing and to build confidence for other sectors.

Third, igniting the engine of growth. The governments in the region must find a way to ignite growth from the supply side of the economy, to complement the various incentives given for social protection and increasing purchasing power on the demand side. This should be in line with the industrial development plan at country and regional levels, as well as part of rebuilding the supply chains destroyed by the crisis. One key to this is revitalization of small- and medium-sized enterprises, which contribute significantly both in terms of output and employment.

Fourth, diversifying the economy. Countries must strengthen their economic fundamentals to increase resilience, including by diversifying their economies and making them more inclusive. The development of ‘country’ and ‘regional’ economic corridors covering special economic zones of different forms must be expedited and scaled up to put economies on a higher growth trajectory that is also broad based and sustainable. This includes programs undertaken as part of the Central Asia Regional Economic Cooperation program, a grouping of nations in the region working together toward shared goals.

Finally, using “social remittances” to employ the migrant workers. With challenges related to their redeployments, the government must employ this productive workforce to strengthen domestic labor markets, support small- and medium-sized enterprises, and domestic industries. As many of the migrants have worked abroad in the tourism sector, their “social remittances” – or the value they bring beyond monetary rewards – can also be part of the revitalization of domestic tourism and beyond, including discovering new activities.

The region must commit to reforms and get them right. The costs of the crisis are already obvious in rising deficits and debt. There is no room for complacency.