## 1. Overview

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### Global outlook and projections
- Global economy projected to grow by 5.9 percent in 2021 and by 4.9 percent in 2022 (0.1 percentage point lower for 2021 than in the July 2021 World Economic Outlook Update).
- Beyond 2022, global growth projected to moderate to about 3.5 percent over the medium term.
- Ongoing rise in inflation expected to be transitory, though uncertainty remains high.
- Vaccine access identified as the principal fault line dividing the global recovery.

### Asia and Pacific: aggregate outlook and revisions
- Asian outlook for 2021 downgraded by more than 1 percent to 6.5 percent compared with the April 2021 World Economic Outlook because of new peaks driven by the Delta variant.
- As vaccination rates accelerate, region expected to grow slightly faster in 2022 than anticipated earlier.
- Divergence deepening between Asian advanced economies and emerging market and developing economies, reflecting vaccination coverage and policy support.
- Medium-term output levels in emerging market and developing economies expected to remain below pre-pandemic trends.
- Regional current account surpluses projected to remain broadly unchanged in 2021; global imbalances should narrow over 2022–26 as US twin deficits subside.

### Country-level projections cited
- China projected to grow by 8.0 percent.
- Japan’s growth prospects downgraded to 2.4 percent.
- India projected to grow by 9.5 percent.
- ASEAN-5 and other EMDEs facing severe challenges from resurgent virus and weakness in contact-intensive sectors.
- Growth in Cambodia, Lao P.D.R., the Pacific islands, and South Asia suffering from hit to tourism and constrained policy space.

### Recent regional developments and sectoral patterns
- Advanced economies forecast to grow 5.6 percent in 2021; first half of 2021 saw stronger-than-expected global GDP outturns.
- Manufacturing initially held up in H1 2021 due to pandemic-related demand; services and retail sales recovering more slowly.
- High-frequency indicators suggest softening of manufacturing and related investment in Q3 2021 due to weakening external demand and virus outbreaks (examples: Malaysia, Taiwan Province of China, Vietnam).
- Spread of Delta in low-vaccination countries triggered stricter containment; mobility has not rebounded to pre-pandemic levels in these countries.

### Inflation and prices
- Headline inflation rising across the region due to shifting global demand, rising food and fuel prices, and supply chain disruptions.
- Headline inflation expected to fall mostly within target ranges as transitory pressures subside, given substantial prevailing output gaps.
- Core inflation has risen to a lesser extent; pass-through from producer to consumer prices limited with generally well-anchored inflation expectations.
- Export prices remained relatively flat, suggesting erosion of profit margins in tradable sectors and no significant evidence of Asia exporting inflation elsewhere.

### Macroeconomic policy stance and financial conditions
- Policy mix remained accommodative in Asian advanced economies (asset purchases sustained) and in EMDEs (low policy rates retained).
- Bank of Japan maintained yield curve control; New Zealand first advanced economy to taper; Korea raised policy rates.
- Asian EMDEs generally kept policy rates at historical lows (except Sri Lanka) and retained unconventional policies, including monetary financing (India, Indonesia, the Philippines).
- Accommodative financial conditions allowed unprecedented fiscal support through H1 2021 (ASEAN-5 and India); some countries have moderated, withdrawn, or slowed stimulus (low-income and Pacific island countries; China).

### Near-term risks
- High uncertainty over new variants, supply chain disruptions, inflation outlook, and shifts in global financial conditions.
- New infection waves remain the biggest concern; unequal vaccine distribution and uncertain vaccine efficacy against variants amplify risk of a protracted pandemic.
- Untimely policy normalization or misconstrued US policy communications could cause significant capital outflows and higher borrowing costs for Asian EMDEs.

### Policy priorities and recommendations (overview)
- Foremost priority: achieve widespread vaccination to avoid protracted recoveries.
- Redouble efforts to accelerate vaccinations; continue macroeconomic support where policy space permits with improved targeting; accelerate reforms to develop new growth drivers.
- If recovery is less dynamic, maintain longer-lasting policy accommodation and vigilant financial regulation to preserve stability.
- Fiscal policies should support recovery within medium-term fiscal frameworks to maintain credibility.
- Central banks should be prepared to act quickly if recovery strengthens faster than expected or if inflation expectations rise.
- Push for social policies, structural reforms, and investments in digital and green sectors to raise productivity and address pandemic scars.

### Report scope and analytic pillars
- Chapter 3: determinants of COVID-19 vaccine rollouts and quantified effects of vaccinations on health and economic outcomes; vaccine deployment driven by pandemic severity in 2020, procurement strategies, local production, vaccine acceptance, and health infrastructure; evidence that swift, broad vaccine administration boosts economic activity with effects increasing over time and with larger population shares vaccinated.
- Chapter 4: trade liberalization can boost productivity and output potential, limit regional scarring, and underscores scope to reduce nontariff barriers (significantly higher in Asia than other regions) to accelerate inclusive prosperity.

*Report based on data available as of September 25, 2021.*

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### Box 2.1 — How damaging would faster US-interest-rate normalization be for Asia and the Pacific?

Key pressures and vulnerabilities
- Regulatory forbearance raises risk of rising financial distress as balance sheet deterioration is recognized.
- Supply-side pressures include higher commodity and shipping costs, GVC disruptions, shipment backlogs, semiconductor shortages, surging freight costs, and snap quarantine restrictions.
- Elevated geopolitical risks and trade/technology tensions (notably US–China) could weigh on investment and productivity.
- Natural-disaster threats particularly affect low-income and Pacific island countries.

Mitigating scarring from COVID-19
- COVID-19 caused unprecedented output losses and scarring in productivity and employment; losses larger than earlier expected, especially in EMDEs (excluding China), fiscally constrained and tourism-dependent economies.
- Social and nontelework industries continue shedding jobs, delaying employment recovery and disproportionately affecting youth, low-skilled workers, and women.
- Learning losses from school closures could have long-lasting effects on future earnings and productivity.
- Rising delinquencies when credit support is scaled back may magnify economic losses and raise financial stability concerns.
- Debt-servicing risks highest in:
  - industries hit by lockdowns and dependent on market financing (India);
  - leveraged real estate (China);
  - tradable sectors with dwindling profit margins (ASEAN).
- Public spending and debt likely to keep rising for some years; realistic debt trajectory projections essential.

