Challenges to the Emerging Economies in the Indo-Pacific Region, Post-pandemic Era

The advent of covid pandemic not only set off major health crisis around the globe but also resulted in the worldwide economic downward trend sending the global economy into a disarray. Harsh lockdowns were implemented to curtail the risk of spreading the disease affecting the manufacturing and supply chains of products, poor rate of cash flow in the market, slow down in the revenue growth of the economy, national and international businesses facing losses leading to unemployment, increased expenditure on health and covid prevention measures and GDP of countries which put a lot of pressure on a country’s economy.

The Indo-pacific as a region plays a pivotal role in global trade and commerce, making it economically crucial in the international politics. The region accounts for 63 percent of the worlds GDP, 50 percent of merchandise trade and 46 percent of the worlds merchandise trade. In addition, the region comprises of big economies such USA, China, Australia, Japan and India along with ASEAN states and island nations on the pacific rim and is home to 65 percent of the global population. In total the region comprises of 40 countries and economies: Australia, Bangladesh, Bhutan, Brunei, Cambodia, Democratic People’s Republic of Korea (DPRK), India, Indonesia, Japan, Laos, Malaysia, Maldives, Mongolia, Myanmar, Nepal, New Zealand, the Pacific Island Countries (14), Pakistan, People’s Republic of China (PRC), the Philippines, Republic of Korea (ROK), Singapore, Sri Lanka, Taiwan, Thailand, Timor Leste, and Vietnam. These factor makes the region all the more important and any abrupt change in the economic framework may cause drastic spillover effects across the globe.

The genesis of the term Indo-pacific can be traced back to the German geopolitical scholar Karl Haushofer in his work ‘Indopazifischen Raum’ in 1920s while the term gained prominence after the speech of then Japanese Prime Minister Shinzo Abe’s speech in the Indian Parliament in 2007. Since then, many countries such USA, Australia and India have adopted the concept of Free, open and inclusive Indo-pacific in their foreign policy. The definition and name of the region is contested with some countries using it for more inclusivity while others criticize it for being a containment strategy by the US. Even though, the definition varies from nation to country, it encompasses the world’s most sensitive region, whose security or instability will affect the Western countries but also the rest of the world. Thus, becoming a vital strategic issue for the rest of the world.

As for the emerging markets in the region, there is no official definition of an emerging market. Generally, emerging economies or emerging market economies are countries that prioritize in developing their market, becoming more integrated with global economy and are beginning to experience global economic growth. These countries focus on transitioning their traditional economies with industrialization and a free market into a more developed market economy. As these emerging market economies grow, they become increasingly involved in global markets, and their economies become more linked on a global scale. They also witness the emergence of modern financial institutions and an increase in trade volume. 

According to per “The IMF World Economic Outlook” following characteristics were taken into consideration for labelling a country as an emerging economy. First, their systematic presence which comprises of the size of the country’s economy (nominal GDP), its population and its share of exports in the global trade. Second, the market access comprising of the share of a nation’s external debt in global external debt and whether it is included in the global indices used by large international institutional investors and the frequency and amount of international bonds are issued. Third, the income level meaning a country’s GDP per capita in nominal US dollars.

Following the methods using 5 weighted variables: 0.40×nominal GDP+, 0.15×population+, 0.15 ×GDP per capita+, 0.15×share of world trade+ and 0.15×share of world external debta score was derived for each economy which is not considered advanced. The result after following this approach following countries were recognised as emergingArgentina, Brazil, Chile, Colombia, Egypt, Hungary, Poland, Russia, Saudi Arabia, Turkey, the United Arab Emirates, Iran, Mexico, South Africa, China, India, Indonesia, Malaysia, the Philippines and Thailandwhich accounted for thirty-four percent of the world’s GDP in US dollars and forty-six percent in purchasing-power-parity terms. Out of these 20 countries China, Indonesia, Malaysia, Thailand, Philippines and India belong to the Indo-pacific region signifying the region’s growing prominence

The Indo-Pacific region encompasses a number of emerging economies that face various challenges. While each country has its own unique circumstances, there are shared obstacles encountered by many emerging economies in the Indo-Pacific. Here are some of the main challenges faced by these economies:

First, decline in labour inputs: The long-term consequences of reduced labour inputs in Asia are a cause for concern, particularly in light of the pandemic. Employment growth has witnessed a notable decrease, which is projected to result in a 1.5 percentage point decline in output across Asia. Various factors contribute to this decline, with advanced economies like Australia and New Zealand experiencing reduced employment due to border closures and halted migration. On the other hand, lower labour force participation is the primary factor in emerging market and developing economies, possibly due to worker disengagement and significant economic disruption. This highlights the risk of sustained employment losses in these economies. 

