WORLD BANK EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

BRAVING THE STORMS

WORLD BANK EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Braving the Storms

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BRAVING THE STORMS

Contents

List of Abbreviations ix

Preface and Acknowledgments xi

Summary xiii

Overview xv
1. Recent Developments 1
2. What Explains Economic Performance 4
2.1. COVID-19: shock and containment 4
2.2. External environment 9
2.3. Macroeconomic policy 12
3. Risks, Opportunities and Outlook 17
3.1. New growth risks: three international developments 17
3.2. New growth opportunities: trade, digital technology and green production 31
3.3. Outlook 40
4. Policy Priorities 45
4.1. Enhancing efficiency of fiscal policy 45
4.2. Addressing macrofinancial vulnerabilities 52
4.3. Trade policy 56
4.4. Enhancing innovation 59

References 63

Annex 65

LIST Of CONTENTS iii

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

List of Figures

Overview
Figure O.1. Forecasts for growth in 2022 xv
Figure O.2. The estimated impact on EAP countries’ growth of international developments xvii
Figure O.3. State of recovery and macrofinancial vulnerabilities xix
1. Recent Developments
figure 1. GDP recovered in 2021Q4, after the Delta-dip in 2021Q3 1
figure 2. The recovery is uneven across countries . . . 1
figure 3. . . . uneven in terms of components of aggregate demand . . . 2
figure 4. . . . and uneven across sectors 2
figure 5. The number of poor in developing EAP countries is expected to decline to 2019 levels in 2022 3
figure 6. Estimated income inequality in several developing EAP countries has increased during the
COVID-19 pandemic 3
2. What Explains Economic Performance
figure 7. EAP country performance is being shaped by COVID-19 containment, external conditions, and
governments support 4
figure 8. Thanks to increased immunity, EAP’s COVID-19-related mortality remains low even though the
Omicron-variant infection wave is underway. EAP governments have not heightened mobility
restrictions as a result 5
Figure B1.1. Correlation between vaccination and GDP growth 6
Figure B1.2. Correlation between vaccination and household’s economic circumstances 6
Figure B2.1. Critical gaps in health systems capacity in EAP countries 7
Figure B2.2. Most EAP countries are ill-prepared to carry out real-time surveillance and reporting 8
Figure 9. Goods exports have recovered and are growing, whereas services exports still languish,
except in China 9
Figure 10. Manufacturing has led growth of EAP countries’ good exports, whereas travel and transport
are a drag on services exports 9
Figure B3.1. GDP growth and dependence on tourism 10
Figure B3.2. GDP growth and fishing license fees 10
Figure B4.1. Immediate effects of international and domestic supply chain disruptions 11
figure 11. While COVID-19-related fiscal support for health has increased, support on non-health expenses
has declined 12
figure 12. Monetary policy remained supportive, because inflation remained low in 2021 13
figure 13. Higher prices of food and transport are driving inflation 13
figure B5.1. Most common price controls in EAP 15
figure B5.2. Effect of price controls on inflation 15
figure B5.3. Relation between controlled energy prices and inflation in Mongolia 16
3. Risks, Opportunities and Outlook
figure 14. Three international developments are shaping external conditions 17
figure 15. Inflation outside the region is increasing fast, accelerating monetary tightening in the
United States 18
figure 16. Global financial volatility increased and financial conditions in the region tightened as Russia
invade Ukraine 18
figure 17. External sector vulnerabilities 20

iv LIST OF COnTEnTS
BRAVING THE STORMS

List of Figures continued

figure 18. Financial linkages of developing EAP with the US are more important than those with China 21
figure B7.1. Financial shocks from US and China have sizeable effect on EAP countries 22
figure 19. China and United States are major contributors to global growth 22
figure 20. China’s growing importance as the ultimate destination of the EAP countries’ value-added exports 23
figure 21. The importance of Chinese sectors as a source of demand has grown significantly 23
figure B8.1. Output growth declines in China and the United States will negatively affect growth in
developing East Asia 24
figure 22. Declining investment in China’s real estate sector reflects high leverage 25
figure 23. China Zero-CoViD Policy 25
figure B9.1. simulated exogenous contraction in China’s residential investment 27
Figure B9.2. China zero-COVID shock in the Oxford Economics’ model 28
figure 24. EAP region is exposed to oil and food market developments 29
Figure B10.1. Impact of fuel and grain price changes on real incomes 30
Figure B11.1. Potential poverty impacts of energy and cereal price increases in the Philippines 31
figure 25. Shifting GVCs: the relocation decision will depend on the shock 32
figure 26. China accounts for a large share of inputs for most countries 33
figure 27. EAP needs to adapt to a changing trade landscape: A stylized depiction 33
figure 28. China a growing source of inputs for EAP exports 34
figure 29. As China’s share of US final goods imports fell, the rest of EAP’s share rose 34
figure 30. Vietnam accounted for much of the increase in EAP countries’ share of US imports 35
figure 31. Past shocks suggest production relocation to countries with more trade friendly conditions 35
figure 32. Low productivity tends to erode EAP countries’ labor cost advantage 36
Figure B12.1. Despite widespread diffusion of basic technologies, advanced technology use is nascent
in Vietnam 37
figure 33. Large scope for faster technology diffusion in EAP 37
figure 34. CoViD has accelerated technology adoption 38
figure 35. Limited evidence that CoViD accelerated automation 38
figure 36. The COVID-induced digital diffusion is changing the structure of services trade 39
figure 37. Energy cost increases could make green technologies more economically viable 40
Figure B13.1. GDP growth and fiscal balance 43
4. Policy Priorities
figure 38. Macroeconomic policy is expected to play a demanding triple role 45
figure 39. COVID-19 related spending focused more on relief than on growth 46
figure 40. Most governments are beginning fiscal consolidation even though output remains below potential 46
figure 41. Government debt has grown significantly because of large primary deficits 47
figure 42. . . . and relatively low revenue mobilization 47
figure B15.1. indonesia has a low tax efficiency score 48
figure B15.2. indonesia has experienced a widening tax gap since 2005 48
figure 43. Although household incomes have not completely recovered, most countries have already begun
to reduce support to households 51
figure 44. With a persistent slump in earnings, withdrawing support too rapidly could increase poverty:
Example from Indonesia 52
figure 45. Government assistance has been poorly targeted; better targeting could provide more “bang for
buck” in terms of poverty reduction 52
figure 46. Most EAP countries have higher real interest rates than the US and some have scope for cutting
reserve requirements 53

LIST OF COnTEnTS v
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

List of Figures continued

figure 47. EAP countries can take advantage of changing opportunities 56

figure 48. non-tariff barriers penalize exports in a GVC world 57
figure 49. The EAP region has seen slight but uneven improvement in logistics performance 57
figure 50. EAP’s services trade restrictiveness index by sector (2021) 58
figure 51. significant heterogeneity in digital services trade restrictions across countries 58
figure 52. Policies that facilitate rather than inhibit labor mobility can enhance the gains from new trade
opportunities 58
figure 53. negotiating shifting constellations of trade agreements 59
figure 54. Unequal access to fast broadband across and within EAP countries 60
figure 55. Strengthening management quality and remedying weaknesses in human capital are critical
to greater innovation in the region 61
figure 56. Relaxed financial constraints are associated with higher innovation quality 61
Annex
Figure A1. Vaccination may help curb mortality during the Omicron wave and allow economic
activity to continue 65
figure B.A1. Mobility, stringency and vaccination rates in selected PiCs, 2020-2022 68
Figure A2. As China’s share of US final goods imports fell, the rest of EAP’s share rose 70
Figure A3. Vietnam accounts for much of the increase in EAP countries’ share in US final good imports 70
Figure A4. As China’s share of EU’s final goods imports fell, the rest of EAP’s share rose 71
figure A5. Vietnam accounts for much of the increase in EAP countries’ share in EU final good imports 71
figure A6. As China’s share of Japan’s final goods imports fell, the rest of EAP’s share rose 72
figure A7. Vietnam accounts for much of the increase in EAP countries’ share in Japan’s final good imports 72
figure A8. Examples of relocation of production from China to Vietnam 73

vi LIST OF COnTEnTS
BRAVING THE STORMS

List of Tables

Overview
Table O.1. GDP growth forecasts xxi
Table O.2. Growth, the disease, trade and financial exposure, and fiscal and monetary policy space xxii
2. What Explains Economic Performance
Table 1. Fiscal policy space has narrowed across developing East Asian economies; monetary policy space less so 13
3. Risks, Opportunities and Outlook
Table 2. GDP growth forecast 41
Table B13.1. 2022 GDP growth forecast under fiscal policy scenarios (percent) 43
4. Policy Priorities
Table 3. Government finances have worsened in most EAP countries 50
Table 4. Many EAP countries adopt fiscal rules to ensure fiscal discipline 50
Table 5. Financial sector is well-capitalized, but risks remain to solvency, liquidity and corporate health 54
Table 6. forward-looking measures of asset quality 55
Table 7. Share of firms and debt at risk (percent) 55
Annex
Table B.A1. CoViD-19 in the PiCs 67
Table A1. External sector vulnerabilities 69

LIST OF COnTEnTS vii

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

List of Boxes

2. What Explains Economic Performance

Box 1. Vaccination, GDP growth, and household economic circumstances 6
Box 2. not all endemicity is benign 7
Box 3. Tourism and growth in the Pacific 10
Box 4. The effects of global supply chain disruptions 11
Box 5. The role of price controls in times of high volatility 14
3. Risks, Opportunities and Outlook
Box 6. sanctions imposed on Russia in response to the escalation of war with Ukraine 19
Box 7. Estimated financial spillovers from the United states and China 21
Box 8. Estimated growth spillovers from China and United states to developing East Asian economies 24
Box 9. The simulated regional impact of China’s property market downturn and Zero-CoViD policy 26
Box 10. Impact of the fuel and grain price increase on real incomes 29
Box 11. Possible effects on poverty: A simulation from the Philippines 30
Box 12. Limited technology diffusion among East Asian firms: evidence from Vietnam 36
Box 13. China’s growth in 2022: between shocks and stimulus 42
4. Policy Priorities
Box 14. COVID-19–related policy issues examined in recent economic updates 45
Box 15. Indonesia’s tax reforms to create fiscal space 48
Annex
Box A1. COVID-19 comes to the Pacific 66

viii LIST OF COnTEnTS

BRAVING THE STORMS

List of Abbreviations

AE Advanced Economy NPL Nonperforming loans

AFC Asian Financial Crisis organisation for Economic Co-operation and
oECD
Comprehensive and Progressive Agreement for Development
CPTPP Trans-Pacific Partnership pp Percentage point
DEC Development Economics PPP Purchasing Power Parity
Efi Equitable Growth finance and institutions RCEP Regional Comprehensive Economic Partnership
EMDE Emerging Markets and Developing Countries RHS Right Hand Side
EU European Union ROW Rest of the World
FDI Foreign Direct Investment sME Small and medium enterprise
GDP Gross domestic product soE State-owned enterprise
GFC Global Financial Crisis TPP Trans-Pacific Partnership
GTAP Global Trade Analysis Project UHC Universal Health Coverage
GVC Global Value Chain UMIC Upper Middle Income Country
HIC High Income Country U.S. United States
HNP Health Population and Nutrition VAT Value Added Tax
ICT Information and Communications Technology VAR Vector autoregression
ICU Intensive Care Unit VIX Volatility Index
IMF International Monetary Fund WDR World Development Report
LMIC Lower Middle Income Country WTO World Trade Organization

Regions, World Bank Classification and Country Groups LAC Latin America and the Caribbean
MNA Middle East and north Africa
EAP East Asia and Pacific SAR South Asia
ECA Eastern Europe and Central Asia SSA Sub-Saharan Africa

Country Abbreviations PHL Philippines

PLW Palau
CHN China PNG Papua New Guinea
fJi Fiji RMI Republic of the Marshall Islands
FSM Federated States of Micronesia SLB Solomon Islands
IDN Indonesia THA Thailand
JPn Japan TLS Timor-Leste
KHM Cambodia TON Tonga
KIR Kiribati TUV Tuvalu
KOR Republic of Korea UK United Kingdom
LAO Lao People’s Democratic Republic USA United States
MNG Mongolia VNM Vietnam
MMR Myanmar VUT Vanuatu
MYS Malaysia WSM Samoa
NRU Nauru

LisT of ABBREViATions ix
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

List of Abbreviations continued

Currency Units P Philippine peso

RM Malaysian ringgit
B Thai baht RMB Chinese renminbi
CR Cambodian riel Rp Indonesian rupiah
D Vietnamese dong SI$ Solomon Islands dollar
F$ Fiji dollar Tog Mongolian tugrik
K Myanmar kyat US$ Timor-Leste (U.S. dollar)
K Papua New Guinea kina US$ United States dollar
Kip Lao kip

x LisT of ABBREViATions
BRAVING THE STORMS

Preface and Acknowledgments

This report is a collective endeavor and involved several parts of the World Bank including the DEC, EAP, Efi, and HnP.

it was prepared by a team led by Ergys islamaj, Aaditya Mattoo, and Ekaterine T. Vashakmadze. other members of
the team were Vishesh Agarwal, Undral Batmunkh, Yu Cao, Francesca de Nicola, Caroline Gerd G De Roover, Daisuke
fukuzawa, Justin Damien Guenette, shafaat Yar Khan, Young Eun Kim, Duong Trung Le, Andrew D. Mason, Tobias Pfutze,
Agustin samano Penaloza, Jonathan Timmis, ikuko Uochi, Ralph Van Doorn, Matthew Wai-Poi, and Cecile Wodon.

significant contributions to the report were made by Maxym Chepeliev, ibrahim saeed Chowdhury, Reno Dewina,
sergiy Kasyanenko, Uzma Khalil, smita Kuriakose, Yusha Li, Maria Ana Lugo, Maryla Maliszewska, Tonny Brian Mungai
Muthee, Robert Palacios, franz Ulrich Ruch, Maria filipa seara e Pereira, Aparnaa somanathan, Kaltrina Temaj, and
Radu Tutucu.

Manuela V. Ferro provided valuable guidance. We are grateful for helpful discussions and comments to Bejoy Das Gupta,
ndiame Diop, sebastian Eckardt, Erik feyen, Davide furceri, Ayhan Kose, Paolo Mauro, Tewodaj Mogues, Lars Moller,
Rinku Murgai, Zafer Mustafaoglu, franziska ohnsorge, Ugo Panizza, shanaka Jayanath Peiris, Martin Raiser, Mauricio
soto, Cecile Thioro niang, Hassan Zaman, and Jeromin Zettelmeyer; and staff of the EAP region who participated in the
consultation meetings on February 9 and March 7, 2022. We greatly appreciate the support for dissemination provided
by Alejandro Cedeno, Mariana Lucia De Lama Odria, Mark Felsenthal, Nicholas Keyes, Andy Shuai Liu, and Kym Louise
Smithies.

The following staff from the Macroeconomics, Trade and investment Global Practice and the Poverty and Equity Global
Practice prepared country-specific macroeconomic outlook pages: Zainab Ali Ahmad, Rabia Ali, Tanida Arayavechkit,
Kiatipong Ariyapruchya, Mahama Samir Bandaogo, Undral Batmunkh, Nadia Belhaj Hassine Belghith, Andrew
Blackman, Yew Keat Chong, Ibrahim Saeed Chowdhury, Kevin C. Chua, Souleymane Coulibaly, Kevin Thomas Garcia
Cruz, somneuk Davading, Reno Dewina, sebastian Eckardt, Kim Alan Edwards, Karen Annette Lazaro Enriquez, David M.
Gould, indira Maulani Hapsari, Rashad Hasanov, faya Hayati, Taufik indrakesuma, Ganbaatar Jambal, Wendy Karamba,
Demet Kaya, Yusha Li, Maria Ana Lugo, sodeth Ly, Dorsati Madani, Wael Mansur, Pedro Miguel Gaspar Martins, Jacques
Morisset, Thi Da Myint, Darian naidoo, shohei nakamura, Jean-Pascal nguessa nganou, Konesawang nghardsaysone,
Hoang The Nguyen, Anthony Obeyesekere, Yus Medina Pakpahan, Keomanivone Phimmahasay, Ruslan Piontkivsky,
Sharon Faye Alariao Piza, Warunthorn Puthong, Ririn Salwa Purnamasari, Rong Qian, Habib Rab, Ratih Dwi Rahmadanti,
Thanapat Reungsri, Alief Aulia Rezza, Anna Robinson, Apurva Sanghi, Virgi Agita Sari, Shakira Binti Teh Sharifuddin,
Reshika Singh, Bambang Suharnoko Sjahrir, Lodewijk Smets, Abdoulaye Sy, Kathleen Victoria Tedi, Kimsun Tong,
Tuimasi Radravu Ulu, ikuko Uochi, Phonthanat Uruhamanon, Ralph Van Doorn, Matthew Wai-Poi, and Judy Yang. The
work was managed by sebastian Eckardt and Lars Christian Moller for the Macroeconomics, Trade and investment Global
Practice, and by Rinku Murgai for the Poverty and Equity Global Practice. Benoit Philippe Marcel Campagne, Alexander
Haider, Monika Anna Matyja, and Kristina Catherine Tan Mercado made contributions to the model, table production,
and assisting staff with their forecasts. Buntarika Sangarun and Yu Shang provided technical support.

The report was edited and typeset by Circle Graphics, Inc., Reisterstown, MD.

PREfACE AnD ACKnoWLEDGMEnTs xi

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Throughout the report, geographic groupings are defined as follows:

Developing East Asia and Pacific comprises Cambodia, China, indonesia, Lao People’s Democratic Republic (PDR),
Malaysia, Mongolia, Myanmar, Papua new Guinea, the Philippines, Thailand, Timor-Leste, Vietnam, and the Pacific
Island Countries.

The Pacific Island Countries comprise Fiji, Kiribati, the Marshall Islands, the Federated States of Micronesia, Nauru,
Palau, Samoa, the Solomon Islands, Tonga, Tuvalu, and Vanuatu.

The ASEAN member countries comprise Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the
Philippines, Singapore, Thailand, and Vietnam.

The ASEAN-5 comprise Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

The analysis in this report is based on the latest country-level data available as of March 22, 2021.

xii PREfACE AnD ACKnoWLEDGMEnTs

BRAVING THE STORMS

Summary

Just as the EAP region was weathering the recurrent CoViD-19 storms, three clouds have gathered over the economic
horizon, which will mean lower economic growth and higher poverty.
• Most recently, shocks emanating from the war in Ukraine are disrupting the supply of commodities, increasing
financial stress, and dampening global growth.
• The war comes on top of not just the lingering pandemic, but two other developments.
• Us inflation ignited by the stimulus-led rebound and persistent supply disruptions could provoke faster-
than-anticipated financial tightening, perhaps timely in the Us but too early in many EAP countries where
recovery is incomplete.
• China’s structural slowdown, deleveraging of the real estate sector and CoViD-19 resurgence amidst zero-
COVID policies, could dampen regional exports.

Set against these shocks, are some opportunities.

• Shifts in the trade landscape are creating new export niches: in manufacturing, for other EAP countries as some
production moves out of China; in services, as digital delivery, renders tradeable a wider variety of tasks.
• The diffusion of digital technologies could boost productivity, not just of the few countries and firms close to the
frontier, but also of the many in the inefficient interior.
• The increased viability of green technologies could allow EAP countries to cut carbon emissions and cope with
the new energy insecurity without unacceptable cuts in consumption or growth.

To mitigate the risks and grasp the opportunities, countries must take four steps:
• Enhance efficiency of fiscal policy for recovery and growth. More efficient and targeted support to households and
firms would limit pain from the cumulative shocks and create space for investment in the infrastructure of trade,
energy, and technology diffusion. Fiscal support implemented by entities like local governments and state-owned
enterprises must not undermine their financial viability. Committing to fiscal rules and future reforms of revenue and
expenditure would help reconcile spending needs with tightening budget constraints amidst growing debt.
• Strengthen macroprudential policies to mitigate risks from global financial tightening. Monetary policy must remain
alert to new inflationary pressures but at present can continue to support recovery, because real interest rates are
relatively high and core inflation relatively low. stress-testing diagnostics are needed to help identify vulnerabilities
that might fester behind the veil of regulatory forbearance and implicit guarantees. Measures could then be taken
where needed to capitalize banks, hedge and extend the maturity of debt, and enhance liquidity buffers.
• Reform trade-related policies in goods and, especially, in still-protected EAP services sectors to take advantage of shifts
in the global trade landscape. in addition, facilitating domestic labor mobility, as well as entry and exit of firms, would
allow reallocation of resources in response to the global shocks. Refraining from national export restrictions in the face
of rising global prices could help avert an even worse global outcome. Participation in deep trade agreements could
catalyze reform at home and secure access to markets abroad.
• Policy reform and assistance to encourage diffusion of technology. Increased domestic and international competition
could strengthen incentives for productivity-enhancing technology adoption. Enhancing managerial and technical
skills, and improving access to finance as well as digital infrastructure would boost the capacity for technology
adoption. Eliminating domestic distortions, such as those due to fossil fuel subsidies and local content requirements,
could encourage the adoption of green technologies.

SUMMARY xiii
BRAVING THE STORMS

Overview

At the beginning of 2022, the EAP countries appeared to be on the path of sustained recovery. The region had emerged from the
difficult Delta wave and suffered relatively little from omicron wave. External trade and financial conditions remained benign,
and governments were contemplating fiscal consolidation. since then, the acceleration in Us inflation prompted faster-than-
expected financial tightening, China saw a spike in CoViD-19 infections and continued strains on overleveraged real estate firms,
and Russia invaded Ukraine. While some larger countries may be better equipped to weather these shocks, the repercussions of
these events will dampen the growth prospects of most in the EAP region. Projections for regional growth in 2022 have therefore
been reduced from 5.4 percent in the previous Update to 5 percent. In a low case scenario, if global conditions worsen and
national policy responses are weak, growth could slow to 4 percent. (figure o.1). However, the turmoil should not obscure
the new avenues for growth through trade and innovation. Bold reforms of fiscal, prudential, trade and innovation policies could
help EAP countries avert the many risks and grasp the few opportunities.

Figure O.1. Forecasts for growth in 2022

7
Previous forecast
6
Baseline 5

Percent
Low case 4
3
2
1
0
Vietnam

Malaysia

Philippines

China

Indonesia

Mongolia

Lao PDR

Cambodia

PNG

Thailand

countries
Island
Source: World Bank staff estimates.
Notes: PNG stands for Papua New Guinea.

The backdrop

After the Delta-dip in 2021Q3, economic recovery in much of the EAP region resumed in 2021Q4 and continued in
2022Q1, despite the omicron outbreak. Countries in the region grew on average by 7.2 percent and are projected to grow
by 5 percent in 2022 (figure o.1). However, the revival has been uneven across countries and sectors. China, indonesia,
and Vietnam have already surpassed pre-pandemic levels of output, while Cambodia, Malaysia, Mongolia, the Philippines
and Thailand are expected to do so in 2022. However, output in several hardest hit Pacific islands is not likely to return to
pre-pandemic levels even by 2023. While sectors like agriculture, finance, information, and communication technology have
been resilient, output in transportation, accommodation and catering remains well-below pre-pandemic levels. The year 2021
saw no decline in poverty in countries other than China, but in 2022, 30 million people are projected to escape poverty, relative
to the upper-middle income class poverty line of US$5.50/day (2011 PPP).

Why?

The economic performance of countries is being shaped by how efficiently they contain the CoViD shock, how they are affected
by changing conditions in the rest of the world, and how much support governments provide. Natural disasters, notably the
volcanic eruption which affected Tonga, and other idiosyncratic factors, like the unrest in the Solomon Islands, also played a role.

oVERViEW xv
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Ì COVID shock and containment strategy

Thanks to the increased immunity conferred by vaccination and Delta variant infections, most countries in the region have
so far been less vulnerable to new spikes in infection by the Omicron variant and have therefore imposed fewer restrictions
on mobility and economic activity. However, some countries, such as those in the Pacific, are yet to feel the full force of the
Omicron wave and China has recently seen a spike in cases prompting strict lockdowns. The Delta variant in 2021
inflicted a much greater human cost on the region than the initial wave of CoViD-19 in early 2020. But the economic
contraction induced by the Delta variant was smaller than in the earlier wave. Nevertheless, across countries, the virus and
related measures continue to dampen domestic consumption, private investment, and international tourism.

Ì Trade

Since demand in the rest of the world remained buoyant even in the face of the Omicron spike, and logistics constraints
are beginning to ease, trade has continued to grow. The fear of saturating global demand for consumer electronics, which
are important exports for countries like China, Malaysia, and Vietnam, has not yet materialized. However, the incoming data
point to a slowdown of global trade growth in 2022. While trade in digitized services, which are important for countries like
China and the Philippines, remains resilient, tourism, which is vital for several Pacific islands, Cambodia, the Philippines
and Thailand, is recovering much more slowly.

Ì Macroeconomic support

A combination of tightening intertemporal budget constraints and what had until recently seemed like diminishing
need were leading to a reduction in fiscal support, from an average of 6 percent in 2020 to 5 percent in 2021.
A further decline to 1.5 percent of GDP on average was projected in 2022, although China was projected to ease
fiscal policy significantly to support growth. in 2021, average consumer price inflation remained within the central
bank target ranges in all major economies, allowing central banks to keep an accommodative monetary policy
stance over the course of the year.

New growth risks: Three international developments

Financial tightening, especially in the United States, changes in the growth and composition of economic activity,
especially in China, and the war in Ukraine, are now shaping the external environment for EAP countries.

