Monday, October 12, 2020

State of the Region (SOTR): Special Report on Covid-19 Executive Summary

Eduardo Pedrosa
Secretary General, Pacific Economic Cooperation Council
Christopher Findlay
Vice-Chair, Australian Pacific Economic Cooperation Committee (AUSPECC) and Honorary Professor, Crawford School of Public Policy, Australian National University

The Asia-Pacific is undergoing a health, human, and economic crisis. Its many
dimensions make this an exceptional challenge for policy makers and one that
can only be effectively overcome through extraordinary international cooperation.
While the Asia-Pacific was at the epicenter of the shock, through its longestablished
norms and processes it can also locate itself at the heart of the solutions.

The SOTR report focuses on how regional cooperation can provide
governments with more options for recovery in the face of these uncertainties. It
assembles a set of proposals on the basis of data collected in a special survey PECC
undertook on the impact of the Covid-19 crisis on the region. 710 policy experts
from business, academia, government and civil society responded to the survey,
which was conducted from 19 May to 12 June, 2020. An analysis of the responses
also provides insights for further commentary on the regional outlook and the
strategies available for transitioning out of the current situation.

The Economic Outlook

The Asia-Pacific is expected to shrink by 4.7 percent this year before recovering
to 5.4 percent growth in 2021 based on data from the IMF. Unemployment for
the region is expected to rise from 3.9 percent to 5.5 percent of the labor force.
However, there remains a great deal of uncertainty over the size of the shock, its
duration, implications for stabilisation policies and an eventual recovery. This
uncertainty makes it extraordinarily difficult to formulate policy and therefore may slow down responses. As we have seen in the pandemic, delay can be very costly.

PECC’s survey of policy experts and stakeholders shows an even greater degree
of pessimism than official estimates. Respondents do not expect a recovery to precrisis
levels within the next 5 years; and they expect things to get worse before they
begin to get better. Even as far out as 3 years on, only 27 percent of respondents
expect growth to be stronger than in 2019, and even by then a large group of 31
percent still expect growth to be weaker than last year (2019).

Cooperation on Stimulus Measures

Massive stimulus measures adopted by governments have prevented even
greater declines. Governments across the world have cut interest rates, at a time
when they were already at historic lows and they have been implementing fiscal
stimulus packages to assist people and businesses. These stimulus packages as a
percentage of Asia-Pacific GDP are approximately 10.6 percent of the economy,
and even higher shares of GDP in high income economies. Their total value is
approximately $5.4 trillion, compared to an estimate of the global total of US$11
trillion. There are other forms of stimulus. The IMF refers to as ‘above the line’ –
revenue and expenditure measures as well as ‘below the line’ measures - loans and
equity injections.

There are constraints on the extent to which policy makers in the region will
apply a stimulus. They are scarred by two financial crises which may constrain their
appetite. At the same time, the assessment of the report is that regional economies
have space for further stimulus given the levels of financial vulnerability. Even so,
coordination and cooperation can help ease those constraints. It would support a
bolder approach to fiscal stimulus on the part of the region’s emerging economies.
They would be more confident of the impact of their fiscal measures. International
coordination and cooperation on the design and implementation of these packages
of measures would also help restore, as it did during the Global Financial Crisis,
confidence as well as build a sense of direction to support future growth.

There are regional mechanisms to facilitate this cooperation. The ASEAN+3
Macroeconomic Research Office (AMRO) was established following the 1997-98 crisis with a mandate to conduct macroeconomic surveillance. APEC officials
also now seek to fulfill the mandate from the APEC Trade Ministers Statement on
Covid-19 to develop a “coordinated approach to collecting and sharing information
on policies and measures, including stimulus packages for the immediate responses
to the economic crisis and long-term recovery packages” In this context, East Asian
discussion and cooperation that is based in ASEAN+3 mechanisms such as AMRO
is highly valuable, and could usefully be extended to the APEC Finance Ministers’
process. While not necessarily including all APEC members such a dialogue would
help to avoid duplication of effort and help to identify gaps in information and data
necessary for strengthening policy cooperation and coordination.

