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The Consequences of the Pandemic for Southeast Asia

GB Geo-Blog

The Consequences of the Pandemic for Southeast Asia

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Covid-19 seems to have plateaued in China. Beijing first mishandled the crisis by trying to cover it up, thus allowing the virus to take hold in China and rapidly spread beyond its borders. But the draconian measures of which only a Leninist system is capable brought it under control, albeit at great cost – not all of which was borne by China. 

The global epicentre is now in Europe and, increasingly, the US. Like China, the West fumbled its initial responses. Democracies are slow to react until shocked into action. However, these are resilient systems with strong economic, scientific and administrative capabilities, and they have begun to mobilize. The costs to everyone will again be great. Still, there is no question that they will eventually get a grip on the disease and bring it under control in their own way. 

Everything must eventually end. But are we now at the beginning of the end, or only the end of the beginning? No one really knows. Historically, pandemics have had significant economic, political and geopolitical consequences. It will not be exactly the same world afterward. In this Geo-Blog, I speculate about the possible impact of the Covid-19 pandemic on Southeast Asia – one of the first regions to which the disease spread to from China.

Everything must eventually end. But are we now at the beginning of the end, or only the end of the beginning? No one really knows. Historically, pandemics have had significant economic, political and geopolitical consequences.

Economics

Even before Covid-19, slowing Chinese growth had a global impact. The pandemic has now also exposed the vulnerabilities of over-reliance on Chinese supply chains. Some corporations are already hedging their China risks. Diversification had already begun before the pandemic because of rising costs in China, US-China trade tensions and the security restrictions that the US had placed on Chinese technology companies. But the concerns have now extended to sectors that are not necessarily security-sensitive such as automobile parts and active pharmaceutical ingredients. 

A reorientation of supply chains could have profound long-term implications for globalization. What is at present not clear is the extent to which foreign manufacturers and suppliers will or can reduce dependence on China. Japan’s decades-long search for a viable ‘plus one’ for its ‘China plus one’ strategy suggests that it will not be straightforward to diversify out of China. 

Much depends on how quickly China can restore production and whether China’s recovery will be ‘V-shaped’ or ‘U-shaped’. The Chinese government is talking up prospects for a quick rebound. Given China’s impact on the world economy, we should all hope that China recovers quickly. But I suspect that the Chinese Communist Party (CCP) will find that it was much simpler to command a halt to production than for it to decree that production should resume. 

The Chinese government is talking up prospects for a quick rebound. Given China’s impact on the world economy, we should all hope that China recovers quickly. But I suspect that the Chinese Communist Party (CCP) will find that it was much simpler to command a halt to production than for it to decree that production should resume.

The IMF has said that while the Chinese economy is showing signs of normalizing, risks remain. Supply chains within China will take time to restore. Not all migrant workers have returned to work. Health risks could return as they do so and as international travel resumes. China, like Taiwan, Hong Kong and Singapore, is now trying to contain a second wave of mainly imported infections. Some of the necessary continuing health precautions are onerous. Economic activity seems to have steadily picked up for large enterprises, but still seems below par for SMEs. 

More than 90 percent of Chinese enterprises are SMEs, which account for 60 percent of China’s GDP and some 80 percent of jobs. Assuming that there is no second outbreak of Covid-19, SMEs too will eventually return to normalcy. Given their impact on social stability, SMEs have received special attention in the support and stimulus measures aggressively rolled out by the CCP. More measures are surely on the way. But this may enhance existing systemic risks to the Chinese economy. Nor is Chinese economic policy-making entirely autonomous. Chinese policy-makers must balance contradictory considerations in the context of a global economy. 

According to World Bank figures, in 2018 household consumption comprised 38.7 percent of China’s GDP. To put this into perspective, that same year, the world average, based on 152 countries, was 63.6 percent. Clearly, external demand will have a significant impact on China’s recovery. As the disease takes hold in Europe and the US, global demand will slow, affecting China’s growth. China and the West need each other to recover. In the worst case, sequential and mutually reinforcing contractions in China, the US and Europe could cause a global recession. 

If there is a global recession, there will be less incentive to diversify supply chains until the global economy recovers. A global recession could be prolonged. Since the 2008 financial crisis, the scope for stimulus measures by central banks of key economies has been reduced, with interest rates already very low and most major economies running huge budget deficits. In any case, can the usual stimulus measures calm a crisis of confidence? However, if the worst case is avoided and China’s economy bounces back quickly, there will also be less immediate incentive to diversify. 