Policies for a lasting and equitable recovery
- First priority: accelerate vaccine deployment and health-related spending.
- Where outbreaks linger and output gaps persist, maintain generalized fiscal stimulus as policy space allows; as pandemic duration increases, target lifelines/transfers to worst affected.
- Near-term fiscal measures should be set within credible medium-term frameworks; revert to rules-based frameworks as part of exit strategies.
- Detailed fiscal frameworks underpinned by concrete tax and subsidy reforms can help.
- Strengthen countercyclical policies via automatic activation tied to economic metrics (examples: Australia’s Disaster Payment Program; New Zealand’s contingency measures).
- Finalize agreement on a global minimum for corporate taxes and avoid a race to the bottom.
- Once activity normalizes (metrics such as health care system spare capacity), gradually pare back sectoral support while scaling up training and job search programs for reallocation to green and digital economies.
- Financing could draw on IMF special drawing rights and concessional resources; where debt treatment needed, pursue restructuring options, including under the Common Framework.

Monetary and financial stability guidance
- Continue monetary accommodation where inflation projected to remain below or within targets, but taper asset purchases and monetary financing where warranted.
- Cautious policy normalization warranted in most Asian EMDEs given weakening recovery paths, provided external stability and inflation expectations remain anchored.
- Deploy tools—foreign exchange intervention, micro and macroprudential policies—matching tools to shock nature and country characteristics per the Integrated Policy Framework.
- Address balance sheet vulnerabilities, expedite resolution of debt overhangs, and flatten insolvency curves.
- Fortify bank balance sheets in India; address high corporate leverage and phase out implicit guarantees in China; balance regulatory activism with fostering fintech innovation, including crypto-assets.

Structural reforms and climate policy
- Reinvigorate structural reform drive to boost output potential and alleviate human, physical, and digital infrastructure bottlenecks.
- Reverse human capital losses by increasing time in school, expanding vocational training, and digital curricula/platforms.
- Expand social safety nets in economies with large informal sectors and inadequate coverage (examples: China, Thailand, Vietnam).
- Trade reforms including reducing nontariff barriers in Asia to boost medium-term productivity.
- Leverage Asia’s leadership in digital money and fintech for financial inclusion and productivity; China’s e-CNY may hold lessons for CBDC considerations with prudential safeguards.
- To avert catastrophic climate change, support reallocations toward greener sectors; establish minimum carbon prices with flexibility and equity; deploy instruments beyond carbon pricing (regulations, feebates, sector-specific instruments such as a coal tax).
- Achieving carbon net neutrality will require rebalancing away from investment-heavy to consumption-led growth in China and better-articulated country-level climate strategies.

Spillovers from faster US monetary policy normalization
- Faster-than-anticipated US normalization could weaken activity and increase downside risks in many Asian economies, especially EMDEs, amplified by weaker cyclical positions and stretched balance sheets.
- Spillovers may increase COVID-19–related divergences, hitting smaller and more leveraged firms harder.
- Long-term US interest rates have been volatile; changes not driven by better economic conditions have historically produced sizable negative spillovers for EMDEs.

Empirical estimates of spillovers (methodology and key quantitative findings)
- Method: Jordá’s (2005) local projection method with panel quantile regression on 62 advanced and emerging market economies.
- Estimated median impact of a 100-basis-point exogenous shock increase in US interest rates:
  - –0.2 percent for output after four quarters.
  - –0.6 percent for investment after four quarters.
- Impact at the fifth percentile after four quarters:
  - –0.4 percent for output.
  - –1.8 percent for investment.
- Spillovers are state-dependent: larger when domestic conditions are weaker (example: –0.1 percent versus –0.4 percent after four quarters during weaker conditions).
- Macroeconomic fundamentals matter: larger spillovers where reserves are lower, external debt higher, and public debt higher.
- Heterogeneity across firms: firms dependent on external finance, with weaker balance sheets, higher foreign currency liabilities, or greater export reliance face greater exposure.

Heterogeneous firm responses
- Tightening in US monetary policy associated with lower investment and revenue across firms on average.
- Larger impacts among:
  - More leveraged firms: cumulative difference over eight quarters on investment of 5 percentage points for higher-leverage firms.
  - Firms with higher foreign currency liability share: cumulative difference over eight quarters on investment of 13 percentage points.
  - Smaller firms: more affected than large firms.
- Data source: S&P Capital IQ; sample: 63 countries, Q3 1996–Q3 2016; includes 15 Asia and Pacific countries.
- Estimation: response of firm investment ratio to a 100-basis-points exogenous US rate shock; semiparametric approach with firm and country-industry-time fixed effects; standard errors clustered at firm level; 90 percent confidence intervals reported.

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### Leveraging opportunities from COVID-19 vaccines: key findings (Asia-focused)
- Objective: examine determinants of vaccine rollouts and quantify effects of vaccinations on health and economic outcomes.
- Key drivers of vaccine deployment:
  - Severity of COVID-19 waves in 2020.
  - Procurement strategies (early procurement).
  - Local production.
  - Quality of health infrastructure and preparedness.
  - Vaccine acceptance.
- Main empirical claims:
  - Swift and broad administration of vaccines significantly boosts economic activity; effects increase over time and with larger vaccination shares.
  - Health improvements more visible when country is in the middle of a significant outbreak with containment measures.
  - Cross-country health and economic spillovers from infections and vaccine rollouts are sizable.

Vaccine deployment: uneven pace and access
- By mid-2021:
  - Europe and North America led administration; Asian countries lagged overall, with average vaccination rate of less than 3 percent by Q1 2021 (exceptions: Bhutan, Maldives, Singapore).
  - Pacific island countries and small states often had swifter rollouts (Bhutan and Maldives vaccinated more than half by April 2021; Nauru and Tuvalu followed).
- Empirical determinants (Deb and others 2021a):
  - Severity of 2020 waves had the largest impact.
  - Vaccine hesitancy: difference between Singapore and the Philippines associated with 2.3-percentage-points difference in vaccination rates.
  - Procurement differences in January 2021 associated with 4-percentage-point difference in vaccination rates.
  - Domestic production associated with higher and faster vaccination rates.
  - Health infrastructure and preparedness contributed to rollout speed.
- Asia-specific observations:
  - Severity of pandemic in 2020 explains slow pace due to earlier successful containment.
  - Many Asian advanced economies had procured enough vaccines by January 2021; Asian EMDE coverage barely enough for one-quarter of populations in early 2021.
  - Vaccine acceptance in Asia (January 2021) averaged 75 percent willing to take vaccines (University of Maryland / Facebook survey).
  - Health infrastructure index: Asia similar to other regions (excluding Africa); advanced economies score highest; Asian EMDEs, lower-income countries, and Pacific island countries have significantly lower scores.

