Number crunchers are coming up with an increasingly downbeat outlook for the global economy. In May, the IMF offered a contraction of 3% for the global economy this year. But since then, the outlook has worsened. The World Bank’s latest forecast calls for a contraction of 5.2%, which was outdone by the OECD’s projection of a heart-stopping contraction of 7.5%. The expected V-shaped recovery is also being gradually modified to look more like a U-shaped one.
Five members of the Forbes Asia Panel of Economic Commentators shared their insights from a broad range of interconnected perspectives on how the world may have been changed by Covid-19. The perspectives covered include undimmed prospects for emerging markets, Asia’s successful strategic responses, the emergence of stronger China-centric supply chains, government interventions in Japan, and Hong Kong’s abiding strategic importance. Together, they form a surprisingly positive take on the post-Covid-19 future.
Suman Bery: Is the Party Over for Large Emerging Markets in the Post-Covid-19 World?
China’s explosive growth in the first decade of this century stimulated expectations that its trajectory could be duplicated by other large emerging markets. Goldman Sachs famously coined the acronym BRICs in 2001, which argued that the world’s economic future would be determined by four large middle-income countries: Brazil, Russia, India and China (joined later by South Africa). These expectations were largely met until the crisis of 2008. In the second half of the decade that followed growth in China, India, Russia and the major Latin countries all stumbled even as the advanced economies, notably the U.S., recovered some of their verve. The Covid-19 shock has made their outlook even murkier. The rough-and-ready guidance provided by the Coronavirus tracker of the Financial Times newspaper suggests that Brazil, India and South Africa are yet to flatten the curve of new cases. While it is too early to comment on the economic consequences of these medical trends, it is difficult to believe that these economies can fully restore domestic supply chains until there is a widespread sense that the epidemic is under control, even if lockdowns are eased (as in India and South Africa) or avoided (as in Brazil).
These domestic difficulties are compounded by a less supportive external environment. The crisis of 2008 originated in the financial markets of the Atlantic economies, who were therefore prepared to be generous to their poorer companions in the G20. Much has happened in the intervening decade, particularly in G7 attitudes toward China and Russia, which are far less genial. In the current much wider crisis, the G20 countries appear to be more tight-fisted toward the large emerging markets. The uncertainty on international liquidity, coupled with significant capital outflows and reduced remittances all will tilt the balance in these countries toward adjustment rather than financing. This time round, perhaps with the exception of China, the advanced economies may lead the recovery.
Many of the big economic, diplomatic and security bets of the last two decades have been driven by the conviction that there was an unstoppable shift in the world’s economic center away from its traditional home in the North Atlantic toward what is now called the Indo-Pacific. These judgements in their turn were based on expectations of an expanding labor force in the South operating at rising levels of productivity, based on better education and improved access to modern technology and management through deeper global integration. Led by the U.S., this global economic model was under attack well before the pandemic. As Dani Rodrik predicted a decade ago, similar tensions also arise in the poorer democracies in trying to reconcile democratic sovereignty with the impersonal demands of global integration. The demand by the Trump Administration of symmetric market access further intensifies these political tensions. This was all before the highly regressive impact of Covid-19 was added to the brew, in both rich and poor countries. Prime Minister Narendra Modi’s May 12 speech in which he articulated a vision of a self-reliant India can be seen as a political response to these stresses.
Where do we go from here? First, as already indicated, this recovery will likely be led by the advanced economies. Second, all large democracies will perforce turn inward, even if more forceful global engagement is to be preferred. Third, regional bubbles and pacts will take priority over universal agreements, discriminatory and inefficient though this might be. However, we need to remember that Europe and Japan rebuilt in the 1950s and East Asia in the 1980s under regimes that today might be seen as relatively closed, but by doing a few important things right, domestically and externally. Coming as it does on top of the shocks and mediocre performance of the past decade, the Covid-19 crisis should compel the large emerging markets, certainly individually and ideally together, to think deeply about how they need to engage with and succeed in a less friendly global order. The party is not over even if the emerging markets are only partially successful in doing so. As the saying goes, a crisis is a terrible thing to waste.
Manu Bhaskaran: Upbeat Prospects in Post-Covid-19 Asia
The painful economic contractions and job losses of immense scale have understandably created great pessimism about the post-Covid-19 world. But Asia has been here before. During the 1997-98 Asian financial crisis (for those who are old enough to remember), it seemed at the time as if the world was crashing down on Asia. But even the worst affected Asian economies returned to stability and solid economic growth within a few years. This is not to downplay the headwinds that Asia will face, only to say that with the right strategies, those challenges can be overcome and new opportunities exploited profitably.
