Economics in the Time of Covid-19: The economic impact on Asia (Summary)

NAKAJIMA Atsushi (Chairman, RIETI)

I'd like to introduce our fellows who will present their views on COVID-19 in Asia: fellows Dr. Willem THORBECKE and Dr. ITO Arata and senior fellows FUJI Kazuhiko, Dr. KONISHI Yoko and Mr. SEKIZAWA Yoichi. I'd also like to welcome our vice president, Dr. MORIKAWA Masayuki.

Richard BALDWIN (Professor of International Economics, Graduate Institute, Geneva)

SARS in Asia vs. the U.S./Europe

I would first like to try to explain why Europe is responding so differently than Asia to the crisis. First, Asia—East Asia in particular—was very heavily impacted by SARS. Governments and the public understood how serious SARS was and undertook preparations for the next virus, while these lessons from the SARS outbreak were ignored or quickly forgotten in Europe and the United States. Second, COVID-19 is highly infectious but not very lethal, meaning that a recession resulting purely from the medical impact would not be very sharp. However, the spike in new cases overwhelms the hospitals. In Italy and Spain this is happening right now. This horrifies the public, causing governments to impose very extreme lockdown policies because they haven't been doing any testing so they don't know who has it. The only way to reduce the infection rate is to isolate everyone rather than only the infected. These extreme containment policies cause an enormous recession, which then impels governments to develop enormous rescue packages that are fiscally so large that they risk triggering further crises, such as debt crises. None of this is going on in Asia now because Asia was prepared. The standard sequence you've seen in Western countries has been for governments to downplay the seriousness of the situation until doctors begin to sound the alarm about overwhelmed hospitals and the fact that people will die who could otherwise have been saved if the infection rate were low. This results in the imposition of increasingly extreme measures to slow the infection rate causing a massive recession. I think this is really due to the fact that the U.S. and Europe weren't prepared to test quickly and isolate the infected. My last point is about the US, where the outbreak has now begun outpacing the outbreak in China. I think the economic shock to the US will be very bad and the economic damage from containment policies will heavily influence the world economy.

Beatrice WEDER di MAURO (President, CEPR / Professor of International Economics, Graduate Institute, Geneva / Distinguished Fellow, Emerging Markets Institute, INSEAD)

Lessons from Singapore

Singapore, where I am right now, was in many ways on the front line and it is still doing remarkably well in comparison with other countries. I agree with Richard that this has been because of a very high degree of preparedness. Because of Singapore's very fast reaction it was able to keep the infection curve flat for about five weeks. However, Singapore is now fighting a second wave of infections which is almost 90% imported. This has increased the number of infections from around 100-120 to 400 in very little time.

European response and duration of containment measures

Beatrice WEDER di MAURO: Europe is increasingly coming to an economic standstill, but minds in Europe are moving very, very fast. Many of the economic responses that national governments have put on the table would have been unthinkable only a few weeks ago, but they are now increasingly seen as necessary because of how the extreme containment measures which have become necessary are affecting the economy. How long will we be in this situation? Is this as we initially expected—a down period of a month or two and then a return to normal—or will these measures last much longer? Quite obviously, the macroeconomic consequences could be very significant in terms of debt levels, fiscal policy, monetary coordination, growth and productivity. Lastly, we need to look at globalization and what it might look like in the future. I think on all of these issues, Japan is very much ahead of the curve and can teach the rest of the world a lot.

Willem THORBECKE (Senior Fellow)

The virus has affected supply chains in China in several ways. First, one-third of migrant workers were unable to return to work after the lunar new year. This impacted not only factories but also truck drivers, who could no longer make deliveries, totally disrupting supply chains. The third, fourth and fifth tier suppliers in these large supply chains are very dependent on cash and many could very easily go bankrupt, but if their products are critical to supply chains, entire supply chains could be disrupted. However, China is very quickly getting back to work and traditionally, Asia is very good at dealing with supply chain problems. The problem is subsequent demand shocks: a slowdown in Europe and America could be problematic.

China, Semiconductors and Supply Chains

China has made it a national and industrial policy goal to become self-sufficient in semiconductors. They are behind the rest of the world but they are very determined to catch up. In this part of the electronics value chain, spending by the Chinese government has maintained demand for Chinese-made semiconductors. Fierce competition between China, Korea, Taiwan and Japan in semiconductors and electronics products can be expected to accelerate as China moves into the semiconductor market, keeping prices low. Meanwhile, the US dollar is strengthening while the renminbi, Korean won and Japanese yen weaken, which will also keep the US dollar price of Asian electronics low. The US had a one trillion dollar budget deficit going into the crisis. The strong dollar and U.S. fiscal stimulus will cause continued East Asia-US trade imbalances and protectionist pressures will remain very strong.

Responses

It will be important for leading firms to obtain a more complete grasp of the structure of their supply chains down to the 4th and 5th tier suppliers to avert trouble, and to begin diversifying their production further outside of China and beyond just-in-time, or lead time inventory management systems, despite the fact that this could be very costly. Asia's trade surplus with the US continued to balloon after both the 1997 Asian economic crisis and the 2008 global financial crisis, leading to ever greater protectionist pressures. Asia and the US should try to work together to somehow avoid that outcome.

