COVID-19 and the Global Economic Outlook for Asia

Madhav Rajan:    00:00:00    Good evening, ladies and gentlemen. Welcome to Chicago Booth's Virtual Economic Outlook 2020. My name is Madhav Rajan. I'm the Dean and the George Pratt Shultz Professor of Accounting at the University of Chicago Booth School of Business. I hope all of you are safe and doing well in this uncertain time. It's fantastic to see such a great turnout for Economic Outlook this evening. I want to thank all of you for attending this event and for engaging with the School in this manner.

Madhav Rajan:    00:00:58    Booth has a long tradition of informing public disclosure through platforms such as Economic Outlook which was started way back in 1954, as well as our Initiative on Global Markets and our Chicago Booth Review publication. The Chicago Booth Virtual Outlook, Economic Outlook series launched last week in Chicago, where 6,300 members of the Booth community joined the event featuring professors from Booth, Austan Goolsbee, Randy Kroszner, and Raghuram Rajan.

Madhav Rajan:    00:01:26    We have the Hong Kong one today, and then we'll host our third Virtual Economic Outlook next week, on May 13 in London. Economic Outlook provides a forum for our pathbreaking thought leaders to confront the future, evaluate emerging trends and share insights that help reframe our understanding of the world to come. We have an amazing panel this evening. I want to thank our distinguished panelists for agreeing to be here today, Chicago Booth professors Chang-Tai Hsieh and Randy Kroszner, and Hong Kong economist Richard Wong, to share their insights related to Covid-19 and the global economic outlook for Asia.

Madhav Rajan:    00:02:02    My thanks also to Henny Sender of the Financial Times for moderating this panel. As we look forward to hearing what's on the mind of the panelists, let me just take a minute to introduce them a bit more deeply. Chang-Tai Hsieh is the Phyllis and Irwin Winkelried Professor of Economics and PCL Faculty Scholar at Chicago Booth. Chang conducts research on growth and development. He has been a visiting scholar at the Federal Reserve Banks of San Francisco, New York, and Minneapolis, as well as the World Bank's Development Economics Group, and the Economics Planning Agency in Japan.

Madhav Rajan:    00:02:35    Randy Kroszner is Deputy Dean for Executive Programs and the Norman Bobins Professor of Economics at Chicago Booth. Randy has served as a Governor of the Federal Reserve System from 2006 until 2009, chairing the Committee on Supervision and Regulation of Banking Institutions, and the Committee on Consumer and Community Affairs. Randy took a leading role in developing responses to the financial crisis, and undertaking initiatives to improve consumer protection and disclosure.

Madhav Rajan:    00:03:04    Richard Wong is Professor of Economics and the Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong. He has been Founding Director of the Hong Kong Centre For Economic Research since 1987, and the Hong Kong Institute of Economics and Business Strategy since 1999. His research focuses on the political economy of public policy, property, housing, labor, and population, and the regional economic development in China.

Madhav Rajan:    00:03:33    Our moderator is Henny Sender, Chief Correspondent of International Finance for the Financial Times, based in New York and Hong Kong. Before joining the Financial Times in 2007, she was the Senior Special Writer for Money and Investing at the Wall Street Journal. Once again, thank you all for being here. With that, I'm going to hand it off to Henny. Thanks, Henny.

Henny Sender:    00:03:54    I have now un-muted my phone. I'd like to join Dean Rajan in thanking my panelists who are going to make my job particularly easy tonight, and thank all of you, especially those of you who have gotten up at dawn in Chicago to join us. I like to run a very interactive panel, which is a challenge when it's a virtual one. Some of you have already submitted questions, I would urge all the rest of you to do so. Because I like to run an interactive panel, I'd like my panelists, if they want to respond to something another panelist has said, to just please show me on the camera so I know to call on you.

Henny Sender:    00:04:44    A lot of this panel will be devoted to China, which is by far the biggest economy in the region, but we will get to other parts of the region before we end, in about an hour's time. There is a debate about where the virus started. We're not going to get into that debate very much, although I will bring in a question that came from one of the members of the audience regarding that. Let's talk about how different will China's path be as it emerges, or appears to be emerging, from the worst of the virus. Randy, of course I will start with you. Thank you.

Randall S. Kroszner:    00:05:34    Thank you very much. I'm delighted to be with you. I'm speaking to you from London where I am just a stone's throw away from our new campus in London, that we were just about to move into before we went into work-from-home here. I'm hoping that in the not-too-distant future, we're going to be able to get in there. Also, I've been to our wonderful Hong Kong campus many, many times. Actually, I have a long connection to Hong Kong. Richard Wong and I met more than 30 years ago, just before I started teaching at Chicago Booth. So it's a long connection with Hong Kong and with the region. I think China, as well as the world economy, is going to emerge very different.