In short, it is not to be taken for granted that there will be a significant effort to diversify supply chains out of China, although some diversification will certainly occur. Southeast Asia can provide an alternative production platform. Some firms have already shifted production to avoid American tariffs and rising costs in China. However, moving to Southeast Asia is not automatic. Bottlenecks in infrastructure and skilled labour need to be addressed. Regulatory frameworks in areas such as tax, labour regulations and justice systems will have to be made more business-friendly. American security concerns will need to be addressed. 

Politics

Prime Minister Lee Hsien Loong of Singapore has said that the economic impact of Covid-19 could be worse than that of the 2008 global financial crisis. Malaysia’s Dr. Mahathir said much the same thing, referencing the 1997 Asian financial crisis. If they are right, there are bound to be political consequences even if their precise nature cannot now be predicted – all the more so if there is a prolonged global recession. 

The 1997 Asian economic crisis catalyzed Suharto’s fall in Indonesia and the dismissal and jailing of his deputy, Anwar Ibrahim, by then-prime minister Muhammad Mahathir in Malaysia. In Thailand, it had a profound impact on economic and social systems that ultimately brought a non-traditional leader, Thaksin Shinawatra, to power. This aroused the distrust and anger of the traditional Thai political elite, leading to two coups. More than two decades later, the consequences of those events are still playing themselves out in these countries. 

Indonesia, Malaysia and Thailand, together with Vietnam and perhaps the Philippines, are the ASEAN members that could potentially benefit most from whatever diversification may occur, provided they get their fundamentals right. But will they? The crucial factor is the domestic politics of these countries. 

In Malaysia, the coalition that toppled Dr. Mahathir’s government is keen to demonstrate its competence in managing the economy. But the new government is fragile and marked by considerable infighting. Its stronger emphasis on pro-Malay, pro-Islam policies pulls economic policy in directions that are not necessarily conducive to foreign investment. 

Indonesia has yet to reach a stable post-Suharto equilibrium. President Jokowi is trying to tame the political Islam he used to win a second term, while holding together his motley cabinet and pushing for economic reforms. Some parties in his cabinet seem unenthusiastic about his reform package. In Thailand, political conflict has been frozen, but not resolved. Power is still the priority of the military-backed government. It will have to manage continuing tensions, while dealing with an unpredictable new monarch. 

The poor performance of some governments in dealing with Covid-19 is almost certain to generate public pushback and political uncertainties of their own even if the economic fall-out of the pandemic is mitigated. The future political and policy trajectories of Myanmar and Philippines, which face elections this year and in 2022, respectively, are uncertain. How Cambodia will evolve after Hun Sen is anyone’s guess. The only ASEAN members where basic political stability and continuity can be assumed are Brunei, Singapore, Laos and Vietnam. Overall, this is not a situation that is conducive to great optimism about the region’s ability to optimize the potential opportunities.

Geopolitics

The tardy and incoherent responses of Europe and the US to the Covid-19 crisis as compared to China has led to some exaggerated assessments of the pandemic’s impact on global order. For example, Obama’s former Assistant Secretary of State, Kurt Campbell, in a recent Foreign Affairs article, suggested that the weak American handling of the crisis will give China increased hegemony in the Asia-Pacific. Such alarmist assessments reflect the foreign policy establishment’s deeply ingrained distaste for President Trump, and perhaps the desire to give the Democrats more fodder for the presidential elections.

The fact is that China and the West have both been materially damaged politically and economically by the Covid-19 crisis. Both initially bungled by trying to cover-up or downplay its seriousness. Although the West’s response could certainly have been much better, it was always impossible for any Western democracy to have responded to the crisis in the same way as China. In its own way, as mentioned, the West and will eventually contain the pandemic. China and the West need each other to recover from the economic fallout.

It is condescending to suggest that the governments and peoples in the Asia-Pacific are so naive or ignorant as to be incapable of making such nuanced judgements, and will swallow the propaganda of either side whole. When the pandemic eventually ends, the relative power equation between the US and its allies and China – and the changes have always been relative not absolute and underway long before the pandemic erupted – is unlikely to be altered in any fundamental way. 

When the pandemic eventually ends, the relative power equation between the US and its allies and China – and the changes have always been relative not absolute and underway long before the pandemic erupted – is unlikely to be altered in any fundamental way.

