The Future of Asia: What a Difference a Year Can Make

IMF Blog, March 17, 2021

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Having been hit by COVID-19 first, Asia is also recovering first.
At the pandemic’s first anniversary, it is "too early to know for sure" whether the region is back to full health.
The pandemic exacerbated existing long-term issues: slowing productivity growth, growing indebtedness, aging population, rising inequality, and managing climate change.
Asia must remain agile and innovative to exit the crisis in a durable, greener, and more equitable way.

Past recessions in advanced economies show that, on average, five years after the start of a recession, output is still almost 5 percent below its precrisis trend and unlikely to ever catch up.
The COVID-19 pandemic has:
- destroyed jobs,
- worsened poverty and inequality,
- created a public and private debt problem—especially for countries and firms already in fragile financial health beforehand.
Potential lasting scars arise from persistent declines in the capital stock, employment, and productivity.
Labor market impacts in Asia:
- Unemployment surged.
- Labor force participation plunged.
- Job losses concentrated in industries with lower wages and among women and youth.
- The poorest and most vulnerable were disproportionately hit, exposing severe gaps in social protection and exacerbating already high inequality in advanced and emerging Asia.

Many countries will have to contend with high public and private debt burdens—possibly too large for some to manage.
Sovereign debt is an issue in small states; addressing it will require extra focus on revenue mobilization, public finances, and debt management, with support from multilateral partners and debt relief providing some breathing space.
In larger emerging markets, the main problem might be record-high private debt:
- More companies are not generating enough earnings to service their debts.
- Government support is helping firms to keep afloat, but a large wave of corporate bankruptcies could follow when support is withdrawn and absent other interventions.
- Vulnerability could be acute if global financial market conditions tighten during the recovery, leading to capital outflows and additional pressure on the corporate sector.
Policy actions to address private debt vulnerability:
- Reinforce private debt resolution frameworks.
- Ensure the availability of adequate financing.
- Facilitate access to risk capital to speed up the reallocation of resources towards growing sectors.

Most countries provided significant fiscal and monetary policy support to cushion the blow.
Many—especially emerging and developing economies—resorted more to unconventional monetary policies to ease pressure on banks and borrowers.
Country examples and measures:
- India, Sri Lanka and Nepal announced debt service moratoria and targeted lending schemes for households and firms.
- Financial regulation requirements related to capital and liquidity coverage were loosened.
- Malaysia and Thailand provided extra liquidity to firms through central bank lending operations.
- Indonesia and the Philippines used large-scale asset purchases.
Risks and guidance:
- More aggressive policies entail risks that increase the longer they are used.
- Policymakers should focus on minimizing distortions and developing clear exit strategies for the unconventional measures adopted.

To prevent longer-term economic "scarring," Asia needs to expedite economic reforms to:
- boost productivity growth and investment,
- allow for adequate reallocation of resources across sectors,
- support workers affected by the transition.
Potential policy package elements:
- Well-targeted hiring subsidies and worker retraining schemes.
- Infrastructure upgrades.
- Simplifying business processes.
- Reducing regulatory and tax burdens.
Social protection:
- Upgrade social safety nets to bring workers into formal systems.
- Support the vulnerable with targeted conditional cash transfers.

The COVID-19 shock provided a glimpse of possible structural change:
- Temporary re-allocation away from energy-intensive sectors (airlines and transportation) provides an opportunity for job creation in more productive and cleaner sectors.
Policy instruments and complementarities:
- A well-designed carbon tax package combined with complementary product and labor market policies could support capital re-allocation and labor reskilling.
Expected benefits:
- Aid the global fight against climate change (Asia-Pacific contains some of the largest carbon dioxide emitters and polluters).
- Improved local health conditions, better jobs, and more resources to meet developmental needs.

IMF Blog article by Chang Yong Rhee and Katsiaryna Svirydzenka, March 17, 2021.