The rapid stimulus-led rebound in the United states has contributed to higher inflation. The earlier-than-expected
monetary tightening in response could make recovery even harder in other countries. Financial conditions in the US are
of particular significance for developing EAP countries, especially those like Malaysia which rely more on short term capital
flows. The risk of capital outflows, which could put pressure on their currencies, could induce premature financial tightening.
A monetary policy shock in the U.S., assumed to increase interest rates by at least 25 basis points, is likely to hurt growth

xvi oVERViEW
BRAVING THE STORMS

in developing EAP, by as much as −0.4 percentage points in Figure O.2. The estimated impact on EAP countries’ growth of
Malaysia to -0.7 percentage points in Thailand (figure o.2). international developments

Percentage points
0.4
Growth is expected to slow down both in China, because 0.2
0.0
of the structural slowdown and regulatory regime change, –0.2
–0.4
and in the US, because of the cyclical slowdown. Therefore, –0.6
–0.8

Monetary

Real estate

Zero-COVID

Energy (importers)

Energy (exporters)

Crops(importers)

Crops(exporters)

Financial
both are expected to make smaller contributions to global
growth in 2022 and 2023 than in 2021–the year in which
output rebounded from the COVID contraction. However,
the absolute size of China and the Us’ contribution to
growth, is estimated to be almost as large as in the
pre-COVID years. A one percent slowdown in US growth is United China War in Ukraine G7
States
estimated to have a slightly larger impact (0.4 percentage
points) on the EAP region than a comparable slowdown in Source: World Bank staff estimates.
China’s growth (0.3 percentage points). Notes: This chart provides a rough sense of the impact of alternative hypothetical shocks. The specific assumptions
underlying each shock are presented in the text. Effects of Us monetary shocks are estimated using the sign-
restricted structural VAR methodology. China real estate, zero-CoViD, and global financial shocks from the war
in Ukraine are modeled and estimated using the oxford Economics Model. shocks to energy and crops in the
aftermath of the war in Ukraine war are modeled and estimated using the GTAP computable general equilibrium
specific shocks to economic activity in China, are likely also model. The G7 shocks is estimates using a structural VAR methodology.

to affect EAP countries whose trade is increasingly oriented

to China’s markets. Construction, constrained by efforts
potentially to reduce leverage, industry, by efforts potentially to reduce emissions; and services, constrained by efforts to
control CoViD-19 and monopolistic providers, are each a significant destination for EAP value added. The contraction in
the real estate sector, assumed to match a projected decline in residential investment growth by 10 percentage points
from 2020 to 2022, could reduce the EAP region’s growth by 0.3 percentage points in 2022. China’s zero-CoViD policy,
assumed to be equivalent to the impact of the Delta shock on consumption in China for only one quarter of 2022, could
reduce EAP growth by 0.14 percentage points.

shocks emanating from the war in Ukraine and the related sanctions could affect the EAP region most concretely by
disrupting the supply of commodities, as well as by increasing financial stress and reducing global confidence. The
region’s direct dependence on Russia and Ukraine through imports and exports of goods, services, and capital, is limited.
But the war and sanctions are likely to increase international prices of food and fuel, hurting consumers and growth.
The number of poor in the Philippines, for example, could increase by 1 percentage point or 1.1 million measured
at the lower-middle-class poverty line ($3.2/day) if cereal prices rise by an average of 10 percent over the year. Real
national income in commodity importers like Cambodia and Thailand could be reduced by 0.7 percentage points if fuel
prices increase by an average of 10 percent over the year. furthermore, with already heightened global inflationary
pressures, the knock-on effects of the war may not be transitory and could de-anchor inflation expectations.

These three shocks could have both offsetting and reinforcing aspects. on the one hand, the financial shock from the war
in Ukraine may lead to a slower-than-planned tightening of Us monetary policy despite the stronger inflationary
pressures. Similarly, the increase in commodity prices due to the war may offset the decline in prices due to real estate
contraction in China, though the commodities affected would not be the same. On the other hand, each shock will
adversely affect global growth by hurting economic activity in the directly affected countries as well as indirectly in the
rest of the world. A slowdown in the growth of G7 countries by 0.9 percent would imply weaker export demand for EAP
countries and hence a decline in their average growth by as much as 0.6 percent.

oVERViEW xvii
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

These shocks are likely to magnify existing post-CoViD difficulties. struggling regional firms, more than 50 percent of which
reported payment arrears in 2021, will be hit by new supply and demand shocks. Households, whose 8 million members fell
back into poverty during the pandemic, will see real incomes shrink even further as prices soar. The microeconomic misery
will have to contend with macroeconomic miserliness. Indebted governments, who have seen their debt as a share of GDP
increase by 10 percentage points since 2019, will struggle to provide economic support. financial tightening and increased
inflation, at least one percentage point above previous expectations due to the oil price shock alone, will shrink room for
monetary easing. And overexposed banks, with credit as a share of GDP about 10 percent higher than before the pandemic,
will have to cope with new financial stresses and increased risks to loans.

Some countries in the region may nevertheless be more resilient than others in the face of these shocks because of their
attributes and prior prudence. Commodity exporters, like Indonesia and Malaysia, may absorb international price increases
with less difficulty than commodity importers, like fiji and Thailand. Countries that exercised fiscal and monetary policy
restraint in the early phases of the pandemic have the policy space to counteract shocks. For example, China reduced its
structural fiscal balance by as much 2.6 percentage points of GDP in 2021, allowing it to plan an increase of 2.8 percent
in 2022 to meet its growth target. In contrast, Mongolia, with government debt equal to nearly 80 percent of GDP and
annual inflation running at over 14 percent, has little room to soften the adverse impact. But all countries in the region,
by virtue of their openness to trade and finance, face serious economic risks if global conditions significantly worsen.
Regional growth in 2022 could decline from the 5.4 percent projected in the October 2021 Update, to 5 percent in the
present baseline scenario and in the low case scenario to 4 percent.

New growth opportunities: Trade, digital technology, and green production

The incentives to diversify production and imports, already strong because of the dependence aversion in the aftermath of
CoViD-19, will be magnified by the current war and sanctions. Incentives to relocate production were already strengthening
because of the increase in China’s real wages, driven by growth and demographic change, and the China-Us trade tensions.
The share of EAP countries other than China in Us final good imports increased from 10 percent in early 2018 to 14 percent in
mid-2021 before the Delta shock, while China’s share fell over the same period from 33 percent to 25 percent. However, the
growing scope for automation is narrowing the window of opportunity for other countries to engage in GVCs by specializing in
labor intensive tasks. The extent to which individual countries benefit from the reconfiguration of value chains depends on their
production and trade costs. But developing EAP countries’ advantage in terms of low labor costs is offset to varying degrees by
low labor productivity.

Technology is a key driver of productivity and the COVID-19 shock has accelerated the diffusion of digital technologies. In
the EAP countries, frontier firms tended to adopt better technologies more quickly than in the past, but these technologies
diffused more slowly to other firms. While the CoViD shock has led to convergence in the use of basic consumer-facing
technologies, such as ecommerce, it has been associated with divergence in the use of more sophisticated productivity-
enhancing technologies, such as data analytics.

The pandemic-induced diffusion of technologies is also changing the structure of services trade. While tourism and travel
have been disrupted, trade in data-intensive services has grown. irreversible investments in digital delivery made by firms and
consumers during the pandemic are durably reducing the costs of international trade relative to domestic transactions. The
result will be increased opportunities for trade in digitized services even as tourism and travel recover more slowly.

High fossil fuel prices could increase incentives to switch to renewable energy. And the adoption of green production technologies
would allow EAP countries to cut carbon emissions and cope with the new energy insecurity without unacceptable cuts in

xviii oVERViEW
BRAVING THE STORMS

consumption or growth. But not all current changes will favor green technologies. The high fuel prices could also induce
more investment in the production of fossil fuels. And the war in Ukraine could reduce availability of key inputs in the
production of green goods, like palladium and nickel.

What must be done?

Fiscal policy. EAP countries were already struggling to Figure O.3. state of recovery and macrofinancial
reconcile fiscal support, for relief, recovery, and growth, vulnerabilities
with shrinking fiscal space. For example, the growth in 12
debt–by more than 10 percentage point of GDP in most CHN VNM

Percent deviation of 2021 GDP from 2019

EAP countries and by more than three times as much in 8
Fiji–is increasing pressure for fiscal consolidation even 4 LAO
IDN
where recovery is incomplete (figure o.3). furthermore, fiscal
MYS
support implemented by entities like local governments 0
PHL PNG KHM
and state-owned enterprises risks undermining their –4 THA MNG
financial viability. The new shocks will sharpen the trade- TLS
offs, and lower investment in the infrastructure of trade, –8

energy, and technology diffusion–which are needed to –12

harness the new growth opportunities by enhancing domestic MMR
–16
capacity and international connectivity.
FJI
–20
2.5 3.0 3.5 4.0 4.5
Three measures can help. first, more efficient social
Macrofinancial vulnerabilities index
protection would free fiscal space for other ends. EAP
countries have shielded households from recent COVID- Source: World Bank staff estimates.
Note: y-axis shows the latest quarterly/annual real GDP level compared to 2019. The macrofinancial
related income shocks though a broad-based increase in vulnerability index comprises four dimensions: government finances; external financing needs; financial
sector health; and macroeconomic volatility. The scale 1-5 refers to quintiles compared to a sample of all
social protection and from price shocks through a emerging market and developing economies.
combination of price controls and subsidies (or tax cuts).
Both types of measures may be the only form of assistance
that is feasible in the short term, but neither is efficient or fiscally sustainable. Direct transfers to poor households and firms,
once the relevant digital infrastructure is in place, would alleviate the pain from the cumulative shocks without distorting
price signals or subsidizing the wealthy. For example, a means-based transfer could deliver a 2 percentage point greater
reduction in poverty rates than a universal transfer in a typical middle-income country. Second, public resources combined
with investment policy reform could encourage greater private investment in the creation of public infrastructure. Finally,
governments should reconcile spending needs with tightening budget constraints, by committing (a) to restoring fiscal
discipline through the (re)introduction of fiscal rules, as indonesia is planning to do in 2023; and (b) to fiscal reform through
enactment of legislation to be implemented conditional on objective measures of recovery. For example, new tax reform
legislation in Indonesia is expected to raise revenue by 1.2 percent of GDP in the medium term.

Macroprudential policy. EAP countries must guard against the risk of financial instability in the face of financial tightening
in major markets. Monetary policy must remain alert to new inflationary pressures, but can at present continue to support
recovery in most EAP countries, because real interest rates are relatively high and core inflation relatively low. While banks
in most EAP countries are well-capitalized and reported levels of non-performing loans are low, stress-testing diagnostics can
help identify vulnerabilities that might fester behind the veil of regulatory forbearance. Then, depending on circumstances,
countries must ensure adequate capitalization of banks with large loans at risk; hedge and extend the maturity of debt to
address currency mismatches and rollover risk; enhance liquidity buffers and secure lines of credit to anticipate potential

oVERViEW xix
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

increases in external financing needs. Countries with unsustainable external debt, like Lao PDR and some of the Pacific island
Countries, would benefit from the development of a more effective international debt resolution framework.

Trade: policy and infrastructure. Comprehensive trade-related reforms would enable EAP countries to take advantage of shifts
in the global trade landscape. First, liberalizing and facilitating trade, rather than retaliating in response to reshoring policies
abroad, could lead to a net increase in real incomes by as much as 3 percent. Also, global restraint on export restrictions in
the face of commodity price shocks would avoid creating price spirals and an even worse global outcome. Second, looking
beyond goods trade, reforming still-high restrictions on trade in transport, communication, and other business services, could
reduce trade costs and boost economy-wide productivity. Third, implementing measures to facilitate domestic labor mobility,
such as retraining and placement assistance, would allow resources to move to new areas of comparative advantage, also
boosting productivity and incomes. Finally, participation in deep trade agreements could both catalyze reform at home and
secure access to markets abroad. For example, China joining is estimated to quadruple the global income gains from the
CPTPP to around $630 billion compared to the current gains of about $150 billion. Deep agreements could include not just
trade liberalization, but regulatory cooperation and infrastructural coordination that further deeper economic integration.

Technological diffusion: policy and infrastructure. The rapid diffusion of technology in the post-COVID period could
boost productivity. But harnessing technology will require policy reform and assistance. First, enhancing competition, by
eliminating barriers to entry and exit for both domestic and foreign firms, as well as reforms of the business environment,
would strengthen incentives for technology adoption and diffusion. Second, measures to enhance relevant managerial and
technical skills as well as access to the necessary finance, would enable firms to embed productivity-boosting technologies
in their businesses. Third, while digital infrastructure for basic technologies is often available, broadband access, which is
widespread for example in China’s Eastern provinces, needs to be widened in countries like indonesia and the Philippines
to facilitate the use of more advanced technologies. Finally, eliminating domestic distortions, such as those due to fossil
fuel subsidies and local content requirements, could encourage the adoption of green technologies.

xx oVERViEW
BRAVING THE STORMS

Table 0.1. GDP growth forecasts

October 2021 April 2022

forecast for 2022 Baseline Lower case

East Asia & Pacific 5.4 5.0 4.0

East Asia & Pacific (excluding China) 5.2 4.8 4.2
ASEAN-5 5.2 4.9 4.3
Pacific Island Countries 5.4 2.9

China 5.4 5.0 4.0

Indonesia 5.2 5.1 4.6
Malaysia 5.8 5.5 4.8
Philippines 5.8 5.7 4.9
Thailand 3.6 2.9 2.6
Vietnam 6.5 5.3 4.0
Cambodia 4.5 4.5 3.8
Lao PDR 4.5 3.8 3.3
Mongolia 5.2 2.5 0.7
Myanmar 1.0
Papua New Guinea 4.0 4.0 3.0
Timor-Leste 3.7 2.4
Palau 12.0 7.2
Fiji 7.8 6.3
Solomon Isl. 4.5 −2.9
Tuvalu 3.5 3.5
Marshall Isl. 3.5 3.0
Vanuatu 3.0 2.0
Kiribati 2.6 −1.8
Tonga 2.6 −1.6
Samoa 1.5 −0.3
Micronesia 1.0 0.4
Nauru 0.9 0.9
Source: World Bank; World Bank staff estimates and projections.
Notes: Percent growth of GDP at market prices. Values for 2022 represent forecast. Values for 2021 for the small island economies refer to GDP growth estimates. AsEAn-5 comprises indonesia, Thailand, the Philippines,
Malaysia, and Vietnam. Values for Timor-Leste represent non-oil GDP. for the following countries, values correspond to the fiscal year: federal states of Micronesia, Palau, and Republic of the Marshall islands (October 1–September
30); nauru, samoa, and Tonga (July 1–June 30). Myanmar growth rates refer to the fiscal year from october to september. Given the lack of high-frequency data, we have not produced forecasts for the low case scenario for
Myanmar, Timor-Leste and the Pacific island countries.

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 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Table O.2. Growth, the disease, trade and financial exposure, and fiscal and monetary policy space

COVID-19 Commodity dependence Trade and financial exposure Macroeconomic policy space

GDP
growth General
Country COVID-19 Net energy Net food export Gross goods & External
estimates Restriction government CPI inflatin
cases per export (grains) services export financing needs
(2022) index debt (Feb 2022 or
million (% of GDP, (% of GDP, (% of GDP, (% of GDP,
(March 2022) (% of GDP, latest)
(March 2022) 2015-19) 2015-19) 2015-19) 2022 est.)
2021)

China 5.0 1 64 –1.4 0.0 20 6 45 0.8

Indonesia 5.1 67 61 1.4 –0.3 19 9 41 2.1
Malaysia 5.5 818 54 3.6 –0.4 78 29 63 2.2
Philippines 5.7 5 78 –3.1 –0.6 30 8 55 3.0
Thailand 2.9 346 48 –3.5 0.9 66 11 58 5.3
Vietnam 5.3 2267 65 –2.9 0.0 99 5 45 1.4

Cambodia 4.5 13 23 –9.6 1.3 72 36 35 3.7

Lao PDR 3.8 84 82 –4.7 0.2 34 20 78 7.3
Mongolia 2.5 124 12 10.0 –0.3 57 43 80 14.3
Myanmar 1.0 18 71 2.4 0.7 29 3 57 9.9
PNG 4.0 1 51 14.7 –0.8 42 –9 52 5.7
Timor-Leste 2.4 4 36 0.8 –1.4 7 18 25 5.4

Fiji 6.3 20 65 –5.6 –1.1 45 14 86 2.7

Kiribati 1.8 55 76 –7.7 –2.8 11 21 3.0
Marshall Is. 3.0 0 –1.0 29 14
Micronesia 0.4 0 –9.2 –1.1 30 15 2.5
Nauru 0.9 0 –26.2 –0.1 32 28 2.0
Palau 7.2 463 –4.7 –0.3 54 3.0
Samoa –0.3 60 –4.6 –0.3 35 10 50 8.5
Solomon Is. –2.9 204 87 –3.7 –1.9 40 21 21 3.3
Tonga –1.6 1460 87 –6.7 0.0 20 12 46 6.0
Tuvalu 3.5 0 –22.1 –0.7 20 6 2.8
Vanuatu 2.0 159 41 –4.1 –0.6 44 14 28 4.5
Source: UN Comtrade; Fitch Solutions; Haver Analytics; International Monetary Fund; Oxford Covid-19 Government Response Tracker (OxCGRT), WHO Coronavirus (COVID-19) Dashboard; World Development
Indicators; World Bank.
Note: Restriction index refers to a measure of COVID-19-related government restriction policies, rescaled from 0 to 100 (100 = strictest). For countries missing March 2022 data, February 2022 data were used. Net energy
export includes mineral fuels, oils and waxes (HS code 27) less electrical energy. net food export (grain) includes cereals and grains (Hs code 10). CPi inflation of Kiribati, Micronesia, nauru, Palau, samoa, solomon Is.,
Tonga, Tuvalu and Vanuatu show 2021 end-of-period estimates. Color scale represents quintiles relative to the group of emerging markets and developing economies, with red denoting the worst exposure and green
the least. General government debt of small island economies is not color scaled because debt tolerance of small island countries is lower than larger EMDEs.

xxii oVERViEW
BRAVING THE STORMS

1. Recent Developments
The region’s economic recovery resumed in the fourth quarter of 2021. The EAP countries continued the recovery
during 2021, albeit in an uneven fashion. China’s economy grew by 8.1 percent in 2021, while the rest of the region
grew by 2.6 percent. output in China and Vietnam had already exceeded pre-pandemic levels in 2020. strong performance
in the fourth quarter of 2021 undid some of the sluggishness in economic growth during the Delta-dip in the third quarter
that was highlighted in the previous EAP Update. output in indonesia and Malaysia surpassed the pre-pandemic level at the
end of 2021. While output in the Philippines and Thailand remains below the pre-pandemic level, growth accelerated
in the fourth quarter of 2021, boosted by further easing of CoViD-19 curbs and surging rates of vaccination (figure 1).

Output remains below pre-pandemic levels in many of the region’s economies. The recovery has been uneven across
EAP countries. The worst affected and the slowest to recover are Myanmar and several Pacific island countries (figure 2).
Cambodia, Mongolia, the Philippines and Thailand are expected to surpass pre-pandemic levels of output in 2022, and
output in many Pacific islands is not likely to return to pre-pandemic levels even by 2023.

Figure 1. GDP recovered in 2021Q4, after the Delta-dip in 2021Q3

a. GDP relative to pre-pandemic level b. GDP relative to pre-pandemic level

120 120
INDEX: 100 = 2019Q4
INDEX: 2019Q4 = 100

110 110

100
100

90
90
80
80 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021
2019 2020 2021
Indonesia Malaysia Philippines
World excluding EAP EAP excluding China China Thailand Vietnam

Source: Haver Analytics, World Bank.

Note: The figures show seasonally adjusted real GDP indexed to 2019Q4 (100).

Figure 2. The recovery is uneven across countries . . .

Change in GDP between 2021 and 2019

15
10
5
0
Percent

–5
–10
–15
–20
–25
China
Vietnam
Tuvalu
Lao PDR
Nauru
Indonesia
Tonga
Malaysia
Cambodia
Kiribati
Philippines
PNG
Thailand
Mongolia
Solomon Islands
Marshall Islands
FSM
Vanuatu
Timor-Leste
Samoa
Myanmar
Fiji
Palau

Source: Haver Analytics, World Bank.

Note: The figure shows real GDP deviation between the 2021 and 2019. fsM stands for federated states of Micronesia, and PnG stands for Papua new Guinea.

1. RECEnT DEVELoPMEnTs 1
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Private consumption and investment have negatively Figure 3. . . . uneven in terms of components of aggregate
affected growth since the pandemic started. In demand . . .
contrast, goods exports, and to a lesser extent public 6
spending, have supported growth reflecting robust global
4
demand (figure 3). services exports have remained
2

Percentage point
sluggish, disproportionally affecting tourism-dependent
countries. 0

–2
The recovery has been uneven across sectors. While –4
sectors like information and communication technology,
–6
finance and agriculture have been resilient, output
–8 Gross fixed Government Goods Export
in transportation, accommodation and catering sectors Private Service
consumption capital Export consumption
remains well-below pre-pandemic levels (figure 4). formation

Source: Haver Analytics.

The number of poor in developing East Asian and Note: Figure shows the percentage point difference between the contribution to GDP growth of the 2021Q4
Pacific countries is expected to decline to its 2019 compared to 2019Q4 and the average contribution in 2017–2019. Weighted average of Indonesia, Malaysia,
Philippines, and Thailand.
level in 2022 (figure 5). In China, the estimated
number of poor has continued to decline during the
pandemic and has already returned to levels predicted prior to the pandemic, based on strong GDP growth in 2021.
Elsewhere in developing EAP, the CoViD-19 economic shock coupled with slow economic recovery in most countries, set
back progress on poverty reduction in 2020 and 2021. However, with expected economic recovery, poverty is projected
to decline again in 2022 and to reach pre-pandemic levels. For the region, 11 million people are expected to escape
poverty between 2021 and 2022 using the lower-middle income class poverty line of US$3.20/day (2011 PPP), and 30 million
people are projected to escape poverty using the upper-middle income class poverty line of US$5.50/day (2011 PPP).
Recent food price increases in the region, reinforced by food and fuel price rises related to the the war in Ukraine could
threaten expected progress in poverty reduction in 2022, as poor households tend to spend substantial shares of
their incomes on food and energy. Simulation analysis suggests, for example, that if cereal prices rise by 10 percent in the

Figure 4. . . . and uneven across sectors

120

110
INDEX: 100 = 2019Q4

100

90

80

70

60
Indonesia Malaysia Philippines Thailand Vietnam

ICT & finance Agriculture Wholesale & Retail trade

Manufacturing Real estate & professional business Construction
Accommodation & Food Transportation & Storage

Source: Haver Analytics.

Note: Figure shows sectoral real value added in 2021Q4 indexed to 2019Q4.

2 1. RECEnT DEVELoPMEnTs
BRAVING THE STORMS

Figure 5. The number of poor in developing EAP countries is expected to decline to 2019 levels in 2022

a. US$3.20 a day poverty line b. US$5.50 a day poverty line

120 300
263 267
95 95 259
87 250
91 257
Millions of people

Millions of people
80 86 251
81 245
211
223
200
195 174
40 153
169
21 150
24 14
18 11
13
0 100
2019 2020 2021 2022 2019 2020 2021 2022
pre-COVID projections, EAP excluding China pre-COVID projections, EAP excluding China
pre-COVID projections, China pre-COVID projections, China
COVID estimates, EAP excluding China COVID estimates, EAP excluding China
COVID estimates, China COVID estimates, China

Source: World Bank Staff estimations. Poverty estimates are based on growth forecasts, population projections, and historical growth elasticities of poverty.
Note: forecasts are based on GDP growth projections as of March 23, 2022. Us$3.20 per-person-per-day and Us$5.50 per-person-per-day poverty lines (2011PPP) represent the typical value of poverty lines found in
lower-middle-income and upper-middle-income countries, respectively (World Bank, 2018a). The pre-CoViD forecasts are based on GDP growth projections from January 2020 GEP and are available up to 2021.

Philippines, this would be expected to increase the poverty rate by 1 percentage point–about l.1 million addition poor–measured
using the lower-middle-class poverty line ($3.20/day). If the low case GDP growth scenario were to materialize, 6 million more
people would remain trapped in poverty in 2022 at the US$5.50/day poverty line.

The COVID-19 pandemic has increased inequality within Figure 6. Estimated income inequality in several developing
several developing EAP countries. While official estimates EAP countries has increased during the CoViD-19
pandemic
on income/consumption inequality are available only
for a few countries, such estimates, based on nationally 0.6
representative household survey data, suggests that income
Percentage point

0.4
inequality has increased (World Bank, 2021a; Kim et al. 0.2
2021). in indonesia, for example, the Gini coefficient rose 0.0
during the pandemic (from 37.0 in March 2019 to 37.3
–0.2
in March 2021), driven by increasing inequality in urban
–0.4
areas.1 In China, the income Gini also increased slightly,
Mongolia

Vietnam

Philippines

Indonesia

China

PNG

Lao PDR

Cambodia

Malaysia

Thailand

Developing
EAP average
Myanmar

from 46.5 in 2019 to 46.8 in 2020, again the result of

increasing urban inequality. Preliminary simulations suggest
that the Gini coefficient may also have risen in Mongolia,
Vietnam, the Philippines, Myanmar, Lao PDR, and Papua Sources: for China and indonesia: official sources. for other countries: Mahler, Yonzan and Lakner (forthcoming),
New Guinea, but decreased in Thailand during the initial simulated based on household surveys and high-frequency phone surveys.
Notes: The figure shows percentage point change in Gini index between 2019 and 2020. income-based Gini
year of the pandemic (Mahler, Yonzan and Lakner, indices for China, Malaysia and Philippines; expenditure-based Gini indices for the rest of the countries.
Average Gini indices is a simple average across countries included in the figure. for indonesia, the 2021
forthcoming) (figure 6). estimate is included instead of 2020 because the available data are from March of each year, and the March
2021 better captures the impact of the pandemic.

1 Between March 2019 and March 2021, only the top 20 percent of urban households in indonesia experienced robust consumption growth. The rest of urban households, especially
middle to upper-middle income classes, experienced negative to zero consumption growth. By contrast, consumption growth of rural households was more equitable across the welfare
distribution and the rural Gini ratio remained stable.

1. RECEnT DEVELoPMEnTs 3
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

2. What Explains Economic Performance

Four broad factors are shaping the recovery across EAP countries. The heterogeneity of economic performance
across EAP countries is explained primarily by the scale of the CoViD-19 shock, the measures by which the disease is
being contained, the extent to which external conditions are favorable to recovery, and the capacity of the government
to provide support (figure 7). Most EAP countries have been able to ramp up vaccinations, and relaxed restrictions that
hurt domestic economic activity. Until recently the buoyant external environment helped sustain exports of the countries
that export manufactured goods and commodities, but international tourism remained subdued, hurting countries
like Thailand, the Philippines and many Pacific islands. EAP governments’ ability to provide continued policy support
differed, with some increasingly constrained by rising debt.