Vaccine outcomes: health and economic effects
- Data and methods: daily new infections, fatalities, ICU admissions; high-frequency economic indicators such as daily NO2 emissions; studies include Deb and others 2021a, 2021b.
- Health outcomes:
  - A 20-percentage-point increase in first-dose administration per capita associated with:
    - Reduction in daily new cases as share of population by about one standard deviation after 21 days.
    - Cumulative effect peaking after 30 days: within a month, a 20-percentage-point increase associated with cumulative decline of new cases by –0.5 percentage point of the population.
  - Second dose contributes to flattening the pandemic curve by reducing reproduction rate.
  - Vaccination reduces COVID-19–related ICU patients as share of confirmed cases significantly after 21 days.
  - Variant-specific effect: vaccines retain efficacy against Delta but with lower marginal impact; increase in vaccination rates reduces infections by only half as much when Delta dominant compared with other strains.
- Economic outcomes:
  - Higher vaccination outcomes associated with increases in NO2 emissions (proxy for economic activity); effects increase over time and with higher vaccination rates.
  - Reported empirical indicator: R² = 0.1856 in analysis of growth revisions versus vaccination rates.
- Robustness and heterogeneity:
  - Results hold using vaccine “surprises” and subnational data controlling for unobserved heterogeneity.
  - Larger reductions in new infections when rollouts complemented by containment measures (examples: Hong Kong SAR and Korea).

Vaccine spillovers and timing
- Delta spread rapidly from India to neighboring countries; became dominant in ASEAN and North America within one to three months after India.
- Analysis constructs daily proxies of foreign COVID-19 cases and vaccines using geographic proximity and trade links.
- Key spillover findings:
  - Foreign cases in proximate countries can increase domestic infections.
  - Foreign vaccine rollouts reduce domestic new cases and NO2 emissions per capita (effects measured after 7 and 30 days).
- Timing reference: April 19 2021 used as reference date for India when computing days until Delta reached 50 percent of cases.

Policy implications on vaccines
- Countries with excess supplies should consider sharing doses once domestic infections are under control, given larger marginal health gains in countries with severe outbreaks and diminishing returns where pandemic milder.
- Ramp up vaccine production and ensure distribution to all countries, including sharing excess doses.
- Distributing vaccines to severe-outbreak countries can save lives, limit spillovers, and foster global economic gains.
- Containment measures coupled with broader vaccinations support recovery and medium-term growth.
- Emphasis: “the pandemic is not over anywhere until it is over everywhere.”

Chapter summary — key findings and conclusions
- Accelerating vaccine rollout has significant health effects, particularly where pandemic not under control.
- Vaccination reduces ICU patients per infected person, enhancing health system resilience.
- Vaccination enhances containment effects of social distancing, potentially shortening the needed period of stringent measures and allowing faster reopening.
- Vaccination has a significant and persistent effect on economic activity, with effects increasing with vaccination share.
- Important health and economic spillovers from vaccinations; more equitable access—sharing excess doses, ramping up production, ensuring distribution—is welfare enhancing.
- Cross-chapter related statistic: a significant decrease in trade barriers (equivalent to a two-standard-deviation change in the NTB indicator) associated with GDP increasing by about 1.6 percent five years after the reform.

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### Trade, NTBs, and growth: key findings and model-based results

Effect of reducing NTBs
- Impulse response to a two-standard-deviation decrease in NTB index at first and fifth horizons; standard errors via Driscoll-Kraay.
- Reduction in NTBs historically associated with positive outcomes and often works through a GVC channel, increasing GVC participation.
- Impact on GDP (model simulations):
  - Simulation: NTBs in APD EMDEs reduced to level of European EMDEs (equivalent to decrease of about four standard deviations).
  - Long-term simulated GDP outcomes:
    - APD EMDEs could see GDP increases of about 4 percent in the long term.
    - Asian advanced economies would experience GDP increases of about 2 percent through spillovers.
    - Without the GVC channel, long-term gains would be about 1 percent (compared with 4 percent with GVC amplification).
- Mechanisms: reallocation to more productive firms; amplification via cross-border intermediate goods in input-output networks; firms heterogeneous in productivity.

Heterogeneity and complementary policies
- Gains larger for GVC-intensive manufacturers and trade partners; larger when tariffs are high, product and financial markets liberalized, and job protection less stringent.
- Trade liberalization can generate winners and losers; reforms should be accompanied by offsetting policies to mitigate inequality.
- Recommendation: pursue NTB reductions alongside complementary reforms (product, financial, labor markets) and policies to mitigate distributional effects.

Additional model-based notes
- Sectoral computable general equilibrium model with input-output links (Caliendo and others 2017) used for simulations.
- Without GVC channel, long-term gains materially smaller (~1 percent for APD EMDEs).

Conclusion and policy recommendations (trade focus)
- Trade in Asia, especially GVC trade, has stalled partly due to still-high NTBs.
- Given pandemic-induced output losses and potential scarring, urgent structural reform drive needed to boost productivity and output potential.
- Reducing NTBs is a potent tool for medium-term productivity gains in Asia, with significant scope for reforms in Asian EMDEs and large gains for GVC-intensive sectors.
- Reforms should be paired with complementary policies to amplify gains and address inequality.

*International Monetary Fund | October 2021*

### 1.   Overview   1

### 1. Overview

### Global outlook and projections
- The global economy is projected to grow by 5.9 percent in 2021 and by 4.9 percent in 2022 (0.1 percentage point lower for 2021 than in the July 2021 World Economic Outlook Update).
- Beyond 2022, global growth is projected to moderate to about 3.5 percent over the medium term.
- The ongoing rise in inflation is expected to be transitory, though uncertainty remains high.
- Vaccine access has emerged as the principal fault line dividing the global recovery between economies that can look forward to further normalization (mostly advanced economies) and those facing mounting hospitalizations and death tolls from resurgent infections.