Randall S. Kroszner:    00:06:20    First, consumption patterns will be very, very different for a significant time going forward. Even in China, where shopping malls have opened, where hotels have reopened, people are still very concerned about going out and going into these other places. This is certainly true in Europe as well as in the US. It's also going to have a big impact on global supply chains. Obviously there've been a lot of reassessment of risk management and risk mitigation, and so I think there's going to be a lot more movement of things to be made at home rather than abroad. There's going to be greater self-reliance in production, in a whole variety of different areas.

Randall S. Kroszner:    00:07:06    Also, I think some of the tensions that had been there before of China and the rest of the world have continued to flare up rather than being calmed down by this. There are now different accusations about the origin of the virus. Various accusations about different production processes and things that could spill over into further the trade disputes or further investment disputes. I think we're going to see much less willingness of countries to invest in China and there may be a weariness of China to invest in the US or some of the west. So I think-

Henny Sender:    00:07:50    Run deep, yeah.

Randall S. Kroszner:    00:07:51    ... that's going to be very different going forward.

Henny Sender:    00:07:53    You've given us a great overview of all the topics that we will touch on. So now let's drill down on the first. In every crisis we see governments having a bigger role and a bit bigger role in the economies. China, we're dealing with an economy where the government already had a huge role in the economy. How does the economic structure change as a result of this crisis? And Chang, I'll start with you for that question. Do we see an even heavier reliance of the state sector as opposed to the private? And is that a good or a bad thing for China?

Chang-Tai Hsieh:    00:08:43    Thanks, Henny. I want to take a step back and just parse out the question of state versus private in China.

Henny Sender:    00:08:52    Thanks.

Chang-Tai Hsieh:    00:08:52    So the way that we normally think about this question, we think about the firms that are formerly state-owned. So think about companies like PetroChina or Sinopec, if you want to think about companies in the oil sector on the one hand. And then we think about private companies, maybe one wants to think about Alibaba as a private company. Maybe one wants to think about Huawei as a private company although there are some dispute about that. I would say that increasingly that's really not a useful way to think about the Chinese economic structure. I think maybe the right way to think about it is that it really is all just shades of gray. That there's no such thing as a purely state-owned firm. There's no such thing as a purely private firm with the exception of the very smallest firms. Those I think you can safely say are purely private firms. But what you see is that what has developed in the last 15 or 20 years is this network of firms.

Chang-Tai Hsieh:    00:09:55    So one of the things, for example, that if you look at say the ownership structure of most firms that you think of as private. What you're going to see is this web of say joint ventures with lots and lots of state firms. If you look down from the firm, and there's also going to be this lots of equity investments by state-owned firms in the private firms. So I think perhaps the best way to think about it is that it's a web of connections and there's all this... So in that respect, I don't think it's going to change much relative to say what China was like in 2009 before this pandemic hit. So in that respect, I don't see a change, but there's been this long run change that we've been seeing over the last 10 or 15 years. And I do expect that the growth of this web of this network is going to be growing.

Henny Sender:    00:10:59    So do you think, Chang, to follow up that we will see capital allocation flowing efficiently in China and the companies that can generate the most quality growth and quality jobs will be the ones that get the capital going forward?

Chang-Tai Hsieh:    00:11:17    I don't think so. I don't think so because one of the things that you do see is what state-owned firms increasingly have been doing with their resources, is that they've not been investing these resources into their companies. What they've been doing with these resources is that they've been setting up joint ventures with private companies. So I mean the data is limited, but the limited amount of data that we have suggests that most of this seems to be better allocation of capital. So I would just want to come back to the point that when you think about state-owned firms, what you see is only a very small slice of what they're doing.

Henny Sender:    00:12:03    That's a really interesting perspective. Thank you very much. Let me turn now to Richard. Something like 26 million jobs have been lost in urban China. What do you think the Chinese Government can do to get the economy restarted after we've seen the economy shrink by 6.8% in the first quarter? Which is the worst economic performance that we've seen since the 70s.

Richard Wong:    00:12:43    The challenge is going forward is uncertain. It's a big country, even the central government is only effective when it comes to a major ham-fisted approach. Dexterity, fine tuning is not a easy thing to achieve in a big economy with a lot of provincial local autonomy. I think that the description of using the web, the network defines it. It's a cross between state, market, and informal structures to varying degrees. As a consequence, capital allocation still goes through to a considerable degree through the state banking system. And therefore when the economy contracts, it's actually the private economy that contracts more than the state side.

Richard Wong:    00:13:46    Now different joint ventures using Chang's description is also going to be affected because that part will also shrink. So jobs are easier to protect in the state-owned enterprises than in the private sector and that's what probably most of the central funding through the banking system is going to preserve. So in going forward, opening is still an uncertain process. Because whereas they have moved very rapidly to lockdown once they recognize that this was a major problem, opening is a much more ambivalent process, right.

