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In the famous cover engraving of Thomas Hobbes' "Leviathan," the state is embodied in an authority-bearing figure presiding over a serene European landscape. But as the world tries to reimagine the state in the aftermath of COVID-19, it makes sense to look toward governments like South Korea and Taiwan, which have mixed high state capacity with plenty of technological innovation.   © Illustration by Chuan Ming Ong
The Big Story

Coronavirus: Asia embraces big government to battle recession

Lavish spending, deep debt, high-tech surveillance. Is this the end of the small state tradition?

JAMES CRABTREE, Nikkei Asia contributing writer | Southeast Asia

SINGAPORE -- His face disguised by a black protective mask, Malaysian Prime Minister Muhyiddin Yassin posed for the cameras in early November, holding up a thick red budget document. Inside, its pages bulged with promises for $78 billion of spending over the next year -- the most expensive budget in Malaysian history. Some of it targeted a worsening COVID-19 pandemic via higher health care investment. Other measures tried to kick-start a stuttering economy with cash handouts and infrastructure schemes.

Altogether, the budget pushed spending higher even than in 2020, when Malaysia launched four successive emergency packages to soften the impact of COVID-19.

"This is an unprecedented crisis," Finance Minister Tengku Zafrul Aziz said later in parliament: "The worst economic crisis since the 1930s' Great Depression."

Malaysia is far from the only Asian nation that might seem to be taking inspiration from former U.S. President Franklin Delano Roosevelt and his radical depression-era "New Deal" program to jack up public spending in the face of an economic catastrophe. Governments around the region have spent unprecedented sums over the past year, while also assuming ever-greater control over their citizens' lives.

Wealthier countries like Japan and Singapore launched wave after wave of stimulus to protect vulnerable companies and workers. Emerging economies from China to Thailand have done the same at a smaller scale, boosting outlays and piling on debt. Taken together, Asia's leaders have so far unveiled $7 trillion in emergency measures -- easily the largest spending splurge in the continent's history.

A new New Deal: Malaysia's Prime Minister Muhyiddin Yassin, left, and Finance Minister Tengku Zafrul Tengku Abdul Aziz pose with the 2021 budget on Nov. 6.   © Malaysia's Department of Information/AFP/Jiji

The region's pandemic response has in many ways transformed the image of Asian governance -- at least when compared to the lackluster records of many previously admired nations in Europe and North America. The question now is whether the pandemic might transform Asia's governments as well.

For decades, leaders like Singapore's Lee Kuan Yew and Malaysia's Mahathir Mohamad spoke proudly of Asia's tradition of small, nimble public administration. European welfare states were bloated and inefficient, they argued, sapping the energies of their citizens and undermining traditional family structures. Asian government, by contrast, was thrifty, efficient and pro-business. This small-state tradition has proved remarkably durable: Even as Asian nations have grown rapidly richer over recent decades, their governments remain, on average, much smaller than in other regions of the world, according to research from the Asian Development Bank.

Deeply rooted though Asia's small-state tradition remains, three forces are combining that could now begin to usher in a new moment of larger, active government, beginning with the huge sums spent responding to COVID-19. This is enabled by a second factor, namely a new era of unusually cheap borrowing, freeing governments from the constraints of financial orthodoxy. These then combine with a third set of longer-term trends that will increase demand for state action, from providing health care to rapidly aging populations, to combating widening social inequality and climate change.

Taken together, these have begun to prompt a rethink about the role of the state in Asia, argues Ong Kian Ming, who was Malaysia's deputy minister of International Trade and Industry until earlier this year. "There has been a big change of thinking from governments about what is possible," he says. "And this has come in part from new demands from the population."

Pedestrians in front of Shinjuku Station in Tokyo on Nov. 19. At 40% of GDP, Japan already has European levels of public spending. (Photo by Wataru Ito)

Asian governments are not suddenly going to transform into expensive European-style welfare systems. At some point, all the money borrowed during the pandemic will have to be repaid. But historically, moments of political and economic crisis have resulted in demands for more government -- be that the aftermath of the Great Depression, or earlier pandemics from cholera to the Spanish flu.

One further famous example came amid the chaos of the English civil war in the mid-17th century, when the political theorist Thomas Hobbes argued for the creation of a new kind of "Leviathan" state, ruled by an absolute and unchallenged sovereign power. Now, in the aftermath of COVID-19, might Asian nations begin to give birth to a newer, larger and more active state Leviathan of their own?

'Whatever it takes'

Asia's experiment in big government begins with the scale of its repeated stimulus packages, more of which are on the horizon. Japan's Prime Minister Yoshihide Suga spoke in November of another package to follow two giant earlier rounds of spending, totaling $2.2 trillion, or not far off half a year's worth of gross domestic product. Singapore's spending record, for a supposedly frugal nation, has been just as dramatic. The city-state spent more than $100 billion this year on everything from cash handouts to support for struggling airlines, hotels and builders.

Transport Minister Ong Ye Kung recently predicted more was likely early next year: "Definitely you're going to see more fiscal policies coming into play," he said.

Heavy spending is true elsewhere. China's initial $500 billion stimulus, unveiled in May, might look small compared to its huge post-2008 crisis rescue, which added up to about 13% of the country's GDP. Still, Beijing will end up spending about 7% of GDP on COVID-19 recovery this time, according to a recent report by economist Christine Wong. And, again, more is likely: "The government is preparing to do 'whatever it takes' to support economic growth and employment," Wong wrote.

Poorer countries have pushed boundaries too, with India and Myanmar both unveiling measures adding up to about 2% of GDP. This might look paltry next to the likes of Japan, suggests economist Sean Turnell, a senior adviser to State Counselor Aung San Suu Kyi. But Myanmar's efforts come in a country where tax revenues add up only to 5% of GDP.

"For Myanmar and many other poorer countries in Asia, this is a huge shift," he says. Permanently larger budgets in areas like public health and infrastructure are now likely. "The long-term result will unquestionably be a bigger state in terms of spending, albeit from a low base," Turnell suggests.

Beyond financing, the pandemic has expanded the scope of government in other ways. Politicians have rushed in rules controlling when people can move, with whom they can socialize, and when they can travel, if at all. Citizens have grown familiar with intrusive digital monitoring, from contact tracing apps to check-ins outside workplaces and malls. Companies have demanded, and been given, expensive bailouts, while workers have happily accepted handouts to protect their wages.

If Asia is indeed philosophically averse to big government, as figures like Lee Kuan Yew might have suggested, it is hard to see that on display during the pandemic. Instead, COVID-19 appears to have raised expectations about the role governments can play.

"The bigger picture here is that politicians suddenly have this feeling of: 'Oh my goodness -- we can do more. We don't need austerity! And there is money for it, too,'" suggests Bert Hofman, head of the East Asian Institute, a think tank at the National University of Singapore. "And now they will be thinking, hang on, if we can spend 10% or 15% or 20% of GDP on COVID-19, then can we also spend these sums on climate change, or education, or health care? What exactly is holding us back?"

One factor, above all, no longer checks those ambitions: money. