A New Economic-Policy Agenda for Asia

The global economic landscape is changing fast. Scarring from the COVID-19 pandemic has weakened potential growth, making slower income gains the new normal for many countries. Geopolitical tensions – especially the trade and technology “war” between the United States and China – are threatening not only to halt globalization, a key enabler of growth over the last few decades, but also to split the world economy into separate blocs. And the days of low and stable inflation seem to be giving way to structurally higher and more volatile prices.
Meanwhile, rapid digitalization – propelled partly by advanced technologies like generative artificial intelligence – is continuing apace, and the effects of climate change are becoming more visible by the day. Taken together, these developments pose major challenges to policymakers worldwide. Those in the ASEAN+3 countries – the ten ASEAN member states, plus China, Japan, and South Korea – are no exception.

During the pandemic, ASEAN+3 governments went all in to support their economies, not least by monetizing fiscal deficits – a taboo in normal times. The unprecedented fiscal stimulus they pursued – including large amounts of direct assistance to households and firms, from cash handouts to fuel subsidies – was accompanied by large interest-rate cuts. For example, in the Philippines, cumulative cuts in the policy rate reached 200 basis points in 2020. Governments also pursued policies like debt moratoria and regulatory forbearance.

In the post-pandemic era, these measures are excessive, imprudent, and unsustainable. But lower growth, higher inflation, and more public debt – which surged from around 93% of GDP, on average, in 2019 to 100% in 2022 in ASEAN+3 economies – makes unwinding them difficult. Doing so while addressing the multifaceted challenges that lie ahead will require a carefully crafted mix of policies, tailored to specific economies’ needs.

ASEAN+3 policymakers seem to recognize this. As the chart shows, despite facing broadly similar challenges, these governments have emphasized different measures, depending on their economy’s circumstances and policy space. For example, countries like Singapore and the Philippines sought to tackle inflation primarily through aggressive monetary tightening, with the former using exchange-rate targeting to reduce imported inflation.

By contrast, Indonesia, Malaysia, South Korea, and Thailand pursued more gradual interest-rate hikes, and used fuel and food subsidies to keep inflation in check. Meanwhile, China (where inflation remains low, and the post-pandemic recovery has been slower than expected) and Japan (with structurally low inflation) upheld accommodative policies.
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