Richard Wong:    00:14:30    A lot of trial and errors and chances are, despite all the social monitoring, it will be uncertain. And this means that investment is going to be a big problem. With that much uncertainty how do you invest? So it would be easier to perhaps ram up some of the state owned enterprises, some of the infrastructure project. But that is actually not what you want to go because the deep external demand will be much less than they had been in the process year. So as a result, trying to get domestic demand going is much more difficult.

Richard Wong:    00:15:14    The past few years has shown that readjusting the structural problem is not an easy one. It's a political economy problem in part and under uncertainty I am less confident about how you could do the restructuring easily.

Henny Sender:    00:15:36    Thank you very much. We've already been inundated with questions. Many of them have to do with a Chinese place in the world, trade friction with the US, the future of globalization. So I'm going to ask one more question about domestic China and then I'm going to turn to China's role in the world.

Henny Sender:    00:16:00    And Randy, I'm coming back to you on this. Many people have looked at China in 2009 when there was a global financial crisis and said, "We need to have a massive stimulus." Here we are in the COVID era and many people are concerned about economic crisis, recession, depression. And yet China's stimulus program has been far less. What would you recommend in the form of monetary and fiscal policy to help China in a world where domestic demand, to Richard's point, has to be a big part of the response to get away from the shrinking economy?

Randall S. Kroszner:    00:16:51    I think these are very important points and exactly as you said, it was back in 2008-2009 that China went on a massive spending spree and did an enormous number of infrastructure projects. I was actually in China when some of these were announced and it was such a broad flurry. It was hard to even add all of these things up while I was there to get to an official total. There was a lot of monetary and fiscal stimulus which helped them to power through the global financial crisis. But as you said, this is a bit different. This is not just a financial crisis. This is a shock to production. When you lock workers down and don't allow them to go to the production plant, that's a problem. When you lock people in and they can't go out and go shopping, that's a problem. And both of these are going to be slow to recover.

Randall S. Kroszner:    00:17:50    And so I think China has been a little bit wary of going too far because they expended enormously, the amount of debt they had outstanding after the global financial crisis. And so I think they want to keep some of their powder dry to see how things are going to evolve. I think they're hoping that they can nudge people to get back shopping and such. So I think they're taking a slower, more wait and see approach. Part of that is also exactly as I think Chang and Richard were saying, that in the state owned enterprises it's easier to preserve jobs because you just say this is effectively part of the state. Or you have such a close web with the state that people are not being furloughed. So the income can stay there, even if that makes the institution much less profitable.

Randall S. Kroszner:    00:18:42    So some of the short term programs of income support that you're seeing in the west may not be as necessary in China because those welfare programs are being done but in a different way. So I should be clear. I think it's the same fiscal impact or the same impact, but it's just being done differently. Rather than being run through an explicit policy of the government. It's being run implicitly through this web where jobs are being preserved even though people aren't really working the way and the demand for those workers isn't there the way that it was.

Randall S. Kroszner:    00:19:20    So we're seeing that and I think that's important in the transition. The key is going to be how do you unlock those workers and eventually allow them to move into the sectors where there is the appropriate demand? Because obviously it's going to be an enormous change. Transportation sectors, hospitality sectors, whether it's China or the rest of the world, they're going to be much smaller. We have to allow people to change.

Randall S. Kroszner:    00:19:40    And that's going to be much more difficult to move. And then I think as these companies face more and more challenges and some of them may go into bankruptcy, you're going to see much more need for liquidity and support from the central banks.

Henny Sender:    00:19:58    That's great.

Randall S. Kroszner:    00:19:58    I think we're going to start seeing more from the central bank. And I think the fiscal policy is more implicit rather than explicit.

Henny Sender:    00:20:05    Dean Rajan, I have to tell you that the questions I'm getting are some of the most thoughtful questions I've seen and because most of them assume that there is kind of a competition between the US and China in the world today, let's turn to China's place in the world and then go on into the whole question of de-globalization and a more bipolar world.

Henny Sender:    00:20:34    Do you think, and I'll address this question to Chang, that China has emerged with more or less respected in the eyes of the world? Some people make the case that China originally covered things up. They lost valuable time in so doing. There's the heartbreaking case of Dr. Li.

Henny Sender:    00:20:58    Other people say once they originally woke up to the severity of this thing, they gave the world 10 weeks of early warning. And China did act in a very functional way. To what extent do you think China soft power in the world has been strengthened or weakened by this episode?

Chang-Tai Hsieh:    00:21:22    I'm going to give you a two-part answer to that question. That I think there's a big difference between what China is doing internally and what China is doing externally.