FUJI Kazuhiko (Senior Fellow)

Amid the global spread of COVID-19, more and more countries and regions are tightening their border controls. This would not pose a serious problem if these measures were only imposed for relatively short periods of time. However, the current pandemic may last more than one-and-a-half years and the current border control measures are going to last longer than initially expected. Long-lasting border controls will have a severe impact on the cross-border movement of goods, people and capital. This could stop the momentum of globalization for the first time in the past 30 years and I'm concerned that it may even reverse it. Many countries may be forced to dramatically change their growth strategies that were premised on continued globalization.

The oil market

Oil prices have plummeted since February over concerns that the COVID-19 pandemic will limit the movement of people, leading to a sharp drop in demand for transportation fuel. In late March, after negotiations between Russia and OPEC on further production cuts broke down, crude oil prices fell further to an 18-year low. All oil producing countries will suffer if oil prices remain at around 20 dollars a barrel. Saudi Arabia's oil production cost is estimated to be less than $3 a barrel; however the financial and structural reforms contemplated under the so-called "Vision 2030" project being led by Crown Prince Mohammad bin Salman are being seriously imperiled by the low oil prices, as their success is based on a minimum price of $84 per barrel.

Iraq

My biggest concern is the situation in Iraq. In addition to the fact that crude oil trade income accounts for 95% of the government's total income, the country has been in a state of anarchy since last October. The poor public health standard in the country is expected to deteriorate even further due to budget constraints resulting from low oil prices. There is an increasing possibility that Iraq could become the next COVID-19 hotspot in the Middle East. Political instability in the Middle East and Persian Gulf increase the risk of oil supply disruptions for Asian countries. Unfortunately, it could also mean a new flood of refugees to Europe, including possible COVID-19 virus carriers.

ITO Arata (Fellow)

I will focus on news-based indices of economic policy uncertainty in the US and Japan. There is a daily news-based economic policy uncertainty index for the US from 1985 onwards developed by Scott Baker at Northwestern, Nick Bloom at Stanford and Steve Davis at Chicago. This index captures uncertainty in what policy actions will be taken by when, who will implement economic policies and what their economic impacts will be. It reflects the frequency of articles in major U.S. newspapers containing at least one key word from each of three groups: "economic" or "economy"; "uncertain" or "uncertainty"; and lastly policy-related terms such as "Congress," "legislation" and "Federal Reserve." This index has very recently risen to a 30-year high. Unfortunately, we can't determine which policy areas are contributing to the surge in uncertainty because policy-specific indices are unavailable. Japan also has a monthly news-based economic policy uncertainty index from January 1987 onwards. I helped to create this index with Professor Davis and some economists at the IMF using the same methodology that was used to construct the U.S. index. The index reflects the frequency of articles in major Japanese newspapers that discuss policy uncertainty. This index soared in March to its highest level since 2011, according to the data that became available yesterday.

Monetary policy uncertainty index

Monetary policy has been most responsible for the jump. As you can see in the slide, the index last dramatically increased in 2016 and now the index value in March is 3.7 times higher than its value in February. There are uncertainties over what policy actions central banks will undertake to support the real and financial economies and over the economic effects of different policy measures.

Fiscal policy uncertainty index

This index reflects the frequency of articles in Japanese newspapers that discuss policy uncertainty and fiscal policy matters. It rises in response to the outbreak of the coronavirus in March. However, the rise in this index is not as significant as the rise in the monetary policy uncertainty index.

Trade policy uncertainty index

This last index reflects the frequency of articles in Japanese newspapers discussing policy uncertainty and trade matters. In contrast to the monetary and fiscal policy uncertainty indices, this trade policy uncertainty index has fallen to a historic low. Many studies find that an increase in policy uncertainty innovation will foreshadow declines in investment and employment.

KONISHI Yoko (Senior Fellow)

I will discuss the impact of COVID-19 on consumer behavior in Japan using point-of-sale data. This graph shows daily sales of face masks in January and February for 2019 and 2020. A coronavirus-related shock has been observed in the market for healthcare products, such as face masks and hand sanitizers. This graph shows the weekly POS sales index for drug stores. This index is the ratio of increase or decrease relative to the figures from the same week in the previous year. When the value is 100 %, the sales amount is double the previous year. The red line indicates the healthcare index, including face masks. We can see a peak in sales at the end of January—the same as the previous mask graph. The blue line indicates paper products, including toilet paper. The index was 150 %, representing 2.5 times the previous year's sales. Recently, the two product indices have begun to approach last year's levels. People are staying home and stocking up on staple foods like canned food, ready meals and processed food. Also, the index for PCs and TVs is positive. Telecommuting requires a PC and so the PC index has continued to show a positive value through February and March. We have found that the cosmetics index is decreasing, as people spend more time at home and more often wear a face mask when going out. Makeup products have decreased more than skin-care products.