Figure 7. EAP country performance is being shaped by CoViD-19 containment, external conditions, and governments support

Ability to implement an
COVID-19 pandemic efficient containment strategy

Country economic
conditions

Economic conditions in Government capacity to

the rest of the world provide economic support

Source: World Bank staff elaboration.

Some countries’ performance was also shaped by idiosyncratic factors. The military takeover in Myanmar in February
2021 and the subsequent third wave of COVID-19 cases have severely impacted economic activity. Tonga was affected by
a volcanic eruption.

2.1. COVID-19: shock and containment

The coming of the Delta variant in 2021 inflicted a much greater human cost on the region than the initial wave
of infection in early 2020. However, the economic contraction induced by the Delta variant was relatively small.
Thanks to increased immunity conferred by vaccination and Delta infections, COVID-19-related mortalities in the region
have remained less severe during the ongoing Omicron-variant wave, despite new spikes in infection. As a result, the
stringency of government restrictions on mobility and economic activity continue to decline in most countries (figure 8).
Because there are less disruptions to mobility and interaction, we are beginning to see economic recovery. However,
some countries are yet to feel the full force of the Omicron wave and China has seen a recent spike in infections and related
restrictions. The Pacific island countries (PiCs), having managed to largely avoid domestic CoViD-19 outbreaks up until
2022, have seen the Omicron variant spreading rapidly through the region, requiring strict lockdowns and public health

4 2. WHAT ExPLAins EConoMiC PERfoRMAnCE

BRAVING THE STORMS

Figure 8. Thanks to increased immunity, EAP’s CoViD-19-related mortality remains low even though the Omicron-variant wave is
underway. EAP governments have not heightened mobility restrictions as a result

a. COVID-19 new infections b. COVID-19 new deaths

1.0 Delta Omicron 3 15

Delta Omicron
variant variant variant variant
Cases per thousand

0.8

Deaths per million

2 10
0.6

0.4
1 5
0.2

0.0 0 0
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21
Nov-21
Dec-21
Jan-22
Feb-22
Mar-22

Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21
Nov-21
Dec-21
Jan-22
Feb-22
Mar-22
China Indonesia Malaysia China Indonesia Malaysia
Philippines Thailand Vietnam Philippines Thailand Vietnam

c. Vaccination coverage by region d. Government stringency index

100 100

80 80

60 60
Percent

40
40

20
20
0
Nov-20

Nov-21
Mar-20

Mar-21

Mar-22
Jan-20

Jan-21

Jan-22
May-20

May-21
Jul-20

Jul-21
Sep-20

Sep-21
0
NAR EAP ECA LAC SAR MENA SSA

Fully vaccinated Partially vaccinated

World average (at least one dose) World Average EAP Average

Source: Oxford COVID-19 Government Response Tracker (OxCGRT), Our World in Data (OWiD).
Note: Latest observations as of March 21, 2022. Stringency Index is an aggregate policy score based on the number and strictness of government policies (Panel D). 0 to 100, 100 = strictest.

measures (box A1). Across countries, the virus and related measures continue to dampen domestic consumption, private
investment, and international tourism.

High rates of vaccination reduce the sensitivity of economic activity to infections. High frequency indicators of economic
activity suggest that recent economic activity has been relatively resilient to infections in countries with high vaccination
rates. In addition, in most countries, the public health measures provoked by the outbreak restrict overall mobility less,
and economic agents have learned to function in the face of infections and diminished mobility (figure 8; figure A1.1). As
countries adapt to living with surges of infection, and vaccination rates continue to increase across the region, new infections
are likely to hurt economic activity less. On average, countries having fully vaccinated one percentage point larger share of
their population during H1-2021 experienced a 6-basis points higher GDP growth in 2021 relative to the pre-pandemic level
in 2019 (box 1).

2. WHAT ExPLAins EConoMiC PERfoRMAnCE 5

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Box 1. Vaccination, GDP growth, and household economic circumstances

Cross-country correlation analysis suggests vaccination progress—especially before the Delta-variant outbreak—
is significantly correlated with economic recovery, even after controlling for indicators related to other CoViD-19
containment measures (proxied by border lockdown stringency), baseline economic exposures (proxied by the
dependence on manufacturing and services) and fiscal vulnerabilities (proxied by total gross debt position).
On average, countries having fully vaccinated a one percentage point larger share of their population during
H1-2021, experienced a 6-basis points higher GDP growth in 2021 relative to the pre-pandemic level in 2019
(figure B1.1). Higher pre-pandemic tourism dependence and debt contribute negatively to growth; an additional
index-point of tourism dependency and an additional GDP-equivalent percentage point in debt is associated with
a 13-basis points and a 5-basis points lower GDP growth, respectively.

Empirical evidence using micro-level data from facebook’s Global CoViD-19 Trends and impact survey also suggests
that vaccination is significantly correlated with improved economic circumstances of households. on average, being
vaccinated is associated with a 2 percentage points lower likelihood of unemployment, and over a 5 percentage
points lower likelihood of a household facing financial and food securities (figure B1.2).

Figure B1.1. Correlation between vaccination Figure B1.2. Correlation between vaccination and
and GDP growth household’s economic circumstances
3 0
Marginal effect on GDP growth (%)

Marginal effect of vaccinations (%)

–2
0

–4
–3
–6

–6
Vaccination Border Manufacturing Gross Tourism –8
rate lockdowns export debt dependence Unemployment Household-financing Food
position Likelihood insecurity insecurity

Source: EAP staff research, based on data from World Economic outlook (WEo) october 2021; Source: EAP staff research, based on data from facebook’s Global CoViD-19 Trends and impact
World Development Index (WDI); OWiD. Survey (Facebook GTIS).
Note: the figure shows point-estimates from cross-section ordinary Least square regressions between Note: The figure shows panel-data regression results from facebook GTis’s micro-data covering
countries’ GDP growths in 2021 (relative to the 2019 level) and pre-Delta vaccination coverages March-December 2021. An observation is specific to a demographic-group (defined categorically
(cumulative share of the population fully vaccinated in June 2021), international lockdown stringency by gender, age cohort, and educational level), location (first-tier administrative unit in a surveyed
(OWiD index), manufacturing export (share of GDP), tourism dependency index (calculated using country), and week. Dependent variables are derived from individual responses to the following
2015–2019 averages for the total contribution of tourism to export receipts; scaled between 0 and question in the Facebook survey: “In the past 4 weeks, did you do any work for pay? By work for
100), and gross debt position (share of GDP). All explanatory variables are standardized as units pay, we mean any kind of business, farming, or other activity to earn money, even if only for one
of deviation from the global average. Bar heights represent the sizes of the estimated coefficients. hour.” (unemployment); “How worried are you about having enough to eat in the next week?”
Whiskers represent 90-percent confidence intervals of the estimates. (food security); and “How worried are you about your household’s finances in the next month?”
(household finance security). The regressions control for group-by-location and location-by y-week
fixed effects. Covariates includes self-containment behaviors such as covid testing and wearing
mask. Standard errors are clustered at the country level.

6 2. WHAT ExPLAins EConoMiC PERfoRMAnCE

BRAVING THE STORMS

Box 2. Not all endemicity is benign

What next for the COVID-19 response in EAP? As the omicron wave sweeps through the EAP region, it is evident
that vaccines are doing exactly what they were designed to do: prevent serious illness, not infection. Countries
with high levels of population immunity through varying combinations of prior infection and vaccination have
reported significantly lower level of mortality compared to the previous waves. With the majority of EAP countries
well-placed to achieve 70% vaccination coverage or higher by mid-2022, the focus is now on managing the
endemicity of COVID-19 and preparing health systems for future pandemics.

Does endemicity imply a benign state of the disease? An endemic disease is one that is constantly present
in a certain area, irrespective of severity. The move towards endemicity implies reaching a dynamic equilibrium
where on average, one person infects one other person. It does not mean that the disease reaches a stage where
it causes minimal harm. Malaria for example is endemic in tropical and sub-tropical areas and killed more than
600,000 people in 2020.

Are health systems in EAP adequate to manage endemicity of COVID-19 and respond to future pandemics?
The Global Health security index assessment of countries’ readiness for future health emergencies noted in
December 2021: “. . . despite significant steps taken by countries to respond to the COVID-19 pandemic, all
countries remain dangerously unprepared to meet future epidemic and pandemic threats.” COVID-19 revealed
critical gaps in health systems capacity in EAP countries, a result of many years of relative underinvestment in
health (Figures B2.1, B2.2).

Figure B2.1. Critical gaps in health systems capacity in EAP countries

a. Critical care beds per hundred thousand people (2017) b. Physicians per thousand people (2016-2020)

12 4
10
3
8
6 2
4 1
2
0
0
Australia
Japan
Korea, Rep.
New Zealand
Singapore

China
Indonesia
Thailand

Lao PDR
Mongolia
Myanmar
Philippines
PNG
Solomon
Timor-Leste
Vanuatu
Vietnam
Hong Kong SAR, China
Japan
Singapore
Korea, Rep.

China
Malaysia
Thailand

Indonesia
Lao PDR
Mongolia

Philippines
Myanmar

High income Upper-middle Lower-middle

EAP income EAP income EAP

High income Upper-middle Lower-middle

EAP income EAP income EAP

Source: Phua et al. (2020); World Development indicators.

(continued)

2. WHAT ExPLAins EConoMiC PERfoRMAnCE 7

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

(Box 2. continued)

Figure B2.2. Most EAP countries are ill-prepared to carry out real-time surveillance and reporting

Vietnam Cambodia
Vanuatu China
Tuvalu Fiji
Electronic reporting surveillance system
Tonga Indonesia operational at national and sub-national level

Timor-Leste Kiribati Electronic reporting surveillance system

collects ongoing or real-time laboratory data

Thailand Lao PDR Commitment to share surveillance data

during a public health emergency with
neighboring countries
Korea,
Rep. Malaysia
Electronic health records available and
commonly in use
Solomon Marshall
Islands Islands
National public health system has access to
Singapore Micronesia individuals’ electronic health records

Samoa Mongolia Data standards (e.g. ISO) are available to

ensure data is comparable
Philippines Myanmar
Papua New Guinea Palau Nauru

Source: Global Health Security Index (2019).

What are no-regret investments in health sector in EAP?

COVID-19 was both a health shock and an economic shock, implying that a strong and resilient recovery
must address the health crisis as well. The overall public financing landscape was impacted by CoViD-19.
EAP countries increased the priority given to health in an effort to contain the pandemic, but countries were left
with having to make difficult choices between responding to CoViD-19, protecting essential health services and
strengthening surveillance and preparedness. In the short-term, managing endemicity will require continued
surveillance, treatment, and wide-spread coverage of COVID-19 vaccines. In the long-term, progress toward
universal health coverage (UHC)–including pandemic preparedness—and sound population health are vital for
a sustainable and inclusive longer-term economic recovery and poverty reduction.

“No-regret investments” that address the health crisis includes strengthening health systems to sustain progress
towards Universal Health Coverage, managing endemicity of COVID-19, and building resilience against future
pandemics. EAP countries should invest in emergency preparedness where surges can be handled on top of routine
work; make extra hospital capacity ‘modular’, which will allow more critical care capacity to be quickly expanded
on demand; adopt technologies for low-cost/modular ICUs, such as oxygen generation capacity, that will allow for a
universal coverage expansion of ICU capacities; reduce inequalities in access to critical care capacity, especially in
remote areas; and digitize health management and information systems and increase laboratory networks.

8 2. WHAT ExPLAins EConoMiC PERfoRMAnCE

BRAVING THE STORMS

2.2. External environment

Trade continued to grow in 2021 because demand in the rest of the world remained buoyant in even in the
face of the omicron spike (figure 9A). However, logistics constraints disrupted trade and global value chains, hurting
production and employment, in the second half of 2021 (Box 4). These constraints were beginning to ease but the war in
Ukraine may create new difficulties. The fear of saturating global demand for consumer electronics, which are important
for countries like China, Malaysia, and Vietnam, has not yet materialized (figure 10). However, incoming data point to a
slowdown of global trade growth in 2022.

Figure 9. Goods exports have recovered and are growing, whereas services exports still languish, except in China

a. Change in goods exports b. Change in services exports

50 60
40 40
30 20

Percent
Percent

20 0
10 –20
0 –40
–10 –60
–20 –80
Mar-20

May-20

Jul-20

Sep-20

Nov-20

Jan-21

Mar-21

May-21

Jul-21

Sep-21

Nov-21
Jan-20

Mar-20

May-20

Jul-20

Sep-20

Nov-20

Jan-21

Mar-21

May-21

Jul-21

Sep-21

Nov-21
Jan-20

China EAP excluding China World excluding EAP China EAP excluding China World excluding EAP

Source: Global Economic Monitor, World Bank; international Monetary fund, Balance of Payment Accounts; World Trade organization.
Note: The chart shows growth relative to 2019-Q4.

Figure 10. Manufacturing has led growth of EAP countries’ good exports, whereas travel and transport are a drag on services exports
50
40
30
20
Percent

10
0
–10
–20
–30
–40
2020q1
2020q3
2021q1
2021q3

2020q1
2020q3
2021q1
2021q2

2020q1
2020q3
2021q1
2021q3

2020q1
2020q3
2021q1
2021q3

2020q1
2020q3
2021q1
2021q3

China Indonesia Malaysia Philippines Thailand

Agriculture and livestock Extraction Machinery/electronics

Other manufacturing goods Other services Transport services
Travel services

Source: Customs data from China, the EU, Japan, and the Us, iMf Balance of Payment statistics.
Note: The chart shows decomposed export growth relative to 2019-Q4.

2. WHAT ExPLAins EConoMiC PERfoRMAnCE 9

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Services trade continued to languish. Tourism did not show any signs of revival (figure 9B, box 3). Trade in digitized
services, which are important for countries like China and the Philippines, remains resilient. International tourism, which
is vital, not just for several Pacific islands but also countries like Cambodia and Thailand, is reviving only slowly. several
EAP countries have eased restrictions on international tourists during the last few months, which is expected to bring
some increase in international travelers.

Box 3. Tourism and growth in the Pacific

Countries which were most tourism-dependent saw the highest declines in GDP growth. The tourism-dependent
economies of Fiji, Palau, Samoa and Vanuatu saw the largest declines in GDP as international border closures
halted overseas arrivals. Large declines in output were seen in 2020 with the four countries experiencing an
average decline in output of 8.3 percent relative to 3.7 percent for the region. A further decline was seen in 2021
with average output declining by 6.7 percent in 2021 for the four countries relative to a 1.9 percent decline for
the region as borders remained closed to overseas arrivals. However, as borders have reopened in Fiji, tourist
arrivals have been larger than expected with more than 23,000 arrivals in January 2022 which is about one-third
of the number of arrivals in January 2019.

Countries that were dependent on commodities exports, particularly fishing exports, saw relatively modest
declines in output. The economies of Kiribati, Tuvalu, FSM, and Republic of the Marshall Islands (RMI) that were
largely dependent on fishing exports saw modest declines in output relative to other PiCs as these exports were
largely unaffected by the pandemic. on average, output declined by 1.2 percent for these countries compared to
3.7 percent for the region in 2020 and remained constant in 2021 relative to a 1.9 percent decline for the region.
Papua New Guinea which is also a large commodity exporter, including gold, copper, palm oil and coffee, saw a
3.5 percent decline in output in 2020 but recovered to 3.5 percent growth in 2021. Additionally, nauru which is
largely dependent on revenues from the regional processing center did not experience a recession with positive
growth in both 2020 and 2021.

Figure B3.1. GDP growth and dependence on tourism Figure B3.2. GDP growth and fishing license fees

5 5

0 0
GDP growth
GDP growth

–5 –5

–10 –10

–15 –15

–20 –20
0 10 20 30 40 50 0 20 40 60 80
Tourism receipts (% of GDP) Fishing access fees (% of goverment revenues)

2020 2021 2020 2021

Source: World Development Indicators and Fiji Bureau of Statistics.

10 2. WHAT ExPLAins EConoMiC PERfoRMAnCE

BRAVING THE STORMS

Box 4. The effects of global supply chain disruptions

The economic recovery in the aftermath of COVID-19 was affected by supply chain disruptions during the second half
of 2021. These disruptions were seen in the form of large shipping delays, port congestion, and the ensuing increase
in shipping costs. A new study (Alessandria et al. forthcoming) uses a general equilibrium trade framework with a
shipping delays margin and inventory holdings to evaluate the aggregate effects of supply chain disruptions.

This analysis extends the two-country inventory model of Alessandria et al. (2010) to include an input-output structure
and sectoral heterogeneity in the use and consumption of imported intermediates. A key feature of the approach is
that it explicitly models the differential costs in time, resources, and delivery risk for domestic and international
transactions. These risks are reflected in the different inventory management approaches used for imported and
domestic transactions.

This framework is used to study a global increase by 10 days in domestic and international shipments. The results
indicate that such an increase in shipping delays contributes to a 17 percent reduction in trade whereas industrial
production and employment decline by 8.4 percent and 4.3 percent, respectively.

Recently, there has been a reduction in shipment delays due to the relaxation of port, retail, and production restrictions
across the world. The analysis suggests a corresponding dissipation of the negative effects on trade production and
employment over time. However, the war in Ukraine is already disrupting air traffic and some shipping, and may
once again lead to delivery delays.

Figure B4.1. Immediate effects of international and domestic supply chain disruptions

a. Supply delays b. Impact of delivery delays on the economy

Index (8/9/2021 = 100) 0

240
Share of respondents

–4
200 –4.3

160 –8
Percent

–8.4
120
–12

80
Jun-21
Oct-20

Oct-21
Apr-21
Feb-21

Feb-22
Dec-20

Dec-21
Aug-20

Aug-21

–16
–16.8
Domestic supplier delays –20
Foreign supplier delays
Delays in delivery/shipping to customers Trade Production Employment

Source. Based on Alessandria et al. (forthcoming).

Note. A. Share of businesses reporting shipment delays (8/9/2021 = 100). B shows simulated effects of a global increase in domestic and international shipments of 10 days from an average delay of 35 days initially.

2. WHAT ExPLAins EConoMiC PERfoRMAnCE 11

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

2.3. Macroeconomic policy

A combination of tightening intertemporal budget constraints and diminishing need are leading to a reduction
in COVID-19 related fiscal support. such support declined from an average of 6.0 percent in 2020 to 5.0 percent in
2021 (figure 11). A further decline to 1.5 percent of GDP is projected in 2022.

Figure 11. While CoViD-19-related fiscal support for health has increased, support on non-health expenses has declined

a. Government support–health b. Government support–non-health

3 8

6
Percent of GDP

Percent of GDP
2

4
1
2

0 0
Cambodia

Mongolia

Indonesia

Vietnam

Philippines

Thailand

Malaysia

China

Mongolia

China

Malaysia

Indonesia

Thailand

Cambodia

Philippines

Vietnam
2020 2021 2022 2020 2021 2022

Source: World Bank staff estimates.

Notes: B. Figure shows fiscal support excluding health measures, below-the-line measures, and contingent liabilities.

In 2021, average consumer price inflation remained within the central bank target ranges in all major economies.
Dormant inflation allowing central banks to keep an accommodative monetary policy stance over the course of the year
(figure 12). Despite the signs of monetary tightening in the Us, financial conditions have so far remained relatively benign for
the EAP region.

During the crisis, governments increased spending, relaxed monetary policy, and exercised regulatory forbearance
toward the financial sector. As a result, policy space narrowed in certain dimensions (table 1).

However, price pressures are building rapidly in most countries, reflecting rising energy and food prices (figure 13).
inflation is now above the target range in Thailand and, significantly so, in Mongolia. in Mongolia, the prolonged border
frictions associated with China’s zero-CoViD policy contributed to supply shortages and generated significant price
pressures. in Myanmar, consumer price inflation was nearly 10 percent in october 2021 reflecting increasing transport
prices and a sharp depreciation in the kyat, amid ongoing war. Among small economies with available data, inflation has
accelerated in Cambodia, Fiji, Lao PDR, and Timor-Leste. A sustained increase in producer prices, driven by high import
prices could further add pressure to consumer prices. Indonesia and Malaysia announced price stabilizing measures on
crucial food items such as rice, meat, and cooking oil in early 2022 to cap the increase in food prices. While helpful in
containing price pressures in the short term, subsidies to limit price increases are less efficient than direct transfers to
poor households (box 5).

12 2. WHAT ExPLAins EConoMiC PERfoRMAnCE

Figure 12. Monetary policy remained supportive, because inflation remained low in 2021
a. Policy rate b. Core inflation
12 16
14
10
12
8 10
Percent

Percent
8
6
6
4 4
2
2 0
0 –2

Feb-19

May-19

Aug-19

Nov-19

Feb-20

May-20

Aug-20

Nov-20

Feb-21

May-21

Aug-21

Nov-21

Feb-22
Aug-19
Oct-19
Dec-19
Feb-20
Apr-20
Jun-20
Aug-20
Oct-20
Dec-20
Feb-21
Apr-21
Jun-21
Aug-21
Oct-21
Dec-21
Feb-22
China Indonesia Malaysia China Indonesia Malaysia
Mongolia Myanmar PNG Mongolia Philippines Thailand
Philippines Thailand Vietnam Vietnam

Source: Haver Analytics.

Note. Core inflation measure excludes food and energy from CPi inflation.

Table 1. fiscal policy space has narrowed across developing East Asian economies; monetary policy space less so
Fiscal Monetary Reserve Buffers
General Domestic credit
Key policy Headline Inflation Reserves,
government Fiscal balance to private
rate, in inflation rate, target in months of
gross debt (% of GDP) sector (% of
percent in percent 2022 imports
(% of GDP) GDP)
2021 change 2021 change 2021 change Feb-22 change Feb-22 change 2021 change
Cambodia 35 5 –5.7 –6 143 52 3.7 9.5 2
China 45 –5 –4.4 0 205 17 3.7 –1 0.8 3 12.8 –4
Indonesia 41 12 –4.6 –2 39 1 3.5 –2 2.1 2–4 8.0 0
Lao PDR 78 21 –1.4 4 46 5 3.0 –1 7.3 3.1 1
Malaysia 64 8 –6.4 –4 145 14 1.8 –1 2.2 2.5–4 9.1 2
Mongolia 80 4 –3.1 1 46 –7 6.5 –5 14.2 4-8 8.3 1
Myanmar 57 19 –8.8 –5 27 2 7.0 –3 9.9 7.2 2
Philippines 55 17 –8.6 –8 52 2 2.0 –2 3.0 2–4 10.3 2
Thailand 58 16 –7.8 –8 135 13 0.5 –1 5.3 1–3 9.9 1
Vietnam 45 0 –3.8 –1 117 –9 2.5 –2 1.4 <4 5.3 2

Source: World Development Indicators; Haver Analytics; Fitch Solutions; World Bank staff estimates.
Note: Color scale represents country quintiles relative to the group of emerging markets and developing economies, with red denoting the worst exposure and green the least. Change denotes percentage point change
compared to 2015–2019 average.

Figure 13. Higher prices of food and transport are driving inflation

6
Percentage point

–2

–4
Jan-20
Jun-20
Nov-20
Apr-21
Sep-21
Feb-22
Mar-19
Aug-19
Jan-20
Jun-20
Nov-20
Apr-21
Sep-21
Feb-22
Mar-19
Aug-19
Jan-20
Jun-20
Nov-20
Apr-21
Sep-21
Feb-22
Mar-19
Aug-19
Jan-20
Jun-20
Nov-20
Apr-21
Sep-21
Feb-22
Mar-19
Aug-19
Jan-20
Jun-20
Nov-20
Apr-21
Sep-21
Feb-22

Indonesia Malaysia Philippines Thailand Vietnam

Food & beverage Housing & furnishing Transport & communication Others CPI

Source: Haver Analytics.

Note: The figure shows the decomposition of headline CPi year on year inflation. The latest CPi weight is applied to the whole period.

2. WHAT ExPLAins EConoMiC PERfoRMAnCE 13

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRiL 2022

Box 5. The role of price controls in times of high volatility

Some EAP countries have shielded households from price increases stemming through a combination of price
controls and subsidies (or tax cuts). Both types of measures may be the only form of assistance that is feasible in
the short term, but neither is efficient or fiscally sustainable.

The most common practice is the use of price ceilings (maximum prices) to keep prices of goods deemed to be
necessities, such as staple food items and fuels, low to protect consumers. Basic economic theory suggests that
binding price ceilings will result in allocative inefficiencies due to price distortions and shortages as producers will
not be willing to produce as large a quantity of the good at that price as consumers will demand. Such shortages
can be avoided through subsidies paid to the producer or to the consumers but that implies a fiscal cost.

standard economic thinking views price controls as mostly inefficient as they result either in market shortages or
substantial public expenditures. Moreover, a subsidy will necessarily benefit the well-off as well as poor households.
for goods such as gasoline it may even be regressive (benefit the better-off more than the not-so-well-off) if richer
households spend a larger share of their income on it than poorer ones. For that reason, direct cash payments
to poor households are considered a more efficient policy than subsidies. A case in point here is indonesia,
which replaced a costly fuel subsidy with a cash-transfer program. More generally, replacing price controls and
related subsidies with well-targeted social safety nets, combined with competition-enhancing reforms, can reduce
poverty and increase growth (Guenette 2020).

There are, however, situations in which price controls may constitute an efficient market intervention. Wanting to
curb monopolistic market power, the rationale behind price controls on medicines in most advanced economies,
would be one example. A case can also be made for keeping price volatility in check. For one, cash assistance
programs to the poor are usually very static. So sudden spikes in the price of staple foods or fuel could still lead
to widespread destitution. They can have important impacts on the rate and volatility of inflation. Unexpected
bottlenecks in several crucial sectors have been widely blamed for increased inflation during the second half of
2021. Given the concerns that higher inflation can become entrenched, short-term price controls may play an
important role in keeping medium to longer-term inflation in check.

We will now look at the extent and nature of price controls in the EAP region and assess if they may have played a
role in lowering headline inflation. The data used is tentative and only captures price controls that show up in trade
statistics. We can compare the number of price-controlled product categories for 11 EAP countries to other Emerging
Markets and Developing Countries (EMDE). The median number of price controls on food and beverage in EAP is 10,
while the median for EMDEs (excluding the EAP countries) is five. similarly, median number of price controls set on
energy related products is significantly higher in the 11 EAP countries relative to the rest of the EMDEs. Within the
EAP countries, Malaysia and the solomon islands have the highest number of price controls on food items.