First, let’s acknowledge the challenges. The sheer scale of the crisis will certainly cause households and corporations to adjust their economic behavior in ways that might slow global growth. For example, households in the most affected countries may increase their savings which would slow consumption spending. Global companies may reconfigure their supply chains and some may even pull back from their production bases in Asia. Governments burdened with higher debts but under pressure to spending more on health care and social welfare may cut back on productive infrastructure investment and raise taxes. Some governments may even succumb to the temptation of trade protectionism that ends up hurting everyone.
But there is another more promising side to the picture. Most importantly, policy makers in Asia appreciate these dangers and are stepping up supply side reforms to ensure their economies can continue to prosper. Leading the pack is China, which is stepping up major initiatives that will deliver higher quality economic growth over time. These include reforms of the hukou system, which will boost labor and housing markets, acceleration of investment in advanced technology to reduce dependence on the West (the U.S. especially), creation of mega-urban regions, and “new infrastructure” spending on things like ultra-high voltage grids and connectivity. China, with about 16% of world output will be a source of dynamism, with spill over benefits for the rest of Asia.
Despite having to cope with a very difficult Covid-19 outbreak, India has found a new zeal for some of the reforms that many observers have been recommending for a long time. Several state governments run by Prime Minister Modi’s ruling party have announced sweeping reforms of labor laws, addressing one of the major bugbears for foreign investors. Efforts will also be made to make it easier for investors to secure land needed for new factories, addressing another obstacle to investors. In addition, if the promised reforms in the agriculture sector are carried through, India could see a radical transformation of its farming sectors into a new engine of growth.
Indonesia is also pursuing labor market reforms which will enhance its competitiveness. Moreover, the infrastructure push started by President Joko Widodo in 2015 is being expanded, while his reforms of the bureaucracy have helped create a more welcoming business environment. These are just three of many examples. Vietnam and the Philippines are also embarking on major reform initiatives.
Reforming countries will also be better placed to leverage off some of the more positive trends in the global economy. One is that production will continue to be relocated out of China. This trend had begun earlier as China’s immense economic success allowed it to enjoy higher wages and to move up the value chain. Now with trade and technology wars afoot, this trend will accelerate. As the business environments become more welcoming in India, Indonesia and elsewhere, it is now more likely that production relocation will boost the manufacturing sectors in those countries. There is no question that the post-Covid-19 world will be a challenging one. But Asian policy makers are putting in place strategies that will enable the region to better cope with those headwinds, while taking advantage of new opportunities that are the emergent new drivers of global economic growth.
Fan Gang: How will the China-Centric Global Supply Chains be Reshaped after Covid-19
Given the experience of supply disruptions, Covid-19 has compelled businesses to reassess their dependence on the China-centric global supply chains. The issue of supply diversification, including “risks” associated with foreign supplies, is seen as a key challenge that global companies need to address in the post-Covid-19 world. This is not only about medical supplies, which tended to capture the most media attention, but practically all industries that source components and inputs from the increasingly complex, but highly efficient China-centric global supply chains. The U.S. government’s efforts to deglobalize, and more specifically to decouple from and isolate China, has certainly accentuated this trend. There is little doubt that the China-centric global supply chains will be going through some adjustment in the post-Covid-19 world.
How will the China-centric global supply chains be reshaped? Is it a matter of just pulling out of China and relocate elsewhere? It turns out that it is not that simple. To begin with, relocating physical production capacity on the basis of geopolitics as opposed to economics could be very costly, typically involves writing off massive sunk costs. Instead of pulling up stakes to leave China, it is more sensible for global companies to pursue the “China + 1” option, which is to make their next incremental investment somewhere outside of China which could then serve as an alternative should the supply from China be disrupted in any way. And this means a very gradual process of incremental adjustments lasting many years.
Apart from concerns of over-dependence on China, some global companies will move their production capacity out of China anyway because of rising costs of production. Chinese wages are getting higher, which is a natural corollary of economic development and rising prosperity. Simply put, China today is much less competitive than it was even a decade earlier in low wage labor intensive manufacturing. Covid-19 will accelerate the out-migration of such jobs to lower wage economies like Vietnam, Bangladesh, Sri Lanka, and others. The China-centric global supply chains will be shedding production capacity in the low end.
For many global companies, the decision whether to leave China or not is also tempered by the fact that China is becoming one of the world’s largest markets in many sectors. Indeed, China is now poised to surpass the U.S. as the world’s largest importer. The priority to access the China market will weigh heavily on many global companies, even as they come under pressure from the U.S. government to disengage from China.
China will diversify its sources of supply too, and many Chinese companies may also want to decouple from the U.S. in areas where they are vulnerable to being “cut off” as a result of sanctions and other policy measures by the American government. Admittedly it is more difficult for Chinese companies to do without easy access to American high-tech industries; but the incentive is that much stronger to invest in R&D to become less dependent on foreign, especially American technology.