Effect of decreased tourism

This graph shows the total number of inbound tourists on a monthly basis. The number of inbound tourists in February 2020 was down 58% compared to 2019. In Japan, inbound tourists from four east Asian countries account for around 75% of the total. Tourists from East Asian countries spend the most on shopping, and cosmetics and medicines are very popular purchases. The indices for cosmetics and medicine are now negative. The medicines index dropped particularly rapidly and in addition to the effects of the COVID-19 measures, there has been a significant drop in flu and common cold infections which may be one cause of this drop.

MORIKAWA Masayuki (Vice President)

In Japan, the percentage of firms that regularly utilize teleworking has been very low. According to my survey, the percentage had been less than 10% until recently. However, it has suddenly increased due to the coronavirus shock. Some studies have been conducted on the productivity of teleworking for specific occupations. The study by Bloom et al., which indicates a positive impact on productivity, is particularly famous. One CEPR discussion paper indicates a negative impact on productivity. However, it should be noted that the studies concern very specific occupations. Causal evidence for ordinary white-collar workers has been scant. I have conducted an interview survey of managers, staff and researchers working at RIETI. RIETI has strongly recommended working from home and so our survey asked specific questions: Assuming that your productivity at the office has a value of 100, how do you evaluate your productivity at home? About 95% of full-time employees responded to the survey, including our chairman, Mr. NAKAJIMA, and all the presenters here for the webinar.

RIETI survey findings

I have three findings. The first finding is that teleworking productivity relative to working from the office is low. Sixty-three percent is the mean. The second finding is that researchers' teleworking productivity is less than that of managers and staff. The third finding is the huge variation of responses even within the same occupation. A natural question is why the productivity disparity is so large. I asked people about factors affecting productivity at home. The most commonly cited reason is a lack of user-friendly access to office IT systems. The second most commonly cited factor is that some tasks must be conducted at the office (often for security reasons). The third is the loss of efficient face-to-face communication and the last is a poor working environment at home. Many Japanese people do not have a private room that can be used as an office. For such people, it's very difficult to work at home. I think teleworking productivity will gradually converge with office productivity but the differences cannot be eliminated completely. Finally, I'd like to talk about the policy implications. Subsidizing firms' ICT investments related to teleworking may be considered wise spending from both a demand-side and a supply-side perspective.

SEKIZAWA Yoichi (Senior Fellow)

Mitigation seeks to delay the speed of transmission and reduce the peak patient number, thus making it possible to meet peak medical demand and promote herd immunity among the population. By contrast, suppression aims to inhibit the incidence of COVID-19 altogether and needs to be continued until vaccination is available. Although both strategies use restrictive measures to reduce the transmission of COVID-19, mitigation uses shorter term and less severe measures than suppression. Mitigation can both delay and reduce the size of the peak. However, people may not acquire immunity where suppression measures are taken.

Prospect theory

Prospect theory is a major theory of behavioral economics which holds that people care more about losses than gains and are willing to take greater risks to avoid losses. In my view, some countries may be pursuing loss aversion strategies, possibly unconsciously. Mitigation strategies will cause many people —particularly the elderly—to die in the short run and there may be greater casualties among medical staff due to contagion and exhaustion. The medical system may collapse for at least a short period of time. Stanford Professor John Ioannidis, an expert in epidemiology, said that, "Unpredictable evolutions may ensue, including financial crisis, unrest, civil strife, war and a meltdown of the social fabric." Many people may commit suicide. Child education levels may be insufficient. Mitigation is seen as a gamble in the UK and around the world, but this is not necessarily the case. Rather, it is about accepting substantial losses in the short-term in the hope that the situation will become more manageable in the future. By contrast, the suppression strategies being employed by some countries are seen as the safer course, but may actually be a gamble in the long run.

Framing

One way of changing people's perspectives is by using framing: if we acknowledge that a loss is already realized due to the virus' existence, that the loss is already fixed, any effective measures would be seen as a gain rather than a loss. For example, with no measures, 50,000 people will die. Effective measures will save 30,000. This is gain framing; loss framing is saying that 20,000 will die even with effective measures. Hearing the same message in a different way alters peoples' decisions.

Richard BALDWIN:
This is a unique event in that most of the world is simultaneously facing the same crisis. It's possible that this will pull us all together, but it's also possible that it will tear us apart. I'm afraid that some of the leadership we have will tend toward the latter rather than the former. Perhaps this presents an opportunity for Europe and Asia and all the CPTPP countries and China to come together to pledge not to resort to protectionism and to try and help support developing countries, who are likely to experience debt crises. I'd like to end with a call to humanity. This is an extremely rare historical event. Countries that believe in multilateralism have an obligation to come together and try to make sure that it works.

Beatrice WEDER di MAURO:
As a macroeconomist, I am framing this mostly in macroeconomic terms. Already before this crisis, the Japanese experience of dealing with a very long crisis has left the country in a situation with high debt, low growth and low inflation. The question of whether this will be the future for other advanced countries is now even more pressing and striking. Now that other advanced countries are having to deal fiscally with this crisis, there is no question that debt levels will be higher. There is also in my mind no question that long-term growth will at least be impacted by the fact that one has to pay for this over the longer run. The unanswered question is whether this takes us out of a deflationary world and into one that is more inflationary. I thank you very much for making this possible, and for getting together and having this discussion today.