- Emerging Asia risks falling into an inequality trap as they recover from the pandemic.
- The region’s poorest are hit hardest by lost income and lack of access to credit.
- Here are 3 ways government agencies can restore some balance.
There are no elements of the global economy that have escaped the impact of the recent pandemic. From central bank governors to prudent individual savers, we are all exposed to the forces of financial change.
The looming inequality trap over the emerging countries of Asia
“Emerging Asia” (defined by the IMF as China, India, Indonesia, Malaysia, the Philippines, Thailand and Vietnam) is at risk of falling into an inequality trap for three reasons:
1. Financially disadvantaged people have been hit hard by the pandemic.
2. The people hardest hit by the crisis now have limited access to credit.
3. As a result, they are forced to use unregulated providers.
These three factors will worry lawmakers and governments in emerging Asia as many economies begin to look beyond the pandemic.
The uneven impact of the global health crisis on emerging Asia has challenged real disposable incomes and hit the region’s poorest hardest. In Southeast Asia in particular, the Asian Development Bank estimates that the pandemic has pushed 4.7 million people into poverty and destroyed over 9 million jobs.
The lack of access for poorer-income households to more formal lines of credit is highlighted by a recent Economist Impact report analyzing the impact of COVID-19 on personal finances in Asia. It shows that the countries with the largest increases in household debt in 2020 were all high-income economies, with the exception of China (which has a fast-growing mortgage sector).
A separate OECD study of ASEAN countries found that half of households that suffered a negative income shock drew on their savings, while more than a third made payments and paid off debt, and a similar proportion applied for government aid. This dramatic shift will have far-reaching consequences for the region’s poorest, many of whom now find themselves unable to access credit as before.
In this new scenario, struggling consumers are often left with little choice but to turn to the black market for financial help. These traditional offline operators mostly offer unregulated, unsecured and unfavorable financial solutions to severe debt problems. The increasing popularity of “buy now, pay later” products also poses a threat, as many of these products are aimed at younger, less financially savvy consumers.
Ensuring a smooth recovery for emerging Asia and ASEAN
When an economy is portrayed as a human body, the money that flows through that economy is its blood. Put simply, people need access to money if an economy is to remain healthy. In many cases in emerging Asia, the economic patient is sick – and governments and regulators must act quickly.
In many cases, they have taken action, leading to increased public spending to protect some citizens from adverse pandemic-related effects. Countries have launched large-scale fiscal and monetary packages. These measures aim to boost the economy, ensure a minimum level of income security and protect businesses, especially SMEs.
The scale of the effort is outlined by data from the ISEAS-Yusof Ishak Institute in Singapore. It shows that ASEAN countries had approved $730 billion in pandemic stimulus packages at the peak of the pandemic in 2021. This corresponds to 7.7% of the region’s GDP. But what else can authorities do to ensure a less uneven recovery and ensure protection is provided to those who need it? Here are three options.
1. Driving Digital Adoption: The pandemic has necessitated the use of digital tools and platforms as a means of solving health challenges. The democratization of information and services would further open access to resources such as financial services. A McKinsey paper on Asia’s opportunity to harness technology for growth suggests the region (including emerging Asia) has taken a leadership role in social commerce – the process of selling products directly through social media and the COVID 19 pandemic has simply accelerated adoption.
2. Emphasize the importance of financial literacy: Providing tools for individuals to understand and use financial services responsibly is an important part of any response to the global health crisis. In an article written for the Asian Development Bank on financial literacy in Indonesia, the three academic authors conclude: “A key policy lesson from the study is that it is advisable to pay more attention to improving and improving national and international poverty reduction efforts to devote the financial knowledge and skills of a person.”
3. Level the playing field: Regulators now have the opportunity to create an equitable environment that offers protection and transparency. Sound regulation is also a form of protection. For example, new market entrants should be subject to a common regulatory approach – protecting the most vulnerable consumers should be a post-pandemic priority.
There is little doubt that the global pandemic will have a long-term impact on populations in emerging Asia. However, the crisis has opened up new opportunities to take new approaches to healthcare and access to financial services. The profound impact on the region’s poorest, limited access to credit for these communities, and the threat of unregulated operators mean we need closer collaboration between the public and private sectors if we are to avoid greater post-pandemic inequality.