The bottom line is that the China’s supply chains will be reshaped in the post-Covid-19 world, becoming more high-tech and capital intensive, and involving more indigenous innovations. Global companies will continue to participate, not the least of which to gain better access to the growing China markets. In that sense, it will continue to be China-centric.
Yasuhiro Maehara: Greater Government Interventions in the Post-Covid-19 World–A View from Japan
“Black swan” was made popular describing the global financial crisis, but Covid-19 is a bigger black swan and is likely to have much more significant damage across the world. To deal with a more complicated post-Covid-19 world, the traditional economic model of capitalism where consumers and businesses seek to maximize their utility and profit, where the invisible hand allocates resources efficiently, and where the government acts as the last resort when markets fail, may well be inadequate. The government will have to intervene in the activities of private sectors more intrusively to safeguard public health.
In Japan, the government has called for “a new lifestyle”, urging people to adopt a “3 C’s” principle in daily life to avoid: Closed spaces, Crowded places and Close contacts. To contain the pandemic, we are being asked to change our daily interactions with each other, which define us as a community. Thus, the 3 C’s will change the behavior of both consumers and businesses. Consumers will not be able to dine with friends, go shopping and travel abroad as freely as they used to do, which means they are not able to maximize their utility. Companies will also need to change how they operate: more web meetings and video conferences and less in-person contact, and more flexibility for employees to work both from home and at the office. Even then there are challenges. For example, how can companies in manufacturing conduct their production efficiently while complying with 3 C’s? Prioritizing public health and safety could curtail businesses’ ability to maximize profit. Furthermore, pandemic-proofing the post Covid-19 world involves coping with what is known in economics as Knightian uncertainty – a lack of quantifiable knowledge of possible outcomes (unlike risks, which can be quantified). In this context, the social cost of safeguarding public health could be quite high and the market mechanism may break down. Simply put, invisible fear paralyzes the invisible hand.
Households have had a more difficult time in coping with Covid-19, and the Japanese government provided each person in all households with a supplementary income payment of 100,000 yen (a little more than $900) to these households. Similar income support policy has also been implemented elsewhere. It appears that the basic income approach has become more acceptable as a means to sustain social cohesion when society is under assault from Covid-19. In turn, the government is becoming more involved in managing affairs previously considered to be in the private domain.
Klaus Schwab, founder of the World Economic Forum, said “The global health crisis has laid bare the unsustainability of our old system in terms of social cohesion, the lack of equal opportunities and inclusiveness.”
And last but not least, Covid-19 demonstrated how globally interconnected we are. In order to cope with “black swan” like pandemic and keep ourselves safe, countries must cooperate. We cannot afford politicizing the pandemic. But there is more. The Bank for International Settlements in January this year warned the coming of “the green swan,” which are “climate-change black swans.” It is certain that they will come; their impact will be more damaging; and the way they affect us will be more complex. We will have to manage to live with the black swan, and Covid-19 is a wake-up call. We have no time to waste in preparing for the green swan as well.
Simon Ogus: What Has Not Been Changed by Covid-19 in Hong Kong
Post-Covid-19, and despite its well-documented troubles, Hong Kong will continue to be indispensable to Beijing as a controlled funnel for financial flows both in and out of the mainland. It will also remain overwhelmingly the principal gateway for both renminbi trade settlement and offshore renminbi deposit taking, while dominating bond and equity trading in and issuance for mainland companies. Indeed, contemporary American legislative initiatives seem set to reinforce such trends. The renminbi’s role in international trade and finance, and increasingly as an investible currency, should continue to steadily expand, even though its full convertibility is far from imminent, further enhancing Hong Kong’s strategic importance for China. The fact is that Hong Kong remains unique in being able to combine an internationally top-notch financial and legal architecture with an un-replicable pool of talent with deep Chinese knowledge, connections and expertise. One has to assume/hope that the powers in Beijing recognize as much (See: Post-Coronavirus Hong Kong: Abiding Strategic Relevance)
Beijing’s decision to impose the security law in Hong Kong will certainly complicate the territory’s business environment, but much will depend on how the law is drafted and enforced. The details matter, and while there is a wide margin of uncertainty in this regard, many of the doomsday predictions are founded on extreme assumptions that are–at this juncture–unsubstantiated.
Regarding the U.S.’s avowed intention to revoke special privileges for Hong Kong, calibration matters, for all parties. More extreme measures would not only hurt ordinary Hong Kong people but would additionally entail considerable pain and financial volatility for American interests. The bottom line is that, short of a convergence of worst case scenarios in terms of how the security law is drafted and implemented, and how far the U.S. is prepared to go to “punish” China using Hong Kong as an unwitting football, Hong Kong’s unique and special advantages should persist in the post-Covid-19 world.