Looking more closely at the 11 EAP countries, figure B5.1 shows the aggregate number of price controls by more
detailed product categories. We show the number of countries with any controls, the median number of controls in
countries that have at least one such control, and the total number of controlled prices in all 11 countries.
(continued)

14 2. WHAT ExPLAins EConoMiC PERfoRMAnCE

BRAVING THE STORMS

(Box 5. continued)

Figure B5.1. Most common price controls in EAP

40

30

20

10

0
Petroleum Milk, Rice Cooking Water Sugar Fish, Coal, gas,
products butter, oils fish electricity
cream products

Number of countries with price controls

Total number of price controls
Median number of price controls

Source: Guenette (2020); World Bank; World Trade Organization.

Note: Listed price control policies are retrieved from the latest (2003–19) country Trade Policy Review publication.

The next question is if the relatively large number of price controls in EAP may have played a role in its subdued
inflation during the second half of 2021, and whether such a negative relationship between price controls and
inflation does exist at all. To shed light on this question we regressed the inflation rates in the third quarter
of 2021 on the number of price controls for a subset of countries for which we have consistent data on both
measures (figure B5.2). The five included EAP countries lie entirely below the regression line, suggesting that
some other factors are at play. However, a strongly negative relationship holds at the global level.

Figure B5.2. Effect of price controls on inflation

6
Inflation Rate in Third Quarter of 2021

5
4
3
2
1
0
–1
–2
0 5 10 15 20 25 30 35 40 45 50
Number of Price Controls

95% Confidence Interval Regression Line

EAP countries Other Countries

Source: World Bank Economic Monitoring; World Bank staff calculations; World Trade Organization.
Note: Inflation rate refers to CPI inflation.

(continued)
(continued)

2. WHAT ExPLAins EConoMiC PERfoRMAnCE 15

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

(Box 5. continued)

Figure B5.3. Relation between controlled energy prices and inflation in Mongolia

20
17
15
15

Percent 10

0 1 1
–2 –2 –2 –2 –1 –1

–5

Apr
Mar

Aug
Nov

Nov
Oct

Oct
May

Jul
Feb
Dec

Jun

Dec
Sep
Jan

Jan
2020 2021 2022

Price contribution of fuel Price contribution of coal briquette

Annual inflation (Ulaanbaatar) Central bank's inflation target

Source: national statistics office, Bank of Mongolia; World Bank staff estimates.
Note: Central bank targets inflation at 6 percent within a band of ±2 percent.

An instructive case study can be found in Mongolia. The price of coal briquettes and fuel is partially and temporarily
controlled by the government through a variety of instruments. Figure B5.3 illustrates how the easing of price
controls on coal briquettes over the course of 2021 is associated with an increase in the rate of inflation.

The bottom line is that while inefficient in most cases, under certain circumstances price controls may be warranted
to avoid sudden price spikes in necessities. Two considerations stand out: first, except gasoline, most such products,
like staple foods and cooking fuels, make up a larger share in the consumption basket of poorer households relative
to richer ones. An abrupt and large increase in their prices would thus hit poor households particularly hard,
throwing them deeper into poverty. In the absence of highly dynamic social protection programs, price ceilings,
while costly to the public purse, constitute an effective measure of protection. Second, since such goods make up
a large part of the overall consumption basket, sudden price spikes will feed directly into higher inflation.
if inflation expectations are not well-anchored, this may result in a permanently higher rate of inflation with all
the associated efficiency costs, not least the need of contractionary monetary policies to bring it back down to
previous levels.

That said, caution must be exercised when implementing price controls. They run the risk of incurring high efficiency
costs due to price distortions and may lead to unaffordable fiscal costs. in the absence of subsidies, they may also
lead to severe shortages and possibly the emergence of black markets. Monopolistic situations aside, they should
not be used to fix prices below their long term, or average, equilibrium market price. Price ceilings could be set at
levels that prevent sudden temporary price spikes but are non-binding (i.e. above the market price) in normal times.
in any case, direct transfers to poor households and firms, once the relevant digital infrastructure is in place, would
alleviate the pain from the price shocks without distorting price signals or subsidizing the wealthy.

16 2. WHAT ExPLAins EConoMiC PERfoRMAnCE

BRAVING THE STORMS

3. Risks, Opportunities and Outlook

3.1. New growth risks: three international developments

The global economy has become increasingly interconnected over the past decades, leading to growing spillovers
through both real and financial channels. The importance of China and the United States to the global economy implies
that developments in these two countries have far-reaching macroeconomic consequences (figure 14). shocks to growth
or investment in China, reflecting a structural slowdown and regulator changes, can affect countries in the region through
trade ties. shocks to monetary policy or financial markets in the United states, because of policy makers reactions to
increasing inflation or market corrections, could spill over to other countries, including in East Asia, through interconnected
financial markets.

Shocks emanating from the war in Ukraine and the related sanctions could affect the EAP region by disrupting the
supply of commodities, increasing financial stress, and reducing global confidence. The region’s direct dependence on
Russia and Ukraine through imports and exports of goods, services, and capital, is limited. However, the war and sanctions are
likely to increase international prices of food and fuel, hurting consumers and growth, and de-anchoring inflation expectations.
increasing investor risk aversion could lead to capital outflows, and hence exchange rate depreciation, falling equity prices and
rising risk premia. Reduced confidence can inhibit consumer spending and business investment.

Figure 14. Three international developments are shaping external conditions

United States China Russia-Ukraine

• Cyclical slowdown • Structural slowdown • Commodity disruptions
• Inflation • Financial stress • Financial stress
• Financial tightening • Regulatory regime change • Global confidence

External economic
conditions

Real shocks depend on Financial shocks depend on

country's trade exposure country's financial exposure
and resilience arid resilience

EAP country
economic
performance

Source: World Bank staff.

Ì 3.1.1. Financial channel

New financial stresses are emerging due to inflationary pressures and international war. A generalized rise in investor
risk aversion could lead to capital outflows, currency depreciations, equity market devaluations, and rising risk premia in bond
markets. The increasing financial stress could compound post-pandemic fiscal and financial vulnerabilities in the region.

Inflation expectations in the United States are increasing, leading to faster than expected rises in interest rates.
The market-implied path of US policy rates shifted upwards from three to six 25-basis point increases this year following the
January foMC meeting (figure 15). The federal Reserve is moving forward with the planned increase in the U.s. policy rate

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 17

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Figure 15. inflation outside the region is increasing fast, accelerating monetary tightening in the United states
a. US inflation and 10-Year Treasury Note Yields b. Market-based expectations for the Fed Funds rate

8 3.0 2.0

2.5
6 1.5
2.0

Percent
Percent

4 1.5 1.0

1.0
2 0.5
0.5

0 0.0 0.0

2022Q1
2022Q2
2022Q3
2022Q4
2023Q1
2023Q2
2023Q3
2023Q4
2024Q1
2024Q2
2024Q3
2024Q4
2025Q1
2025Q2
2025Q3
2025Q4
2026Q1
2026Q2
2026Q3
2026Q4
Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Jan-21

Apr-21

Jul-21

Oct-21

Jan-22

CPI 10-Year Treasury Note Yield (RHS) Shock Mid December End of January

Source: Haver Analytics.

in March given the 40-year-high inflation rate in february, despite the heightened uncertainty following the war in Ukraine.
Expected euro area policy rates have also moved up, with the market anticipating slightly more than 50 basis points of
tightening in 2022, having foreseen only one 10 basis point increase as recently as early January.

Russia’s invasion of Ukraine on February 24, 2022 led to a sharp increase in global financial volatility and
contributed to a further tightening of financial conditions. While an “economic surprise index,” jumped from −7 to
+31, the highest level since 2001, global stocks fell 2.8 percent on news of Russia’s invasion (figure 16). The Us dollar

Figure 16. Global financial volatility increased and financial conditions in the region tightened as Russia invade Ukraine
a. Financial markets indices b. EMBI spreads (basis points)

Avg. Dec-31-91 = 100 Jan. 3, 2022 = 100 Jan. 3, 2022 = 100

60 580 180 280

40
540 230
Percent

20
150
0
500 180
–20

–40 460 120

130
05-Jan-22

21-Jan-22

08-Feb-22

24-Feb-22

14-Mar-22

90 80
05-Jan-22 25-Jan-22 14-Feb-22 06-Mar-22
Citigroup Economic Surprise Index: Based on USD
China Indonesia Malaysia
Dow Jones Global Index: World (RHS) Philippines Vietnam (RHS)

Source: Haver Analytics.

Note: A. Citigroup economic surprise index is based on US$.

18 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

appreciated by more than 1 percent against a basket of currencies due to a rise in investors’ risk aversion. spreads for a range
of EAP countries, especially Vietnam, widened. Uncertainty is expected to remain elevated following the imposition of
sanctions towards Russia by other major economies (box 6).

EAP countries differ in their vulnerability to tighter global financing conditions. in some dimensions, major EAP economies
appear to be relatively well equipped to cope with those shocks. They generally have a strong pre-COVID track record of
growth, flexible exchange rate regimes, and relatively robust fiscal, monetary, and prudential frameworks. However, EAP

Box 6. Sanctions imposed on Russia in response to the escalation of war in Ukraine

following the escalation of Russia’s military intervention in Ukraine, major western economies are imposing a wide
range of sanctions on Russia. These include sanctions on oil and gas, financial measures, trade, and restrictions on
specific individuals. The following is an illustrative list of still-evolving measures.

Oil and gas

The Us is banning all Russian oil and gas imports and the UK will phase out Russian oil by the end of 2022. The EU,
which gets a quarter of its oil and 40 percent of its gas from Russia, is planning to switch to alternative sources of
energy and reduce Europe’s dependence on Russian energy “well before 2030.” Germany has put on hold permission
for the Nord Stream 2 gas pipeline from Russia to open.

Financial measures
Western countries have frozen the assets of Russia’s central bank, preventing it from using its $630bn of dollar
reserves. some Russian banks are being removed from the international financial messaging system swift, which
is used to transfer money across borders. This will delay payments to Russia for energy exports. The UK is freezing
the assets of major Russian banks and the Russian state and major companies will not be able to raise finance
or borrow money in the UK. The EU is considering targeting 70 percent of the Russian banking market and key
state-owned firms.

Targeting individuals
Assets belonging to Russian President Vladimir Putin and his foreign minister Sergei Lavrov are being frozen in the US,
EU, UK and Canada. sanctions have been imposed on wealthy business leaders known as oligarchs, who are considered
close to the Kremlin, including freezing their assets and restricting their ability to travel. EU, UK and Us have also
imposed sanctions on 386 members of the Russian parliament. The UK is limiting the sale of “golden visas”, which
allowed wealthy Russians to get British residency rights.

Targeting specific traded products

Many countries, including EU, UK, and the Us have announced export restrictions on technological exports as well as
items that could have both a civilian and military purposes–including chemicals and lasers. The EU is also banning the
sale of aircraft and equipment to Russian airlines. All Russian flights have been banned from Us, UK, EU and Canadian
airspace. The UK has also banned private jets chartered by Russians.

(continued)

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 19

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

(Box 6. continued)

Private sector response

Many companies in the energy sector have refrained from buying and transporting Russian produced energy products
even at a discount. At the same time, a growing number of international companies have suspended all operations
in Russia.

Russia’s response
Russia has banned exports of more than 200 products, including telecommunications, medical, vehicle, agricultural,
electrical equipment and timber. In addition, it is blocking interest payments to foreign investors who hold
government bonds, and banning Russian firms from paying overseas shareholders. it has stopped foreign investors
who hold Russian stocks and bonds from selling them. Russia has also warned that it could shut off gas supplies in
response to oil sanctions.

countries are susceptible to financial shocks in certain respects: sizable external financing needs (Cambodia, Malaysia,
Mongolia); large stock of foreign portfolio liabilities (Malaysia, Mongolia, the Philippines, Thailand); elevated public (Fiji,
Lao PDR, Mongolia) and private (Cambodia, China, Lao PDR, Thailand, Vietnam), and especially external (Cambodia, Lao
PDR, Malaysia, Mongolia, Papua New Guinea), debt; considerable foreign holdings of domestic debt (Indonesia, Malaysia,
Thailand); and sizable fiscal deficits (Myanmar, Philippines, Thailand) (figure 17, table 3, table 5, and table A1.1).

Most EAP economies are more financially integrated with the major global financial hubs than with each other
(figure 18). The region is most exposed to the Us on portfolio flows and to Japan on cross-border lending. Regional
financial integration has grown as China has gradually eased restrictions on portfolio flows and foreign exchange
transactions and Chinese banks have gained a stronger foothold in the region. Financial volatility in these two countries
will affect economic activity in the EAP countries through these linkages (box 7).

Figure 17. External sector vulnerabilities

50

40
Percent of GDP

30

20

10

0
Mongolia

Cambodia

Malaysia

Solomon Isl.

Lao PDR

Fiji

Thailand

Indonesia

Philippines

China

Vietnam

Myanmar

EMDE

–10

Current account deficit Debt service

Short term debt

Source: International Monetary Fund. World Development Indicators. World Bank. Fitch Solutions.
Note: The figure shows decomposition of external financing needs in 2022 estimates. EMDE shows the unweighted average of EMDEs.

20 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

Figure 18. financial linkages of developing EAP with the Us are more important than those with China

a. Portfolio liabilities b. Financial inflows by source (EAP ex. China)

50 80

40
60
Share of GDP

30

Percent
40
20

10 20

0
0
Malaysia

Mongolia

Thailand

Philippines

Indonesia

China
FDI Portfolio flows Cross-border
lending

China US UK Japan NIEs

US Other AE China Others EMDEs EAP EU

Source: BIS, IMF, World Bank.

Note: newly industrialized economies (niEs) include Korea, Rep., singapore, and Taiwan, China. China includes Hong Kong sAR, China.

Box 7. Estimated financial spillovers from the United States and China

The United states is at the heart of the global financial system, and its shocks have been found to have the most impactful
and far-reaching macroeconomic consequences (Miranda-Agrippino and Rey 2015; Georgiadis 2016; D’ees and Galesi
2019). Recently, monetary policy and financial shocks emanating from China have also been found to influence global
financial and activity variables (Miranda-Agrippino, nenova and Rey 2020; Beirne, Renzhi and Volz 2021).

The transmission of hypothetical financial shocks and monetary policy tightening from the United states and
China can be evaluated using a suite of structural vector autoregressive models in sequential order. First, sign-
restricted vector autoregressive models (VARs) are used to extract historical sequences of financial and monetary
shocks in China and the United States.2 second, recursively identified VARs are estimated to quantify the impact
of these shocks on output growth in other East Asian economies.

Financial tightening shocks emanating from the United States are estimated to have large negative spillovers to output
in the broader EAP region (figure B7.1). in all countries examined, Us financial shocks have a bigger incidence on
output than the corresponding shocks from China. on the balance, financial shocks result in larger output spillovers
than their monetary policy counterparts. This may be due to a much larger negative impact on equity prices across
the region (figure B7.1). Among EAP countries, Malaysia is estimated to experience the largest impact on output
from financial shocks occurring in China and the United states, which likely reflects the greater depth of Malaysia’s
financial markets among other factors.

Monetary policy tightening shocks emanating from the United States tend to have a larger impact on activity in the
region than their Chinese counterparts, which is broadly consistent with the empirical findings of Miranda-Agrippino,
Nenova, and Rey (2020). However, there is heterogeneity in the impacts across countries, with estimates only for
Malaysia and Thailand showing statistically significant output spillovers.

2 This step exploits the stylized fact that both China and the United States can be considered large, closed economies

(continued)

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 21

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

(Box 7. continued)

Figure B7.1. financial shocks from Us and China have sizeable effect on EAP countries

a. 1-year impact of financial shocks b. 1-year impact of monetary policy shocks

0.8 0.8

0.4 0.4
0.1 0.1

Percentage points
0.0
Percentage points

0 0
–0.1 –0.1 –0.1–0.1
–0.2 –0.3
–0.4 –0.3 –0.4
–0.4
–0.6 –0.6 –0.6 –0.8 –0.7
–0.8 –0.7
–1.2
–1.2
–1.6
–1.6
Indonesia Malaysia Philippines Thailand
Indonesia Malaysia Philippines Thailand
U.S.shock China shock
U.S.shock China shock

Source: World Bank staff estimations.

Note: Financial and monetary policy shocks are generated using a sign-restricted structural VAR methodology. Effects on output growth of financial and monetary policy shocks emanating from the United states and
China are estimated using recursively identified structural VAR models.

Ì 3.1.2. Real channels

Growth spillovers from China and the US

China and the US are expected to make smaller Figure 19. China and United States are major contributors
contributions to global growth in 2022 and 2023 than to global growth
in 2021. Growth was exceptionally high in 2021, the
Contributions to global growth
year in which output rebounded from the COVID-19
contraction (figure 19). However, the absolute size of China 6
and Us’ contribution to global growth will be as large as in
5
the pre-COVID years.
4
Percentage points

China and the US are also a significant a source of final

demand for the countries in the region. Direct and indirect 3
value-added exports to reveal how much economic activity
2
in an EAP country is exposed to shocks to domestic demand
in foreign countries. This measure excludes both the value 1
of imported inputs and gross exports to a particular country
that are headed for other countries positioned downstream. 0
2012–19 2021e 2022f 2023f
China’s importance as an ultimate destination has been
growing and is now comparable to that of the US:about one- China United States Euro area Others World
tenth of value added in Lao PDR, Malaysia, Myanmar, Thailand,
Source: Haver Analytics, World Bank.
and Vietnam is ultimately absorbed in China (figure 20).

22 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

Figure 20. China’s growing importance as the ultimate destination of the EAP countries’ value-added exports

Relative importance of ultimate destination for the value added produced in EAP countries

70

60

50
Percent of GDP

40

30

20

10

0
1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018
IDN KHM LAO MMR MYS PHL THA VNM

China EU Japan USA Others

Source: oECD Trade in Value Added database.

Note: The chart plots the share of EAP countries’ total value added that is absorbed in major economies. The values for other countries do not include value added absorbed domestically.

Furthermore, the three sectors likely to see slowing growth in China–construction because of efforts to reduce
leverage, industry because of efforts potentially to reduce emissions, and services because of efforts to control COVID-19
and monopolistic providers–are each a significant destination for EAP value added (figure 21). shocks to real activity in
China and the Us can negatively affect growth in EAP countries (box 8).

Figure 21. The importance of Chinese sectors as a source of demand has grown significantly

Relative importance of China’s sectors as an ultimate destination of value-added

9
8
7
Percent of GDP

6
5
4
3
2
1
0
1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

IDN KHM LAO MMR MYS PHL THA VNM

Manufacturing Construction Services

Source: oECD Trade in Value Added database.

Note: The chart plots the share of EAP countries’ total value added which is absorbed in China’s manufacturing, construction, and services sectors.

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 23

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Box 8. Estimated growth spillovers from China and United States to developing East Asian economies

Growth shocks in China and the United States would reverberate to developing EAP countries. A growth
shock originating in China or the United states would impact other EAP economies through bilateral trade,
including trade in intermediate goods through global and regional supply chains, trade in services, and financial
flows, including foreign direct investment (fDis). An unexpected, one-off drop in China’s GDP growth rate of
1 percentage point would lower the aggregate growth rate in the rest of developing EAP by 0.3 percentage
points after one year. A similar shock to Us GDP growth would lower GDP in developing EAP by 0.4 percentage
points after one year. This estimate captures both the upside and downside risks associated with China’s and
Us’ economic growth. These results are consistent with previous findings (World Bank 2016a,b; World Bank 2018b).
The effects of a simulated 1 percentage point slowdown in China (Us) range from a decline of 0.1 (0.2) percentage-
point in indonesia’s growth rate to a declined of almost 0.6 (0.8) percentage points in Malaysia’s (figure B8.1).

Figure B8.1. output growth declines in China and the United states will negatively affect growth in developing East Asia

0
–0.1
–0.2 –0.2 –0.2
–0.2
Percentage points

–0.4
–0.5–0.5
–0.6 –0.6

–0.8 –0.8

–1

–1.2
Indonesia Malaysia Philippines Thailand

US shock China shock

Source: World Bank staff estimations.

Notes: shock refers to one percentage point decline in China and Us growth, respectively. Effects estimated using a structural VAR model. other controls include G7 countries GDP growth, Vix index, EAP country-specific
commodity price growth, EAP country GDP growth, and real effective exchange rate.

The regional impact of China’s property market downturn and Zero-COVID policy

Specific changes within China also have important implications for EAP countries. The projected contraction of
residential investment, including a sluggish recovery over the remaining three quarters of 2022, is expected to reduce
real estate investment growth (figure 22A). A downturn in the real estate sector would have significant economy-wide
reverberations. Activity and investment in the real estate sector represents around 25 percent of both China’s gross value
added and fixed asset investment (box 9). The sector is an important revenue source for most local governments and a
significant income source for a large share of households. Around 40–50 percent of total bank loans are property-related.
The combined onshore and offshore liabilities in real estate sector amount to almost 30 percent of GDP (figure 22B).

China’s Zero-COVID Policy is also affecting economic activity. Eliminating CoViD-19 infections through a combination
of testing-tracing-isolation and targeted shutdowns entailed a relatively small economic cost when the COVID-19 variants

24 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

Figure 22. Declining investment in China’s real estate sector reflects high leverage

a. Fixed asset investment b. Real estate sector liabilities

16 30

12

Percent of GDP
20
8
Percent

4
10
0

–4 0
2012–19 2020 2021 2022 Real estate sector

Manufacturing Real estate Other listed firms Firms with distressed bonds
Infrastructure Total fixed assets Evergrande

Sources: Haver Analytics; Morgan Stanley Capital International; Wind Information, Co; World Bank.
Note: A. nominal fixed asset investment in urban areas. B. Left bar shows liabilities of real estate firms as share of GDP. firms with distressed bonds refer to those whose UsD-denominated bond spreads exceed 20 percentage points.

were less infectious. However, the highly transmissible but seeming less potent Omicron variant has increased the economic
costs and reduced the health benefits of an elimination strategy. Both services and manufacturing PMis dropped in January
reflecting CoViD-19 flare-ups and strict control under Beijing’s zero CoViD strategy (figure 23). Despite the changing trade-
offs, China is maintaining the strict strategy, perhaps because (a) tolerating low levels of infection may not be a stable
equilibrium, (b) a spike in infections could overwhelm China’s limited health capacity in rural areas, and (c) the omicron
variant may still have serious health consequences for China’s population because it has suffered fewer prior infections and
been inoculated with a less effective vaccine.*

Figure 23. China Zero-CoViD Policy

a. COVID-19 cases and lockdown stringency b. Manufacturing and services PMIs

Delta Omicron 57
250 100
outbreak outbreak
Index, 50+ = expansion

55
200 80
53
Stringency index
Daily cases

150 60 51
49
100 40
47
50 20 45
Apr-21

Jun-21

Aug-21

Oct-21

Dec-21

Feb-22

Apr-21

Jun-21

Aug-21

Oct-21

Dec-21

Feb-22

0 0
Apr-20

Jun-20

Aug-20

Oct-20

Dec-20

Feb-21
Apr-21

Jun-21

Aug-21

Oct-21

Dec-21

Feb-22

Manufacturing PMI Services PMI

COVID-19 cases Lockdown stringency (rhs) Caixin Official

Sources: oxford Economics; World Bank. Source: Haver Analytics.

*https://www.healthdata.org/covid/covid-19-vaccine-efficacy-summary

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 25

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Box 9. The simulated regional impact of China’s property market downturn and Zero-COVID policy

Economic developments in China can have meaningful spillovers onto activity in the broader EAP region. These
spillovers can be simulated using a global macroeconomic projection model.

Methodology. The scenarios are developed using the oxford Global Economic Model (oEM). The oEM is a semi-
structural projection model that balances theoretical properties, empirical fit, and forecasting performance (oxford
Economics 2019). it features over 80 explicitly modeled country blocks, many of which are available at the quarterly
frequency.3

China’s Property Market Downturn

Growth in China’s property investment is expected to decline from a recent peak of 11.2 percent year-on-year in
2021Q1 to −8.3 percent in 2022Q1.4 The model quantifies the domestic, regional, and global effects of this
slowdown by simulating a shock to China’s residential investment of a similar magnitude and duration.

The model simulation matches the sharp decline in residential investment over the course of 2021 and projects a
sluggish recovery over 2022. in this simulation, residential investment would decrease by an average of 5 percent per
year in 2021 and 2022 compared to an alternative scenario without a property market downturn.5 The shock would
have a small impact on private consumption due to its limited effect on the level of personal disposable income. As a
result, the overall impact on output growth would be relatively muted, amounting to an estimated 0.6 percentage point
in 2022 compared to the alternative scenario of robust growth in residential investment (figure B9.1A). But the impact
on Chinese imports would be more pronounced, in part due to the property market’s elevated commodity intensity. The
resulting decline in global commodity demand would lower global commodity prices.

The region’s economies would be affected via several channels. first, the decline in China’s import demand, coupled
with a deterioration in competitiveness caused by the depreciation of the Yuan, would lower trading partner exports.
Second, the decline in commodity prices induced by the contraction in residential investment would further weigh
on activity in the region’s commodity-exporting economies. Third, the fall in China’s equity prices would weigh on
investor risk appetite across the region, contributing to a mild downturn in equity markets in several neighboring
countries. overall, growth in developing EAP excluding China would be reduced by 0.3 percentage points in 2022
(figure B9.1B). The heterogenous impact across EAP countries reflects differences in their exposure to developments
in China.

3 The model exhibits “Keynesian” features such as sticky prices in the short run, and neoclassical properties in the long run, such that prices adjust fully and the equilibrium
is determined by supply factors. Countries are assumed to be small open economies, in the sense that exports are determined by aggregate demand and a country cannot
ultimately determine its terms of trade. Consequently, exports are a function of world demand and real exchange rates.
4 oxford Economics estimates as of March 2022.
5 in the alternative “no property market downturn” scenario, residential investment growth in China is assumed to remain at its recent 5-year quarterly average of about 9 percent (y/y).

(continued)

26 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

(Box 9. continued)

Figure B9.1. Simulated exogenous contraction in China’s residential investment

a. Residential investment, imports and GDP growth–
simulated shock b. Growth spillovers to other EAP economies

0 0.2

Percentage points
–2 0.0
Pecentage points

–4 –0.2

–6 –0.4

–8 –0.6
–0.8
–10

Myanmar
Solomon Isl.
Lao PDR
Mongolia
Malaysia
Vietnam
Thailand
Indonesia
PNG
Cambodia
Philippines
Vanuatu
Fiji
Tonga
Kiribati
–12
Residential Imports GDP
investment

Sources: oxford Economics; World Bank.

