The Covid crisis did not affect every country in the same manner. We have long known that symmetric shocks almost always have asymmetric consequences. While there are marked differences even within homogeneous areas (such as the Eurozone), the differences between macro-regions are particularly striking. In October of this year, the IMF’s World Economic Outlook projected a 5.8% decline in GDP for advanced countries in 2020 (with an 8.3% decline for the Eurozone and a 4.3% decline for the United States). Emerging and developing Asian countries did much better (-1.7%); China, which put the Wuhan area only under lockdown early in the year, even managed to achieve positive growth according to IMF estimates (+1.9%). These estimates were made before the second wave, which hit Europe and the United States particularly hard. As a result, these differences are likely to increase. Not only did the crisis hit advanced countries harder, but the recovery is likely to be stronger in emerging Asian countries (+6.3% in 2021) than in the Eurozone (+5.2%) or the United States (+2.9%).
There is nothing surprising about the fact that the growth rate in emerging and developing countries is structurally higher than that of developed countries with larger capital stocks. There is a rather high degree of consensus among economists on so-called convergence (under non-pathological conditions). In addition, Europe had particularly disappointing growth rates over the last decade, due to unfortunate policy choices. The better performance of Asian countries during the crisis and the expectation of a strong recovery on their part begs the question: what explains their greater dynamism, even in their ability to react to an external shock?
We can begin by pointing out what does not explain the difference in performance. Almost all East Asian countries supported their economies with expansive monetary and budgetary policies. But the size of the macroeconomic stimulus (in particular the budget stimulus) is comparable to that of advanced countries, and cannot by itself explain the greater resilience of Asian economies. Domestic consumption dynamics during the spring lockdown were also similar to those of other regions, and cannot explain the difference in performance.
One factor that did play in favour of Asian economies was their effectiveness in containing the health crisis. First and foremost, health authorities almost everywhere in the region reacted promptly to the crisis, and once they brought the pandemic under control they installed efficient testing and tracing measures. On both these fronts, Asian countries did better than the rest of the world, probably due to their experience in tackling previous pandemics. Learning-by-doing is a major factor of productivity, as Kenneth Arrow pointed out. This explains why the second wave was far less violent in the continent, or even non-existent in China. This allowed Asia to start its recovery earlier, and more importantly, to consolidate the progress made during the second trimester, while the rest of the global economy was once again under lockdown, albeit only partially. Additionally, economic recovery in the region was spurred by a boom in exports of medical and health supplies and machinery, and by exports in home appliances and electronics, global demand for which rose during the pandemic. Successfully avoiding a drop in GDP in the autumn obviously had an effect on growth in 2020, but it also limited permanent damage to the economy. Asian economies never experienced the wave of business failures that various countries managed to avoid during the first semester, but that inexorably came to pass at year’s end. Asia thus has a much more solid foundation upon which to build the 2021 recovery than other regions do.
But the outlook is not entirely rosy. The pandemic increased inequalities worldwide, since its impact on the labour market hit low-income workers particularly hard. In advanced countries, and particularly in Europe, this impact has been mitigated by income and employment support programmes (but how long will they last? Will they manage to limit rising inequality in the coming year? The past record is far from encouraging!), in Asian countries social security measures are far more limited.
In Asia, the accumulation of human capital, investment, and future growth may be hindered by the insufficient protection provided by the welfare state. Businesses and families have had to focus on meeting immediate needs by dipping into savings (or accumulating private debt, which had been quite high even before the crisis in some countries) while sacrificing investments in education and physical capital. Business closings and the severing of longstanding employment relationships could lead to a loss in know-how and intangible capital, affecting productivity in the long term. Should these trends fail to rapidly reverse, the outlook in the mid-term could suffer. Yet some perspective is needed. Asia is far from homogeneous: its countries have different levels of development, and several have very high levels of human capita, South Korea being a fitting example. The impact of the crisis on the accumulation of human capital will thus vary greatly.
Last but not least, the pandemic may leave us with a re-organization of global production, with shorter value chains in particular. Should this happen, East Asian countries should in turn re-organize their chains of production, which could prove highly complex.
In summary, emerging Asian countries, and China in particular, withstood the Covid crisis better that those in other regions and at least in the short term their recovery will be stronger. Nevertheless, the crisis exacerbated some structural weaknesses in the economies of certain East Asian countries, and it has unveiled new ones. The outlook for the coming years remains quite uncertain in these countries as well.
The world as a whole is on a slippery slope, which might lead to a lengthy period of stagnant growth and reduced well-being. But nothing is inevitable: as Keynes once said, our destiny is in our hands.