Henny Sender:    00:21:31    Great point.

Chang-Tai Hsieh:    00:21:31    So internally, I think that there's a great deal of respect on looking at what China did to combat the virus. There's a great deal of respect in terms of what China has been able to accomplish in terms of its economy. It's the vital source for all of the critical medical equipment that we need. It's a critical part of the supply chain.

Chang-Tai Hsieh:    00:22:06    Externally, for reasons that I don't quite understand, so I'm thinking about the foreign policy apparatus of China. I'm thinking about what the People's Daily does, and I'm thinking about what the Global Times does. I think it's an unmitigated disaster in terms of what China has been doing, the tone, the hectoring, the aggressiveness. I think it just takes away from all the soft power that China gains for what it does internally.

Chang-Tai Hsieh:    00:22:46    So it's a two-part thing, which I, on net, I don't know how to judge it, but it's one of the things that has long puzzled me about China. That is how is it that they can run things internally in one way, and then externally, it looks so incredibly boneheaded.

Henny Sender:    00:23:11    Those are strong words. Richard, you and I are both sitting in Hong Kong. I've been a permanent resident here for over 20 years, and people in Hong Kong say, "We don't want to choose between China and the US. We can't really have any choice about, we have to live with China now," but to what extent do you think that relations are going to be on a downward spiral between the US and China, and what are the economic ramifications? One of our audience says, given the heightened hostility on both sides, how likely is an economic cold war?

Richard Wong:    00:24:01    It's difficult for me to... Let me start with something different. I think I'd like to respond a bit to Chang's comments that I think which... Historically, China was largely engrossed with... Its basic constituency is actually internal, right? The outside world didn't really matter and I think it's very difficult to shake off this. It seems to me that a lot of it is external diplomatic initiatives recently with respect to the COVID-19 pandemic, a lot of it might actually being aimed at an internal audience rather than an external audience. That factor cannot be sort of, it's difficult to know put how much weight on that, because given the kind of society it is, if you actually get the responses back into China from outside, it sounds a lot more credible to your own domestic audience. So a lot of that external posturing might well have a internal consumption objective.

Richard Wong:    00:25:16    Now in terms of a US-China relationship, it's very regrettable for the whole world and not to mention for US and China, that it will develop into a cold war. I hope it could be avoided but I cannot be sanguine at all by the prospects that whatever happened during the COVID-19 pandemic and its aftermath, is likely to accelerate rather than slow the process of greater difficulty in managing geopolitical relationships because we are all plunging into... Every country needs to address its domestic audience and if you have great difficulty in your own internal, it's much easier to put the blame outside. And I think this is almost, at least the short-term and probably the medium-term in the next few years, this is likely to be an ongoing event.

Richard Wong:    00:26:24    My personal view, based on a lot of my colleagues in the medical faculty, is this COVID-19 event is not going to go away very quickly. It will take a much longer time to clear this. So the prospects are, I would probably, I hope at the end game is a positive one, but I think we'll see a lot worsening of a U.S.-China relationship before it hopefully, if it ever gets better.

Henny Sender:    00:26:51    Thank you for that downbeat view. I am back to you, Randy. We have seen that one impact of the COVID virus, as many of you in your questions have pointed out, is reverse internationalization. Does mean that every country shrinks into itself and we have a generally de-globalized world, or do we have a more bipolar world where every company, every country in the world is forced to choose between the US and China? And you can see it in countries like Australia, who are US allies, but their economic ties are closer to China. You can see that in the way that HSBC became hostage to the Huawei dispute. How does the world break up as a result of COVID?

Henny Sender:    00:27:56    Randy, have we lost you? While Randy tries to get back in, Chang, let's hear from you about this. And let me ask you one separate question as well, which is, who do you think helps the rest of the world more in a de-globalized post-COVID world? Will China be an engine of growth and support more for the rest of the world or will the US be? That's also a question from various questions combined from the audience.

Chang-Tai Hsieh:    00:28:35    Right. So let me try to say something about your first question. I guess the answer is that I don't know. I don't know, but I'm going to give you a non-answer by pointing you to one company to watch closely as the canary in the mine, so to speak. There's this Taiwanese company called Taiwan Semiconductor, which is the world's-

Henny Sender:    00:28:59    Yes, TSMC for everyone.

Chang-Tai Hsieh:    00:29:03    TSMC, and for those who don't know, it doesn't really disclose information, but as best as I could make out, 10% of its sales go to Apple and 10% of its sales go to Huawei, so it's a company that is crucial for both countries.

Henny Sender:    00:29:20    It's a great example.