### Asia and Pacific: aggregate outlook and revisions
- The Asian outlook for 2021 has been downgraded by more than 1 percent to 6.5 percent compared with the April 2021 World Economic Outlook because of new peaks of the pandemic cycle driven by the highly contagious Delta variant.
- As vaccination rates accelerate, the region is expected to grow slightly faster in 2022 than anticipated earlier.
- The divergence between Asian advanced economies and emerging market and developing economies is deepening, reflecting vaccination coverage and policy support.
- Medium-term output levels in emerging market and developing economies are expected to remain below pre-pandemic trends.
- Regional current account surpluses are projected to remain broadly unchanged in 2021; global imbalances should narrow over 2022–26 as US twin deficits subside.

### Country-level projections cited
- China is projected to grow by 8.0 percent.
- Japan’s growth prospects have been downgraded to 2.4 percent.
- India is projected to grow by 9.5 percent.
- Other emerging market and developing economies, notably the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, Thailand), face severe challenges from a resurgent virus and weakness in contact-intensive sectors.
- Growth in Cambodia, Lao P.D.R., the Pacific islands, and South Asia is suffering from the hit to tourism and constrained policy space.

### Recent regional developments and sectoral patterns
- The first half of 2021 saw stronger-than-expected global GDP outturns; advanced economies are forecast to grow 5.6 percent in 2021.
- Manufacturing initially held up in the first half of 2021 because of surging demand for pandemic-related supplies, but services and retail sales are taking longer to recover.
- High-frequency indicators suggest a softening of manufacturing and related investment in Q3 2021 because of weakening external demand (from China and globally) and virus outbreaks in some economies (for example, Malaysia, Taiwan Province of China, and Vietnam) prompting factory shutdowns.
- The spread of the Delta variant in countries with relatively low vaccination rates has triggered stricter containment measures; mobility has not rebounded to pre-pandemic levels in these countries.

### Inflation and prices
- Headline inflation is on the rise across the region, fueled by shifting global demand, rising food and fuel prices, and supply chain disruptions.
- Headline inflation is expected to fall mostly within target ranges as transitory pressures subside, especially given substantial prevailing output gaps.
- Core inflation has risen to a lesser extent; pass-through from producer to consumer prices has been limited, with generally well-anchored inflation expectations.
- Export prices have remained relatively flat, suggesting an erosion of profit margins in tradable sectors and no significant evidence of Asia exporting inflation elsewhere.

### Macroeconomic policy stance and financial conditions
- The policy mix has remained accommodative in Asian advanced economies (asset purchases sustained) and in emerging market and developing economies (low policy rates retained).
- The Bank of Japan maintained its yield curve control framework; New Zealand was the first advanced economy to taper and Korea to raise policy rates.
- Asian emerging market and developing economies have generally kept policy rates at historical lows (except for Sri Lanka) and retained unconventional policies, including monetary financing (India, Indonesia, and the Philippines).
- Accommodative financial conditions allowed fiscal authorities to maintain unprecedented support to vulnerable households and firms through the first half of 2021 (ASEAN-5 and India), though some countries have moderated or withdrawn stimulus (low-income and Pacific island countries) or slowed stimulus (China) to limit public debt increases.

### Near-term risks
- Projections are subject to high uncertainty regarding the emergence of new variants, the outlook for supply chain disruptions and inflation, and shifts in global financial conditions.
- New infection waves remain the biggest concern; unequal vaccine distribution and uncertain vaccine efficacy against emerging variants amplify the potential for a protracted pandemic with more hospitalizations and potential lockdowns subduing recovery.
- Untimely policy normalization or misconstrued policy communications in the US could engender significant capital outflows and higher borrowing costs for Asian emerging market and developing economies, especially those with large financing needs or elevated debt levels.

### Policy priorities and recommendations
- Achieving widespread vaccination is the foremost priority because delayed deployment and unequal access are contributing to more protracted recoveries.
- Policy should redouble efforts to accelerate vaccinations, continue macroeconomic support (policy space permitting) with improved targeting, and accelerate reforms to develop new growth drivers.
- A less-dynamic recovery would call for longer-lasting policy accommodation, which in turn calls for vigilant financial regulation to preserve financial stability.
- Fiscal policies should continue to support the recovery but within medium-term fiscal frameworks to maintain credibility.
- Central banks should be prepared to act quickly if the recovery strengthens faster than expected or if inflation expectations rise.
- A push for social policies, structural reforms, and investments in digital and green sectors is needed to raise productivity and give a fair shot to schoolchildren and workers scarred by the pandemic.

### Report scope and analytic pillars
- This Regional Economic Outlook draws on two studies focused on the imperatives for a strong and durable recovery:
  - Chapter 3 examines determinants of COVID-19 vaccine rollouts and quantifies the effects of vaccinations on health and economic outcomes, finding that vaccine deployment is driven primarily by the pandemic’s severity in 2020, procurement strategies, the extent of local production, vaccine acceptance, and the quality of the health infrastructure; it provides empirical evidence that swift and broad administration of vaccines can significantly boost economic activity, with effects increasing over time and when a larger share of population gets vaccinated.
  - Chapter 4 analyzes how trade liberalization can boost productivity and output potential, limit regional scarring from the pandemic, and underscores scope to reduce nontariff barriers (which are significantly higher in Asia than in other regions) to accelerate inclusive prosperity and build on progress from regional agreements.

*Report based on data available as of September 25, 2021.*

### Box 2.1). In addition, regulatory forbearance

### Box 2.1. How Damaging Would Faster US-Interest-Rate Normalization Be for the Asia and Pacific Region?

### Key pressures and vulnerabilities
- Regulatory forbearance during the crisis heightens the risk of rising financial distress as balance sheet deterioration is recognized and highly leveraged firms face greater refinancing costs.
- Supply-side pressures: higher commodity prices and shipping costs, continued disruption of global value chains (GVCs), lasting delays in mining operations, shipment backlogs, semiconductor shortages, surging freight costs, and snap quarantine restrictions magnify inflation risk and may cause structural changes to production, delivery, and storage capacity across sectors.
- Elevated geopolitical risks and escalation of trade and technology tensions—notably between the US and China—could weigh on investment and productivity growth.
- Natural-disaster threat continues to weigh on low-income countries, especially Pacific island countries.