China’s Zero-COVID Policy

The continuation of China’s zero-CoViD policies in the face of the omicron variant will hurt economic activity
in China and have negative spillovers onto the rest of the region. To quantify the zero-CoViD policy shock, first,
private consumption shocks that hit China during the first wave (2020Q1–2020Q2) are extracted from the oEM
following Guenette and Yamazaki (2021). These shocks represent exogenous disturbances to private consumption
unrelated to the model’s predicted evolution of macroeconomic fundamentals. By and large, they reflect the
imposition and subsequent relaxation of strict pandemic control measures, including lockdowns (Guenette and
Yamazaki 2021). Then, these shocks are scaled to match the relationship between epidemiological developments
and economic activity. During the Delta wave in 2021Q3, the size of the exogenous shock to private consumption
was approximately 20 percent of that of the first pandemic shock in 2020Q1. This 20 percent scaling is used to
calibrate China’s zero-CoViD shock during the omicron wave. finally, the scaled shocks are re-introduced in the
oEM as an alternative scenario.6 The negative shock to consumption is assumed to occur in 2022Q1 followed by
an immediate rebound in 2022Q2.

in this scenario, private consumption in China is reduced by about 3 percent in 2022Q1, reducing aggregate demand.
The level of investment would fall by 1.3 percent, and output would be 1.6 percent lower in 2022Q1 relative to
an alternative baseline without an Omicron wave. Much of the fall in output experienced in 2022Q1 would be
reversed in 2022Q2, with the level of output recovering to 0.5 percent below baseline. By 2022Q4, output would
be nearly fully recovered. Overall, for 2022, the zero-COVID shock would be expected to reduce output in China
by about 0.6 percent (figure 2.A).

6 See Guenette and Yamazaki (2021) and World Bank (2022a).

(continued)

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 27

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

(Box 9. continued)

Figure B9.2. China zero-CoViD shock in the oxford Economics’ model

a. Annual impact on investment, imports and output b. Spillovers to other EAP countries

0.0 0.0
–0.1

Percentage points
–0.4
–0.2
Percentage points

–0.8 –0.3
–0.4
–1.2 –0.5
–0.6
–1.6

Myanmar
Solomon Isl.
Lao, PDR
Mongolia
Malaysia
Thailand
Vietnam
Indonesia
PNG
Philippines
Cambodia
Vanuatu
Fiji
–2.0
Investment Imports GDP

Sources: oxford Economics; World Bank.

The spillovers to EMDEs would be modest owing to the short duration of the shock and the particularly sharp bounce back
in activity in the second quarter. still, EAP countries would be hit harder than other EMDEs. The model-based simulations
point to significant heterogeneity in the impact on activity across EAP countries. spillovers would be most acute for small
commodity-exporting and tourism-focused economies such as Lao PDR, Myanmar, and the Solomon Islands. In contrast,
spillovers to the larger better-diversified trading partners would be limited. spillovers to advanced economies would be
minimal, in line with those to EMDEs outside of East Asia (figure 2.D). overall, global output could be reduced by about
0.2 percent in 2022 as a result of China’s zero-CoViD strategy in response to omicron.

The regional impact of the war in Ukraine

Apart from the financial spillovers, the region will also suffer from the war-driven loss of confidence and policy
uncertainty. Russia’s invasion of Ukraine and other countries’ response could weaken confidence and generate a period
of heightened policy uncertainty. The war could trigger uncertainty about a potential escalation, resulting in spillovers of
economic and political stresses to other countries High policy uncertainty is associated with weaker investment and trade as
firms seek to hedge against adverse outcomes. for example, a one standard deviation increase in global policy uncertainty
is associated with a 0.4 percentage points lower global industrial production (World Bank 2017).

However, the most tangible impact will be felt through disruptions in the commodity market. The region’s direct
dependence on Russia and Ukraine through imports and exports of goods, services, and capital, is limited. However, the war and
sanctions are likely to increase international prices of food and fuel, hurting consumers and growth, because the countries
involved are large suppliers (box 10 and 11).

In the EAP region, Thailand among the larger countries and Fiji among the smaller countries are most dependent
on fuel imports (figure 24). Cambodia, Myanmar, Thailand, and Vietnam are rice exporters, while most other countries are
net grain importers. Even though most EAP countries consume more rice than wheat, they are nevertheless likely to see food
price increases. First, since wheat and rice are substitutes, a negative supply shock to wheat also tends to increase rice prices
as some consumers shift their demand from wheat to rice. Second, the increase in fuel prices feeds through to increased
fertilizer prices and hence the price of all agricultural products.

28 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

Figure 24. EAP region is exposed to oil and food market developments
a. Belarus, Russia, and Ukraine’s commodity exports as a share
of global GDP b. EAP countries’ net exports of ores and mineral fuels
Percent of global exports

60 40

40 30

Percent of GDP
20
20
10
0
Palladium

Nickel

Platinum

Aluminum

Seed oil

Wheat

Fertilizers

Natural gas

Coal

Oil
0

–10

MNG
PNG
MMR
MYS
IDN
TLS
LAO
CHN
VNM
PHL
THA
KHM

SLB
VUT
WSM
PLW
FJI
TON
KIR
FSM
Metals Grains Fuels
East Asia Island economies
Russian Federation Ukraine Belarus
Crude oils Refined oils Petroleum gases
Coal Ores

c. EAP countries net exports of rice, corn, wheat, and fertilizers d. Correlation between rice, wheat, and fertilizer prices

2 1.0
Correlation coefficients

1 0.8
Percent of GDP

0 0.6

0.4
–1

0.2
–2
0.0
–3 Wheat, US SRW Potassium chloride Phosphate rock
THA
KHM
LAO
MMR
CHN
VNM
IDN
MYS
MNG
PHL
PNG
TLS

TON
PLW
WSM
VUT
TUV
FSM
FJI
SLB
KIR

Rice, Thai 5% Rice, Thai 25%

East Asia Island economies Rice, Thai A.1 Rice, Vietnamese 5%

Rice Corn Wheat and meslin Fertilizers

Sources: UN Comtrade, Consensus Economics, Haver Analytics, World Bank.

Notes: : A. Share of selected countries in total global exports of each commodity, in 2020. B.C. Net export of selected commodities as a share of GDP in average 2015–19.

Box 10. Impact of the fuel and grain price increase on real incomes

The fuel price increase affects real income through both the consumption and production channels. An increase
in energy prices hits consumers through higher costs of heating, cooking, electricity, and transport. The increase
also adversely affects production and therefore incomes. The increase in the price of grain affects the cost of the
consumption basket.

(continued)

3. Risks, OPPORTUNiTiEs ANd OUTlOOk 29

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

(Box 10. continued)

The impact of both price increases can be simulated using the static version of Envisage global computable general
equilibrium model. While coal, oil, gas and petroleum products are represented as separate commodities in the
model, wheat is not separated from a broader category of crops. Therefore, these simulations should be seen as
illustrative.

We conduct the following policy simulations: a cut in fuel exports of the Eastern European and Central Asian countries
which leads to an increase in the global price of oil by 11 percent; and cuts in grain exports with resulting increase
in the global grain price of around 5 percent.

The impact on selected EAP countries is presented below. As we would expect, relatively import dependent Philippines,
China, and Thailand (figure B10.1), see a contraction in real income–of between 0.5 and 1.5 percent–while the net
exporter, Malaysia, sees an increase in real income of 0.3 percent. The grain exporters, Thailand and Vietnam
(figure B10.1), benefit from the increase in the price of grains by 0.2 percent, while the grain importers, like China
and Malaysia, suffer a slight decline.

Figure B10.1. Impact of fuel and grain price changes on real incomes
0.5

0.0
Percentage points

–0.5

–1.0

–1.5

–2.0
Thailand China Philippines Vietnam Malaysia

Energy Crops

Source: Chepeliev et al. (2022).

Box 11. Possible effects on poverty: A simulation from the Philippines

Figure B11.1 panel A shows household consumption baskets in the Philippines, by decile, using nationally representative
household survey data from 2018. Energy accounts for an average of 8–9 percent of household expenditure in the
Philippines, shares that are fairly constant across the welfare distribution. The food share is much larger: more than
50 percent for 60 percent of the Philippines population. Cereals (e.g., wheat, rice, corn) make up a substantial
share of household food expenditure, especially among the poor: as high as 39–43 percent of all food expenditures
among households in the poorest 2 deciles.

(continued)

30 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

(Box 11. continued)

The welfare effects of increases in cereal prices dominate the effects of the same percentage increase in energy prices
(figure B11.1B). for example: if cereal prices rise by 10 percent in the Philippines, this would be expected to increase
the poverty rate by 1 percentage point–about l.1 million addition poor–measured using the lower-middle-class
poverty line ($3.20/day). if energy prices rise by 10 percent, the poverty rate would rise by 0.3 percentage points–
about 329,000 people. Together, the effect of 10 percent increases in both energy and cereals prices would be
expected to increase the poverty rate by 1.3 percentage points (or an additional 1.4 million poor filipinos). note that
the energy price effects simulated here represent lower-bound estimates. While they capture the effects related to direct
energy consumption, they do not include the indirect effects of rising energy prices on the costs of transportation or
other non-food goods.

Figure B11.1. Potential poverty impacts of energy and cereal price increases in the Philippines

a. Household consumption shares of energy, food, b. Simulated change in poverty rate for energy
and other nonfood items, by decile and cereal selected price increases

100 4.0

Changes in poverty headcount ratio

80
Share of total expenditure

3.0
(Percentage points)
per capita (%)

60
2.0

40
1.0

20
0.0
10% 20% 30% 10% 20% 30% 10% 20% 30%
0
Poorest 2 3 4 5 6 7 8 9 Richest Energy Cereals Energy plus
decile decile cereals

Energy Food Other non-food Simulated price increases (%)

Source: World Bank staff estimates, based on fiEs 2018 data.

Note: Simulations of energy price increases capture effects via direct energy consumption, but not the indirect effects associated with higher transport prices or higher goods prices that result from higher energy prices.

The Philippines does not control prices in the markets for gasoline, diesel, and rice. Rather, for the most part,
the approach of policymakers has been to provide targeted social transfers to vulnerable categories affected by price
increases, which has been shown to help lower poverty (see also Section 4.1). In the present crisis, anticipating the
potentially significant effect of rising prices on poverty, the government has recently provided targeted cash transfers
to vulnerable groups such as public transporters and farmers.

3.2. New growth opportunities: trade, digital technology and green production
Ì 3.2.1. Shifting Global Value Chains

A simple analytical model can help us understand how alternative shocks are likely to affect the location of
production and hence the structure of global value chains. Say the cost of relocation is F, per unit cost saving in the new
location c, and expected output Q. A firm will relocate if: F < cQ. firms’ per unit costs will depend on real wages, insurance
premium, logistics costs, taxes and destination tariffs. firm’s fixed costs will depend on the costs of establishing production
facilities and technological choices.

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 31

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

The increase in real wages in China, as well the tariffs imposed by the US on China, widen unit cost differences and
increase incentives for relocation to other countries (figure 25). But, contrary to current public discourse, a CoViD-
like shock that reduces the level of output reduces the incentive for firms to move. The reason is that for any given unit cost
differences, lower output implies less profits to cover the fixed cost of establishing a new factory. A shock like the Tsunami
is different because it wipes out existing factories, making firms more sensitive to cost differences since new establishment
costs must be incurred in both existing and new locations.

Figure 25. Shifting GVCs: the relocation decision will depend on the shock

Shocks Relative unit cost Quantity Relative fixed cost Relocation

savings (c) (Q) (F) likelihood
Shocks that reduce level of economic activity (Great Lower Less
Recession and COVID shock) sales

Shocks that increase location-specific risk and/or Increased local Need for new
investments in More
destroy facilities (Tsunami, COVID) risk premium
current location
US-China trade tensions Increased
destination tariffs More

Increased relative
Relative wage increases in China More
real wages

Domestic or border carbon taxes Depends on domestic

Depends
and foreign action

Reduced relative Need for new

New technologies investments in Depends
costs of production
current location

Source: World Bank staff illustration.

In general, an increase in perceived risk could evoke a range of possible responses. These responses could be to:
reshore (if risks are perceived to be higher in trade per se); relocate (if risk inclusive c outweighs F); diversify (if risk inclusive
c outweighs nF); increase inventories (if lower risk premia outweighs inventory costs). It is conceivable that the COVID
shock has increased the perceived riskiness of concentrating production in any one location. Today, China accounts for an
exceptionally large share of inputs for most countries (figure 26). A post-CoViD increase in “dependence aversion” may also
encourage importers to diversify away from China.

We may therefore expect to see a reduction in direct trade, for example between the US and China. This decline
could be due to (a) rising wages in China, or (b) an increase in the trade barriers imposed on China, or (c) increased
risk aversion to post-CoViD over-dependence on China. some of this trade is likely to be diverted towards EAP countries
(figure 27). However, as value chains have become increasingly regionalized, China has become an important source of
inputs for the exports of other EAP countries. China’s value added embodied in the total exports of countries like Vietnam
and Cambodia increased from a little over 6 percent in 2007 to more than 13 percent in 2018 (figure 28). Therefore,
even as the Us imports more from other EAP countries, these countries are likely to increase intermediates imports
from China.

32 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

Figure 26. China accounts for a large share of inputs for most countries

Foreign input reliance (%) in 2015

USA 4.8 2.6 1.6 0.9 0.6 0.7 8.9 1.8 1.3 0.7 11
CAN 29 2.2 1.8 1.3 0.8 0.8 9.9 1.7 1.3 0.6 18
MEX 28 2 2.7 0.7 0.9 1 19 3.3 3.3 1.1 15
DEU 3.9 0.4 0.3 2.8 4.1 3.3 6.3 1.4 0.8 0.7 35
GBR 5.6 1.2 0.2 6.3 3.5 2.2 6.7 1.2 0.8 1 25
FRA 4.9 0.6 0.3 9.1 3.2 4.1 5.7 1.1 0.6 0.7 31
ITA 3 0.4 0.3 7.7 2.2 4.9 6.5 0.8 0.9 0.9 36
CHN 3.3 0.7 0.2 1.5 0.5 0.6 0.5 2.9 3.8 0.5 21
JPN 3.6 0.6 0.2 1.1 0.6 0.5 0.4 8.9 1.7 0.4 22
KOR 6.6 0.7 0.5 3 1.3 1.1 0.9 23 6.7 1.1 35
IND 4.2 0.7 0.3 1.6 1.3 0.7 0.6 10 1.5 2 37
USA CAN MEX DEU GBR FRA ITA CHN JPN KOR IND ROW

Source: Baldwin and Freeman 2021.

Note: The numbers denote foreign input reliance (%). ROW stands for the rest of the world.

Figure 27. EAP needs to adapt to a changing trade landscape: A stylized depiction

Source: World Bank staff.

China’s share in the final good imports of the US has in fact declined, while the share of EAP countries has
increased (see figure 29 and figures A2–A7 for longer term trends in the EU, Japan and Us). This shift along with
rising EAP sourcing of intermediates from China signals shifting production towards other EAP countries. The trend was,
however, disrupted when China recovered faster than the rest of the world from the first CoViD Alpha variant, and again
in recent months, when the EAP countries suffered bigger production disruptions from the CoViD variant than China. it
remains to be seen whether the longer term trend resumes once the COVID pandemic subsides.

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 33

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Figure 28. China a growing source of inputs for EAP exports

Share of ultimate foreign source for value added in EAP countries’ exports

30

25

20
Percent

15

10

0
1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018

1995
2007
2018
IDN KHM LAO MMR MYS PHL THA VNM

China EU Japan USA

Source: oECD Trade in Value Added database.

Note: The chart plots the share of major economies value-added in EAP countries’ exports–a measure of backward GVC linkage.

Figure 29. As China’s share of Us final goods imports fell, the rest of EAP’s share rose
120 18

16
100 Dev. EAP's share in US
final goods imports (right) 14
80
12

60 China's sharein Dev. EAP 10

Percent

intermediate imports
40 8

6
20 China's sharein US
final goods imports
4
US-China Trade tensions COVID19 alpha COVID19 delta
0
2
2018m1
2018m3
2018m5
2018m7
2018m9
2018m11
2019m1
2019m3
2019m5
2019m7
2019m9
2019m11
2020m1
2020m3
2020m5
2020m7
2020m9
2020m11
2021m1
2021m3
2021m5
2021m7
2021m9
2021m11

–20 0

Dev. EAP covid cases relative to China (000s)

Source: China, EU, Japan and Us customs trade data.

The increase in EAP (excluding China) share in US imports was not evenly spread across countries. Vietnam’s
share increased from an average of 5 percent to 7.5 percent of Us final goods imports before the Delta wave (see
figure 30, figures A2–A7 for longer term trends in EU, Japan and Us, and figure A8 for examples of relocation of
production from China to Vietnam). There was also a smaller increase in Cambodia and Malaysia’s exports, but other EAP
countries did not see comparable growth during this period.

34 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

Figure 30. Vietnam accounted for much of the increase in EAP countries’ share of US imports

16 US-China COVID19 Alpha COVID19 Delta

Trade tensions
14

12

10
Percent

0
2017m1
2017m4
2017m7
2017m10
2018m1
2018m4
2018m7
2018m10
2019m1
2019m4
2019m7
2019m10
2020m1
2020m4
2020m7
2020m10
2021m1
2021m4
2021m7
2021m10
Indonesia Philippines Thailand Cambodia Malaysia Vietnam

Source: China, EU, Japan and Us customs trade data.

Note: The figure shows the share in Us final goods imports.

While the shifts described above arise from contemporaneous policy and exogenous shocks, the longer-term trade
implications are indicated by the response to an earlier shock, the 2011 earthquake in Japan. That natural disaster
had large immediate ripple effects across the world but also led to longer term relocation of production outside of Japan,
presumably because of increased awareness of the risks associated with overdependence on a particular source. As expected,
this relocation was driven by industries where Japan had a higher global share. At that stage too, Vietnam was a significant
beneficiary of the relocation while countries like indonesia did not benefit from changing GVC patterns (figure 31).

Figure 31. Past shocks suggest production relocation to countries with more trade friendly conditions

Relocation in products on which dependence on Japan was high after the 2011 earthquake Change in share of imports of electronic components

Japan Market Share pre > 15 Japan Market Share pre > 15
Vietnam Share Indonesia Share

2.5 3

2
1.5

1
1
.5

0
0
2005 2010 2015 2020
Year 2005 2010 2015 2020
Year
Mean Median
Mean Median

Source: Freund, Mattoo, Mulabdic, and Ruta (2020).

Note: The figures plot each country’s mean and median market share in country-products in which Japan had an average market share greater than 15 percent (right panel “High share”) calculated over the 2004–10 period.

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 35

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

What determines the attractiveness of a specific Figure 32. Low productivity tends to erode EAP countries’
location? Labor costs are clearly an important factor as a key labor cost advantage
determinant of relative unit costs. It is, however, not just the Average monthly salary and productivity in 2019, descending order
wage level but productivity-adjusted wages that matter for the by productivity-adjusted wages
relative cost advantage. Accumulated human capital through
US$
education, availability of complementary capital, and better 600 3
labor matching and management, all contribute to higher 500 2.5
labor productivity–which can even make high absolute 400 2
wage costs worthwhile, especially for the high value added 300 1.5
production. On the face of it, we have a puzzle: Vietnam does 200 1
not have an advantage over other EAP countries in terms of 100 0.5
economy-wide productivity-adjusted wages (figure 32). The 0 0

Cambodia

Vietnam

China

Myanmar

Indonesia

India

Thailand

Philippines

Lao PDR

Bangladesh

Pakistan

Malaysia

Sri Lanka
picture in exportable goods sectors may be quite different.
We explore other factors that may affect the relocation
choice in the policy section.
Wages Productivity Productivity-adjusted wages

Ì 3.2.2. Accelerating technology diffusion Source: JETRo survey (2019); WDi.

Note: Countries on the horizontal axis are sorted by productivity-adjusted wages (wages/productivity),
and adoption shown on the right-hand scale, in decreasing order.

EAP countries have large scope for broader technology diffusion: frontier firms are adopting new technologies more
quickly than in the past; however, these technologies are diffusing more slowly to other firms (box 12). Technologies are
used less intensively in EAP than oECD economies, as reflected by the vertical grey lines in figure 33. importantly, this use
intensity gap is widening for newer technologies, shown by the diverging fitted lines between the oECD and EAP in figure 33.
for example, in 2001 the electric furnaces in EAP were used with around 50% of the intensity of the Us, compared to 95% in
oECD countries. in contrast, more modern oxygen furnaces (invented 43 years later) are used with only 10% of Us intensity
in EAP, compared to more than 90% in oECD countries. To close technology diffusion gaps between EAP and advanced
economies requires diffusing modern technologies more widely, beyond the best firms.

Box 12. Limited technology diffusion among East Asian firms: evidence from Vietnam

Although Vietnam has near universal diffusion of more basic technologies, use of modern so called industry
4.0 technologies is rare (figure B12.1). Almost all Vietnamese firms of all sizes use a computer and have access
to the internet, and nearly 90% of firms use mobile phones. in terms of industry 4.0 technologies, fewer than
6% of firms have advanced manufacturing methods that use robots, only 7% of firms use cloud computing,
and less than 2% of firms use big data or Ai in their business. Even amongst large firms in Vietnam, few use
these advanced technologies and adoption is even more anemic for small enterprises. In addition, there are large
differences in technology use within firms. some business functions, such as quality control, production planning,
sales, and sourcing and procurement, remain reliant on basic technologies even where other parts of the firm are
upgrading. Differences in factor prices, such as labor costs, between developing and advanced economies, may
explain part of the limited adoption of Industry 4.0 technologies, especially automation.

(continued)

36 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

(Box 12. continued)

Figure B12.1. Despite widespread diffusion of basic technologies, advanced technology use is nascent in Vietnam
100

Estimated probablility 80

60

40

20

0
Small

Medium

Large

Small

Medium

Large

Small

Medium

Large

Small

Medium

Large

Small

Medium

Large

Small

Medium

Large
Computer Internet Mobile Cloud Robots Big Data
Phone Analytics

Industry 3.0 Industry 4.0

Source: Cirera et al. (2021b).

Figure 33. Large scope for faster technology diffusion in EAP

Spindles
−.5
Ships Railway Passengers
Railway FreightMail Electric Furnace
Electricity
log intensive margin (relative to the US)

Telegraph
Steel
−1 Aviation Freight
Fertilizer
Aviation Passengers Pcs
Cellphones

Internet
−1.5 Tractor
Telephone
Trucks Harvester

Synthetic Fiber
−2
Cars
Oxygen Furnace

−2.5

1800 1850 1900 1950 2000

Year of technology invention

Fitted line − OECD Fitted line − Developing EAP

Source: Cirera et al. (2021a) using country technology-level estimates from Comin and Mestieri 2018.
Notes: The vertical grey lines show the difference in use intensity between the oECD (at the top of the line) and developing EAP countries (at the bottom) for each technology. The fitted line for EAP (oECD) passes through
the points at the top (bottom) of the grey lines. Use intensity is measured in 2003 or earlier, depending upon the technology (see Comin and Hobijn, 2009).

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 37

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRiL 2022

Figure 34. CoViD has accelerated technology adoption

a. E-commerce b. Data analytics

3 3

2 2
Percent of firms

Percent of firms
1 1

0 0

–1 –1
–8 –4 0 4 8 12 16 20 24 –8 –4 0 4 8 12 16 20 24
Event weeks Event weeks

Source: World Bank. 2021a.

Note: Event study plot where the x-axis shows event time in weeks—relative to the first CoViD-19 cases. CoViD-19 cases taken from oxford Covid-19 Government Response Tracker. Unweighted average of country-level
adoption for firms in Brazil, China, the Czech Republic, Hungary, india, Mexico, Poland, the slovak Republic, and Thailand. includes country fixed effects, and standard errors clustered at country levels. Bars reflect 95 percent
confidence intervals. Coefficients are normalized relative to the omitted category at week t-1, the week before the first CoViD cases. Data analytics includes both advanced functions, such as A/B testing, and more basic
functions, such as visitor count tracking, feedback forms, and error tracking.

COVID-19 accelerated technology diffusion – particularly Figure 35. Limited evidence that CoViD accelerated automation
those for reaching customers online. Weeks after the
–4
first CoViD-19 cases, there was large growth in e-commerce
and digital finance, as well as technologies to analyze the
Log robots per worker

–6
data generated online (figure 34). The pandemic forced
companies to adjust business models due to lockdown –8
barriers to in-person sales and customers less willing to visit
stores in-person. Despite widespread anecdotal report of –10
robots replacing locked-down workers, automation doesn’t
seem to have accelerated during the pandemic so far. in –12
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
most EAP countries (excluding China), robot diffusion slowed
in the years preceding the pandemic and similar adoption KOR JPN CHN MYS
trends are observed during 2020 (figure 35). for example, THA VNM IDN PHL
automation diffused rapidly between 2010 and 2015 from
2 to 5 robots per 10,000 workers in Thailand’s economy; Source: World Bank calculations based on ifR data on industrial robots and WDi labor force data.
Notes: Robots per worker reflects the total number of industrial robots (stock net of depreciation) in the
however this only further increased to 6 robots per 10,000 economy as a share of the total labor force.

workers by 2020.

While the COVID-19 shock led to convergence in the use of basic consumer-facing technologies such as e-commerce,
it is also associated with divergence in the use of more sophisticated productivity-enhancing technologies such
as advanced data analytics. Across countries, those with relatively low use of e-commerce, online payments or digital
marketing pre-pandemic experienced faster growth in their uptake (Ragoussis and Timmis, forthcoming). Within EAP
countries, the growth in e-commerce use appears to befaster among non-frontier firms: those that are domestically owned
and, if anything, smaller. in contrast, advanced data analytics, such as A/B testing, is disproportionately concentrated
in richer countries, and among the most productive and largest firms.

38 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

The rapid adoption of technology presents an opportunity to unlock productivity growth–particularly for advanced
technologies. Use of more sophisticated technologies, such as data analytics, have previously been found to be important
for data driven decision making, organizational change and productivity gains (Brynjolfsson and McElheran 2019; Koning
et al., 2019). However, adoption of these advanced technologies is concentrated in the best firms and richer countries,
suggesting the productivity gains may not be widespread. in addition, more productive firms are better able to reorganize their
business models to take advantage of new technologies, with access to more data and complementary skills, and embed them
more fully across their business (Cirera et al. 2020). so, the best firms are both more likely to adopt the technologies that matter
most for productivity and better able to transform these technologies into growth.

