In this webinar, Dr Kensuke Tanaka presented key findings of the 2021 edition of the OECD Economic Outlook for Southeast Asia, China and India and discuss the importance of reallocating resources to digitalisation in response to the Covid-19 pandemic
REGIONAL ECONOMIC STUDIES PROGRAMME WEBINAR
Monday, 31 May 2021 – ISEAS – Yusof Ishak Institute hosted a webinar on “Ongoing Challenges of COVID-19 for ASEAN: Quantitative Analyses and Policy Responses”, delivered by Dr Kensuke Tanaka, Head of the Asia Desk at the OECD Development Centre. The discussant was Professor Naoyuki Yoshino, Professor Emeritus at Keio University and former Dean of the Asian Development Bank Institute (ADBI).
The webinar commenced with an overview of the growth prospects in Emerging Asia. The year 2020 saw historically low growth rates in ASEAN and Emerging Asia (ASEAN, China and India). Nonetheless, these rates are anticipated to bounce back in 2021. Dr Tanaka also emphasised that the COVID-19 crisis is quite distinct from previous economic crisis; it has resulted in greater job losses in comparison to previous crisis and is caused by both demand and supply shocks in manufacturing and services.
Despite the pessimistic outlook, there are positive indications of recovery from the crisis. One area is trade driven by demand from China and to some extent, the United States. In the region, an increase in export growth numbers were observed in Indonesia, Vietnam and Malaysia. The recent conclusion of the Regional Comprehensive Economic Partnership (RCEP) could also contribute to further trade growth, especially benefiting export-dependent countries such as Malaysia and Singapore. In addition, financial markets have remained stable due to large amounts of liquidity. The current challenge for countries would be to recover from the COVID-19 crisis while maintaining stability in the financial markets.
Dr Tanaka then discussed the challenges of forecasting the impact of the pandemic on economic growth. He outlined the three main traditional approaches to forecast growth which includes the structural model approach which uses a medium-term projection framework (MPF), the reduced-form model approach, and the indicator-based approach. A different approach using natural disasters may also serve as a reference for large external shocks to measure a country’s resilience. However, there are numerous challenges in forecasting growth. These include difficulties in estimating potential output, measuring of elasticities and incorporating flexibility for changing policy stances.
The webinar then turned to the discussion on immediate policy responses, specifically that of health, monetary and fiscal policies. Dr Tanaka highlighted that current good practices should be scaled up, resources should be better allocated, vaccines should be distributed in a safe and equitable manner and precautions should be taken against any uncertainties i.e. new virus mutations.
On the monetary policy front, Dr Tanaka noted that the scope for additional rate cuts is limited as inflation targeting is not as effective as evidenced by the downward inflation pressure in countries such as Indonesia and Thailand. Thus, the focus of monetary policy could shift to improving policy transmission instead. Other alternatives include using the natural rate of interest (the interest rate at which actual output equals to potential output) as a supplementary benchmark. Currently, these rates appear to be largely decreasing across countries, possibly due to changes in demography and productivity growth. Comparing the impact of previous financial crisis on the natural rates of interest, similar trends appear today. Moreover, the pandemic has weakened governments’ fiscal position. As such, targeted fiscal spending and broader financing options should be considered.
Dr Tanaka went on to describe the medium-term policy challenges in reallocating resources for digitalisation in response to COVID-19. In many countries, the use of digital health tools and telemedicine platforms has increased. However, for telemedicine to become an alternative to traditional healthcare, access to telemedicine, regulatory framework and reimbursement rules and cybersecurity need to be improved on. For e-learning, expansion of internet access and ensuring education quality are some steps that should be taken for greater progress in e-learning. Dr Tanaka remarked that although initiatives to support digitalisation in different countries have been accelerated by the pandemic, challenges such as lack of awareness and budgetary limitations remain.
The webinar was then handed over to Professor Yoshino who began with a brief introduction sustainability of debt in Asian countries. Sustainability is often determined by the Domar Condition of Fiscal Stability which considers interest rate and the economy’s growth rate. Should the former exceed the latter, the deficit is deemed as unsustainable. However, Professor Yoshino pointed out that the Domar condition only applies to the US because the USD is a major currency and US government bonds are purchased worldwide. As such, Asian governments must use alternatives to measure fiscal sustainability.
To accurately measure the demand of government bonds, the existing stock of government bonds and the interest rate sensitivity of overseas and domestic investors have to be accounted for. Applying this to the debt situation in Greece and Japan, evidence showed that Greece violated the stability condition while Japan did not. Professor Yoshino also argued that domestic investors are key in determining the stability of the budget, stabilising the market and preventing any overhang. Investors of Greek bonds resided mostly overseas while a large majority of Japanese bonds were held domestically.
Professor Yoshino then proceeded to examine the demand of infrastructure investment, a crucial driver of economic development. Fortunately, young ASEAN countries are able to hinge on large fiscal multipliers. However, public debt has been increasing and Public Private Partnerships (PPPs) have been experiencing high rates of cancellation due to the low rates of return. To ease the fiscal burden on the government, Professor Yoshino proposed to increase the rate of return from infrastructure investment to attract private investment. Citing the Mekong region, Professor Yoshino shared that a port could not be constructed due to low rates of return during the initial period of development. However, large spillover effects, such as greater business flows and higher tax revenues, could be enjoyed if a port was constructed. To rectify this, spillover benefits could be passed to investors through the implementation of a floating-interest-rate infrastructure bond. Investors receive the returns equivalent to government bonds first, then receive higher returns when the spillover effect comes into play. Alternatively, a land trust could also be adopted to smoothen land acquisition in countries that allows landowners to lease land, allowing infrastructure companies to invest in projects in a less arduous manner.
Professor Yoshino emphasised that education has many spillover effects and can enhance the impact of infrastructure development. As such, it is crucial for students to have access to education via their phones and not just computers. Similar effects can be achieved via e-commerce where start-ups and farmers can advertise and sell their products directly to consumers.
Professor Yoshino also highlighted that many households and small businesses have borrowed from private lenders due to rejections from banks, resulting in debt overhang. The sustainability of the debt is influenced by several factors such as the loan to income ratio, interest rate, loan term, growth rate of income and marginal propensity to consume. Professor Yoshino suggests regulating money lenders who charge high interest rates.
The webinar concluded with Dr Tanaka and Professor Yoshino answering the questions posed by the audience. The questions included the long-term and permanent effects of the government’s response to the pandemic, the potential inter-generational effects on education and health that can perpetuate inequality and the use of big data in forecasting business cycle during the pandemic.