### Mitigating scarring from COVID-19
- COVID-19 has resulted in unprecedented output losses in the Asia and Pacific region, leading to scarring in diminished productivity and lost jobs; losses will likely be larger than expected earlier, especially in emerging market and developing economies (excluding China), fiscally constrained and tourist-dependent economies, including Pacific island countries.
- Social and nontelework industries continue to shed jobs, delaying employment recovery and disproportionately affecting youth, low-skilled workers, and women, contributing to rising inequality and poverty.
- Pandemic-induced loss of learning from school closures could have long-lasting effects on future earnings and productivity in Asia.
- Economic losses may be magnified further by rising delinquencies when credit support measures are scaled back, potentially raising financial stability concerns.
- Debt-servicing risks are highest in:
  - industries hit harder by lockdowns and dependent on market financing (India),
  - leveraged real estate (China),
  - tradable sectors squeezed by dwindling profit margins (ASEAN).
- Public spending and debt are likely to keep rising for some years; realistic projections of debt trajectories are essential given history of abrupt upticks in rollover costs once market expectations shift.

### Policies for a lasting and equitable recovery
- First priority: accelerate vaccine deployment and health-related spending.
- Where outbreaks linger and output gaps persist, maintain more generalized fiscal stimulus as policy space allows; as pandemic duration increases, fiscal space constraints bind and lifelines/transfers should become increasingly targeted to the worst affected.
- Near-term fiscal measures should be set within credible medium-term frameworks; countries should revert to rules-based frameworks as part of exit strategies.
- Detailed fiscal frameworks underpinned by concrete tax and subsidy reforms can help (example referenced: Indonesia’s recent announcements).
- Strengthen countercyclical policies by automatic activation of spending measures linked to state of the economy (for example, unemployment rate), citing Australia’s Disaster Payment Program and New Zealand’s contingency measures as models.
- Finalize agreement on a global minimum for corporate taxes and avoid a race to the bottom to bolster public finances for critical investments in Asian EMDEs with shallow tax bases.
- Once activity normalizes (using metrics such as health care system spare capacity), governments should gradually pare back sectoral support while scaling up training and job search programs to facilitate labor reallocation and adaptation to the green and digital economy.
- Financing such initiatives could draw, in part, on the IMF’s recent special drawing rights allocation and concessional resources for financially constrained EMDEs; allocations could help ease external payment obligations and domestic spending needs.
- Where debt treatment is needed, eligible countries should pursue debt restructuring options, including under the Common Framework endorsed by the Group of Twenty nations.

### Monetary and financial stability guidance
- Continue monetary accommodation where inflation is projected to remain below or within target bands, but taper asset purchases and monetary financing where warranted by inflation prospects and risks to central bank independence.
- A cautious approach to policy normalization is warranted in most Asian EMDEs given weakening recovery paths, provided external stability and inflation expectations remain well anchored.
- Deploy available tools—including foreign exchange intervention and micro and macroprudential policies—to safeguard stability in response to global shocks, matching tools to shock nature and country characteristics per the Integrated Policy Framework.
- Address balance sheet vulnerabilities to flatten insolvency curves and encourage exit of nonviable “zombie” firms; expedite resolution of debt overhangs.
- Financial sector measures to fortify bank balance sheets in India, address high corporate leverage and phase out implicit guarantees through regulatory strengthening in China (including cross-agency measures) to help safeguard financial stability.
- Strike a balance between regulatory activism and fostering innovation in response to rapid growth in financial technology activities, including crypto assets.

### Structural reforms and climate policy
- Reinvigorated structural reform drive needed to boost output potential and alleviate human, physical, and digital infrastructure bottlenecks.
- Reverse human capital losses by increasing time in school, expanding vocational training programs, and digital curricula/platforms for post-pandemic jobs.
- Expand social safety nets in Asian economies with large informal sectors and inadequate coverage (examples cited: China, Thailand, Vietnam) to reduce households’ need for high precautionary savings.
- Trade reforms, including reducing nontariff barriers within Asia where GVC intensity is high, would boost medium-term productivity growth.
- Build on Asia’s leadership in digital money and financial technology adoption to boost financial inclusion and productivity; China’s experience with e-CNY could hold lessons for other central bank digital currency considerations if backed by prudential safeguards.
- To avert catastrophic climate change, policies must support reallocations toward greener and more inclusive sectors; establish minimum carbon prices with flexibility and equity, consider historical contributions and development levels, and deploy a variety of instruments beyond carbon pricing (regulations, feebates, sector-specific instruments such as a coal tax).
- Achieving carbon net neutrality will require stronger efforts to rebalance away from investment-heavy to consumption-led growth in China and better-articulated country-level climate strategies for the region.

### Spillovers from faster US monetary policy normalization
- A faster-than-anticipated normalization in US monetary policy could weaken economic activity and increase downside risks to growth in many Asian economies, especially EMDEs; spillovers amplified by weaker cyclical positions and relatively stretched corporate and public sector balance sheets.
- Spillovers may increase divergences caused by the COVID-19 shock, with larger effects on smaller and more leveraged firms.
- Long-term US interest rates have been volatile; changes not driven by better economic conditions (for example, due to higher inflation or inflation expectations reflecting supply-side pressures) have historically been associated with sizable negative spillovers for EMDEs.

### Empirical estimates of spillovers
- Methodology: Jordá’s (2005) local projection method with a panel quantile regression framework for a sample of 62 advanced and emerging market economies; examines dynamic effects of exogenous US monetary policy shocks.
- Key quantitative findings:
  - The estimated median impact of a 100-basis-point exogenous shock increase in US interest rates is –0.2 and –0.6 percent for output and investment, respectively, after four quarters.
  - The impact at the same horizon for the fifth percentile is –0.4 and –1.8 percent, respectively, indicating larger effects on the downside of the distributions of real GDP growth and investment.
  - Spillovers are state-dependent: medium-term effects of US monetary policy shocks are larger when domestic economic conditions are weaker (example comparison cited as –0.1 percent versus –0.4 percent after four quarters during weaker economic conditions; Box Figure 2.1.3).
- Macroeconomic fundamentals matter: larger spillovers are estimated in countries with lower reserves, higher external debt, and higher public debt.
- Heterogeneity across firms: firms more dependent on external finance, with weaker balance sheets, higher foreign currency liabilities, or greater reliance on exports face greater exposure to spillover channels from US rate increases.