Chang-Tai Hsieh:    00:29:21    There's now tremendous pressure by the US administration on Taiwan to get TSMC to shut off its sales to Chinese companies. And one of the arguments that the US administration is making that if it ever comes to the time when Chinese missiles are being sent over the Chinese straits, the missiles will be powered by TSMC computer chips.

Chang-Tai Hsieh:    00:29:50    The Tai administration is generally, most of you know, it's a very anti China administration. But this is one thing that they've been fighting the US administration on because they know that it's critical for TSMC to integrate with the Chinese market. So what TSMC eventually does, I think it's going to be the company to watch to see whether we're going to go to a bipolar world, because it might be the case that TSMC is going to have to choose. It's going to have to choose which world it wants to be in. So the answer is, I don't know, but let's watch that company to see what it does in response to the pressure.

Chang-Tai Hsieh:    00:30:49    In response to your second question, the US is still a much larger share of the world economy. The US is still much more open to the rest of the world, relative to China. China is growing faster than the US although its growth rate has been slowing. So, I would still say that it's the US that matters the most to the world, relative to China. But this is a bit like asking the question at the eve of World War One, "Who matters more? Is it Great Britain or is it Germany?" And maybe that's not a good example because we know how that ended up.

Henny Sender:    00:31:40    There's a lovely book about central banking written by Liaquat Ahamed called “Lords of Finance”. And there's this wonderful anecdote in this book where a delegation from the Lloyd's of London calls on the British government in 1912 to say, "By the way, if the Royal Navy sinks the German Navy and the German Merchant Marine, they will sink Lloyd's, because we've insured them." So, globalization is not as new as we think.

Henny Sender:    00:32:14    One of our audience asks, "Will the US FED stimulus work for the emerging Asian economies? Will a higher printing of notes by the FED save the day for India and other EMs?" I'm going to ask you this question again, Chang, because it's something that you think of and then I'll turn back to Richard to pick up on other things that you've said.

Chang-Tai Hsieh:    00:32:37    The quick answer is no. The US is the only country that has what we call exorbitant privilege, no other country has it. So the answer is no, it's only the US that has that freedom in terms of its monetary and fiscal policy. No other country has that freedom.

Henny Sender:    00:32:57    And it won't save the emerging Asian economies in your view?

Chang-Tai Hsieh:    00:33:03    No. So, they've got to think about something else. They got to think of something else. It's just ... you can't just copy what the US does.

Henny Sender:    00:33:15    And do you think that some of ... I mean, at the moment, we've seen this huge rush into the safety of the US Treasury market and away from emerging markets. How concerned are you, Richard, about the plight of emerging markets in Asia and which are the most vulnerable in this very messy shrinking world?

Richard Wong:    00:33:45    Well, on the whole, I think all of emerging Asia is very uncertain. For one thing, how is the pandemic statistics look like in most parts of Asia, like India, Indonesia, is that we know we do not have a lot of good quality data. Just in Jakarta, number of deaths in Jakarta... and this is not because of COVID-19, because we do not know why people die, we don't have that data. But just in Jakarta, death numbers in March is 40% higher than any of the months in the previous two years. Now, it may be how you interpret that number is that we don't know but all this will probably take a toll on economic activity. So, I think it is rather uncertain in Asia.

Richard Wong:    00:34:56    Now Asia is very trade driven, especially to smaller economies. There is also uncertainty of re-diversifying some global supply chains. This will not happen quickly but specifically people will not be investing very much during the coming year at the very least. So I would anticipate that they are not very many choices for emerging Asia because so much of that, the growth is driven by globalization. And as this slows down, I think we are talking about at least a year of zero to negative growth. Right. At least a year if not more.

Richard Wong:    00:35:49    And then a lot of the activity in emerging Asia has been driven by US economy as the ultimate consumer. And this too is not a major driving force going forward very quickly. So I would think, now country's most likely to be hit, Thailand, Australia. We'll see about the other ones. These are the most obvious to come. In Hong Kong, the first quarter -9.8% growth. Right. This is wide open economy and therefore when the whole world slows down, we feel it instantly. Even though our COVID-19 epidemic is very trivial at the moment.

Henny Sender:    00:36:45    Yeah. We have Randy back. So Randy, you were the first one to mention supply chains. So several questions for you. Now that you've joined us again.

Randall S. Kroszner:    00:36:58    Great.

Henny Sender:    00:36:58    Who will be the beneficiaries as people try to diversify away from China and how successful can they be in diversifying away from China? Chang had mentioned Apple for example, which depends hugely on China. Who can actually offer the kind of scale and low costs and productive workers of China? So who will be the major beneficiaries of any attempt at diversification and how much will China be hurt by that?