The pandemic is changing the structure of services trade. While tourism and travel have been disrupted, trade
in data-intensive services has grown (figure 36). irreversible investments in digital delivery made by firms and consumers
during the pandemic are durably reducing the costs of international trade relative to domestic transactions. The
result will be increased opportunities for trade in digitized services even as tourism and travel recover more slowly.

While the pandemic affected the structure of services trade, the war in Ukraine is likely to affect the energy transition.
Oil and gas prices have soared due to the supply disruption and sanctions, as countries start diversifying away from Russia,
a major exporter of oil and gas. These price increases may catalyze the competitiveness of renewable energy. In the
past decade, renewable power generation has become substantially cheaper, thanks to steady improvements in technologies,
economies of scale, competitive supply chains, and developers’ increased experience. Producing energy from utility-scale
solar photovoltaics (PV) has become 85 percent cheaper than in 2010 (figure 37). Before the war, the variable costs of energy
from either solar PV or onshore wind were already below the cheapest new fossil fuel-fired project, and recent prices increase
may widen this cost differential.

Figure 36. The COVID-induced digital diffusion is changing the structure of services trade

Export growth over corresponding quarter in 2019

250
200
150
100
Percent

50
0
–50
–100
–150
–200
2020q1
2020q2
2020q3
2020q4
2021q1
2021q2
2021q3

2020q1
2020q2
2020q3
2020q4
2021q1
2021q2
2021q3

2020q1
2020q2
2020q3
2020q4
2021q1
2021q2
2021q3

2020q1
2020q2
2020q3
2020q4
2021q1
2021q2
2021q3

China Germany Japan USA

Financial & Insurance ICT Other business services

Other services Transport Travel

Source: International Monetary Fund.

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 39

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Yet other developments in the wake of the war could Figure 37. Energy cost increases could make green
inhibit the switch from fossil fuels to renewable energy technologies more economically viable
in the short term. The increase in fuel prices is likely 0.4
to induce further investments in fossil fuel production.
The war is also disrupting availability of key metals, like 0.3
palladium and nickel, used in the production of green

USD/kWh
products, such as catalytic converters and lithium-ion
0.2
batteries for electric vehicles respectively.
Fossil fuel
0.1 costs range
Domestic distortions could also inhibit the transitions -
despite recent net capacity changes in favor of renewable 0
sources and AsEAn’s (ambitious) commitment to derive

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
23 percent of its total primary energy supply from
renewables by 2025, socially inefficient policies could Solar photovoltaic Onshore wind
be an impediment. For example, in Indonesia, fossil fuel Offshore wind Concentrating solar power
subsidies and renewal energy regulations contribute to Source: iREnA (2021).
limiting the development of renewable sources with Note: Lines are the global weighted average levelized cost of energy (LCoE) by year. The band that crosses
the entire chart represents the fossil-fuel power generation cost range.
the highest potential. Corporate users are prevented
from purchasing renewables other than on-site solar, thus
hampering the growth of geothermal power–for which Indonesia has the worldwide highest potential. Similarly, local
content requirements negatively affect the production of technologies that typically rely on foreign-made equipment.

3.3. Outlook

In the base line scenario, growth in region is projected to decelerate from 7.2 percent in 2021 to 5 percent in
2022, which is half a percentage point slower than expected in October 2021. The slowing growth will be mostly due
to China, where growth will slow to 5 percent in 2022, after the 8.1 percent rebound in 2021. Even though growth in the
rest of the region is projected to rebound to 4.8 percent in 2022 from 2.6 percent growth in 2021, the acceleration
will be less than the 5.2 percent expected in October 2021 (table 2). The forecast assumes lingering COVID-19 related
disruptions and varying degrees of supportive fiscal and monetary policy in the face of external shocks.

The baseline scenario reflects current expectations. The scenario is based on the following assumptions. Most of the
Covid-19 related economic shock will be felt in the first half of 2022, followed by a bounce back in the second half of the
year. The current COVID-19 outbreak, in China and elsewhere, will largely affect the demand side with a limited impact
on production. Commodity prices will decline from their current highs but will remain significantly higher than before
the war because of disruptions production and trade and the lingering sanctions. Global growth will be only 1 percentage
point lower than previously expected, as the oECD predicts. financial conditions will be somewhat tighter but less volatile.
China, and a few other countries in region, will be able to mitigate the impact of the adverse shocks on growth to a varying
extent through expansionary fiscal policy and supportive monetary policy.

Some countries in the region may be more resilient than others in the face of these shocks because of their
attributes and prior prudence (table O.1). Commodity exporters, like Indonesia and Malaysia, can absorb international
price increases with less difficulty than commodity importers, like fiji and Thailand. Export dependent economies like

40 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

Table 2. GDP growth forecast

April 2022 October 2021
2020 2021 Baseline Low case Forecast for 2022

East Asia & Pacific 1.3 7.2 5.0 4.0 5.4

East Asia & Pacific (excluding China) −3.7 2.6 4.8 4.2 5.2
ASEAN-5 −3.9 3.4 4.9 4.3 5.2

Pacific Island Countries −9.9 −3.2 2.9 5.4

China 2.2 8.1 5.0 4.0 5.4
Indonesia −2.1 3.7 5.1 4.6 5.2
Malaysia −5.6 3.1 5.5 4.8 5.8
Philippines −9.6 5.6 5.7 4.9 5.8
Thailand −6.2 1.6 2.9 2.6 3.6
Vietnam 2.9 2.6 5.3 4.0 6.5
Cambodia −3.1 3.0 4.5 3.8 4.5
Lao PDR 0.5 2.5 3.8 3.3 4.5
Mongolia −4.4 1.4 2.5 0.7 5.2
Myanmar 3.2 −18.0 1.0
Papua New Guinea −3.5 1.0 4.0 3.0 4.0
Timor-Leste −8.6 1.6 2.4 3.7
Palau −9.7 −17.1 7.2 12.0
Fiji −15.7 −4.1 6.3 7.8
Solomon Isl. −4.3 0.1 −2.9 4.5
Tuvalu 4.4 2.5 3.5 3.5
Marshall Isl. −2.2 −2.5 3.5 3.5
Vanuatu −6.8 1.2 2.0 3.0
Kiribati −0.5 1.5 1.8 2.6
Tonga 0.7 −0.8 −1.6 2.6
Samoa −2.6 −8.1 −0.3 1.5
Micronesia −1.8 −3.2 0.4 1.0
Nauru 1.1 1.5 0.9 0.9
Source:World Bank; World Bank staff estimates and projections.
Notes: Percent growth of GDP at market prices. Values for 2022 represent forecast. Values for 2021 for the small island economies refer to GDP growth estimates. AsEAn-5 comprises indonesia, Thailand, the
Philippines, Malaysia, and Vietnam. Values for Timor-Leste represent non-oil GDP. for the following countries, values correspond to the fiscal year: federal states of Micronesia, Palau, and Republic of the Marshall islands
(October 1–september 30); nauru, samoa, and Tonga (July 1–June 30). Myanmar growth rates refer to the fiscal year from october to september. Given the lack of high-frequency data, we have not been able to produce
forecasts for the low case scenario for Myanmar, Timor-Leste and the Pacific island countries.

Cambodia, Malaysia, Vietnam are more vulnerable to contractions in global demand. Countries with large external financing
needs, either in the form of short-term capital, as in Cambodia, Indonesia and Malaysia, or because of high overall debt,
as in Lao PDR and Mongolia, are more susceptible to global financial turmoil. Countries that exercised fiscal and monetary
policy restraint in the early phases of the pandemic have the policy space to counteract shocks. For example, China reduced
its structural fiscal balance by as much 2.6 percentage points of GDP in 2021, allowing it to plan an increase of 2.8 percent
in 2022 to meet its growth target (box 13). In contrast, Mongolia, with government debt equal to nearly 80 percent of GDP
and annual inflation running at over 14 percent, has little room to soften the adverse impact.

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 41

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Box 13. China’s growth in 2022: between shocks and stimulus

This box explains China’s growth projections for 2022. It presents the estimated impact of the twin shocks related
to the war in Ukraine and the pandemic resurgence. it then presents the estimated impact of the government’s
fiscal stimulus and concludes with presenting the potential net impact of the all these factors.

The analysis rests on the following assumptions:

• COVID-19 resurgence: the current COVID-19 outbreak will be brought under control within two months and
will largely affect the demand side with a limited impact on production.

• Terms of trade and external demand shock: China will experience a deterioration in its terms of trade and
will face a significant slowdown in global growth which will impact economic activity from 2022Q2 onwards.

The impact of these combined shocks on economic growth is significant. Simulations suggest that these shocks
could shave off around 1.6 percentage points from the earlier 5.1 percent baseline projection in 2022, unless
counteracted by additional offsetting stimulus (figure B13.1A.). Estimates show that around 0.9 percentage
point of this 1.6 percentage point decline is due to the terms of trade shock, 0.3 percentage point is owed to the
slowdown in global growth, which is expected to weigh on manufacturing investment growth, and the remaining
0.4 percentage points are related to the negative impact of the COVID-19 resurgence and the associated mobility
restrictions and impact on the demand for services.7

in the face of these shocks, the authorities have announced a significant loosening of policy, deploying available
policy space after last year’s tightening. The previous baseline growth forecast included the assumption of a
moderate fiscal loosening (by around 40 bps of GDP).

The 2022 budget goes beyond this expectation and leaves room for a fiscal impulse of up to 2.7 percent of
GDP (figure B13.1B) – 2.3 percent of GDP more than expected in the previous baseline. This does not mean that
policymakers will necessarily fully exhaust the fiscal impulse. in previous years, there were large deviations between
targets and actual outturns. For instance, fragile local government balance sheets, weak land and real estate markets,
and the lack of shovel-ready projects may constrain the execution of fiscal stimulus.

7 We examine the effect of the different shocks on growth by applying a Structural Vector Autoregression (SVAR) model with a Cholesky decomposition. All variables are
seasonally adjusted, HP filtered monthly data. On the COVID shock, we use the loss in GDP in 2020Q1 as the main reference. For the services sector, we assume that the
growth impact of the current COVID outbreak on cities with medium and high-risk districts would account for about one-third to two-third of the magnitude of the GDP loss
in 2020Q1. For the industry sector, we assume only cities in lockdown would be impacted by the same magnitude of growth impact.

(continued)

42 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

(Box 13. continued)

Figure B13.1. GDP growth and fiscal balance

a. GDP Growth b. Augmented fiscal balance

8 0

–2
5
Percent

Percent of GDP
–4
2
–6

–1
–8
2011–19 2020–21 2022 old 2022 2022 fiscal
average forecast shock stimulus
scenario –10
Private consumption Government consumption 2019 2020 2021 2022f
Gross fixed investment Inventory building
Net exports GDP Spring 2022 EAP update Dec. 2021 CEU

Source: Haver Analytics; World Bank.

Note: f = forecast. World Bank staff calculations. The augmented fiscal balance (narrow definition) adds up the public finance budget, the government fund budget, the state capital management fund budget, and the
social security fund budget.

The analysis explored three scenarios with different execution rates of the fiscal impulse: (i) 70% execution; (ii)
80% execution; and (iii) 90% execution. The analysis further assumes a fiscal multiplier of 0.8, in line with recent
experience. The projections under the different scenarios all point to a significant policy impact that can largely
offset the growth impact of the combined shocks, with growth ranging from 4.8 to 5.2 percent. The new baseline
forecast of 5.0 percent growth for 2022 adopts the middle range of these scenarios. It does not account for any
additional forms of policy loosening, such as measures to stimulate credit growth to the private sector.

Table B13.1. 2022 GDP growth forecast under fiscal policy scenarios (percent)
2022
70 percent execution of fiscal impulse 4.8
80 percent execution of fiscal impulse 5.0
90 percent execution of fiscal impulse 5.2
Source: World Bank calculations.

These projections are subject to significant risks. These include uncertainties about the duration and magnitude of
the war-related shock, which could lead to even higher commodity prices, weaker export demand and more volatile
financial market conditions than expected in the revised baseline. Domestically, a wider and more persistent
CoViD-19 outbreaks could lead to more severe and broad-based economic disruption. Potential financial stress
among property developers could also create negative spillovers to upstream sectors and weigh on investment,
employment and consumption.

(continued)

3. RisKs, oPPoRTUniTiEs AnD oUTLooK 43

 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

(Box 13. continued)

There are also uncertainties about the size, composition, and effectiveness of the policy response. Boosting domestic
demand through investment-led stimulus could exacerbate risks in the real estate sector and run into diminishing
returns as China’s stock of public infrastructure approaches its saturation point. in the face of uncertainty,
government actions may fail to restore private investor confidence, lowering fiscal multipliers and dissipating the
effects of the stimulus.

finally, excessive stimulus could further delay China’s difficult rebalancing towards high-quality growth. The pandemic
has led to persistently lower consumption and China’s return to investment-led stimulus will further increase domestic
imbalances (see figure B13.1A). Moreover, the recovery up to mid-2021 was heavily industry, real estate and
infrastructure based, leading to a temporary halt in the reduction in emission intensity of the economy. The reliance
on already heavily leveraged soEs to ensure economic stability may exacerbate distortions in credit allocation and
hamper the shift towards productivity-based growth.

Against this background, the authorities’ official target of 5.5 percent looks aggressive. Should China face further
negative shocks, policy makers may want to settle for lower growth and maintain policy buffers rather than jeopardize
hard-won rebalancing gains. Providing more support to households, consumption and green investment could also
ease the trade-off between near term stabilization and long term rebalancing targets.

Given the large uncertainty, we also consider a low-case scenario in which regional growth in 2022 could
decline to 4.0 percent. This more dismal scenario is based on the following assumptions. The COVID-19 related shock
will persist and any bounce back in the latter half of 2022 will only partly offset the disruption caused by the outbreak in
the first half of 2022. Moreover, the current outbreak will affect both the demand side and the production. Commodity
prices will stay at their current highs because of worsening geopolitical tensions and tightening sanctions. Global growth
will be more than 1 percentage point lower than previously expected. Financial conditions will be both tighter than in
the baseline scenario and continue to be volatile. All the countries in region will have largely exhausted their capacity to
mitigate the worsening impact of the adverse shocks on growth.

Country-specific circumstances will also weigh on growth. In Myanmar, the economy is projected to grow by a meager 1
percent in 2022, after a sharp contraction in 2021 due to the impact of the military takeover in February 2021 and the third
wave of COVID-19 infection. Prolonged border closures with China, which is hurting coal exports, and import-dependence
on Russia will further hurt growth prospects in Mongolia. Continued weakness in tourism and increased COVID-19 infections
are likely to slow the recovery across the Pacific island Countries. Growth in the solomon islands is expected to shrink by 2.5
percent in 2022, reflecting the negative impact of the recent civil unrest and widespread community transmission of the
coronavirus. Investments to replace damaged productive capacity caused by the riots are unlikely to gain pace until later in
the year. A volcanic eruption in early 2022 has damaged economic prospects in Tonga.

EAP annual median headline inflation is now expected to surpass 3.0 percent in 2022. This forecast is above previous
expectations and implies that inflation will overshoot the upper band of the inflation target in several EAP economies. Higher
food and fuel prices represent a significant risk to the upward-revised inflation outlook. in addition, capital outflows triggered
by faster-than-expected monetary policy tightening in the United States could put pressure on regional currencies, and pass-
through into higher inflation, especially in countries that rely on short-term capital inflows (e.g., Mongolia, Malaysia and to
some extent Indonesia).

44 3. RisKs, oPPoRTUniTiEs AnD oUTLooK

BRAVING THE STORMS

4. Policy Priorities
4.1. Enhancing efficiency of fiscal policy

Governments in the region have relied on fiscal, monetary, and financial sector policies to support their economies
in response to shocks. These policies are expected to play a demanding triple role of supporting relief, recovery, and
growth (figure 38). While economies are in deep recession, households and firms need relief, liquidity, and access to credit.
During the recovery phase, further policy support could help avoid an underemployment equilibrium trap. Once recovery sets
in, macroeconomic policies could help facilitate a transition to more sustainable and inclusive growth.

Figure 38. Macroeconomic policy is expected to play a demanding triple role

Vietnam
China
Indonesia

Malaysia
Philippines
Thailand

Vanuatu
Fiji
Palau

Relief Recovery Long-term growth

Lifeline for people Promote restructuring and reallocation Invest in more inclusive and
and firms sustainable growth

Source: Authors’ illustration.

Note: The horizontal line indicates the level of GDP in December 2019.

Until recently, government spending in most countries has been oriented towards relief in response to the COVID-19
shock rather than investment. Most countries focused their support on providing income support to households
and firms (figure 39). Relatively few countries, including China, Mongolia, and Thailand increased public investment
through public works and the acceleration of already approved public investment projects. Other countries, like Vietnam,
accelerated already planned public investment spending to help the economy during the shock.

Box 14. COVID-19–related policy issues examined in recent economic updates

Previous updates have focused on a number of other policy issues, including: (1) vaccination to contain COVID-19;
(2) fiscal policy for relief, recovery, and growth; (3) climate policy to build back better; (4) smart containment of
COVID-19, especially through non-pharmaceutical interventions like testing-tracing-isolation; (5) smart schooling
to prevent long-term losses of human capital, especially for the poor; (6) social protection to help households
smooth consumption and workers reintegrate as countries recover; (7) support for firms to prevent bankruptcies and
unemployment, without unduly inhibiting the efficient reallocation of workers and resources; (8) financial sector
policies to support relief and recovery without undermining financial stability; (9) trade reform, especially of still-
protected services sectors—finance, transport, communications—to enhance firm productivity, avert pressures to
protect other sectors, and equip people to take advantage of the digital opportunities whose emergence the pandemic
is accelerating; and (10) creating opportunities for firms and ensuring inclusion to promote equitable growth.

4. PoLiCY PRioRiTiEs 45
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Figure 39. COVID-19 related spending focused more on relief than on growth

a. COVID-related support to households and firms b. Public investment and income support

8 20
18
16
6
Percent of GDP

Percent of GDP
14
12
4 10
8
2 6
4
2
0 0
Vietnam

Cambodia

Philippines

Indonesia

Thailand

Malaysia

China

Mongolia

Indonesia

Philippines

Thailand

Vietnam

Myanmar

Malaysia

Cambodia

China

Mongolia
2020 2021 2022 Income support and revenue measures Public investment

Source: World Bank staff estimates.

Notes: B. income support and revenue measures include direct transfers and revenue measures, such as tax exemptions, benefitting both households and firms. Public investment does not include the expansion of credit
to public soEs for investment, which is likely to be significant in a country like China. Data show sum of 2020–2022.

Before the war in Ukraine, governments were beginning to cut expenditure even though output remained below
potential (figure 40). Support to individuals and firms was waning. The focus was shifting from emphasizing relief (cash
handouts to households in the informal and agricultural sectors) to measures that supported the economy, ranging from
cashback for spending on goods and services and subsidy programs for domestic travel (Thailand) to improving connectivity
infrastructure (China, Indonesia). This consolidation was happening even though output still remained below potential.
Economic slack is mostly concentrated in sectors such as transportation and accommodation and catering. other sectors,
like information and communication technology, finance and agriculture are close to their productive capacity.

Fiscal consolidation was being induced by a tightening intertemporal budget constraint. By 2021, public debt
had increased by more than 10 percent of GDP in most developing EAP countries compared to pre-pandemic levels, and

Figure 40. Most governments are beginning fiscal consolidation even though output remains below potential
a. Change in structural balance b. Output gaps after policy support in EAP excluding China

4 2
3
2 –1
Percent of potential GDP
Percentage points

1
–3
0
–1
–5
–2
–3
–7
–4
2020
2021
2022

2020
2021
2022

2020
2021
2022

2020
2021
2022

2020
2021
2022

China Thailand Malaysia Indonesia Philippines

–9
2020 2021 2022 China Indonesia Thailand Malaysia Philippines

Source: IMF; World Bank Staff estimates.

Notes: A. The figure shows the structural balance estimates as a share of potential GDP relative to 2019 level. B. output gap based on estimates from a modified multivariate filter model of World Bank (2018c). Error
bands reflect 90 percent confidence intervals.

46 4. PoLiCY PRioRiTiEs
BRAVING THE STORMS

Figure 41. Government debt has grown significantly because of large primary deficits
a. General government debt b. Drivers of debt in EAP

100 10
8
75
Percent of GDP

Percentage points
50 4
2
25
0

0 –2
–4
Mongolia
Lao PDR
Malaysia
China
Philippines
Myanmar
Thailand
Vietnam
Indonesia
Cambodia
Fiji
Samoa
Vanuatu
Tonga
PNG
Nauru
Kiribati
SB
Timor-Leste
Micronesia
Marshal Islands
Tuvalu
–6
2012–19 2020

Developing East Asia Island Economies Interest Payments Inflation Rate Economic Growth
2020–21 estimated change 2019 forecast 2022 Primary Balance Stock Flows Debt

Source. IMF, World Bank.

Note: A Figure shows gross general government debt as a share of GDP.

by more than 20 and 30 percent in the Philippines and fiji, respectively (figure 41). The increase in debt was mainly
driven by primary deficits and lower economic growth due to the CoViD-19 shock.

Fiscal difficulties are also due to traditionally low revenue mobilization. EAP countries raise relatively limited revenue–
on average less than 20 percent, compared to close to 25 percent for other EMDEs. Among the largest economies general
government revenue is lowest in Indonesia, Malaysia, and the Philippines. Among the smaller economies, revenue generating
capacity is weak in Lao PDR and Papua new Guinea. EAP countries also remain heavily dependent on indirect taxes, which
have declined with CoViD-19 cuts in consumption (figure 42). To increase revenues, governments can enact fiscal reforms, as
indonesia is doing (box 15). fiscal deficits are sizable in all major economies and exceptionally large in fiji, Palau, and Timor-
Leste. interest payment burden in very significant in indonesia, Lao PDR, Papua new Guinea, and Mongolia (table 3). General
government gross debt is significant in Mongolia and fiji, while short term debt to GDP ratio is high in Malaysia, Thailand, and
the Philippines.

Figure 42. . . . and relatively low revenue mobilization

a. General government revenue b. Indirect taxes as a share of total government revenue, 2020

50 80
AFC GFC Covid-19
40 60
Percent of GDP

Percent

30 40

20 20

10 0
Fiji
Lao PDR
Samoa
Tonga
Mongolia
Vanuatu
Solomon Isl.
PNG
Myanmar
Cambodia
Palau
China
Philippines
Vietnam
Thailand
Indonesia
Marshall Isl.
Malaysia
AE

0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022

AE China EAP excluding China EMDE excluding EAP Commodity exporter Commodity importer -

Source: iMf; international Center for Tax and Development and United nations University World institute for Development Economics Research (iCTD/UnU-WiDER) Government Revenue Dataset; World Bank staff calculations.
Note: A. Averages are computed with current U.S. dollar GDP weight. B. Total revenue excludes social contributions and grants revenue. 2020 or latest available year. Commodity exporter denotes countries of which more than
60 per cent of its total merchandise exports are composed of commodities (UNCTAD).

4. PoLiCY PRioRiTiEs 47
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Box 15. Indonesia’s tax reforms to create fiscal space

indonesia’s low and volatile public revenues constrain the overall resource envelope and fiscal space available for
development priorities. Tax revenue was 9.2 percent of GDP in 2021, which is well below its estimated tax potential
and about half the average of similar emerging markets. The tax system is characterized by high tax-free thresholds,
wasteful exemptions, uneven treatment across sectors, and unduly low health, wealth and environmental taxes.
Altogether, these result in a narrow tax base from which government must fund most of its activities.

Indonesia has opportunities to increase tax revenue, as its tax gap, the difference between what is collected and what could
be collected given economic and other conditions, was about 6 percent of GDP in 2018. A stochastic frontier analysis
(SFA)8 shows that indonesia’s tax efficiency9 is below that of peers and the tax gap is rising. High Income Countries in
general tend to be clustered closer to the efficiency frontier (figure B15.1). Middle income Countries are more dispersed.
indonesia’s efficiency score (averaged since 2015) is among the lowest in the sample of countries and therefore furthest
from the efficiency frontier. Tax efficiency has also declined over time. indonesia’s tax potential is estimated at
16.3 percent of GDP in 2018 with a growing tax gap estimated at around 6 percentage of GDP for 2018 (figure B15.2).

Figure B15.2. Indonesia has experienced a widening tax

Figure B15.1. indonesia has a low tax efficiency score gap since 2005

(log of GDP per capita vs. tax efficiency score) (Actual tax collection/GDP vs. Tax potential/GDP)

18

1.0 16
(0-1 where 1 is most efficient)

14
Tax efficiency score

12
Tax to GDP (%)

0.9
10
8
6
0.8
4

Indonesia 2
0.7 0
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
6.6 7.6 8.6 9.6 10.6
Log of GDP per capita

UMIC HIC LMIC Actual tax collection Tax frontier

Sources: ICTD, WDI, ILO, WB Staff estimates. Sources: ICTD, WDI, ILO, WB Staff estimates.

8 The team applied a stochastic frontier analysis (sfA) to provide a first approximation of indonesia’s tax gap using a cross country approach, linking a set of inputs (country
characteristics) to a specific output (tax to GDP). The analysis uses a sample of countries, covering high and middle-income countries, with a population of at least 20 million
(with exception of a few HICs for which population may be lower), and natural resource rents below 20 percent of GDP.
9 This is the ratio of actual taxes over tax potential as a measure of the efficiency of tax collection.

(continued)

48 4. PoLiCY PRioRiTiEs
BRAVING THE STORMS

(Box 15. continued)

The recently approved Tax Harmonization Law is expected to increase tax revenue in the near term and to structurally
increase fiscal space for pro-growth and pro-poor spending. The Law, approved in late 2021 and to be implemented
in steps between 2022 and 2025, expands the tax base and increases tax rates. It expands the tax base through
the introduction of a carbon tax, removal of VAT exemptions, VAT collection on domestic e-commerce platforms,
simplification of the approval process for excises reforms, and an asset declaration program (‘tax amnesty’). it
increases tax rates in 3 different areas: The VAT rate is set to be increased from 10 to 11 percent in April 2022 and
to 12 percent in 2025. A top income tax bracket of 35 percent has been added for high income earners. A previously
legislated corporate income tax rate cut from 22 to 20 percent in 2022 has been abandoned.