*International Monetary Fund | October 2021*

### Box 2.1 (continued)

### Box 2.1 (continued)

### Heterogeneous Firm Responses to US Monetary Policy Shocks
- A tightening in US monetary policy is associated with lower investment and revenue across all firms, on average.
- The impact is larger among:
  - More leveraged firms: cumulative difference in impact over eight quarters on investment of 5 percentage points for higher-leverage firms (Box Figure 2.1.5).
  - Firms with higher foreign currency liability share: cumulative difference in impact over eight quarters on investment of 13 percentage points for firms with higher foreign currency debt (Box Figure 2.1.5).
  - Smaller firms: smaller firms are more affected than large firms (Box Figure 2.1.5).
- Interpretation: Financial frictions and balance sheet effects amplify the spillovers; a firm’s balance sheet strength is an important driver of spillovers.
- Policy implication: Countries emerging from the COVID-19 shock with stretched corporate sector balance sheets may experience a heavier drag on investment.
- Additional point: Higher US interest rates can amplify COVID-19–related divergences in Asia, affecting Asian firms with higher debt-servicing risks concentrated in sectors disproportionately hit by the COVID-19 shock.
- Data and sample notes:
  - Data source: S&P Capital IQ.
  - Sample: 63 countries, period from the third quarter of 1996 through the third quarter of 2016, mainly listed firms; includes 15 countries from the Asia and Pacific region.
  - Estimation: Response of firm investment ratio (capital expenditure to fixed capital) to a 100-basis-points exogenous shock to US interest rate; semiparametric approach with firm and country-industry-time fixed effects; standard errors clustered at firm level; error bars denote the confidence intervals for 90 percent significance.

### Leveraging Opportunities from COVID-19 Vaccines: Early Lessons from Asia — Overview
- Objective: Examine determinants of COVID-19 vaccine rollouts and quantify effects of vaccinations on health and economic outcomes and variation during the pandemic cycle.
- Key drivers of vaccine deployment (cross-country evidence):
  - Severity of COVID-19 waves in 2020.
  - Procurement strategies (early procurement).
  - Local production of vaccines.
  - Quality of health infrastructure and preparedness.
  - Vaccine acceptance.
- Main empirical claims:
  - Swift and broad administration of vaccines can provide a significant boost in economic activity; effects increase over time and with larger vaccination shares.
  - Improvements in health outcomes are more visible when a country is in the middle of a significant outbreak and containment measures are in place.
  - Cross-country health and economic spillovers from COVID-19 infections and vaccine rollouts are sizable.

### Vaccine Deployment: Uneven Pace and Access across Regions
- By mid-2021:
  - Europe and North America led vaccine administration, having vaccinated a large share of their populations (Figure 3.1, panel 1).
  - Asian countries lagged overall, with an average vaccination rate of less than 3 percent of the population by the first quarter of 2021 (exceptions include Bhutan, Maldives, Singapore).
  - Vaccine deployment in Asia increased around late April 2021; Asian advanced economies outpaced Asian emerging market and developing economies, on average (Figure 3.1, panel 2).
  - Pacific island countries and small states generally had swifter rollouts than advanced economies and emerging market and developing economies, on average; Bhutan and Maldives had vaccinated more than half of their populations by April 2021; Nauru and Tuvalu followed soon after.
- Empirical determinants (Deb and others 2021a):
  - Severity of COVID-19 waves in 2020 had the largest impact (Figure 3.2, panel 1): higher number of cases in 2020 is associated with higher vaccination rates in the first half of 2021.
  - Vaccine hesitancy matters: difference in hesitancy between Singapore and the Philippines is associated with a 2.3-percentage-points difference in vaccination rates.
  - Procurement: difference in procured vaccines in January 2021 between early actors and others is associated with a 4-percentage-point difference in vaccination rates.
  - Domestic production is associated with higher and faster vaccination rates.
  - Health infrastructure and preparedness (number of hospitals, medical facilities, and doctors per capita) contributed to speed of rollout.
- Asia-specific observations:
  - Severity of the pandemic in 2020 is the main factor explaining the slow vaccination pace in the region due to successful containment policies in 2020.
  - Vaccine procurement was slow in Asia compared with other regions in early 2020, though it picked up toward the end of 2020 (outpacing European economies).
  - Many Asian advanced economies had procured enough vaccines to cover their populations by January 2021; coverage for Asian emerging market and developing economies was barely enough to cover one-quarter of their populations in early 2021.
  - Vaccine acceptance in Asia (January 2021) averaged 75 percent willing to take COVID-19 vaccines (University of Maryland / Facebook survey).
  - Health infrastructure index: Asia similar to other regions (excluding Africa); advanced economies score highest on preparedness while Asian emerging and developing economies, lower-income countries, and Pacific island countries have significantly lower health infrastructure index (Figure 3.2, panel 6).

### Vaccine Outcomes: Effects on Health and Economic Activity
- Data and methods:
  - Daily data on new COVID-19 infections, fatalities, and ICU admissions; high-frequency indicators of economic activity such as daily NO2 emissions.
  - Studies: Deb and others 2021a, 2021b; consistent with Dagan and others [2021] and Hall and others [2021].
- Health outcomes:
  - A 20-percentage-point increase in administration of the first vaccine dose per capita is associated with:
    - A reduction in daily new cases as a share of population by about one standard deviation after 21 days.
    - Cumulative effect peaking after 30 days: within a month, a 20-percentage-point increase in first dose vaccination is associated with a cumulative decline of new cases by –0.5 percentage point of the population.
  - Second dose contributes to flattening the pandemic curve by reducing the virus reproduction rate.
  - Vaccination reduces number of COVID-19–related ICU patients as a share of confirmed COVID-19 cases significantly after 21 days.
  - Variant-specific effect: Vaccines retain efficacy against the Delta variant but have a lower marginal impact; increase in vaccination rates reduces infections by only half as much when the Delta strain is dominant compared with when other strains are dominant (Figure 3.3, panel 1).
- Economic outcomes:
  - Higher vaccination outcomes (first and second dose per capita) are associated with an increase in NO2 emissions (proxy for economic activity); effects increase over time and with higher vaccination rates (Figure 3.3, panel 3).
  - Interpretation: As a larger share of the population gains protection, the risk of infection diminishes and confidence improves, boosting economic activity.
- Robustness and heterogeneity:
  - Results hold using vaccine “surprises” (difference between actual vaccinations and expected rollout) and when using subnational data that control for unobserved heterogeneity at the subnational level and time-varying country-level factors (Deb and others 2021b).
  - Average effects mask heterogeneity: vaccine rollouts are associated with greater reductions in new infections when complemented by containment measures (example: Hong Kong SAR and Korea).