Randall S. Kroszner:    00:37:45    And so I think this is an important point of basically it's going to be accelerating a trend that had already been there. China was become used to be the very low cost producer. As China has developed and become wealthier, it has become less low cost. And so even without the trade disputes, even without the recent COVID issues, people had been looking to Malaysia, had been looking to Thailand, had been looking to Indonesia, Vietnam as other places to be able to produce.

Randall S. Kroszner:    00:38:21    Certainly a country like Indonesia is a very large country so it has enormous scale. And also large plants can be built in these other places. But there's also a broader concern on just relying outside of your home country. And so I think home producers in a country like the US are going to benefit. You've got the increasing concerns about supply chain, so in risk management sense, people bring things back home. But also with dramatically lower energy prices, which I think are likely to be with us, that makes domestic manufacturing in the US more feasible than it was before. So I think you're going to see onshoring in general and I think particularly in the US and then some movement to some of the other countries within Asia.

Henny Sender:    00:39:12    Can we talk about it in a more granular way since we've gotten so many questions from the audience about specific countries in Southeast Asia? And then, of course, I'll get to India. But Vietnam for example, where Samsung makes most of its cell phones, is already close to capacity. I could say the same about Bangladesh. The productivity of workers in Indonesia is extremely low. Do you think that Southeast Asia will not be by and large a great beneficiary of this?

Richard Wong:    00:39:58    Can I step in? Yeah, I think I would say yes, they would not be a great beneficiary. Say one of the reasons why China could grow so rapidly was to a large extent... Actually China started to open up around 1979. And before really globalization in terms of global supplies, chains that turned China into a manufacturing powerhouse was China had about 10, maybe 15 years, head start in restructuring its economy so that became more business-friendly to foreign investments. And that was pretty crucial.

Richard Wong:    00:40:46    Now that type of reform and opening up was partly internally driven policy that was very successfully executed in China. And they had benefited from the experience of Hong Kong in terms of learning how to create a business friendly environment 10, 15 years before global supply chains took up.

Richard Wong:    00:41:11    Now in most of the other parts of the world, like South Asia, Indonesia, which would have the size and scale as an alternative to China, I don't see those types of institutional reforms creating business friendly environment moving forward easily. The institutional drive to make that change on a very rapid scale is not apparent to me. Now, Vietnam is able to make some of that progress. Korea and Taiwan have accomplished that a long time ago, but then they don't have that kind of scale.

Richard Wong:    00:42:02    Whereas it might be easier from an institutional, friendly, business friendliness point of view to bring some of that back to the high cost economies, advancing economies for that reason then it is actually to move in to take advantage of low cost areas because the institutional barriers, the business friendly environment, is a big part of the cost. And that's why, as you mentioned much earlier, productivity isn't that high, and therefore diversification from China to the rest of Southeast Asia or South Asia I think is not an easy task.

Henny Sender:    00:42:46    Many of you in the audience have asked questions about India. It's interesting to me that we haven't said, "Oh, India could be a beneficiary of the diversification away from China." Which one of you wants to take the question about, can India be a beneficiary of diversification away from China? Can it be the beneficiary of anti-Chinese rhetoric or do you think that India and its policies, particularly it's protectionism, its lack of infrastructure development mean that it will not be a big beneficiary of a post COVID world recovery?

Chang-Tai Hsieh:    00:43:39    I can jump in there.

Henny Sender:    00:43:42    Thank you.

Chang-Tai Hsieh:    00:43:42    I just don't see it. I just don't see it, particularly with the current Indian administration. The current Indian administration, it's clear now that their agenda is essentially beating up on the Muslims. I mean, it's clear that that's what they're devoting a large part of their political capital on.

Henny Sender:    00:44:04    This Hindu revivalist nationalistic agenda, yes.

Chang-Tai Hsieh:    00:44:10    Yes. I mean, it's clear now that that's what they're doing. When the current administration came in, it seemed that they might be doing things that would make India a challenger to China, but I just don't see that. I mean, essentially the way that you want to think about the structure in India is that local governments have basically no funding and no political capacity. And in terms of China, that's where a lot of the action is taking place. So then the issue is basically whether the central government or whether the state governments in India are focused on solving the infrastructure problems, solving the problem of ports and of roads and of highways and of power, just the basics of what you need of solving the problems of the allocation of land.

Chang-Tai Hsieh:    00:45:09    And I just don't see that happening anywhere in India. Yes, there's a tremendous amount of potential, but it sort of reminds me of the other place in the world I do a lot of work on it, is South America. So it reminds me of the joke that people tell about Brazil that Brazil is and always will be the country of the future. So, yes, there's a tremendous amount of potential but ...

Henny Sender:    00:45:37    Never materializes.

Chang-Tai Hsieh:    00:45:39    Decades pass by and it just doesn't happen. So I just don't see it.