The reforms also make the tax system fairer through several measures, including notably: (i) rationalizing VAT
exemptions improves the horizontal equity of the VAT (i.e., fewer distortions with fewer exemptions resulting in
more equal treatment of different business sectors); (ii) shifting the personal income tax burden towards high-
net-worth individuals; (iii) effective taxation of the digital economy levels the playing field between digital and
non-digital businesses; (iv) the introduction of a new tax-free threshold for the income of small firms; and (v) stricter
fringe benefits rules.

The Tax Harmonization Law is expected to reduce the tax gap. Preliminary estimates suggest that the Tax Harmonization
Law could raise revenues by 0.7 percent–1.2 percent of GDP in the medium-term, all other things constant. This
would bridge the tax gap by 12 percent–20 percent approximately. This is quite significant, although there will still
be a significant tax gap of around 5 percent of GDP, which will require additional tax reforms.

Such tax reforms should be complemented by improvements in the competitiveness of the business environment. Lack
of competitiveness raises the costs of doing business and induces informality and thereby tax leakage. For example,
access to finance is a dimension of competitiveness that has an important impact on tax declarations. several studies
have illustrated the link between financial sector depth and tax collections. This includes firm level evidence showing
that financially constrained firms tend to engage more in tax evasion and avoidance.10 Recent investment liberalization
reforms and upcoming financial sector reforms could have multiplicative effects on tax collections when complemented
with tax reforms

10 see for example: Alm, Liu, and Zhang (2018).

The new shocks will sharpen the fiscal policy trade-offs. EAP countries were already struggling to reconcile fiscal support,
for relief, recovery, and growth, with shrinking fiscal space. The new shocks will create more needs for support and a further
contraction in revenues. one risk is that fiscal support implemented by entities like local governments and state-owned
enterprises could undermine their financial viability. Another risk is lower investment in the infrastructure of trade, energy,
and technology diffusion–which are needed to harness the new growth opportunities by enhancing domestic capacity and
international connectivity.

Three measures can help. First, more efficient social protection would protect the vulnerable and free fiscal space for other
ends. EAP countries have shielded households from recent CoViD-related income shocks though a broad-based increase in
social protection and from price shocks through a combination of price controls and subsidies (or tax cuts). Both types of
measures may be the only form of assistance that is feasible in the short term, but neither is efficient or fiscally sustainable
(section on social protection below and Box 5 on price controls). Direct transfers to poor households and firms, once the

4. PoLiCY PRioRiTiEs 49
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Table 3. Government finances have worsened in most EAP countries

General General Sovereign

Fiscal Interest Short-term
government government debt average
balance payment (% debt (% of
revenue gross debt maturity
(% of GDP) of revenue) GDP)
(% of GDP) (% of GDP) (years)

avg. 2019-21 change 2021 change 2021 change 2021 change 2020 change 2020 change
China 36 7 –4.4 0 2 0 45 –5 7.9 0 5 0
Malaysia 16 –5 –6.4 –4 7 –3 64 8 11.1 3 8 1
Indonesia 12 –3 –4.6 –2 12 1 41 12 13.3 0 3 0
Philippines 16 –3 –8.6 –8 14 8 55 17 7.6 –5 5 1
Vietnam 19 0 –3.8 –1 5 0 45 0 4.4 –1 3 0
Thailand 21 –1 –7.8 –8 3 0 58 16 23 3
Lao PDR 14 –3 –1.4 4 15 4 78 21 2 1
Mongolia 30 2 –3.1 1 7 –15 80 4 2.9 –1
Cambodia 23 1 –5.7 –6 4 1 35 5
Myanmar 16 –3 –8.8 –5 5 0 57 19
Timor-Leste 46 –10 –44.2 –9 25 19
Fiji 23 –3 –12.8 –9 8 4 86 41
Solomon Islands 31 –8 –5.4 –4 1 0 21 12
Papua New Guinea 15 –2 –7.6 –4 16 –2 52 18
Samoa 37 6 1.9 3 2 0 50 –2
Vanuatu 41 3 –6.0 –6 1 0 28 –16
Tonga 43 3 –0.4 –2 2 0 46 0 0 0
Palau 45 3 –24.0 –28

Source: International Monetary Fund, World Bank, Fitch Solutions.

Note: Color scale represents country quintiles relative to the group of emerging markets and developing economies, with red denoting the worst exposure and green the least. Change denotes percentage change
compared to 2015–2019 average.

relevant digital infrastructure is in place, would alleviate the pain from the cumulative shocks without distorting price
signals or subsidizing the wealthy. second, the growth benefits of public spending could be magnified if it were combined
with investment policy reform to encourage greater private investment in the creation of public infrastructure. Such reforms
are being undertaken in indonesia and the Philippines (see Box iiB3 in the october 2021 EAP Economic Update). Third,
governments should reconcile spending needs with tightening budget constraints, by committing (a) to restoring fiscal
discipline through the (re)introduction of fiscal rules (see below); and (b) to fiscal reform through enactment of legislation
to be implemented conditional on objective measures of recovery. For example, new tax reform legislation in Indonesia is
expected to raise revenue by 1.2 percent of GDP in the medium term (Box 15).

Governments should commit to restoring fiscal discipline through the reintroduction of fiscal rules. During the
CoViD-19 pandemic, fiscal rules and fiscal councils were tested. The widespread use of escape clauses, temporary suspension
of fiscal rules, and modification of fiscal rule limits were among the novelties in this crisis. for instance, among developing
EAP countries, indonesia, Malaysia, Mongolia, Thailand, and Vietnam either suspended or revised their fiscal rules (table 4).
Even before CoViD-19 spending, fiscal rules had not prevented a large buildup of debt. several countries plan to revise the
framework as part of the transition to reinstate the fiscal rules. The policy challenge is for countries to reinstate improved
fiscal rules. Countries with a good track record regarding fiscal rules are able to respond more aggressively during crises
(Davoodi et.al., 2022).

Table 4. Many EAP countries adopt fiscal rules to ensure fiscal discipline
Budget Rule Status Actual Debt Rule Status Actual
Cambodia no 55 38
Indonesia −3.0 suspended −4.8 60 suspended 43
Malaysia −3.5 revised −4.1 65 revised 70
Mongolia −5.1 revised −5.6 70 revised 71
Thailand no 70 revised 60
Vietnam −3.7 revised −4.7 65 48
Source: IMF Fiscal Rules Database 1985–2021.

50 4. PoLiCY PRioRiTiEs
BRAVING THE STORMS

Ì Efficient social protection

Many households’ incomes remain below pre-pandemic levels, creating a risk of rising poverty if government
assistance programs are unwound too quickly. Recent high-frequency survey data collected by the World Bank indicate
that more than one-third of Malaysian households and more than half of Indonesian and Laotian households reported
having lower incomes in the final quarter of 2021 than prior to the pandemic (figure 43A). At the same time, most countries
in the region began scaling back household support in 2021 (figure 43B). However, unwinding household income support
too quickly raises a risk that countries’ efforts to reduce poverty could remain stalled–or that poverty could increase. This can
be seen in indonesia where data show that in 2021 real earnings remained below their 2019 levels (figure 44A). While
indonesia’s social assistance response was instrumental in limiting the rise in poverty in the first year of the pandemic,
simulation analysis indicates that reductions in social assistance budgets in 2021 may have resulted in further increases in
poverty (figure 44B).

Figure 43. Although household incomes have not completely recovered, most countries have already begun to reduce support
to households
a. Share of households with lower labor incomes than prior
to the pandemic b. Public spending on cash transfers, 2019–2021

80 6
70
5
Percent of households

60
4
Percent of GDP

50
40 3
30
2
20
10 1

0
0
a

sia

ia

es

ia

Cambodia

Myanmar

Tonga

Vietnam

Indonesia

China

Malaysia

Thailand

Philippines

Samoa

Fiji

Mongolia

Timor-Leste
di

PD

ol

ys
na
in
ne
bo

ng

la
pp

et
o
do
m

Ma
La

Vi
Mo

ili
Ca

In

Ph

May–Jun20 Jul–Sep20 Oct–Dec20

Jan–Mar21 Apr–Jun21 Oct–Dec21 2019 2020 2021

Source: World Bank staff estimates, using HFPS data. Source: World Bank staff estimates, using HFPS data.
Note: Losses of labor income defined as having experienced a decline in wage, agriculture, or non-farm business
income relative to the pre-pandemic period. For countries where labor income is not reported separately (Lao
PDR Round 4, Malaysia Round 2, Vietnam) total household income is reported. For country-periods with more
than one round, the average is taken across rounds.

Improved targeting of government assistance could ensure continued protection of those who need it most while
conserving scarce government resources. To date, social assistance programs have not been targeted strictly to those who
experienced pandemic-related income shocks (figure 45A). Governments were prepared to make support broadly available to
ensure that assistance got into the hands of those who needed it on a timely basis. Growing pressures for fiscal consolidation
have raised the need to spend scarce government resource more efficiently, however. several countries have already indicated
that they will reduce assistance budget in 2022 raising the need for better targeting of scarce public resources. Analysis makes
clear that countries in the region can still protect those most in need by improving the targeting of government support
programs (figure 45B), focusing on poor households and those that directly experienced income shocks.

4. PoLiCY PRioRiTiEs 51
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Figure 44. With a persistent slump in earnings, withdrawing support too rapidly could increase poverty: Example from indonesia

a. Real earnings by sector in Indonesia b. Estimated poverty levels in Indonesia

105 14 Simulated
12 11.2
10.2 9.5
10 9.4
100

Percent
Index: 2019 =100

8
6
95 95 4
93 2
91 0
90 Pre-Covid During Covid 2021 2021
(2019) (2020, incl. based on based on
SP 2020 reduced
85 response) funding funding
2019 2020 2021 level level
(70% of
Industry Agriculture Services 2020)

Source: World Bank staff estimates. Source: 2019 and 2020 figures, based on sUsEnAs survey estimate; 2021 estimates simulated,
based on different SP funding levels.

Figure 45. Government assistance has been poorly targeted; better targeting could provide more “bang for buck” in terms of
poverty reduction

a. Share of households receiving government assistance b. Simulated poverty impacts of cash transfers using different
during the pandemic targeting approaches, given a fixed budget

100 Targeting
Households
Proxy Means Geographical w/ Children Universal Basic
Percent of households with

80
wage/business income

Test Targeting Under 6 Income

0
60
–1
40
Percent

–2
20

–3
0
Cambodia Indonesia Mongolia Philippines Vietnam
–4
No income loss in previous period
Income loss in previous period Poverty Rate Poverty Gap

Source: World Bank staff estimates using HFPS data. Source: Adapted from Grosh et al. (2022).
Note: Simulations illustrate the poverty impacts of better targeting social assistance resources in a large
middle-income country.

4.2. Addressing macrofinancial vulnerabilities

EAP countries must deal with monetary tightening abroad, inflationary risks at home, and a deteriorating global
financial environment. Their response will need to include: a monetary policy stance that provides economic support without
compromising financial stability; and robust efforts to address the financial vulnerabilities of banks and firms.

52 4. PoLiCY PRioRiTiEs
BRAVING THE STORMS

Ì Monetary policy in anticipation of financial tightening

Central banks across the region have so far managed to maintain an accommodative monetary stance, as inflation
remained within target ranges and the region enjoyed robust capital inflows. in late 2021, major economies signaled a tightening
in their policy stance as it became evident that price increases were accelerating and persisting. now the war in Eastern Europe
threatens to push up commodity prices further and to roil financial markets. These new shocks will require central banks in
advanced countries to strike a balance between the need to contain inflation and prevent an economic slowdown.

Monetary policy must remain alert to new inflationary pressures in most EAP countries but at present can continue
to support recovery, because real interest rates are relatively high and core inflation relatively low. Policy makers in the
region face a trade-off between supporting economic activity and warding off price pressures to prevent the de-anchoring
of inflation expectations. for many EAP countries, positive nominal rates and low inflation have translated into positive
real policy rate differentials with the Us (figure 46). These differentials combined with ample external buffers provide
some cushion against capital outflow pressures. Until and where inflation expectations remain well-anchored and import
cost pressures contained, central banks can maintain a supportive stance with low interest rates and, in the case of some
countries, lower reserve requirements. However, in countries like Mongolia where inflation is persistently running above the
target, policy tightening may be needed to prevent de-anchoring of inflation expectations.

Figure 46. Most EAP countries have higher real interest rates than the Us and some have scope for cutting reserve requirements

a. Real interest rates b. Reserve requirements

5 16
3.0
14
1.3
0.6 12
0 10
Percent
Percent

-0.5 -1.0 8

-2.7 6
–5 4
2
0
US, -7.4
Philippines

China

Cambodia

Indonesia

Myanmar

Vietnam

Lao

Malaysia

Thailand
-8.1
–10
China

Indonesia

Vietnam

Malaysia

Philippines

Thailand

Mongolia

Jan. 2022 Dec. 2019

Source: Haver Analytics.

Note: A. The real interest rate denotes nominal policy rate minus CPi inflation at the end of January 2022. B. The figure shows domestic currency reserve requirement at the end of January 2022 and December 2019.

Ì Identifying and addressing financial sector vulnerabilities

The banking sector in the region’s economies is reportedly in sound financial condition. Banks in most EAP countries
are well-capitalized and reported levels of non-performing loans are low (table 5). But many countries relaxed the rules
defining an nPL during the crisis, and the available data may not reflect the true extent of exposure to bad loans. The
eventual reversal of forbearance measures will reveal the full extent of weakness in the financial sector. At the same time,
profitability has been declining risks remains to liquidity and solvency of banks. High leverage, combined with stress in the
corporate sector is an additional source of risk.

4. PoLiCY PRioRiTiEs 53
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Table 5. Financial sector is well-capitalized, but risks remain to solvency, liquidity and corporate health
Capital Asset Credit
Profitability Solvency Liquidity Arrears
Adequacy Quality Expansion

Regulatory Domestic credit

NPLs to Total Liquid asset (% Firms in arrears
Capital to Risk- Return on asset Deposit to loan to private
Gross Loans short-term or expect to fall
Weighted (%) ratio (%) sector (% of
(%) liability) in 6 months (%)
Assets (%) GDP)
2021 change 2021 change 2021 change 2021 change 2021 change 2021 change 2021
Indonesia 24 3 3 .2 1.8 –.5 111 10 28 4 39 1 31
Cambodia 22 1 2 –.1 2.0 –.1 86 –8 25 0 143 52 29
Thailand 20 2 3 .3 1.0 –.4 91 1 34 2 135 13
Malaysia 18 1 2 .0 1.2 –.2 117 3 154 15 145 14 57
Lao PDR 17 2 2 –.9 0.6 –.3 31 2 46 5
Philippines 17 2 4 2.6 1.5 .1 132 7 50 –3 52 2 79
China 15 1 2 .0 0.6 –.3 113 –12 59 7 205 17
Vietnam 11 –1 2 –.5 1.6 .7 112 –8 32 –1 117 –9 48
Myanmar 11 –2 4 .9 0.7 .3 188 30 15 –27 27 2
Mongolia 8 .5 –0.2 –.5 119 27 64 18 46 –7 93

Source: IMF, Fitch Solutions, World Bank, national sources.

Note: Color scale represents country quintiles relative to the group of emerging markets and developing economies, with red denoting the worst exposure and green the least. For capital adequacy, the relative ranking is
adjusted following Basel III requirements. Change denotes percentage change compared to 2015–2019 average.

Some forward-looking indicators, such as loans at risk, restructured loans, and special mention loans, have all
deteriorated during the crisis. for example, in indonesia, loans at risk have more than doubled and reached 22.7 percent in
september 2021. in the Philippines, restructured loans increased three- fold from 0.4 percent in January 2020 to 3.1 percent
of the total loan portfolio in December 2021 (table 6). Profitability of banking sectors has declined in all EAP countries, with
Cambodia, indonesia, the Philippines, and Thailand seeing the most significant drops.

Non-financial corporate sector sustainability risks appear to be high across the region, reflecting a sharp increase
in debt level compared to pre-pandemic levels. share of firms facing solvency risks is relatively high in indonesia,
Thailand, and Vietnam. The share of firms facing liquidity risks is high and many firms across the region, especially those
with high leverage, signal persistent liquidity constraints. The ratio of firms exhibiting liquidity risks ranges between one-
third in China and Malaysia and one-half in indonesia, Thailand, and Vietnam. in Malaysia firms reported, on average,
less than five months of cashflow available as of february 2021. in the Philippines, as many as 63 percent of firms
surveyed reported having less than one month of cash available as of May 2021.

Large share of firms in Mongolia, Philippines and Malaysia reported payment arrears in 2021Q1. In Indonesia,
as of March 2021, a large share of firms was reporting difficulty in paying rents and utilities and large share of micro
firms were reporting difficulty in paying wages. in indonesia, as of March 2021, a large share of firms was reporting
difficulty in paying rents and utilities and large share of micro firms were reporting difficulty in paying wages.

EAP countries must guard against the risk of financial instability, as extended period of forbearance may have
worsened the quality of loans. Stress-testing diagnostics can help identify vulnerabilities that might fester behind the
veil of regulatory forbearance. Then, depending on circumstances, countries must ensure adequate capitalization of
banks with large loans at risk; hedge and extend the maturity of debt to address currency mismatches and rollover risk;
enhance liquidity buffers and secure lines of credit to anticipate potential increases in external financing needs.

Countries across the region should strengthen their insolvency frameworks to facilitate firm debt resolution,
restructuring and exit. Many countries, including China and the Philippines, have recently introduced policies to improve
their insolvency processes. But more needs to be done to facilitate low-cost restructuring and liquidation, especially of micro,
small, and medium enterprises. Countries with high levels of external debt, like Lao PDR and some of the Pacific island
Countries, would benefit from the development of a more effective international debt resolution framework.

54 4. PoLiCY PRioRiTiEs
BRAVING THE STORMS

Table 6. Forward-looking measures of asset quality

Country Metric Evolution and Period Source
China significant increase during the early part of the pandemic,
Debt at risk for WB staff calculations based on WinD
listed firms
declined considerably in recent quarters: 5.62 percent database.
(Q4 2019); 22.54 percent (Q1 2020); 20.62 percent
(Q2 2020); 8.33 percent (Q3 2020); 10.4 percent (Q4 2020);
9.8 percent (Q1 2021); 11.9 percent (Q2 2021); 11.7 percent
(Q3 2021)
indonesia Loans at risk increased significantly since the start of the pandemic: Kajian Stabiitas Keuangan–Bank
(LAR) ratio 9.93 percent (Dec 2019); 11.59 percent (Mar 2020); indonesia, oJK Updates (latest
20.65 percent (Jun 2020); 23.53 percent (sep 2020); available sep 2021)
23.38 percent (Dec 2020); 23.3 (Mar 2021) ; 22.7 percent
(June and sep 2021)
Restructured increased from 13 percent (Jun 2020) to 18.8 percent oJK data, Bank indonesia, banks’
loans as a share (Dec 2020), then declined to 18.5 percent (Jan 2021) financial statements, media.
of total loans and 14.2 percent (May 2021)
Malaysia Rescheduled from April to June 2020, the number of applications from BnM (https://www.bnm.gov.my/
& restructured business to reschedule and restructure their loans increased documents/20124/1395181/ch1_2_
loans (R&R) 6.3 times credit.pdf)
Gross impaired 1.44 percent (Jun 2020); 1.37 percent (sep 2020); https://www.bnm.gov.my/documents/2
loans 1.56 percent (Dec 2020); 1.58 percent (Mar 2021); 0124/3434930/1Q2021_GDP_
1.6 percent (June 2021); 1.4 percent (December 2021) slides.pdf;
MfRs stage 2 8.4 percent (Jun 2020); 7.9 percent (sep 2020); https://www.bnm.gov.my/documents/
loans* 10.2 percent (Dec 2020); 10.0 percent (Mar 2021) 20124/3434930/1Q2021_GDP_
slides.pdf
Mongolia Covid-19 22 percent of total loans as of Q3 2020 fitch Ratings, Mongolian Banks
restructured Dashboard: november 2020
loans
Philippines Restructured increased from 0.41 percent in Jan 2020 to 1.91 percent i BsP (https://www.bsp.gov.ph/statistics/
loans as a share n Dec 2020; 2.2 percent in Mar 2021; 3.05 percent in selected%20Performance%20indicators/
of total loans Jun 2021; 3.07 percent in August 2021; and 3.13 percent 7.aspx)
in Dec 2021.
Thailand special mention increased from 2.82 percent in Q4 2019 to 6.65 percent BoT (https://www.bot.or.th/App/
loans as a share in Q4 2020, 6.44 percent in Q1 2021, and 6.37 percent in BTWs_sTAT/statistics/ReportPage.
of total loans Q2 2021; 6.73 percent in Q3 2021. aspx?reportiD=906&language=eng)

Table 7. share of firms and debt at risk (percent)

Credit Depth Solvency Liquidity Profitability
Interest Leverage Current
Corporate Net debt to liabilities to Return on Market to
Coverage (debt to Quick Ratio long term
debt to GDP EBIT asset Book Ratio
Ratio asset) liabilities
2021 change 2021, DaR change 2021, DaR change 2021, DaR change 2021, DaR change 2021, DaR change 2021, DaR change 2021, DaR change
China 155 0 14 –6 17 –6 23 –8 7 –6 4 –1 5 1 1 –1
Vietnam 137 32 34 11 24 –8 31 1 9 –3 9 0 5 1 2 –3
Malaysia 71 4 13 –4 22 12 31 15 2 –1 4 3 4 –1 8 0
Thailand 55 6 17 7 35 9 30 4 15 3 6 4 15 13 0 0
Philippines 32 3 10 8 40 –4 26 23 3 2 4 4 6 5 18 6
Indonesia 26 0 24 4 33 9 24 5 17 6 14 13 16 8 4 –9

Source: iif, Bloomberg; World Bank staff calculations.

Note: indicators for solvency, liquidity and profitability show the share of debt at risk (DaR) defined by the methodology of feyen et al. 2017. Threshold is 1 for interest Coverage Ratio (earnings before income and taxes
(EBiT) divided by interest expenses). for Leverage Ratio, net Debt to EBiT Ratio, and Current Liabilities to Long-Term Liabilities, the thresholds correspond to the 90th percentile value of the respective indicators for all
firms within the same industry and across countries during 2006–2016. for Quick Ratio (current asset excluding inventories divided by current liabilities), Return on Assets, and Market to Book Ratio (market value divided
by book value), the respective thresholds are equal to the 10th percentile value of the indicator by industry. Vietnam shows 2021Q1, other countries show 2021Q2. Color scale represents country quintiles relative to the
group of emerging markets and developing economies, with red denoting the worst exposure and green the least. . Change denotes percentage change compared to 2015–2019 average.

4. PoLiCY PRioRiTiEs 55
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

4.3. Trade policy

Comprehensive trade-related reforms would enable EAP countries to take advantage of shifts in the global trade
landscape. First, liberalizing and facilitating trade, rather than retaliating in response to reshoring policies abroad, could lead
to a net increase in real incomes by as much as three percent. Second, looking beyond goods trade, reforming restrictions
on trade in transport, communication, and other business
services, could reduce trade costs and boost economy-wide Figure 47. EAP countries can take advantage of changing
productivity. Third, implementing measures to facilitate opportunities
domestic labor mobility, such as retraining and placement Real income change under reshoring by leading economies, by all
assistance, would allow resources to move to new areas countries, and in the GVC-friendly scenario in 2030 (deviations from
of comparative advantage, also boosting productivity and the L-shape COVID recovery, percent)
incomes. Finally, participation in deep trade agreements 15
could both catalyze reform at home and secure access to
markets abroad. Such agreements could include not just trade 10
liberalization, but regulatory cooperation and infrastructural 5
coordination that further deeper economic integration.

Percent
0

Countries should commit to trade liberalization. In an –5

environment where other countries are resorting to protection
or encouraging reshoring, it may be tempting for countries –10

to respond in a like manner. Recent analysis suggest that –15

would be a mistake (figure 47). While the heavily trade- China Malaysia Philippines Rest of Thailand Vietnam
dependent EAP countries would lose from reshoring policies East Asia

in leading countries, responding in kind would lead to even Reshoring leading economies Reshoring all
bigger losses in income. Instead, liberalizing and facilitating GVC friendly liberalization + TF imports
trade could lead to a net increase in real incomes by as much
Source: Chepeliev et al. 2021.
as three percent.

Non-tariff barriers remain high in the region. While tariffs are currently low outside of agriculture, textiles and leather
goods, non-tariff measures (NTM) are increasingly used as an instrument of trade policy. While certain NTMs, such as
product standards, have legitimate regulatory objectives, many are frequently used as a tool for protectionism. Non-tariff
barriers on imports affect the performance of domestic firms by restricting supply of inputs and reducing international
competition, which also negatively affects their export performance (figure 48). for example, indonesia, which has the
largest share of imports by value subject to new trade restrictions, also has had a relatively stagnant share of trade in GDP.

There has been a slight improvement in trade logistics of EAP countries over the years, with the exception of
Malaysia (figure 49). However, there is considerable variation across different parameters of logistics performance.
China’s performance remains better than other EAP countries in all logistics dimensions, especially in quality of trade and
transport infrastructure.

While EAP countries are relatively open to trade in goods, several continue to have relatively restrictive trade
policies in services (figure 50). There is growing evidence that reforming restrictions on trade in transport, communication,
and other business services could reduce trade costs, enhance global value chain (GVC) participation, and boost economy-
wide productivity. Recent measures of services trade restrictions suggest significant heterogeneity across countries and
sectors (figure 51). indonesia and Thailand have on average more restrictive policies than Malaysia and Vietnam. Trade
in telecommunications, financial, transport and professional services remains more restricted in the region than in the
average oECD country. The ability to take advantage of new digital opportunities in services trade may be impeded by
the persistence of restrictions, revealing inter alia a reluctance in some countries to allow the free flow of data.

56 4. PoLiCY PRioRiTiEs
BRAVING THE STORMS

Figure 48. Non-tariff barriers penalize exports in a GVC world

a. Share of import value subject to new import restrictions b. Export performance in East Asia

80 140
70 120
60
100

Percent to GDP
50
Percent

80
40
60
30
20 40

10 20
0 0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2001 2004 2007 2010 2013 2016 2019

Cambodia Indonesia Malaysia China Indonesia Malaysia Philippines

Singapore Thailand Vietnam Thailand Vietnam Developing EAP

Source: Global Trade Alert; World Integrated Trade Solution (WITS) database.

