- Asian Development Bank recently published a report updating its assessment of the economic impact of COVID-19. We hosted a webinar with Dr. Badri Gopalakrishnan, the author of the report. Dr. Badri is based in Seattle and is a consulting Economist for the ADB and McKinsey and Company. This note has the summary of the key points made by him. The full video of the Webinar is on our blog site( www.kasb.blog).
- ADB’s assessment report has used Global Trade Analysis Project for modelling the economic impact. GTAP is a quantitative model that use supply chain inter-sectoral and inter-country linkages to measure the impact of a shock. This model considers five different aspects of the economy : 1) Tourism 2) Simultaneous disruption in supply and demand 3) Investment behavior 4) Explicit Trade measures 5)Stimulus injection. The report concludes that longer the containment period, the more difficult and prolonged the recovery will be. Strong income and employment protection are critical to support the most vulnerable and avoid long-term economic scarring.
- GDP Impact: New analysis using the Global trade analysis Project estimates that the global economic impact of COVID-19 could reach $5.8 trillion(6.4% of global GDP) under a 3-month containment scenario, and $8.8 trillion (9.7% of global GDP) under a 6-month containment scenario.
- Potential economic impact on Asia and the Pacific: $1.7 trillion(6.2% of regional GDP) under 3-month containment scenario and $2.5 trillion (9.3% of regional GDP) under 6-month containment scenario.
- Sub-regional impact: output in East Asia excluding PRC will be down by $164 billion to $257 billion (6.0% to 9.3% of the subregion’s GDP). GDP in South Asia will also be lower by $142 billion to $218 billion (3.9% to 6.0% of GDP).
- G3 Impact: Output in the US, Japan and the EU plus the UK(G3) will fall by $3.5 trillion to $5.3 trillion (7.3% to 11%).
- Impact on various sectors in the economy: According to Dr. Badri and the ADB report, retail and recreation sector is hit badly followed by grocery and pharmaceutical sector. Transport and workplaces are also been negatively impacted.
- Government policy response-such as direct income and revenue support- could soften the COVID-19 impact by as much as 30%-40%, reducing the global economic loss to $4.1-$5.4 trillion (4.5%-5.9% of global GDP).
- Restriction to transport, labor mobility and workplace closures acted as supply shocks to the economy. This spilled over to the demand side as people were locked down in their homes and workers were laid off and lost income.
- Potential economic impact using three channels: 1)Higher Trade Costs 2)Negative Productivity shock 3)Policy response.
- Higher trade costs: Border restrictions and travel bans increased the cost of trade and services. Border closure required longer routes to move goods along the global supply chain and severe reduction on passenger flights mean freight was limited.
- Productivity shock: Impaired the movement of people and factors of production. Translates into lower consumer demand. Weak consumer demand in turn affect business sentiment and investment, compressing demand even further. Production of goods and services also disturbed.
- Policy response: Direct income and revenue support were implemented as subsidy or negative taxation to consumers and producers.
- Effects on Trade: Global trade will cut by $1.7 trillion to $2.6 trillion (1.9% to 2.9% of GDP).
- Domestic vs International spillover effect: Impact of total trade is roughly 30% of the impact of the impact on global GDP. Spillover effects from COVID-19 are relatively small compared with the domestic impact.
- Impact on employment and wage income: Equivalent of 158 million to 242 million jobs will be lost in the two scenarios (6.0-9.0% of the total employment). For Asia, drop in employment will reach 109 million to 167 million -or almost 70% of the total employment losses globally. For the G3 economies, the combined drop in employment ranges from 29 million to 44 million- or 18% of the employment losses globally.
- Impact on wage incomes: Globally, labour income will drop between $1.2 trillion to $1.8 trillion. For Asia, the decline in wage income will range from $359 billion to $550 billion. For G3, the combined fall in labor income ranges from $735 billion to $1.1 trillion.
- Effects of Fiscal Stimulus: Potentially, stimulus and macroeconomic stabilization packages could raise global GDP by $1.7 trillion to $3.4 trillion (1.9% to 3.7% of global GDP). For Asia, macroeconomic stimulus could also add $339 billion to $675 billion (1.3% to 2.5% of the region’s GDP). For the G3 economics, they could raise the output by $1.3 trillion to $2.6 trillion (2.6% to 5.3% of their aggregate GDP).
Key takeaways from webinar with Dr. Badri:
- According to Dr. Badri, this is a low probability, high impact shock. Impact has been pretty high even for countries that are less affected health wise, mainly because economies are at standstill due to lockdowns in place.