Henny Sender:    00:45:45    Let me take it one step further. Some of you have started asking questions that are very interesting about things we haven't talked about as much yet. One of you asked whether de-globalization will be inflationary, and I wanted to combine that with the deflationary pressures of technology. I find India terrifying in that it's a young population. They need to generate a million jobs a month for their young people moving into the cities. They generate less than a million jobs a year. How significant deflationary pressures will be in countries like India from technology? And how does that de-globalization being potentially inflationary and technology being potentially deflationary, how did they play out across Asia? Randy, why don't you take that?

Randall S. Kroszner:    00:46:53    True. It's a very, very interesting question because there have been a lot of questions raised about, what are going to be the inflationary pressures given the enormous amount of debt that's being issued, given me an enormous amount of central bank actions and central bank purchases of assets. After the Global Financial Crisis, back when I came back to Chicago in 2009, [inaudible 00:47:19] Chicago was still worried about inflation and you're going to unleash this enormous burst of high inflation.

Randall S. Kroszner:    00:47:32    I simply I didn't think so and obviously the last decade we've had relatively low inflation rather than high inflation. And I think, at least in the short run, the shock is all about reducing, is going to be deflationary, significant reductions in demand despite central banks putting a lot of liquidity out and a lot of resources out. They're just being held on for individuals and saving, [inaudible 00:47:57] financial institutions as reserves. So I don't think you're going to see, at least in the short term or intermediate run, that burst of inflation.

Randall S. Kroszner:    00:48:11    The de-globalization [inaudible 00:48:13] globalization, we usually think has moved production around the world to the cheapest producers, and so also helped to reduce the real costs of goods and services. Some of that may be reversed, but also what's interesting is in some sense we weren't taking into account a risk-adjusted price. So we were taking into account a price under normal circumstances, but not [inaudible 00:48:35]. This may be really cheap, but I'm taking a big risk that maybe once a year or once a decade or once every two decades, I can't get the good, so the price effectively becomes infinite.

Randall S. Kroszner:    00:48:48    And so I think that's a very different way to think about crisis, but I think it's very important to have that risk piece in it when we start to think about the breakdown of the supply chains and things coming back on [inaudible 00:49:03]. So it's a simple accounting sense there may be some upward pressures, but there may be lower costs in the long run associated with that if you have better risk management. But I think at least for the short term, intermediate term, the [inaudible 00:49:21].

Richard Wong:    00:49:23    Yeah. I think the foreseeable year type of time horizon, it's really the contraction of demand that's really going to hit, and that is a deflationary pressure. Now if we talk about the supply side, this is basically because supply chains are disrupted and therefore there will be bottlenecks of production. There may be pockets of certain types of goods, certain types of services, in some sectors, where you will see that acute shortage. Medical equipment. But that is only price increases in particular markets, as opposed to economy-wide effect. And furthermore, as deglobalization is already happening to some degrees over the past year, past two years, it's already happening, I don't see that as being a cause for inflationary going forward.

Henny Sender:    00:50:38    Thank you. Chang, a number of questions have come up about will emerging markets find themselves in debt traps? Will we see sovereign default? And I want to combine that with Randy's point about how we'll see so much industry coming back to the US. It won't leave China for a different emerging market. We have a new competitive advantage in the US, which is incredibly low energy costs, plus a big market. How concerned are you that the gap between the developed world and the emerging world will actually widen in a post-virus planet, not narrow, given that so many countries won't be able to attract quality jobs and manufacturing, and will have massive debts, and won't have the resources to provide their citizens with a social safety net?

Chang-Tai Hsieh:    00:51:49    I'm going to break it down into two parts. The first part of your question is about the issue of debt. I want to break it down between the short run and the long run. The short run, here's what we're facing. Point one. This is the first time that we have seen an adverse shock hit every country in the world at exactly the same time. So it's a worldwide shock. This is very different from what we saw in 2008 and 2009, which was a very asymmetric shock.

Chang-Tai Hsieh:    00:52:30    Number two, what you see in all the rich countries of the world is that they're spending and they're borrowing tremendous amounts of money. In the US, we borrowed $3 trillion in the last three weeks, and in terms of a fraction of GDP, most of the European countries have done roughly the same amount. China has done relatively little in terms of a rescue package, but it might do more. But the other thing to understand about China now is that even before the pandemic hit, China was already running a current account deficit. So it's no longer the big surplus country that it was…-

Henny Sender:    00:53:19    A really important point.

Chang-Tai Hsieh:    00:53:21    Right. It was already... and then you want to add to that. So the question that you want to ask is, the $3 trillion that the US is borrowing, where's that money coming from? Because for every transaction, there are two sides. The US is borrowing, who is doing the lending? Back in 2009 and 2008, it was the Chinese. They were the surplus country of the world. They're nolonger the surplus country of the world. So I think that what we're seeing, and this ties back to the point that you made, is that a lot of the borrowing is being done by investors in emerging markets.

