Author: Adam Triggs, ANU
AUD$2.5 trillion (US$1.8 trillion) — that’s how much Asia’s developing economies have spent so far in combating the health and economic impacts of the COVID-19 pandemic. On average they are spending the equivalent of 27 per cent of GDP, about the same as Asia’s developed economies when you add up government spending, tax cuts and central bank initiatives.
There is one thing that is very different between Asia’s developed and developing economies: where the money is coming from.
While Asia’s developed economies are relying on their central banks and finance ministries, data from the Asian Development Bank (ADB) shows that Asia’s developing economies are relying heavily on international and bilateral money.
This is a problem. Asia won’t beat COVID-19 without sufficient and reliable external finance, and there are plenty of things that need to be done to strengthen access to it.
On average, Asia’s developing economies are getting 49 per cent of their COVID-19 financing from external sources. This is not by choice — Asia’s developing countries rely on external finance because they lack the fiscal and monetary policy space enjoyed by developed economies to deal with the crisis. Shallow and inefficient financial markets make monetary policy less effective. Porous tax systems, foreign-denominated debt and flighty foreign investors reduce fiscal firepower.
Strengthening Asia’s health and economic response to COVID-19 means strengthening Asia’s access to multilateral financial resources. But multilateral resources are not all created equal. The primary international body to help countries facing financial stress is the Washington-based International Monetary Fund (IMF). The IMF is providing financial support to more than 100 countries around the world. Yet, when it comes to Asia the IMF is providing a mere 8 per cent of the total external support.
This is not surprising to those familiar with Asia’s financial history. The IMF’s self-confessed bungling of the Asian financial crisis — giving too little finance with too many (bad) reform conditionalities — means most Asian economies would rather go to the wall than go to Washington.
Asia’s deep disquiet about the IMF saw the creation of a US$240 billion regional alternative — the Chiang Mai Initiative Multilateralization (CMIM) — touted by its officials as being a fully operational alternative to the IMF. COVID-19 suggests otherwise. Despite the serious financial challenges facing Laos, Myanmar and other members, the CMIM has not had a single customer in the 10 years since its creation. With the biggest downturn since the Great Depression, this confirms the concerns of many: the CMIM is unworkable.
So where are Asia’s developing economies getting their money from? According to ADB data, almost 55 per cent is coming from the ADB, 20 per cent from the World Bank, 10 per cent from the Asian Infrastructure Investment Bank (AIIB), 8 per cent from the IMF and 5 per cent from bilateral aid (predominantly from the United States, Japan and Australia). The remainder is coming primarily from the Islamic Development Bank and the United Nations. While some institutions provide long-term development financing, it nevertheless frees up resources for short-term liquidity support and provides vital foreign exchange.
The United States should take note. Asia’s revealed preference is for the China-dominated AIIB over the US-dominated IMF. A rethink of its stubborn refusal to make the IMF’s governance more inclusive of Asia’s developing economies, including India, is in order.
The missing piece of the puzzle is bilateral currency swap lines. This is where one country’s central bank swaps its currency with that of another central bank on pre-agreed terms, providing rapid access to much needed foreign exchange during times of stress. We don’t know the full extent to which these facilities have been used during COVID-19, but we know that the countries that need them don’t have access to them.
Even when you exclude Japan’s unlimited swap line with the US Federal Reserve, more than 55 per cent of the available swap lines in Asia are for developed economies, not developing economies. Much like credit from a bank, the ones that need credit can’t get it.
Improving access to external finance will require reforms at the global, regional and bilateral level.
Globally, Asia’s response to COVID-19 should be a wake-up call to Washington. Making the IMF relevant to Asia means ensuring Asia is represented in the IMF’s governance. Should it eventuate, an incoming Biden administration should substantially increase IMF quotas, disproportionately favouring developing Asian economies while still preserving US dominance.
Regionally, COVID-19 has revealed the CMIM still to be an ineffective institution. Funding amounts are too low, the application process is too complicated and politicised, and any borrowing over 40 per cent of the country’s quota requires an IMF program anyway. If the IMF can’t be made more inclusive of Asia, the CMIM needs to be a credible alternative.
Bilaterally, swap lines are the fastest, easiest way to plug gaps in the global financial safety net. Too many countries who need them don’t have access to them, and many swap lines aren’t available during a crisis. Asia’s developed economies should collaborate. They need to make it clear that swap lines are available during a crisis and ensure countries that need them have them.
The global elimination of COVID-19 is a public good. But it is a weakest-link public good since our ability to eliminate it depends on the weakest links in the chain. Those weak links are the developing economies. Their success is our success, and they won’t succeed without international financial help.
Adam Triggs is Director of Research at the Asian Bureau of Economic Research (ABER), Crawford School of Public Policy, Australian National University, and non-resident fellow of the Global Economy and Development program at the Brookings Institution.