The impact on employment is expected to extend beyond 2024, as both the quantity and quality of the labour force may be negatively affected in the long term. Prolonged school closures have resulted in significant setbacks in education, leading to substantial losses in human capital and consequently affecting long-term productivity. Asia, particularly lower-income countries, has experienced lengthier school closures compared to other regions, intensifying this concern.

The labour force is also anticipated to face the consequences of a declining population in the aftermath of the pandemic, resulting in lasting effects. Fertility rates have decreased during the pandemic, especially in Asian emerging market and developing economies with strict lockdown measures and economic losses. It is unlikely that these fertility rates will recover in the medium term 

Second, the post-COVID-19 period is expected to see a significant decline in investment in Asia. Projections indicate that Asian emerging market and developing economies will experience a decrease of over 3 percentage points in investment as a proportion of GDP in 2024 compared to pre-pandemic estimates, while other regions will face a decline of only 0.5 percentage points. The reduction in investment and its adverse impact on output in Asia are exacerbated by high levels of corporate debt.

Short-term factors such as reduced demand, increased uncertainty, and global interest rate hikes in 2022 contribute to the immediate decline in investment. However, a major long-term factor that will impede investment in Asia is the elevated level of nonfinancial corporate debt. Extensive research shows that heavily indebted firms struggle to finance investment projects, leading to reduced capital spending. Asia, particularly its emerging market and developing economies, already had historically high levels of nonfinancial corporate debt before the crisis, surpassing debt levels in other parts of the world.

Following the pandemic, corporate leverage has further increased, especially in Asian advanced economies and emerging market and developing economies, with an average rise of about 6 percent of GDP between 2019 and 2021. Industries severely impacted by COVID-19, such as consumer services and transportation, have experienced a significant increase in debt levels, while less affected industries like pharmaceuticals and biotechnology saw a decline in debt. This divergence in leverage ratios is more pronounced in emerging market and developing economies, possibly due to limited government financial support for these firms during the pandemic.

Third, the contested territories in the South China Sea (SCS) are strategically important due to their abundant natural resources, fishing grounds, and shipping routes and SCS dispute holds significant implications for emerging economies in the Indo-Pacific region. Multiple countries in the Indo-pacific, including China, Vietnam, the Philippines, Malaysia, and Brunei, are involved in the dispute. The tensions and territorial conflicts in the South China Sea can affect emerging economies in several ways:

  1. Trade and Economic Stability: The SCS is a critical maritime trade route, and any disruptions or escalation of tensions can hinder the smooth flow of goods, impacting trade. This can have adverse effects on the economies of emerging nations heavily reliant on international trade. The SCS is believed to hold significant reserves of oil, natural gas, and other valuable resources. Access to these resources is crucial for energy security and economic development in the region. However, competing territorial claims and tensions can impede exploration and exploitation, limiting opportunities for emerging economies to access and benefit from these resources.
  2. Defence and Security Expenditure: The SCS dispute has resulted in increased military presence and tensions in the region. Emerging economies may feel compelled to allocate substantial portions of their budgets towards defence and maritime security measures, diverting resources that could have been used for other developmental purposes.
  3. Investor Confidence and Foreign Direct Investment: Heightened tensions and uncertainties in the South China Sea can undermine investor confidence and discourage foreign direct investment in the region. 

