Convergence or Divergence: COVID-19 Crisis as Crossroad for Central Asia

The COVID-19 pandemic has caused a tremendous global economic shock jeopardizing the development and economic growth accumulated in recent years. According to the latest World Bank’s economic prospects, the world is about to face a 5.2% of global GDP decline in 2020, which would be the most severe recession since World War II [World Bank, 2020]. The IMF’s latest October 2020 projections foresee a 4.4% world GDP contraction [IMF, 2020]. Despite unprecedented measures of support and monetary injections, it has become evident that the global recession would be overwhelming, leading to enormous pressure on health care and devastating effects on trade, tourism service sector and other spheres of economy worldwide. The staggering economic impacts will hit all types of economies including those of high-income developed ones, industrialized export-oriented economies and commodity exporters.

On the other hand, it should be kept in mind that the current recession characteristics and figures of future economic growth differ significantly from country to country. First of all, the rate of exposure to the effects of the COVID-19 was different all across the world depending on the spread of the disease, public health care systems, measures of social distancing, demographic factors, geographic features etc. Secondly, it is important to emphasize that, although, many factors determining the spread and severity of the virus were practically unmanageable in very short-term timeframes, the policy measures taken during the crisis and afterwards do matter in determining the current course of the crisis and its future consequences. In fact, the most recent data from different countries already show that countries started to recover at different rates as soon as they reopened after the massive lockdown in spring of 2020 [IMF, 2020].

Advanced and high-income economies are expected to contract the most in relative terms in 2020 because of sharp reduction in domestic demand and supply, trade and overall economic activity. The World Bank projects a 7.0% GDP decline in advanced economies [World Bank, 2020] while the IMF’s forecasts for advanced economies is 5.8% of downturn [IMF, 2020]. However, both the World Bank and IMF forecast better outcomes for developing economies. Emerging market and developing economies are expected to have on average a 2.5% GDP drop according to the World Bank and 3.3% contraction according to IMF. Comparatively smaller share of services in the GDP and reliance on exports rather than internal demand are the main reasons for developing economies to have smaller economic downturns compared to high income advanced economies. According to all projections, on the other hand, the global economy is expected to have a rather strong economic rebound in 2021 mainly due to unprecedented fiscal and monetary support measures taken in many countries.

However, the consequences of the COVID-19 crisis should be put in a broader context and larger timeframes in order to properly evaluate its economic consequences. One of the rising concerns regarding the economic impact of the COVID-19 crisis is the potential polarization of GDP growth rates and upsurge of long-lasting divergent trends as countries around the world will recover in very different paces [KPMG, 2020]. Although many economic projections forecast more moderate scenarios of GDP decline for middle-income and developing economies than for advanced economies, the recovery trajectories of countries will be influenced by their socio-economic capacities and capabilities in managing the spread of the virus. We have already seen many advanced economies spend up to 15-20% of their GDP as fiscal stimulus packages whereas most developing economies are directing a very insignificant amount of resources to stimulate recovery. The signs of early divergence in macroeconomic indicators can even be seen among different European nations with more or less similar development indicators [Gräbner et al., 2020].

When it comes to Central Asia as a whole, the region is projected to see a 1.7% of GDP decline, according to the World Bank, which is a substantially better scenario than in most other parts of the world. Apart from objective economic reasons inside the country, the region will be exposed to negative spillover effects from Europe as well as Russia and China, which are the key trading partners of Central Asian states. Stringent restrictions of labor mobility and contraction in labor markets in Russia are also significant negative factors that are going to affect the region as remittance channels get squeezed. Nevertheless, the World Bank forecasts 1.5% of GDP growth in Uzbekistan and 0% growth in Turkmenistan. The rest of the countries of the region are projected to contract: Kazakhstan -3.0%, Kyrgyzstan -4.0% and Tajikistan -2.0% [World Bank, 2020]. If we put the projections into a larger time frame, the figures appear to be quite dramatic. Except for Kyrgyzstan, the negative GDP growth rates in Central Asian states would take place for the first since the 1990s. Moreover, there are other reliable projections by the EBRD, where it forecasts more severe scenarios with overall 3.3% GDP drop and all five Central Asian states having negative figures of economic growth [EBRD, 2020]. An important point in the official projections of the economic consequences for Central Asia is that all forecasts agree that the region will lag behind in terms of GDP growth compared to the rest of the world. That is, starting from projected global recovery in 2021, for the first time in many years the Central Asian region can step on the path of divergence in terms of economic growth relative to the rest of the world. In other words, Central Asian states are likely to have slower GDP growth rates during post-COVID-19 period compared to other countries.

As we can see from Figure 1, since 2013, the Central Asian states were in decline in terms of GDP per capita measured in current dollars relative to the rest of the world, including even high-income states that tend to grow at slow rates. Depreciation of the national currencies and moderate inflation rates helped the region to keep growing in terms of GDP per capita measured in PPP. However, with the slowdown of the real GDP growth relative to the rest of the world will lead to decline of income and welfare in the region compared to other countries. In this regard, the worst scenario for the region would be the consolidation of the sluggish recovery after the COVID-19 crisis into a longer-term trend, which would lead to accumulation of poverty resulting and economic backwardness with far-reaching social consequences.

In spite of the fact that the effects of the crisis were more severe in advanced and developed economies, their capacities to manage the consequences of the crisis through fiscal and monetary means were much greater compared to developing economies, including the Central Asian states. The projections show that the stark difference in the scale of measures countering the crisis are about to create a global momentum of divergence of economic growth between high-income and developing economies. Establishment and extension of this pattern threatens to turn the global economic growth patterns from the path of convergence to that of divergence. The possibility of this scenario poses a threat to the economic development of the Central Asian states.

References

EBRD (2020). Regional Economic Prospects. Retrieved from https://www.ebrd.com/news/2020/ebrd-revises-down-economic-forecasts-amid-continuing-coronavirus-uncertainty.html#:~:text=The%20EBRD%20is%20now%20forecasting,4.8%20per%20cent%20in%202021. Accessed on 17.11.2020.

Gräbner Claudius, Philipp Heimberger and Jakob Kapeller (2020). Pandemic Pushes Polarisation: the Corona Crisis and Macroeconomic Divergence in the Eurozone, Nature Public Health Emegency Collection No.10: 1–14.

IMF (2020). World Economic Outlook International Monetary Fund: A Long and Difficult Ascent. Retrieved from https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020. Accessed on 12.11.2020.

KPMG (2020). COVID-19 and the Global Economy. Retrieved from https://home.kpmg/xx/en/home/insights/2020/06/covid-19-and-the-global-economy.html. Accessed on 17.11.2020.

World Bank (2020). Global Economic Prospects. Retrieved from https://www.worldbank.org/en/publication/global-economic-prospects. Accessed on 12.11.2020.

World Bank data (2020). GDP per capita (current US$). Retrieved from https://data.worldbank.org/indicator/NY.GDP.PCAP.CD. Accessed on 12.11.2020.

Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.