Because of the nature of the role of the US dollar as the global reserve
currency, another action that would prevent currency outflows for those with
floating exchanges rates is to establish and extend swap arrangements. Indonesia
for example is in talks with central banks around the region on ‘second lines’ of
defense. In the same way that information sharing should be integrated in forums
across the region, so too is it timely to have broader discussions of the adequacy
of the financial safety net – including IMF financial resources and the connection
between regional and global financial crisis mechanisms – in a range of Asia-Pacific
forums. Again, East Asian discussions and cooperation that is based in ASEAN+3
mechanisms, in this case such as the Chiang Mai Initiative Multilateralization
(CMIM), could also usefully be extended to the APEC Finance Ministers’ process.
APEC is one forum where Asia can have this necessary conversation with the
United States.

Exit from Lockdown
One of the great uncertainties is when and how to leave the lockdowns that
have been the first response to the virus. Respondents were asked to give their
opinion on the importance of each of 15 items. The top preconditions for leaving
from lockdown were all related to public health, namely
● Sufficient medical capacity to deal with expected number of cases (including
hospital beds, doctors and nurses, personal protective equipment, and medical
● Evidence that the number of new cases is reducing
● The development of a vaccine
● The availability of medical treatments for those found positive with COVID-19
● The capacity to quarantine and support those who test positive

Of great interest were the two matters that immediately followed these. One
was the economic cost of the lockdown, its position implying that respondents
still considered public health aspects were the priority and the ability to prevent
infection in people who are more at risk. As the virus becomes better understood
that options for its management will increase and the ability to consider more
specific actions better targeted at those at risk of serious illness, long term effects or

Another priority at this level among respondents was international cooperation.
This is a very significant result, with respondents acknowledging that the exit
strategies of all would be facilitated by working together. Examples are provided in
the report.

Given the heterogeneity of the Asia-Pacific region another important question is
whether there would be large differences among different economies on the factors
to be considered for their economy’s exit from lockdown. One hypothesis that we
wanted to test was whether the economic cost of lockdown policies would be a
higher consideration for emerging economies compared to advanced economies.
The answer was largely ‘no’.

The popular discussion of exit strategy is now focusing on the capacity to
achieve goals related to social distancing, to test and also to trace and contact and to
isolate those affected. These are regarded as critical to relaxation of restrictions on
people movement in the short term. These aspects are being given greater attention
as some economies have attempted to relax restrictions, only to see infections rise
again. Survey respondents put these measures in a third tier of priorities, following
public health matters, economic consequences and international cooperation.

The Cooperation Agenda

The value of cooperation in the implementation of short-term stimulus
measures was discussed above. What about longer-term matters? As just observed,
respondents ranked this as a top priority for plans for exiting the current situation.
The top 5 elements of cooperation identified by respondents were:
● The sharing of pandemic preparedness practices
● The development of a vaccine
● Trade facilitation on essential products
● The removal of export restrictions on essential products
● The removal of tariffs on essential products

One question for regional organizations in addressing a global issue of this
magnitude is ‘value-addition’ - there are many organizations working to resolve
the challenges governments and societies are currently confronting. One approach
that APEC might take is to be supportive of ongoing multilateral efforts and that
by taking a ‘first and second order’ priority approach it could identify serious gaps
in the system – issues that are not getting sufficient attention. For example, there is
no doubt that the sharing of pandemic preparedness practices is a priority, as is the
development of a vaccine. But they are not necessarily tasks in which APEC has a
comparative advantage. Trade policy is a different matter which we discuss below.

Moving to a Smaller Public Sector

A very important part of exiting from this situation is the withdrawal of the
support of various forms of state aid, including equity investment. The size of
the public sector has increased dramatically in many economies, associated
with rapidly rising debt levels. This situation demands considerable thought,
because of its significant fiscal consequences but also its potential implications
for efficiency and for productivity. Movement back from the current situation
will most likely meet resistance, from the new sets of interests that have been
created, in particular. Others may also argue that in the context of the uncertainty
created by the pandemic, it is unwise to unravel the emergency arrangements
prematurely. A framework for responding to the pressures of those interest groups
and those arguments will be valuable. One well-tried option is that of the public policy framework, which is based on a series of questions related to the nature
of the problem to be solved, the tools available to do so, the scope to use market
mechanisms rather than regulation followed by a ranking of options and selection
of a preferred response. The design of processes for and institutions for managing
this work is an important element of regional cooperation.