*Source: Regional Economic Outlook: Asia and Pacific — text from Box 2.1 (continued).*

### 3. Effect of COVID-19 Vaccine Surprises on Nitrogen Dioxide (NO

### 3. Effect of COVID-19 Vaccine Surprises on Nitrogen Dioxide (NO2) Emissions

### Vaccines and Economic Activity
- Vaccines lead to an increase in high-frequency indicators of economic activity, particularly at high vaccination rates.
- Vaccination has a significant and persistent effect on economic activity, with effects increasing with the share of population vaccinated.
- Empirical indicator reported: R² = 0.1856 (reported in the analysis of growth revisions versus vaccination rates).
- Chart measures referenced:
  - Vaccines administered as of the end of July 2021 (Percent of the population).
  - GDP growth revision between July and April 2021 (percentage points).
  - People vaccinated per 100 population (axis labeled "People vaccinated per 100 population 0102030405060708090100").

### Role of a Country’s Initial Conditions and Containment Measures
- The impact of vaccines on health and economic outcomes depends on initial conditions:
  - When new cases are high (a country is in the middle of a significant outbreak), vaccine administration leads to a bigger decline in infections.
  - Stringent containment measures and reduced social distancing limit the increase in economic activity after vaccine rollouts.
  - The impact of vaccines on economic activity is dampened when there is a severe outbreak because people are likely to voluntarily socially distance until cases decline significantly.
- Health indicators and outcomes illustrated include:
  - New COVID-19 cases
  - Delta variant prevalence
  - New ICU admissions (RHS)
  - New COVID-19 fatalities (RHS)
- Containment and outbreak effects were analyzed at short and slightly longer horizons (effects shown after 7 and 30 days for neighboring impacts; containment–outbreak interactions depicted across quartiles in the analysis).

### Vaccine Spillovers: Cross-Border Health and Economic Effects
- The Delta variant spread rapidly from India to neighboring countries; the Delta variant became dominant in ASEAN countries and in North America over one to three months after becoming dominant in India.
- Analysis constructs daily proxies of “foreign” COVID-19 cases and vaccines in neighboring countries based on geographic proximity and trade links.
- Key empirical findings on spillovers:
  - New COVID-19 cases in geographically proximate countries can increase a country’s own infections.
  - Foreign vaccine rollouts reduce new COVID-19 cases domestically (positive health spillovers).
  - Foreign vaccinations also reduce a country’s own NO2 emissions per capita (effects measured after 7 and 30 days).
  - Economic spillovers from neighbors’ COVID-19 cases and vaccines are tangible, reflecting confidence effects and trade-link effects.
- Timing and measurement specifics:
  - The chart computing days elapsed until Delta reached 50 percent of cases uses April 19 2021 as the reference date for India.
  - Spillover effects are reported after 7 and 30 days in the analysis.

### Policy Implications and Recommendations
- There is scope for countries with excess vaccine supplies to share doses once domestic infections are under control, given larger marginal health gains in countries with severe outbreaks and diminishing returns where the pandemic is milder.
- Ramp up vaccine production and ensure adequate distribution to all countries, including sharing excess doses, to reduce (re)infections from abroad and achieve better economic outputs.
- Distributing vaccines to countries facing severe outbreaks can:
  - Save lives domestically and abroad.
  - Limit COVID-19 spillovers to foreign countries.
  - Foster global economic gains as vaccination coverage expands.
- Containment measures, though costly short term, coupled with broader vaccinations can lay the foundation for recovery and medium-term growth.
- Vaccinating a large share of the world’s population quickly is emphasized as critical: “the pandemic is not over anywhere until it is over everywhere.”

### Key Findings and Conclusions (chapter summary)
- First, accelerating vaccine rollout has significant health effects, particularly in countries where the pandemic is not under control and infections are pervasive.
- Second, vaccination reduces the number of ICU patients per infected person, enhancing health system resilience and potentially reducing the need for very strict and broad-based containment.
- Third, vaccination enhances the containment effects of social distancing measures, implying that measures may need to remain in place for a shorter period, all else equal, thereby allowing the economy to reopen faster.
- Fourth, vaccination has a significant and persistent effect on economic activity, with effects increasing with the share of population vaccinated—highlighting the importance of continuous progress in vaccination.
- Fifth, there are important health and economic spillovers from vaccinations; more equitable access to vaccination—by sharing excess doses, ramping up vaccine production, and ensuring adequate distribution—is welfare enhancing for all.
- Cross-chapter related statistic: A significant decrease in trade barriers (equivalent to a two-standard-deviation change in the NTB indicator) is associated with GDP increasing by about 1.6 percent five years after the reform (contextual finding within the broader report).

*International Monetary Fund | October 2021*

### 1. Export Growth Goods: GFC versus COVID-19

### 1. Export Growth Goods: GFC versus COVID-19

### Export Growth in REO14 by Sectors
- Chart context: (Percent, weighted average).
- Country grouping: REO14 includes Australia, China, Hong Kong SAR, India, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Taiwan Province of China, Thailand, and Vietnam.
- Visual span of values shown in source figures: –30, –25, –20, –15, –10, –5, 0, 5, 10, 15, 20, 30, 40, 50 (percent markers displayed).

### Potential Impact of Pandemic on Global Value Chains
- Figure corresponds to the impulse response function to a 6-percentage-points decline in partner country growth (equivalent to the decline in global growth in 2020) at the five-year horizon.
- All variables measured as a percent of total exports.
- Standard errors are clustered at the country level.
- GVC = global value chain.
- Sectors highlighted in chart: Pharmaceuticals; Medical equipment, including PPE; Machinery (including computers); Agriculture and mining; Others.
- Linkage categories in chart: Backward linkages; Forward linkages; Total GVC.

