The economies of the region began to bounce back after a severe economic shock in 2020.
- However, only China and Vietnam have followed a V-shape recovery path with output surpassing pre-COVID-19 levels in 2020.
- In the other major economies, output remained on average around 5 percent below pre-pandemic levels, with the smallest gap in Indonesia (2.2 percent) and the largest gap in the Philippines (8.4 percent).
- Economic contraction has been particularly severe and persistent in some of the small Island economies, with output in 2020 remaining more than10 percent below pre-pandemic levels in Fiji, Palau, and Vanuatu.
Increased poverty and entrenched inequality
Due to the economic distress, poverty in the region stopped declining for the first time in 20 years and 32 million people were prevented from escaping poverty.
Inequality increased because of the disease and the resulting shutdowns, as well as the unequal access to social support and digital technologies.
- The depletion of physical and human capital is more dire among the poor. In some countries, children of households in the bottom two-fifths of the distribution are 20 percentage points less likely to be engaged in learning than children of the top one-fifth.
- Women are suffering more violence: 25 percent of respondents in Lao PDR and 83 percent in Indonesia said that intimate partner violence worsened due to COVID-19.
- Sales of micro-enterprises shrank by a third compared to a quarter for large firms. Smaller firms were also less likely to take advantage of new digital opportunities.
From divergence to three-speed recovery
- In 2021, China and Vietnam’s growth is expected to be 8.1 and 6.6 percent, respectively. Because they were less scarred by the crisis, they will converge early to pre-COVID projections.
- The rest of the region will grow about 4.4 percent on average, about 0.4 percentage points slower than pre-crisis growth. The deeper crisis scars will slow down convergence to pre-COVID projections.
- Among smaller countries, the recovery is expected to be particularly protracted in tourism-dependent Island economies, with growth expected to be negative in about half of the countries, even though they have been largely spared by the pandemic.
Drivers of good performance
The better performing countries were able:
- To contain COVID-19 efficiently, by transitioning early from stringent shutdowns to effective test-based strategies rather than relying on prolonged lockdowns. (The roll-out of the vaccine has so far not had an appreciable impact on growth in the region.)
- Take advantage of the revival of trade in manufactured goods, especially electronics, and were not excessively dependent on earnings from tourism.
- To provide significant fiscal and monetary support because their governments had adequate policy space.
Growth-boosting U.S. stimulus and growth-dampening slow vaccine roll-out
- U.S. stimulus could add 1 percentage point on average to the growth of countries in the region in 2021 and bring forward recovery by one quarter on average.
- But slow implementation of vaccination, because of the mismatch between vaccines and need and limited capacity, could retard growth by as much as 1 percentage point in some countries.
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Action to contain COVID-19
- With current stocks and allocation of vaccines, industrial countries would achieve more than 80 percent coverage, developing countries only about 55 percent by the end of 2021. At the same time, new more infectious and possibly immune resistant variants (VOCs) could exacerbate outcomes.
- In countries where COVID-19 control has not been achieved, like Indonesia and the Philippines, rapid vaccination is a priority. Countries, such as China and Vietnam, that are effectively pursuing COVID-19 elimination, have space to develop a more appropriate vaccination strategy for their large populations.
- Since vaccination will not be sufficient to completely suppress viral transmission soon in most countries, governments must enhance other non-pharmaceutical interventions (NPIs), especially testing-tracing-isolation, that would magnify the impact and cost-effectiveness of vaccines.
Support today without instability tomorrow
- Fiscal policy is expected to play a demanding triple-role of supporting relief, recovery and growth. In many EAP countries, relief is less than earning losses, stimulus has not fully remedied deficient demand, and public investment is not a significant part of recovery efforts. At the same time, public debt has increased on average by 7 percent of GDP as governments committed to fiscal support equal to nearly 10 percent of GDP.
- Governments in the region can increase the efficiency of expenditure. For example, households and firms whose incomes were unchanged during the crisis were almost as likely to receive assistance as those who suffered income losses. Returns to public investment are four times higher in countries with better public investment management.
- Rather than curtail spending or raise taxes, governments can credibly commit to future discipline and efficiency-enhancing reforms. They could also commit to phasing out wasteful and regressive spending. Fuel subsidies account for between 0.25 percent and 1.3 percent of GDP in the large EAP countries.
- EAP countries can continue to use monetary policy to share the burden of economic support because their interest rates are positive, reserves requirements relatively high and inflation subdued.
Going green without hurting growth or the poor
- The region is a major contributor to rising greenhouse gas emissions – with emissions tripling since the year 2000 and now accounting for nearly one-third of global emissions. The region also faces the consequences of climate change. But decoupling output growth from emissions will require a massive transformation in consumption and production patterns. Effectively only one-in-three recovery measures taken by China are climate friendly, and only one-in-five by Indonesia and the Philippines.
- Policymakers can rely on a mix of instruments: (i) phasing out fossil fuel and energy subsidies, (ii) adjusting carbon prices, (iii) fostering public investment in innovation and in low carbon infrastructure, (iv) undertaking low-carbon policy reforms in key sectors, such as energy, transport, agriculture, land use and urban planning.
- Transformation to a low carbon economy will need to be accompanied by steps to ensure the costs are distributed fairly. For instance, recycling revenue generated by carbon pricing back into the economy could help subsidize abatements costs, alleviate negative social impacts, and cut other distortionary taxes on labor, consumption, or profits.
International cooperation as complement to bold national action
- International cooperation in production and approval of vaccines and other products for non-pharmaceutical interventions like testing, and cooperation in allocation based on need, would help contain COVID-19 and reduce the emergence of new variants.
- International coordination would magnify the collective impact of fiscal policy because governments tend to under-provide stimulus relative to the global optimum.
- Apart from cooperative action to reduce emissions, international assistance would ideally help poorer developing countries take deeper climate action than they can with their own limited resources.
China’s contribution to three global public goods
China could play a significant role in pandemic control, by expanding production and exports of testing equipment, masks, and vaccines; global recovery, through consumption-enhancing fiscal stimulus; and a greener world, by taking stronger climate action. In each case, China would also benefit itself: by opening borders in a safer world; achieving more balanced domestic growth; and mitigating the adverse domestic consequences of climate change.
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