The annual Asian Development Bank economic outlook released on April 3 makes for grim reading. It forecasts a drop in the region’s growth from 5.2% last year to 2.2% this year as a result of the pandemic. There are multiple references to the global financial crisis of over a decade ago, and it calls on governments and central banks in both emerging and developed Asia to take swift action now as they did then.
“No one can say how widely the COVID-19 pandemic may spread, and containment may take longer than currently projected,” noted the ADB’s chief economist, Yasuyuki Sawada. “The possibility of severe financial turmoil and financial crises cannot be discounted. Sharp and protracted declines in commodity prices and tourist arrivals will challenge dependent economies across the region.”
Yet the Manila-based development bank’s outlook should in fact be far grimmer.
The unfortunate but appropriate comparison should not be with a crisis brought on by too much debt on the part of financial institutions, their corporate clients, households and excessive financial engineering.
Instead, the situation today is far more likely to resemble the Great Depression of 80 years ago. While the catalyst at that time was not a pandemic, now — just as back then — the crisis has affected real economies first.
Yet even the comparison with the Great Depression is far from perfect for a variety of reasons. The world is much more globalized today, so what affects one economy is quickly transmitted to others in a feedback loop that is complicated and hard to measure. Moreover, and perhaps more importantly, the pandemic has hit when technology is transforming both societies and economies.
In some ways tech’s effect was positive and made life better and fairer for tens of millions of people. For example, a kid in a remote village in India whose teacher never bothered to show up at school could afford to go online and take classes. An old man with a cough on an outer island in Indonesia could send his tests to a hospital in Jakarta and know if he had a common cold or lung cancer.
At the same time, though, technology and the sharing economy are fundamentally deflationary. That means that what used to be manufactured and considered a “thing,” such as a car that people aspired to buy, has become instead a “service” that fewer people own but those who do own or rent use far more intensively — such as a driver for ride-hailing services Didi or Gojek or Ola.
That also means the jobs that went into making things, which were the path to a middle-class lifestyle for tens of millions of relatively unskilled workers, are becoming fewer. As those factory opportunities recede, the aspiration to that middle-class lifestyle becomes more difficult to realize. Many unskilled autoworkers laboring in the factories of Detroit could nevertheless afford country houses in the north of the state of Michigan.
Not only will such well-paying jobs become more elusive, the service jobs they have morphed into offer far fewer prospects for social mobility and do not come with a safety net.
A ride-sharing driver or food deliveryman can work 20 hours a day — and may be able to send his son or daughter to a better school. But even then, the odds that the second generation will be able to get on the first rung of the ladder to a better life have dwindled. In any case, their parents will be replaced by autonomous driving and drone deliveries at some point.
That means that the pandemic came at a time when social strains were just beginning to make themselves felt and income inequality was widening.
The ADB report was put together in mid-March, when new President Masatsugu Asakawa says the bank’s economists were focused on the demand side fallout of the virus — first the hit to travel and tourism and then a wider drop in investment and consumption. The bank is now studying the supply side consequences as global supply chains, already in disarray from the antagonism between the U.S. and China, are further disrupted.
Such disruptions provide evidence that the downturn will be deeper than expected and that the world will not go back to what it was after this crisis passes. The deglobalization that was setting in before the virus struck has received a greater push from it.
The protectionism has not gone away but it has taken on a new guise in the name of self-reliance. Governments are forbidding the export of everything from protective equipment to vital drugs, forcing others to also disavow faith in the international trading system. Forget the theory of comparative advantage behind the globalization of the last century. A less efficient world is also one that grows more slowly than it otherwise would.
The individual forecasts of the ADB are also curious.
“We expect the deceleration to be the mildest in South Asia,” the ADB says, referring largely to India and Bangladesh since it is particularly gloomy about Pakistan.
Last year, Indian growth was 5% according to official data. This year the ADB expects it to drop a mere 1 percentage point to 4%. But that is far too optimistic. The ADB itself also refers to the stumbling blocks which have crippled the country, from its inadequate infrastructure, low productivity, and lack of labor and land reforms to the low tax revenues that mean the government has little room to cushion the blow from the virus.
Meanwhile, the ADB expects Chinese gross domestic product growth to go from 6.1% last year to 2.3% this year, about the same as the region as a whole. Yet China is already recovering while the other giant of the region, India, is only now going through what China was experiencing early in the first quarter.
“How can the rest of Asia grow about the same as China itself?” asks Shan Weijian, head of Chinese investment firm PAG, who received his Ph.D. under former Fed Chair Janet Yellen. Chinese demand, after all, has been the catalyst for the growth of its neighbors — but no longer.
In the first quarter, the mainland economy shrank by 6.8%. But by the end of March, the economy was well on its way back to normal. For example, 90% of McDonald’s China outlets had reopened by then, while volumes had recovered to 80% of their normal level.
On April 13 the ADB announced it was tripling to $20 billion the amount it had allocated to the crisis. Assume that these will not be the last revisions upward of aid or the last revisions downward of growth.