After the pandemic, the US and China will both still be important and influential regional actors. Neither can be ignored. Regional countries will still want to have good relationships with both – even if trust in both was already low, as several surveys have consistently demonstrated. The Trump administration had accentuated the inconsistency that has always been inherent in American foreign policy, but the assertiveness of Chinese foreign policy under Xi Jinping had already begun to generate resentment, while the trade war and Hong Kong and already worn some of the gloss off the China story. The pandemic may well enhance regional mistrust of both.  

Middle powers like Japan, the ROK, Australia and India will continue to play their own roles in accordance with their own interests. Driven by mistrust of an overbearing China and a more transactional America, formal US allies may seek more autonomy to pursue their own interests within their alliances. Japan is already moving in that direction, and India has never been anyone’s deputy sheriff. This is more likely to enhance the natural multipolarity of the region rather than deliver it to Chinese hegemony.

That the relative power balance will not immediately change does not mean that the pandemic will have no strategic effects. Neither the US nor China has resisted the temptation to use the pandemic to try and score petty propaganda points against each other. This only sharpens US-China tensions and the continuing strategic competition between Washington and Beijing. Domestic considerations are, however, paramount for both countries. 

The CCP is using nationalism to repair the domestic reputational damage it has suffered. Having allowed a forest fire to spread, China is now trying to capitalize on its ability to contain the fire that it allowed to spread in the first place. Beijing is offering aid and advice to other affected countries, contrasting itself with the US in the hope that its own responsibility will be overlooked. More pronounced internal censorship and the increasingly laudatory depiction of Xi Jinping’s role suggest, however, that the CCP is having difficulty convincing its own people, let alone others. China’s weakness as well as its strengths are now more evident to all.

Slow growth may make fulfilling the commitments that Beijing made in phase one of its trade deal with the US difficult. The Trump administration may ratchet up tensions as the presidential campaign heats up and the American economy cools. Its incoherent response to Covid-19 could well do what it was doubtful that the Democratic Party could by itself: deny Trump a second term. Trump will need a distraction and is unlikely to resist the temptation of using China as a scapegoat. The Democratic candidate will also not want to appear ‘soft’ on China. If the next American president is a Democrat, tensions may well be enhanced as human rights and labour issues may loom larger in US calculations.

Over the medium term, considerations around supply chain vulnerabilities and diversification away from China, if indeed such an effort materializes in any significant way, will strengthen the hand of those in the US who advocate for ‘decoupling’, and perhaps even facilitate decoupling in certain domains. Domain-specific decoupling is already occurring to a certain extent. Southeast Asia is already confronting the dilemmas this entails. 

However, interdependence between the US and China and other major economies – which has been underscored by the speed with which the virus spread to the US and Europe – makes across-the-board systemic decoupling highly improbable, unless the pandemic drags on for years or the virus mutates into a more lethal form that causes even greater panic. The consequences for Southeast Asia will then be profound. 

Still, the most significant long-term geopolitical changes will likely have occurred even independently of the pandemic, or if the pandemic should quickly subside. We are still at the beginning of ‘the fourth industrial revolution’. As they develop, new technologies such as AI and 3D printing could erode the cost advantages of widely distributed supply chains.

The most significant long-term geopolitical changes will likely have occurred even independently of the pandemic, or if the pandemic should quickly subside. We are still at the beginning of ‘the fourth industrial revolution’. As they develop, new technologies such as AI and 3D printing could erode the cost advantages of widely distributed supply chains.

Whole industries could well be ‘brought home’, driven by the domestic political considerations of the major economies, rather than strategic, security or supply chain-risk management concerns. New calculations of interests by major powers could relegate Southeast Asia to a global backwater of interest only to contiguous or regional powers. This will fundamentally change ASEAN’s strategic environment.

As supply chains shrink or vanish, the development prospects of less-developed ASEAN members may be seriously limited. Others may be snared by the middle-income trap. ASEAN’s project of making Southeast Asia a common production platform could become of little interest to the major economies. If supply chains bring little competitive advantage, why is a regional production platform needed? 

ASEAN’s essential purpose is to manage the primordial diversities that divide Southeast Asia and complicate relations between its members. Regional economic cooperation has been ASEAN’s overarching project since 1967. If this becomes irrelevant while growth in some members stalls, what will this mean for intra-ASEAN bilateral relations? Whither ASEAN, then? The region’s trajectory could take an entirely new direction. Will Southeast Asia once again be regarded as ‘the Balkans of Asia’?

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