- South Asian countries have smaller stimulus packages as compared to the developed world. Japan has the highest stimulus package as a % of GDP.
- Stimulus packages would not only mitigate the liquidity issues for the masses but would also bail out companies that are failing.
- Whether to bail out the failing companies or not is debatable. Dr. Badri believes that one possible remedy is to bail them out by taking equity. Conditional way.
- Difference between short-term and long-term containment is almost more than double in some cases. Dr. Badri believes that it is better to endure some severe impact for short period of time than to let the impact linger for longer time period.
- Recovery: Dr. Badri believes that recovery will be a combination of V, L and U. In some sectors requiring people to come together it will be close to L or an unusual U. For food and agriculture sector, since they have been relatively less affected from the demand perspective, recovery will be V-shaped. As far as the auto-industry is concerned so it has been falling globally for a while now. Dr. Badri thinks it will be a U-shaped recovery there. Overall, Dr. Badri feels that large number of industries are going to go through U-shaped recovery. For the bunch of service sector, the recovery can be L-shaped.
- Fiscal space problems: Given the financial constraints, Dr. Badri is of the opinion that governments can be prudent in spending the stimulus. They can do more facilitation and equity participation rather than just shelling out money. He mentioned that India’s large part of the package has been reforms that have been pending for a while. Enabling and facilitating environment needs to be created.
- Dr. Badri feels it is perfect opportunity to bring some bold reforms and recovery can be fresh and resilient. He feels that recovery is not top-down but also bottom-up because it would depend a lot on how specific industries are going to come up with innovative solutions.
- At micro level, industries need to come up with different and innovative retailing and production strategies. On macro level, he feels there is a lot of tendency across the world to more closed economy and less linked to the global supply chain.
- US-China trade war as an opportunity: Dr. Badri feels that trade tensions between US-China can be a blessing in disguise for developing countries through various channels. Firstly, it would lower the commodity prices due to falling demand and hence developing countries can benefit. Secondly, less trade between US-China could mean that there could be trade diversion effect. China or US may switch to importing from developing countries like Pakistan or India. Thirdly, there can be investment relocation from China mainly to avoid tariffs. That would mean increased foreign investment in developing counties and hence fuel the recovery. On the contrary, he also mentioned that if the total economies shrink than the pie becomes smaller so any possible gains could be on margins. There are no winners in a war.
- Pakistan Construction Package: Dr. Badri believes in that in normal circumstances it is a very good package and it can fuel the economy. Infrastructure development generally have multiplier effect of more than 1. It is a low-hanging fruit. But there are few challenges mainly concerning worker-safety and choice. He believes that benefits of the package could depend on the type of construction. If it is on roads and infrastructure, then it can be linked to enabling environment. This can enhance the efficiency and have larger and long-lasting impact. However, he feels that just construction package wouldn’t be enough.
- Financial Sustainability: Dr. Badri feels that in the short-term it is going to be difficult. He says that it is good to see countries helping each other and multilateral agencies coming to the rescue. According to him, recovery should be resilient, and it should transform the business environment. As an example, he quoted how WWII led to new social contract and development of multilateral organizations such as UN, World Bank and IMF. He feels that this is dipping point for things like digital transformation. He added on that fiscal stimulus should be keeping long-term impact in mind.
- Technology Sector: Dr. Badri believes that tech sector will definitely perform well and will expand too. E-commerce is seen expanding rapidly. Alongside that the development of applications to aid in COVID-19 such as contract tracing are some of the examples. He feels that on the one hand while the unemployment numbers are soaring, on the other there are new opportunities arising in the digital industry.
- Rise of protectionism and nationalism: Dr. Badri said that we cannot really ignore them. There are some valid points that need to be considered. He believes that free trade went to other extremes and failed to compensate the people who were losing. There are risks involved in the global supply chain and certain measures need to be taken. Dependence on countries needs to be evened out. Most of the countries are so dependent on China that if something happens in China everyone is affected. Trade actually mitigates risk but that can only happen if it is even. It is just the kind of calibration that is happening, and it is happening through market forces. Global supply chains are being redefined and recalibrated.
- Fairer Society: Dr. Badri believes that a fairer society is necessary. There needs to be rethinking of social contracts. Globally there has been some progress as seen in US with cash transfers to poor people and SME’s. It is going in the right direction but with massive automation and digital economy, inequality is also becoming more pronounced. In order to rectify it, new industries need to absorb the people laid off. Certain people still can’t fit in and that is where the social protection needs to be there. It needs a lot of thought and that is where the role of government is critical. Fairness isn’t about do good thing; it is now a business requirement.
KASB Research
