Asia’s economies are better together in battling the fallout from coronavirus
- Asian countries are facing an ‘Indiana Jones’ dilemma of whether to take on huge foreign debt to reboot their economies at the risk of a financial crisis
- This brutal trade-off can be managed if countries in the region work together
In 1984 Hollywood blockbuster Indiana Jones and the Temple of Doom, the film’s title character faced a tough decision. While crossing a rickety bridge over a crocodile-infested river, his young companion tripped and was left hanging on for dear life. If Indiana did nothing, the boy would fall to a gruesome death. But if he tried to cross the bridge to help him, the additional weight risked collapsing the entire structure.
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But borrowing from abroad creates risks which could lead to a financial crisis. It’s a brutal trade-off, yet one that can be managed through regional cooperation.
This is one of the major recommendations of a new report from an eminent panel of regional economists called An Asian Strategy for Recovery and Reconstruction After Covid-19, which sets out an agenda for cooperation.
Emerging Asian economies have been hit on all sides by Covid-19. Collapsing exchange rates have inflated the size of their foreign debts while rising bond yields have seen the cost of servicing these debts increase, with the collapse of trade, commodity prices, tourism and investment also causing sources of foreign exchange to dry up.
These economies are not to blame for their predicament. Thanks to decades of reform, Asian financial systems are far more effective at managing risk than they were in the late 1990s, when much of the region was gripped by a financial crisis. Banks are well capitalised. Supervisory frameworks are stronger. Exchange rates are determined more by the market and better able to absorb shocks. Large current account imbalances have narrowed considerably. Macroeconomic stability has given Asian economies more monetary and fiscal policy freedom and independence.
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Despite substantial reform, emerging economies remain unable to undertake the sort of vital measures being implemented in advanced economies. These include large-scale expenditures on health care to treat and reduce the spread of Covid-19, income support payments that make lockdowns possible, fiscal stimulus to support demand as the virus abates and large-scale asset purchases by central banks to keep economies liquid, contain borrowing costs and ensure financial markets function effectively. Some of this lack is caused by increased informality in emerging economies, but much of it is a symptom of shallower financial systems with relatively weak institutions.
Domestically, ensuring policymakers and institutions have the legal tools and protections necessary to respond quickly and effectively will be vital. Bailing out banks can send ministers to jail in some countries, a legacy of the Asian financial crisis. Having clear bankruptcy and resolution processes will reduce the crisis’ ultimate cost. Promoting transparency in institutions will build trust among the public and investors, reduce risks and volatility and improve the functioning of markets.
Regionally, development banks should proactively expand and create more limited-conditionality liquidity facilities while regional financing mechanisms expand the availability of precautionary lending and increase surveillance activities.
Globally, Asian IMF members must push for a major new issuance of special drawing rights (SDRs) combined with the creation of new limited-conditionality precautionary lending facilities. A major new SDR issuance will provide vital foreign exchange during times of financial stress while greater access to precautionary financing will reassure markets and provide greater financial resources with less IMF-stigma. Asian members of the G20 should push for a renewal of bilateral loans to the IMF and, in the longer-term, push for IMF reform to increase the quota shares of emerging economies.
Asian governments have had a domestic focus since the spread of Covid-19. This is understandable, but it is a false economy. International cooperation makes domestic challenges easier to manage. Now more than ever, Asia’s economies are better together.
Adam Triggs is director of research, and Shiro Armstrong is director, at the Asian Bureau of Economic Research, The Australian National University. They are among the contributors to the paper An Asian Strategy for Recovery and Reconstruction After Covid-19 available at eaber.org/covid19