### New Export Restrictions (Net), Asia
- Data series spans years 2009 through 2021 (labels: 2009 10 11 12 13 14 15 16 17 18 19 20 21).
- Vertical scale markers in source figure include: –1.4, –1.2, –1.0, –0.8, –0.6, –0.4, –0.2, 0 (number of restrictions, net).
- Note: The data includes credible announcement of a meaningful and unilateral change in the relative treatment of foreign versus domestic commercial interests. Border closures, which affect travel service exports and imports, are not included as restrictions.
- Data source: Global Trade Alerts; and IMF staff calculations.
- Global Trade Alerts is an NGO, a charitable organization that compiles the data used for this chart.

### Export Growth: GFC versus COVID-19 framing
- Source context: (Percent, constant prices) — the headline figure title for the comparison between the Global Financial Crisis (GFC) and COVID-19 episode.

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### Trade and the Asian Miracle — Effects of Reducing NTBs

### Effect of Reducing NTBs (Short term and Medium term)
- Figure corresponds to the impulse response function to a two-standard-deviation decrease in NTB index at the first (short term) and fifth (medium term) horizons.
- Light shaded bars indicate results not significant at 90 percent confidence interval.
- Standard errors calculated using Driscoll-Kraay.
- NTB = nontariff barrier.
- Visual scale markers in source figures: 0.0, 0.5, 1.0, 1.5, 2.0, 2.5 (percent).

### Effect of Reduction in NTB on GVCs and Trade
- Visual scale markers in source figures: 0.0, 0.1, 0.2, 0.3 (percentage points).
- Interpretation: Reduction in NTBs is historically associated with positive economic outcomes and often works through a GVC channel, increasing GVC participation.

### Impact of Backward Linkages on Sectoral Labor Productivity
- Figure corresponds to the impact of a one percent increase in backward linkages, from a panel regression at the sectoral level, controlling for country-industry effects.
- Standard errors are clustered at the country level.
- Visual scale markers in source figures: 0, 0.1, 0.2, 0.3, 0.4, 0.5 (percent).
- Productivity channels highlighted: Real GDP (%); Productivity (%); Investment (%).
- Sectors shown: All; Low-tech manufacturing; High-tech manufacturing; Services.
- Horizons: Short term; Medium term.

### Effect of Reducing NTBs on Inequality
- Figure corresponds to the impulse response function to a two-standard-deviation increase in NTB index at the fifth (medium term) horizon.
- Light shaded bars indicate results not significant at 90 percent confidence interval.
- Standard errors calculated using Driscoll-Kraay.
- Visual scale markers in source figures: 0.0, 1.0, 2.0, 3.0, 4.0 (percent).

### Effect of Reducing NTBs on GDP (Heterogeneity)
- Visual scale markers in source figures: –1.00, –0.50, 0.00, 0.50, 1.00, 1.50, 2.00 (percent).
- Heterogeneity dimensions shown in source: Income; GVC; Tariffs; Structural Reform Index.
- Country groups labeled in figures: AEs; EMDEs; APD AE; APD EMDE; ROW AE; ROW EMDE.
- Note: Light shaded bars indicate non-significance at 90 percent confidence interval.

### Effect of Reducing NTBs in Asian EMDEs on GDP (Model simulations)
- Simulation scenario: NTBs in Asian emerging market and developing economies (APD EMDEs) are reduced to the level of European emerging market and developing economies — equivalent to a decrease in NTBs of about four standard deviations.
- Model type: Sectoral, computable, general equilibrium model with input-output links (Caliendo and others 2017).
- Long-term simulated GDP outcomes:
  - Asian emerging market and developing economies could see GDP increases of about 4 percent in the long term.
  - Asian advanced economies would experience GDP increases of about 2 percent through spillovers.
  - Without the GVC channel, long-term growth gains from the reform push would be about 1 percent (compared with 4 percent with the GVC channel).
- Note on model features: Firms within each sector are heterogeneous in productivity; input-output relationships generate amplification because reduction in NTBs reverberates across domestic and foreign production value chains.
- Standard errors and significance notes: see empirical notes above.

### Distributional and Complementary Policy Considerations
- Trade liberalization can generate winners and losers, with the already better-off well positioned to benefit more.
- It is essential to accompany trade reforms with offsetting policies to mitigate the impact on inequality.
- Gains from reducing NTBs are larger when:
  - Countries are more integrated in value chains (GVC-intensive).
  - Tariffs are high to begin with.
  - Domestic product and financial markets are more liberalized and job protection legislation is less stringent.
- Policy implication: Reforms in other areas are key to removing binding constraints to growth and amplifying the effect of trade liberalization.

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### Model-Based Results and Interpretation

- Empirical estimates are complemented by simulations from a general equilibrium model to quantify long-term gains and provide region-specific estimates accounting for Asia’s position in global trade and value chains.
- Simulation assumption: NTBs in APD EMDEs lowered to EUR EMDEs level (about four standard deviations, similar in size to Australia’s reforms in the early 1980s).
- Long-term results summary:
  - APD EMDEs: ~4 percent GDP increase.
  - Asian advanced economies: ~2 percent GDP increase (spillovers).
  - Without GVC channel: ~1 percent long-term gain for APD EMDEs.
- Mechanisms: Reallocation to more productive firms; amplification via cross-border intermediate goods in input-output networks.

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### Conclusion and Policy Recommendations
- Trade in Asia, especially GVC trade, has stalled recently, partly because of still-high nontariff barriers in the region.
- Given unprecedented pandemic-induced output losses and potential medium-term scarring in the Asia and Pacific region, an urgent and renewed structural reform drive is needed to boost productivity and output potential.
- Reducing NTBs can be an especially potent tool to boost medium-term productivity in Asia because:
  - There is significant scope for such reforms in Asian emerging market and developing economies.
  - Large economic gains would accrue, especially for GVC-intensive manufacturers and their trade partners.
- Recommendation: Pursue NTB reductions alongside complementary reforms (product, financial, and labor market reforms) and policies to mitigate distributional effects on inequality.

*Source: IMF staff calculations and figures from Regional Economic Outlook: Asia and Pacific, International Monetary Fund, October 2021.*

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_Source: https://www.imf.org/-/media/files/publications/reo/apd/2021/oct/english/text.pdf_