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The Perils of Big COVID Government in Asia

Summary:
During a large and complex crisis like the COVID-19 pandemic, government’s role naturally grows – and so do the risks of unproductive spending and abuses of power. That is why, as Asian economies seek to contain COVID-19 and its economic impacts, they must also contain their own governments. SEOUL – Asia is home to many exemplars of small but effective government, countries where sound policies and strong institutions underpin economic stability and robust growth. But during the COVID-19 crisis, many are pursuing expansive macroeconomic interventions and implementing measures that infringe on privacy. They are perched on the edge of a slippery slope. The Way We Could Live Now

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During a large and complex crisis like the COVID-19 pandemic, government’s role naturally grows – and so do the risks of unproductive spending and abuses of power. That is why, as Asian economies seek to contain COVID-19 and its economic impacts, they must also contain their own governments.

SEOUL – Asia is home to many exemplars of small but effective government, countries where sound policies and strong institutions underpin economic stability and robust growth. But during the COVID-19 crisis, many are pursuing expansive macroeconomic interventions and implementing measures that infringe on privacy. They are perched on the edge of a slippery slope.

To be sure, extraordinary times call for extraordinary measures. The COVID-19 pandemic has led to the deepest global recession since World War II, with the International Monetary Fund predicting a 5% economic contraction in 2020 and a slow recovery after that. An “L-shaped” depression is a very real possibility.

Asia is no exception. While the Asian Development Bank expects China to achieve positive GDP growth, it predicts that India’s economy will shrink by 9%. Developing Asia’s GDP will fall by 0.7% – the region’s first contraction since WWII.

In response to these dire growth conditions, governments worldwide have expanded their fiscal spending considerably – with serious consequences for public balance sheets. This year, the government debt of advanced economies is expected to increase by 19 percentage points, on average, to 131% of GDP.

In Asia, both China and India are forecast to record fiscal deficits exceeding 12% of GDP, leading to a significant rise in the government debt-to-GDP ratio. In many Asian economies – such as China, Indonesia, and South Korea – that isn’t much of a problem, because those ratios are relatively low. But in some others – such as Pakistan and Sri Lanka – debt already exceeds 85% of GDP.

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