Author: Ganeshan Wignaraja, Lakshman Kadirgamar Institute

Developing Asia is famous for engineering V-shaped recoveries following the 1997 Asian financial crisis and the 2008 global financial crisis, as well as emerging as a key engine of global growth. The severity of the COVID-19 pandemic has sparked concerns about what shape global growth recovery will take and what it means for developing Asia.

As of 1 April, China accounted for 9.6 per cent of global cases while South Asia accounts for 0.43 per cent. The rapid transmission of the infection is linked to the globalisation of the world economy and the advent of global travel. It has triggered a public health emergency and an economic shock. Stock markets across Asia have tumbled and China-centred global supply chains are collapsing. Travel bans and lockdowns have disrupted daily life. Unemployment and income inequality are rising.

Developing Asia grew at 5.6 per cent in 2019 and the International Monetary Fund (IMF) projected that this figure would uptick to 5.8 per cent in 2020. It is premature to assess the full economic impact of COVID-19 on developing Asia as economic data is still lacking and forecasting models are not adequately specified to analyse the disruption from the pandemic. The IMF will update its forecasts during the virtual Spring Meetings this year.

Projections made in a study on the medium-term outlook on developing Asia’s growth and the prospects for middle-income countries are being updated using leading indicators (such as the manufacturing purchasing managers index) in an attempt to predict significant changes in economic activity.

This updating exercise suggests two economic scenarios for developing Asia and the world, with the depth of the downturn depending on the effectiveness in containing COVID-19.

The first scenario is a short outbreak and a limited economic impact on developing Asia. The spread of COVID-19 is checked within a few months through lockdowns, social distancing, virus testing, quarantine and medical treatment. A vaccine is available ahead of schedule. Developing Asia’s growth could be between 4–4.5 per cent in 2020. This is above expected global growth of 2.3–2.5 per cent. An upturn in Asia could be likely in 2021. Yet Asia would still fall into recession as defined as two consecutive quarters of decline in a country’s real gross domestic product (GDP).

The second scenario is a long outbreak and a prolonged economic impact on developing Asia. In this scenario, COVID-19 continues to spread rapidly in Asia, containment measures are only partially successful, new mutations could bring a second wave and vaccine development takes longer than expected. Developing Asia’s growth may fall to 2–2.5 per cent in 2020 and remain sluggish in 2021. This is worse than the bottoming of Asian growth to 2.8 per cent during the 1997 Asian financial crisis. Meanwhile, global growth could slip to 1–1.5 per cent in 2020. This would constitute a lengthy recession.

As the pandemic is fast-moving with the epicentre spreading from China to Europe and the United States, the L-shaped second scenario seems more likely than the first. Facing such a bleak outlook, central banks in developing Asia have cut interest rates and are buying assets to support financial markets. Governments are undertaking fiscal stimulus and welfare measures.

Looking at Asian debt dynamics helps to grasp why central banks and governments are intervening. IMF technical work in the early 2000s conservatively suggested prudential benchmarks on public debt of a debt-to-GDP ratio of 60 per cent for developed economies and 40 per cent for developing economies. While not officially endorsed by the IMF, it was thought that breaching these benchmarks would threaten fiscal sustainability.

With a government debt-to-GDP ratio of 58.8 per cent in 2019, developing Asia exceeds the benchmark for developing countries and is approaching that for developed economies. China’s government debt-to-GDP ratio of 60.9 per cent in 2019 is argued to significantly understate the total debt-to-GDP ratio of 303 per cent when corporate and household debt are included. The pandemic has led to concerns about high debt in state-owned enterprises and corporates held in a fragile shadow banking system.

South Asia’s government debt-to-GDP ratio of 66.5 per cent in 2019 also exceeds IMF benchmarks, with outliers Pakistan and Sri Lanka at about 80 per cent. Interestingly, at least in Sri Lanka, there is little evidence of a Chinese ‘debt trap’ due to commercial borrowing for…

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Author: Gerrit van der Wees, George Mason University and George Washington University

President Tsai Ing-wen and her Democratic Progressive Party’s (DPP) momentous election victory on 11 January 2020 represents a significant turning point for Taiwan. It marks the culmination of a democratic transformation that started with the end of martial law in 1987 and the commencement of democratic reforms by former president Lee Teng-hui in the early 1990s. Since then, the government has changed hands three times. But a persistent public fear exists that a return of the Kuomintang (KMT) will cause Taiwan to backslide away from democracy and towards China.

This happened in 2008 when Ma Ying-jeou regained the presidency. His pro-China stance led to the 2014 Sunflower Student Movement, which changed the political landscape, and led to major defeats for the KMT in the local 2014 and national 2016 elections.

The overwhelming mandate received by President Tsai and her party significantly reduces the danger of such a pro-China agenda. The KMT candidate Han Kuo-yu lost by a margin of almost 20 per cent, demonstrating that the KMT’s pro-China approach is losing ground, especially among younger voters. In its recent search for a new chairman, the candidate elected on 7 March 2020, ‘Johnny’ Chiang Chi-chen, campaigned on the theme that he would ‘bring back’ the young voters. It remains to be seen whether he can bring about changes that appeal to young voters.

As Mark Harrison and Huong Le Thu wrote, ‘Han’s campaign machine was dysfunctional and the KMT was beset by an identity crisis. In the second half of 2019, the protests in Hong Kong left few in Taiwan under the illusion that Beijing would honour any arrangements that would respect any form of autonomy. The younger generation in particular saw an urgency to defend Taiwan’s sovereignty, maintain their democracy and refuse a future like Hong Kong’s’.