Chang-Tai Hsieh:    00:54:10    Sometimes we'd call that the flight to safety, and we've seen that in the last two months now. There's been a tremendous flight to safety. I've been tracking closely the outflows of capital coming from Mexico in the last two months and it's something approaching $10 billion. It's the most that we have seen in a given amount of time. So now think about what happens in a place like Indonesia.

Chang-Tai Hsieh:    00:54:40    Even if you don't know whether you are hit by the pandemic because you have no testing, you should know that it's there, even if you can't quantify it. What do you do? You need to ramp up your spending on buying tests. You need to ramp up your spending on medical and building up your hospital capacity. And you also need to spend something on trying to make sure that all these informal workers don't die during the transition and all of these businesses don't close.

Chang-Tai Hsieh:    00:55:14    Suppose you need 5% of GDP in order to do that. So let's say that it's less than what you need. Where are you going to get that money from? And at precisely the time when your capital's leaving, precisely because of what the US and the European countries are doing. Okay?

Chang-Tai Hsieh:    00:55:34    So I think that what we're going to see, and what we're going to see in the next year, is a wave of sovereign defaults. Because essentially, countries will be faced with, do I save my people? How do I save my people? I'm going to look at what I can cut, or what parts of the budget can I get the money from? And for the countries for which debt service payments are big, they're going to say, well, do I service those debt payments or do I save my people? Some countries will be making that choice.

Chang-Tai Hsieh:    00:56:11    Now, other countries may say that servicing debt payments is going to be really, really important to me. And I can see some countries making that choice. But then, the other side of that is going to be that their economies are going to die as the consequence. So it's going to be, I think, that really hard choice that we are going to see countries start to make. And I don't think we have really come to grips with the crisis that's going to hit places like Indonesia that don't have much of a domestic bond market that they could use and where capital is fleeing.

Henny Sender:    00:56:50    Thank you.

Chang-Tai Hsieh:    00:56:51    So I do think that really is a first order question.

Henny Sender:    00:56:54    Because Randy had missed part of the discussion, I will turn to him for the last question and then I'm going to close with an editorial comment as my prerogative, as moderator.

Henny Sender:    00:57:06    Randy, what more should the developed world do, both to help their poorest people, because while this attacked every country at the same time, what Singapore shows us is that the burden tended to fall disproportionately on people who were less well off. What more should the developed world do, both to help it's relatively poorer off people and those in emerging markets? Thank you.

Randall S. Kroszner:    00:57:44    It's a super important question. And so, actually, I think the most important thing everywhere is gathering data and testing, because what happened with the responses, when you don't know what's going on, you use a blunt instrument. So you do this broad lockdown. But as we've gathered more data, we have more information, we can do much more targeted interventions that actually help preserve livelihoods.

Randall S. Kroszner:    00:58:10    So I think if you want to revive the economy, which is extremely important, because in [inaudible 00:58:16] tend to get hit harder than the higher end of the spectrum. This is no different and it can be even more extreme here. You really want to make sure that you haven't forgotten about those people and these partners, and you try to be true [inaudible 00:58:38] and the best way to do that is by narrowing the interventions so you can both preserve lives and preserve livelihoods.

Randall S. Kroszner:    00:58:47    Second is, I think, thinking more creatively about welfare policies. The way we have unemployment work in the US and many other countries is you become unemployed, you then get some sort of supplement for a certain number of weeks or a certain number of months, and then that disappears. That may not be the best way to provide support for people. What you might want to do is have a different kind of structure, something that I've sometimes called the personal reemployment account, where rather than just getting a little bit money each month, at least in the US you have to [inaudible 00:59:27] office to be able to show you've been looking for a job and such.

Randall S. Kroszner:    00:59:31    Well, sometimes you need people to move, you need people to be able to move, and so you don't want to tie their payments to being local. So if you give them an account that would have the equivalent of three months of the payments that they would otherwise get, [inaudible 00:59:47] it's much more sensitive to the needs of, especially people [inaudible 00:59:57].

Henny Sender:    01:00:00    You're breaking up, so I'm going to cut you off anyway, because we're out of time. Chicago always says focus on the data and I think that's why we had such a great discussion today. I want to apologize to all the members of the audience whose questions weren't answered. You had less of a chance of getting answered if your questions weren't about Asia. There were a number of questions about Europe. I suggest you tune in next week at the next one, which will be from London. But meanwhile, I want to thank all my panelists from Hong Kong and let you all know that if you come here to visit the beautiful Booth campus in Hong Kong, you will never want to leave. Thank you so much for joining us tonight.