Fourth, the impact of great power competition on emerging economies in the Indo-Pacific region is significant and multifaceted. The region has become a focal point for competition between major powers, particularly the United States and China. Great power competition in the Indo-Pacific region, particularly between the United States and China, has significant and varied impacts on emerging economies in the region. These impacts include:

  1. Economic Dependencies: Emerging economies in the Indo-Pacific region may face challenges in managing their economic ties with the United States and China, as these powers compete for influence. They may feel pressure to choose sides, which could lead to economic repercussions. Emerging economies often seek investment and development financing from major powers, but increased competition among great powers can create challenges. 
  2. Trade and Market Access: Great power competition can result in trade tensions, tariffs, and trade restrictions imposed by competing powers. Emerging economies may experience trade frictions and reduced market access, necessitating the exploration of alternative markets.
  3. Infrastructure Development: Major powers engage in infrastructure development initiatives to enhance their influence. Emerging economies seek investment and assistance in infrastructure projects but face challenges in balancing competing offers, evaluating economic viability, and ensuring transparency and sustainability.
  4. Security and Diplomatic Challenges: Emerging economies may face diplomatic and security challenges as a result of great power competition. They may feel compelled to take sides, participate in alliances, or become entangled in territorial disputes, impacting their own security and regional cooperation.

Fifth, the war between Russia and Ukraine has potential implications for emerging economies in the Indo-Pacific region, albeit indirectly. It is important to note that the Indo-Pacific region is geographically distant from the conflict between Russia and Ukraine. However, the global nature of economic interdependence means that emerging economies in the region can still experience indirect impacts through the global economy, energy markets, geopolitical shifts, and investor sentiment. The conflict can create global economic uncertainty, resulting in financial market volatility and a slowdown in global trade. This can disrupt trade flows, decrease investor confidence, and reduce economic growth prospects for emerging economies in the Indo-Pacific.

The conflict may affect commodity prices, particularly energy resources such as oil and gas. Any disruption in the global energy market or increased tensions in the region can lead to higher energy prices and supply uncertainties. Emerging economies, especially those dependent on energy imports, may struggle with managing energy costs and ensuring energy security. Emerging economies in the Indo-Pacific may face pressures to take sides or navigate complex diplomatic challenges arising from the conflict. Emerging economies in the Indo-Pacific may seek to diversify their investment and trade relationships in response to the conflict. They may reduce reliance on countries involved in the conflict and explore alternative markets and partners, leading to shifts in investment flows and trade patterns within the region. 

Lastly, the slowdown in China’s economic growth has significant implications for the rest of the world, particularly in the Asian region. China’s expanding role in regional trade means that its economic fluctuations have considerable spill-over effects, especially in countries with higher levels of trade dependence on China. Projections indicate that Chinese growth will moderate, leading to global spill-overs, particularly in Asia. Intra-regional trade within Asia has grown substantially, with China’s demand absorbing a quarter of the region’s exports. The recent slowdown in China’s property sector is also expected to have regional spill-over effects. To estimate these effects, a panel local projections model based on data from 50 advanced and emerging economies was utilized by the IMF. The findings suggest that a decline in Chinese growth leads to moderate short-term effects but medium-term effects involving a decline in GDP for other countries. The magnitude and persistence of these spill-overs depend on the nature of the shocks affecting Chinese activity, with supply shocks having a more substantial impact than demand shocks. The slowdown in Chinese growth between 2021 and 2022 is attributed to reduced consumption spending and financial stress in the property sector. Trade links play a crucial role in the magnitude of growth spill-overs, with exports to and imports from China serving as significant sources of demand and inputs for the region. 

In conclusion, the COVID-19 pandemic has had far-reaching effects on the global economy, causing a major health crisis and economic downturn worldwide. The Indo-Pacific region, with its significant contribution to global trade and commerce, plays a crucial role in the international political and economic landscape. Any abrupt changes in the economic framework of the region can have drastic spill-over effects across the globe. Emerging economies in the Indo-Pacific face various challenges, including infrastructure deficits, declining labour inputs, reduced investment, the South China Sea dispute, and the impact of great power competition. The decline in labour inputs due to the pandemic and other factors poses long-term challenges for employment and human capital in the region. Reduced investment, exacerbated by high levels of corporate debt, affects output and economic stability. The South China Sea dispute has implications for trade, resource exploration, maritime security, regional cooperation, and investor confidence. Great power competition, particularly between the United States and China, affects economic dependencies, trade, infrastructure development, and diplomatic challenges in emerging economies. Finally, the conflict between Russia and Ukraine indirectly impacts emerging economies in the Indo-Pacific, highlighting the interconnectedness of the global economy. In order to address these challenges, emerging economies in the Indo-Pacific region should focus on fostering regional cooperation, pursuing balanced, maintaining neutrality, diversifying economic relationships, and transparent policies. By effectively managing the dynamics of the region, these economies can strive for long-term sustainable development in the face of evolving geopolitical realities.

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