Figure 49. The EAP region has seen slight but uneven improvement in logistics performance

Customs
4
4
3

3 Timeliness 2 Infrastructure

1
2
0

1
Tracking & International
tracing shipments
0
Cambodia

China

Indonesia

Malaysia

Philippines

Thailand

Vietnam

Logistics competence

China Indonesia Malaysia

2007 2018 Philippines Thailand Vietnam

Source: World Bank Trade Logistics Performance Index, 2007 and 2018.
Note: The logistics performance index (LPi) is the weighted average of the country scores on the six key dimensions including (i) efficiency of the clearance process; (ii) quality of trade and transport related infrastructure;
(iii) ease of arranging competitively priced shipments; (iv) competence and quality of logistics services; (v) ability to track and trace consignments; and (vi) timeliness of shipments in reaching destination within the
scheduled or expected delivery time. Each score ranks between 0 and 4, with 4 representing the best performance.

Implementing measures to facilitate domestic labor mobility, such as retraining and placement assistance,
would allow resources to move to new areas of comparative advantage, also boosting productivity and incomes.
Data from the CoViD-19 sPJ Policy inventory for 55 LMiC countries shows that countries adopted a wide range of labor market
policies in response to the crisis (figure 52). Policies targeting direct economic support to workers, such as offering wage subsidies,
reducing income taxes, or boosting unemployment benefits, were more popular during the onset of the pandemic but have
been phased out completely by the end of 2020. In contrast, policies aiming at facilitating labor mobility and adaptation,
such as provision of public works, training and placement assistance, supporting entrepreneurship, and adjusting labor
regulations, remain active in several countries.

4. PoLiCY PRioRiTiEs 57
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Figure 50. EAP’s services trade restrictiveness index Figure 51. significant heterogeneity in digital services trade
by sector (2021) restrictions across countries
1 0.6
0.5
0.8
0.4

Index
0.6 0.3
Index

0.4 0.2
0.1
0.2
0

average
China

Lao PDR

Cambodia

Indonesia

Thailand

Korea, Rep.

Malaysia

Vanuatu

Japan

OECD
0
China Indonesia Malaysia Thailand Vietnam Singapore OECD
average

Telecom Professional services Financial

Source: oECD sTRi (2021).
Transport Computer Logistics Distribution Note: The oECD Digital sTRi is a composite index expressing barriers that affect trade in digitally enabled
services. The index takes values between zero and one, one being the most restrictive to foreign services
providers.
Source: oECD sTRi and TiVA databases (2021).
Note: The Services Trade Restrictiveness (STRI) indices takes values between zero and one, one being the
most restrictive. The logistics index is an equal-weighted average of cargo-handling, storage and warehouse,
freight forwarding, and customs brokerage. The professional services index is an equal-weighted average of
accounting, architecture, engineering, and legal. The transport index is an equal-weighted average of air,
maritime, road freight, and rail freight transports. Financial index is an equal-weighted average of commercial
banking and insurance.

Figure 52. Policies that facilitate rather than inhibit labor mobility can enhance the gains from new trade opportunities

80
69 68

60 56
50 50
Percent

40
40
29
24
20 18 19
20 13 13 13 15 16
12 11 11 11
5 6 3 5
0 0 0 0
0
Public works Entrepreneurship Training and Labor regulations Wage subsidies Income tax Unemployment
support placement reduction benefits
assistance

Period 1 (Mar–May 20) Period 2 (Jun–Aug 20) Period 3 (Sep–Nov 20) Period 4 (Dec 20–Jan 21)

Source: De La flor Giuffra et al. 2021. using CoViD-19 sPJ Policy inventory.
Note: Graph based on 55 developing countries implementing labor market programs.

Finally, participation in deep trade agreements could both catalyze reform at home and secure access to markets
abroad. Such agreements could include not just trade liberalization, but regulatory cooperation and infrastructural
coordination that further deeper economic integration.

China’s CPTPP overture has implications for countries in the EAP region. China’s motives to join could be to advance
policy reform, much as it did by joining the WTO and to use the CPTPP to credibly commit to play by the rules. Some
estimates suggest that China’s joining would quadruple the global income gains from the CPTPP to around $630 billion
compared to the current gains of about $150 billion (figure 53). China itself, from incurring the costs of exclusion–
estimated to be between $10-20 billion–could reap the benefits of inclusion–estimated to be around $300 billion. The impact

58 4. PoLiCY PRioRiTiEs
BRAVING THE STORMS

Figure 53. Negotiating shifting constellations of trade agreements

b. Real income increase in 2030 associated with different actual
a. Asia Pacific Regional Groups and potential agreements

RCEP
CPTPP Indonesia
Australia 1,400
Philippines 1225
USMCA Brunei Darussalam Korea, Rep. 1,200

Billions of US dollars (2015 prices)

Canada Japan Thailand
United States
Mexico Malaysia Cambodia 1,000
Chile New Zealand China
Peru Singapore 800
India
632
Vietnam Lao PDR 600 492 449
Myanmar
400 284
Regional groups discussed in the text, charts, and tables:
USMCA US-Mexico-Canada Agreement 200 147
CPTPP Comprehensive and Progressive Agreement
for Trans-Pacific Partnership 0
RCEP Regional Comprehensive Economic Partnership TPP CPTPP CPTPP CPTPP16 CPTPP16 RCEP
CPTPP16 CPTPP + RCEP economies shown in italics + Taiwan, China –200
+ China + China

Source: Petri and Plummer (2019). China Japan Others

Note: UsMCA stands for Us-Mexico-Canada Agreement, CPTPP stands for Comprehensive and Progressive Agreement for Trans-Pacific Partnership, RCEP stands for Regional Comprehensive Economic Partnership, CPTPP16
stands for CPTPP + RCEP economies shown in italics + Taiwan, China. TPP stands for Trans-Pacific Partnership; TPP members include the CPTPP plus the United states.

on third countries will depend on whether their exports are (a) destined for ultimate consumption in China; (b)
compete horizontally with China’s third markets, as is the case to a certain extent with other regional countries’ exports
of electronic products; or (c) are vertically linked to China’s exports, i.e., are used as inputs by China, such as Australia’s
coal or Korea, Rep.’s semiconductor exports, or use Chinese exports as inputs, such as Cambodia’s cloth imports. Malaysia
and Vietnam, among the biggest beneficiaries of the preferential access they gained thanks to CPTPP, would see an erosion
of those preferences if China joined the CPTPP but also benefit from increased access to the Chinese market. if China
did implement more meaningful domestic reform of services and state owned enterprises (soEs), the resultant boost in
productivity would imply fiercer competition for its rivals and greater benefits for those in complementary relationships,
like Cambodia, Australia, and Korea, Rep. All parties to the agreement would benefit from better and hopefully more secure
access to the Chinese market.

4.4. Enhancing innovation

Whilst infrastructure for basic technologies is widely available, the prerequisites for more advanced technologies
are often lacking. The widespread availability of basic infrastructure (e.g., mobile broadband) and the prevalence of
online platforms allowed many firms to reach customers online through e-commerce. These off-the-shelf websites require
minimal adjustment costs and allow firms even with relatively slow broadband speeds to move parts of their business
online. In contrast, data-driven business models that rely on sophisticated data analytics technologies need modern
digital infrastructure (World Bank, 2021b). Storing and processing data is often less expensive using cloud computing,
which has seen rapid growth during the pandemic, but requires a stable, high-speed broadband connection. While in EAP
there is widespread access to basic 2G mobile broadband access, fast fiber speeds are unequally available both across
and within countries (figure 54). China’s Eastern provinces have broad access to fast broadband, whereas other countries
like Indonesia or Myanmar have much slower speeds, and these average speeds mask inequality at more granular levels.

4. PoLiCY PRioRiTiEs 59
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Figure 54. Unequal access to fast broadband across and within EAP countries

Source: World Bank calculations using ookla fixed broadband speed test data for Q4 2020.
Notes: Colors reflect the average reported speeds within each 25 kilometers cell, subject to a minimum number of 100 tests per cell. Gray areas reflect either lack of broadband availability or an insufficient number of reported tests.

Worker skills, including management quality, are critical for innovation and technology diffusion–but EAP remains far
from the frontier. Management quality among firms in developing East Asian countries remains far from the global frontier
(as proxied by the United states) (figure 55). Business advisory services and other forms of training for firm personnel
can be effective in strengthening management quality and, thus, firms’ innovation capabilities (Cirera et al. 2020; McKenzie
2020), especially if tailored to firms’ specific needs. Beyond management, firms in the region consistently report difficulties in
hiring skilled workers across a range of skills (figure 55, panel B for an illustration from Malaysia). Weak development of
foundational skills in reading, math, and science in many of the region’s countries represents an important impediment
to the development of the more advanced cognitive, technical, and socioemotional skills needed to support innovation.

Financial constraints affect innovation–not just its development or diffusion but also its quality. Access to external
financing is challenging when financial markets are not fully developed. for R&D investments, these difficulties are
compounded by the large sunk costs, high uncertainty, and lack of collateral that characterize these investments. Thus,
financially constrained firms, likely sMEs, may shift their investments towards lower-quality but closer-to-market innovation

60 4. PoLiCY PRioRiTiEs
BRAVING THE STORMS

Figure 55. Strengthening management quality and remedying weaknesses in human capital are critical to greater innovation
in the region

a. Insufficient management quality b. Inadequate workforce skills (Malaysia)

.8
Foreign language skills

Managerial and leadership

.6 skills

Writing skills
Density

.4
Technical (other than IT),
vocational, or job-specific skills

Computer or
.2 general IT skills

Interpersonal and
communication skills
0
1 2 3 4 5 Work ethic and commitment
Overall Management Score
0 20 40 60 80 100
China Myanmar Vietnam USA Percent

Source: Cirera et al. 2021a.

Notes: Panel A, based on World Management Survey (WMS) data. WMS scores (collected over several years) range from 1 (worst practice) to 5 (best practice) across key management practices used by organizations in
different sectors. These practices are grouped into five areas: operations Management, Performance Monitoring, Target setting, Leadership Management, and Talent Management. Panel B shows the share of firms cited
difficulty by skill, based on World Bank Enterprise survey data in 2015. iT = Information technologies.

Figure 56. Relaxed financial constraints are associated (figure 56). The top quarter of least financially constrained
with higher innovation quality firms have a three percent higher share of productivity-
50
enhancing innovation than the average firm. This strategy
leads to suboptimal innovation production but allows
49 generating cash flow more quickly.
Share of Productivity-Enhancing

48
Innovation (percent)

Public support may alleviate these constraints and

47 contribute to productivity-enhancing innovation when
46 carefully deployed. Direct investment subsidies and R&D
tax incentives can alleviate firms’ financial constraints and
45 promote more productivity-enhancing innovation (Cao,
44
forthcoming). Chinese state-owned manufacturing firms
with government subsidies conduct 11% more productivity-
43
1 2 3 4 5 6 7 8 9 10 enhancing innovation than those without subsidies, but for
Financial Constraint Index privately-owned firms the difference is 20%. subsidizing
mainly state-owned firms can cause a misallocation of R&D,
Sources: Author’s Calculation based on China Annual survey of Manufacturing and Google Patents.
Notes: the figure shows the conditional prediction of share of productivity-enhancing innovation against a since they are less efficient innovators than private firms
different level of financial constraint index (1 being highly financially constrained and 10 being least financially
constrained). The firm-level financial constraint index is measured by investment-cashflow sensitivity. (Chen et al, 2019). on average, state-owned firms receive
70% more subsidies than privately-owned firms of similar
firm size, whereas state-owned firms file 19% fewer patents than privately-owned firms. Government support would be
more effective if targeted towards more productive private sector innovators.

4. PoLiCY PRioRiTiEs 61
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Financial support can also shape the direction of technological change–towards green technologies. Between 2000 and
2010, China’s share of patents for solar photovoltaic (PV) and wind energy grew exponentially, with the country becoming
one of the largest innovators in this field. in the past decade, technological advancements were accompanied by incentives
and financial support to promote renewables, helping make private-sector financing for solar PV and wind energy viable.
Subsidies can assist the transition to green technologies, but these should be limited to investments that are not privately
profitable, but socially desirable. The temporary freeze of PV subsidies yielded an initial slowdown in PV capacity additions,
but larger developers were largely unaffected by the subsequent phase-out (iEA, 2020). The banking sector has become more
reluctant to lend to private companies, which have less diversified sources of revenues than soEs (World Bank. 2022b.),
and meeting the scale of the investments needed requires significant private sector participation. Thus, leveling the uneven
access to finance and R&D subsidies to better encompass private firms is critical. Moreover, their impact would be maximized
if coupled with reforms of fossil-fuel subsidies which in 2020 amounted to 0.2 percent of GDP (World Bank. 2022b., based
on iEA fossil-fuel subsidy data).

62 4. PoLiCY PRioRiTiEs
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64 4. PoLiCY PRioRiTiEs
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Annex

Figure A1. Vaccination may help curb mortality during the Omicron wave and allow economic activity to continue

a. Indonesia b. Malaysia

300 100 700 100

240 80 560 80

180 60 420 60

120 40 40
280
60 20 20
140
0 0
0 0
–60 –20
–140 –20
Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 Nov-21 Mar-22 Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 Nov-21 Mar-22

Cases per million Deaths per hundred ths. Cases per million Deaths per hundred ths.
Vaccination rate (rhs) Mobility reduction (rhs) Vaccination rate (rhs) Mobility reduction (rhs)
Manufacturing PMI (rhs) Manufacturing PMI (rhs)

c. Philippines d. Thailand

350 100 350 100

280 80 280 80

210 60 210 60

140 40 140 40

70 20 70 20

0 0 0 0

–70 –20 –70 –20

Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 Nov-21 Mar-22 Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 Nov-21 Mar-22

Cases per million Deaths per hundred ths. Cases per million Deaths per hundred ths.
Vaccination rate (rhs) Mobility reduction (rhs) Vaccination rate (rhs) Mobility reduction (rhs)
Manufacturing PMI (rhs) Manufacturing PMI (rhs)

Source: Haver Analytics; Our World in Data (OWiD); Oxford Covid-19 Government Response Tracker (OxCGRT).
Note: Cases show new cases per million. Deaths show new death per thousand. Last observation is February 23, 2022. PMI = Purchasing managers Index.

4. PoLiCY PRioRiTiEs 65
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Box A1. COVID-19 comes to the Pacific

The Pacific Island countries (PICs) managed to largely avoid domestic COVID-19 outbreaks up until 2022.
On 11 March 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization (WHO).
Later in the month, fiji and Papua new Guinea reported their first CoViD-19 cases. These outbreaks were brought
under control through international border closures and domestic lockdowns. All other PICs managed to avoid
domestic outbreaks throughout 2020 and 2021 due to strict border closures to foreign travelers.11

In 2022, the Omicron variant spread rapidly through the region, with many PICs seeing their first domestic
outbreaks. on 26 november 2021, the WHo classified the B.1.1.529 variant of the sARs-CoV-2 virus as ‘omicron’
and flagged it as a variant of concern with the potential to spread faster than previous variants. subsequently,
cases have increased exponentially in the region, with domestic outbreaks of the Omicron variant in Fiji, Papua
New Guinea, Kiribati, Palau, Solomon Islands, and Tonga. In 2022, the latter four countries reported community
transmission for the first time since the beginning of the pandemic. Low testing capacity means that case and death
numbers are most likely understated.

PIC governments have been quick to put in place domestic lockdowns to prevent overburdening their weak
public health systems. Since the beginning of the pandemic, the PICs have largely avoided domestic lockdowns
as international border closures and quarantine requirements on overseas arrivals allowed countries in the region
to remain COVID-free. However, following the rise in Omicron cases, several countries, including Kiribati, Solomon
Islands, and Tonga, implemented domestic lockdowns to prevent overburdening weak public health systems, which
have limited resources and have to serve very remote regions. In Tonga, the recent volcanic eruption led to further
complications, with the country having to rely on international aid which further exposes them to the virus. Additionally,
lack of internet and communication services in the aftermath of the volcano, which severed the fiber-optic cable to
the country, has made it difficult for people to work from home.

There is wide heterogeneity in vaccination rates across the region. As of February 2022, Palau has double
vaccinated virtually their entire population, while Papua New Guinea and Solomon Islands have double vaccination
rates as low as 2.6 and 11.7 percent respectively. others such as nauru, the federated states of Micronesia (fsM),
samoa, and Tonga have managed to vaccinate 60 percent of their populations, the remaining countries have
vaccination rates between 20 and 40 percent. Vaccination of the entire Pacific population is likely to take many
years, increasing the risk of severe health and economic consequences in the region, as well as increased risk of
the emergence of new variants, with potential for global repercussions.

Despite rising vaccination rates, the PICs continue to have strict public health measures: most countries
continue to keep borders shut and restrict domestic activities. Recent outbreaks in Kiribati, Tonga, and
Solomon Islands resulted in these countries keeping their international borders closed and introducing strict
domestic lockdowns despite rising vaccination rates. In PNG, borders remain shut while internal mobility restrictions

11 Marshall islands reported its first CoViD-19 case in november 2020, but cases only reached a total of seven. samoa reported its first CoViD-19 case in november 2020, but
cases only reached a total of three. Vanuatu reported its first CoViD-19 case in february 2021, but only six cases were reported throughout the year. Tonga reported its only
CoViD case in october 2021 when a traveler from new Zealand tested positive. Kiribati, Palau, and solomon islands did not report any cases until 2022. fsM, nauru, and
Tuvalu have not reported any COVID cases.

(continued)

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(Box A1. continued)

Table B.A1. COVID-19 in the PICs

Cases Deaths Vaccinations
Total vaccine
doses Date when
Cumulative Cases—newly Deaths—newly administered Persons fully 60% full
Cases (% of reported in Cumulative reported in per vaccinated per vaccination
Country population) last 7 days deaths last 7 days 100 population 100 population reached
Kiribati 2235 1322 2 2 101.0 38.5 Not reached
(1.9%)
Nauru 0 0 0 0 139.6 68.0 20/2/21
(0.0%)
Tuvalu 0 0 0 0 102.7 49.9 Not reached
(0.0%)
Fiji 63398 192 816 7 142.7 68.5 25/10/21
(7.1%)
FSM 0 0 0 0 78.5 38.4 Not reached
(0.0%)
RMI 4 0 0 0 83.0 39.2 Not reached
(0.0%)
Palau 3045 930 0 0 241.8 94.2 29/8/21
(16.8%)
Papua New Guinea 38222 832 610 13 4.3 2.6 Not reached
(0.4%)
Solomon Islands 4203 1846 50 29 40.4 11.7 Not reached
(0.8%)
Samoa 33 0 0 0 134.6 63.0 13/12/21
(0.0%)
Tonga 73 66 0 0 130.2 60.3 11/1/21
(0.0%)
Vanuatu 7 0 1 0 59.9 24.0 Not reached
(0.0%)
Source: World Health Organization.
Note: Data as of 14/02/2022.

are lenient despite the outbreak which has led to increased mobility relative to levels seen in 2019. Similarly,
closed borders in Vanuatu have ensured that a domestic outbreak has not occurred which has allowed for limited
domestic restrictions. Of all the countries, only Fiji and Palau which have the highest vaccination rates have
opened their borders to foreign arrivals because of their dependence on tourism, resulting in increased internal
mobility.

The current outbreaks are likely to stall growth and increase poverty in the near-term. Following a deep
recession in 2020 due to international border closures that impacted tourism-dependent economies in the Pacific,
growth was expected to rebound in 2021 and future years. However, recent domestic outbreaks have meant that
international border closures have continued, delaying recovery of the tourism sector. Domestic lockdowns will
further hurt the economies of the PICs particularly in sectors such as hospitality and construction. These economic
shocks and slow recovery will also greatly increase the risk of poverty, particularly as households deplete savings
and assets to cope with lost incomes.
(continued)

4. PoLiCY PRioRiTiEs 67
 (Box A1. continued)

Figure B.A1. Mobility, stringency and vaccination rates in selected PICs, 2020–2022

a. Fiji b. Kiribati

100 100
80 80
60 60
40 40
20 20
0 0

–20 –20

–40 –40

–60 –60

Feb-20

May-20

Aug-20

Nov-20

Feb-21

May-21

Aug-21

Nov-21

Feb-22
Feb-20

May-20

Aug-20

Nov-20

Feb-21

May-21

Aug-21

Nov-21

Feb-22
Fully vaccinated (%) Stringency Index Mobility Index Fully vaccinated (%) Stringency Index Mobility Index

c. Papua New Guinea d. Solomon Islands

100 100
80 80
60 60
40 40
20 20
0 0
–20 –20
–40 –40
–60 –60
Feb-20

May-20

Aug-20

Nov-20

Feb-21

May-21

Aug-21

Nov-21

Feb-22

Feb-20

May-20

Aug-20

Nov-20

Feb-21

May-21

Aug-21

Nov-21

Feb-22
Fully vaccinated (%) Stringency Index Mobility Index Fully vaccinated (%) Stringency Index Mobility Index

e. Tonga f. Vanuatu

100 100
80 80
60 60
40 40
20 20
0 0
–20 –20
–40 –40
–60 –60
Feb-20

May-20

Aug-20

Nov-20

Feb-21

May-21

Aug-21

Nov-21

Feb-22

Feb-20

May-20

Aug-20

Nov-20

Feb-21

May-21

Aug-21

Nov-21

Feb-22

Fully vaccinated (%) Stringency Index Mobility Index Fully vaccinated (%) Stringency Index Mobility Index

Source: Google Mobility Tracker, Blavatnik school of Government (University of oxford) and The Pacific Community.

68 4. PoLiCY PRioRiTiEs
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Table A1. External sector vulnerabilities

External Short-term
Current Reserves
External debt Financing external debt
account (% (months of
(% of GDP) needs (% (% of
of GDP) imports)
of GDP) reserves)

2021 change 2021 change 2022 est. change 2021 change 2021 change
China 1.8 0 16 2 6 –2 35 3 12.8 –4
Malaysia 3.5 1 68 3 29 2 49 –31 9.1 2
Indonesia 0.3 2 40 5 9 –4 33 –4 8.0 0
Philippines –1.8 –1 27 4 8 0 12 –9 10.3 2
Vietnam –0.8 –2 36 1 5 –5 23 –15 5.3 2
Thailand –2.2 –10 35 2 11 2 26 –6 9.9 1
Lao PDR 1.3 14 91 6 20 –1 39 –24 3.1 1
Mongolia –12.7 –1 145 0 43 –19 115 –29 8.3 1
Cambodia –28.5 –18 72 19 36 12 21 2 9.5 2
Myanmar –2.8 2 16 0 3 –3 1 –1 7.4 2
Timor-Leste –33.5 –25 13 5 18 8 0 –3 4.8 1
Fiji –15.6 –9 25 10 14 2 5 –2 9.2 4
Solomon Islands –5.2 –1 24 3 21 12 6 0 7.0 –2
Papua New Guinea 20.5 –5 66 –14 -9 4 29 6 7.3 3
Samoa –15.3 –14 54 2 10 6 0 0 9.4 6
Vanuatu 5.0 2 46 5 14 13 7 –6 16.9 7
Tonga –6.9 –1 39 0 12 4 0 0 11.0 –3
Palau –59.3 –43 73 41

Source: International Monetary Fund, World Bank.

Note: Mongolia’s external debt and external financing needs exclude the intercompany transactions amounting to 36 percent of the total external debt in 2021. Color scale represents country quintiles relative to
the group of emerging markets and developing economies, with red denoting the worst exposure and green the least. Change denotes percentage change compared to 2015–2019 average.

4. PoLiCY PRioRiTiEs 69
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Figure A2. As China’s share of EU’s final goods imports fell, the rest of EAP’s share rose
65 16
60 14
55 12
50
10

Percent
45
8
40
6
35
30 4
US-China
25 COVID19 2
Trade tensions
20 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

China's share in US final goods imports

China's share in Dev. EAP intermediate imports
Dev EAP (exc. China) share in US final goods imports (right)

Source: Global bilateral trade data from CEPii-BACi.

Figure A3. Vietnam accounts for much of the increase in EAP countries’ share in Us final good imports

Share in US final goods imports

15
US-China COVID19
13 Trade tensions

11

9
Percent

–1 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Indonesia Philippines Thailand

Cambodia Malaysia Vietnam

Source: Global bilateral trade data from CEPii-BACi.

70 4. PoLiCY PRioRiTiEs
BRAVING THE STORMS

Figure A4. As China’s share of EU’s final goods imports fell, the rest of EAP’s share rose
65 12
60
10
55
50 8

Percent
45
6
40
35 4
30
2
25 US-China
COVID19
20 Trade tensions 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

China's share in EU final goods imports

China's share in Dev. EAP intermediate imports
Dev EAP (exc. China) share in EU final goods imports (right)

Source: Global bilateral trade data from CEPii-BACi.

Figure A5. Vietnam accounts for much of the increase in EAP countries’ share in EU final good imports

Share in EU final goods imports

10
US-China COVID19
9 Trade tensions
8
7
6
Percent

5
4
3
2
1
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Indonesia Philippines Thailand

Cambodia Malaysia Vietnam

Source: Global bilateral trade data from CEPii-BACi.

4. PoLiCY PRioRiTiEs 71
 EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022

Figure A6. As China’s share of Japan’s final goods imports fell, the rest of EAP’s share rose
20
60
16
50
12

Percent
40
8

30 4
US-China COVID19
Trade tensions
20 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

China's share in Japan final goods imports

China's share in Dev. EAP intermediate imports
Dev EAP (exc. China) share in Japan final goods imports (right)

Source: Global bilateral trade data from CEPii-BACi.

Figure A7. Vietnam accounts for much of the increase in EAP countries’ share in Japan’s final good imports

Share in Japan’s final goods imports

20 US-China COVID19
18 Trade tensions
16
14
12
Percent

10
8
6
4
2
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Indonesia Philippines Thailand

Cambodia Malaysia Vietnam

Source: Global bilateral trade data from CEPii-BACi.

72 4. PoLiCY PRioRiTiEs
BRAVING THE STORMS

Figure A8. Examples of relocation of production from China to Vietnam

Source: Lee 2021.

4. PoLiCY PRioRiTiEs 73
WORLD BANK EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022