Trade Related Matters

The contraction in world trade in April compared to March is estimated at
12.1 percent, significantly worse than that during the Global Financial Crisis.
However, data shows early signs of a recovery in trade growth, and efforts by
economies to remove restrictions to trade, like export restrictions prompted by the
pandemic. Despite the expectations of some, these events do not mark the end of

Given APEC’s focus on trade and economic policy issues, the comparative
advantage of its work in this area would be how pandemics impact trade and supply
chains. This could build on existing work APEC has already undertaken such as
the APEC Trade Recovery Program. There is considerable public discussion of
the future of global value chains and expectations by some that they will collapse.
Opinion is divided on this matter among respondents, and the report discusses a
range of options for tackling the issues of the robustness and resilience of GVCs.
Our conclusion is that the likelihood of collapse is overstated.

The survey addressed three main trade policy issues for essential products:
trade facilitation; the removal of export restrictions; and the removal of tariffs. As
noted, the value of all three was strongly supported. In short, the maximum gains
for economies will come when all three actions are done simultaneously by as
many parties as possible.

A major consequence of the Covid-19 crisis has been a deepening and
acceleration of existing trends – especially the growth the digital economy. The use
of digital applications has expanded rapidly. This has stretched existing networks
in some cases but also reinforced the importance of messages about the risks of
digital divides. As schools shut down and continue to be shut down generations of children continue to go without an education if they do not have access to hardware
or adequate and reasonably priced bandwidth. APEC had laid out the need to
address many of these issues in its Internet and Digital Roadmap, many more
lessons have been learnt during this crisis.

One issue that APEC might be able to at last pilot work on is information on
essential equipment. For example, while information on stockpiles of medical
equipment ranked 8th in the list of priorities, when viewed through the lens of
‘second order priorities’ it is the joint top of the list. Such efforts should encompass
the private sector given that the latter has a much better grasp of the relevant supply
chains. Given APEC’s strong engagement with the private sector, it could pioneer
and pilot such an information exchange.

The pandemic is demonstrating too how important people movement is for
trade. This is not just for sectors in which contact is urgent for trade in facilitating
supply chain connectivity but more broadly for business, tourism and education.
Given the difficulties of a global eradication of the virus, the report reviews a series
of options for the short term as the pandemic continues to facilitate the movement
of essential workers, including the various plurilateral projects on confidence
building in this respect. APEC could seek to develop a set of principles which
might apply to the design of these efforts (as done for trade agreements already)
so that, ultimately, they contribute to regional integration. It is interesting that the
Covid-19 period brought to attention both how much people contact matters but
also how much opportunity sits in digital technology.

Capacity building

PECC’s survey also revealed priority areas for capacity building, another
important dimension of regional cooperation. The Covid-19 crisis has had a clear
impact on capacity building needs. Whether this is a temporary or permanent shift
remains to be seen. But health security concerns were a clear priority followed
by digital technology; supply chain resilience; ecommerce; and structural reform.
All these can be seen as a need for policy makers to understand the underlying
economic changes wrought by the crisis and the types of policy instruments that
could be used in the adjustment process.

Another element related to the redesign or recovery of the public sector is
regulatory reform. In this respect, recent experience has included instances of
regulatory retreat by governments different from the subsidy elements. Many
rules and regulations have been relaxed to lower business costs and facilitate
new ways of operating that are consistent with the response to the pandemic.
The WTO recently documented such measures as applied in the services sector.
Examples include changes in the regulation of medical services to facilitate the use
of telehealth. The information provided by these experiments in reform should be
evaluated as to whether each has value that should be continued in the post-crisis
environment. There is value in sharing these results and in cooperation on capacity
building for the management of reform.

APEC after 2020

APEC has another role, which concerns the development of a way of thinking,
and a mindset. Before the Covid-19 Virus crisis struck much of the APEC policy
community’s attention was focused on assessing progress made on the Bogor
Goals and formulating a post-2020 vision for the region. A vision is as important
today as was it was in 1994 if not more so. When endorsed by APEC leaders,
it will provide a long-term strategic framework for regional governments and
stakeholders to plan for the future. Without such a framework there is a risk that
the recovery will be much slower than need be, opportunities to sustain reform
will not be taken, inefficient policies adopted for short term goals will remain
stuck in place, and investment plans put on hold. While APEC remains a relatively
informal organization through which relationships of trust are built, it must allow
for genuine dialogue at all levels. As argued in this report, the Covid-19 crisis is
accelerating change, economies will be taking different approaches in response
to it, APEC provides an essential platform to exchange views on the motivations
behind those policy choices and the international implications that they often have.

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