The overwhelming victory also represents a clear mandate for President Tsai and her DPP, which — in combination with several smaller parties — holds a majority of 70 seats in the 113-seat Legislative Yuan. Tsai will be able to push through legislation and continue reforms initiated by her government in its first term. These reforms include much-needed judicial reform, transitional justice measures, further economic and industrial reforms, streamlining of the economy and strengthening substantive ties with the United States, Europe, Southeast Asia, India, Japan, Australia and New Zealand.

A question remains: how will Taiwan’s relationship with China develop moving forward? If Beijing continues or intensifies its current approach of pushing Taiwan into a corner, it will increasingly find the United States and other democratic countries in the way. The democratic world has now clearly seen that President Tsai has a broad popular mandate and will be much more supportive of Taiwan and its democracy.

In this context it is important to understand that President Tsai and the DPP are the political descendents of the native Taiwanese democracy movement that brought about Taiwan’s transition to democracy in the 1980s and 1990s. Rowan Callick emphasises that the youth vote focused on issues of identity in place of issues of living standards. The majority of Taiwan now identifies as Taiwanese and not Chinese, with only 13 per cent of the population descended from those who came from mainland China in the 1940s.

This distinction is essential for understanding the Taiwan of today, as the China–Taiwan relationship has until now almost exclusively been cast by media and governments alike in terms of the historical rivalry between Mao Zedong’s People’s Republic of China (PRC) and Chiang Kai-shek’s Republic of China (ROC). This narrative asserts that Taiwan ‘split off’ from China in 1949, and that Taiwan and China were perpetual rivals dating back to the Chinese Civil War.

That may have been the case from the 1950s through the 1980s when Chiang Kai-shek’s government imposed ruthless martial law on the island while still claiming to rule all of China. During that period, ‘Taiwan’ became synonymous with Chiang Kai-shek’s ROC. But after the momentous transition to democracy in the late-1980s and early-1990s, the Taiwanese developed their own narrative, very different from  Mao Zedong’s PRC or Chiang Kai-shek’s ROC — an open and inclusive multi-ethnic identity, emphasising that all people who identify with Taiwan are Taiwanese.

A new and democratic Taiwan should prompt the international…

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Author: Yukon Huang, Carnegie Endowment

China’s leadership expected that economic growth in 2020 would be a celebratory event, marking a doubling of the economy’s size over the past decade. But the new coronavirus (COVID-19) has obliterated those forecasts despite Beijing’s draconian measures effectively bringing the epidemic under control sooner than anticipated. The nationwide shutdown led to the epidemic’s slowdown in mid-February, but by then the extent and speed of the virus’s spread already paralysed Chinese society.

Chinese President Xi Jinping took a victory lap on 10 March by visiting the epicentre of virus in Wuhan, the capital of Hubei province. By 19 March, the number of new domestically driven cases fell to zero. Almost all new cases were recent returnees from abroad who found it safer to be in China than in Europe, the epidemic’s new epicentre, or the United States, where the spread of the virus is accelerating.

Yet the economic damage to China is severe, and the prospects for recovery — even with massive financial support — remain uncertain. Sustainably restoring China’s productive capacity in the coming weeks would require an unlikely revival of US demand. China’s recently announced economic indicators for January and February were much weaker than market watchers had forecast. Year over year, retail sales fell by 20.5 per cent and industrial production by 13.5 per cent — China’s worst numbers on record.

The prolonged containment effort has left millions of migrant workers unable to return to work, and factories are still struggling to return to full capacity given the shortages of labour and essential parts. Analysts have downgraded their outlook for the Chinese economy and consider a historic contraction in the first quarter nearly guaranteed. Even with a major fiscal stimulus and interest rate cuts, estimates for 2020 growth vary from 1–4 per cent compared to the original target of 6 per cent.

By contrast, the 2002–2003 economic recovery from the SARS virus was V-shaped, as China made up the entirety of its short-term losses by quickly tapping into strong consumer demand in the West. China was relatively unaffected by the 2008 global financial crisis, when global production and supply networks continued to function, enabling it to maintain rapid growth. Moreover, China’s debt situation today compared with a decade ago makes it less likely that it can rely on expansionary monetary policies or credit-fuelled support for the property market to stimulate growth.

While China’s economy is slowly restarting, the global spread of COVID-19 means that major European economies are in turmoil and the United States is still in the early stages of ramping up its response with unprecedented fiscal measures. China will likely struggle to find enough customers in the West, and emerging markets in Asia and elsewhere are simply not large enough to compensate. Affected sectors include automobiles, as major Western companies have closed down production, and communications equipment, as supply chains have been disrupted.

The outbreak will likely force a re-examination of the logic underpinning the US administration’s extensive use of tariffs to pressure China on trade and investment reforms. The phase one trade deal concluded in January is now inoperative, since there is no possibility that China can meet its agreement to purchase vast quantities of US goods this year.

More importantly, the US strategy to pair tariffs with trade restrictions is incompatible with new priorities, such as arresting the pandemic and ensuring producers have access to necessary parts. There are critical shortages in medicinal supplies emerging in the United States, for example, for which availability and cost have been aggravated by the White House’s tariffs and export restrictions. For better or for worse, the global economy is based on connectivity. The revival of world trade and well-functioning supply networks is essential to resuscitating growth in both China and the West.

Yukon Huang is a Senior Fellow with the Asia Program of the Carnegie Endowment for International Peace.

A version of this article originally appeared here on Carnegie Endowment for International Peace.

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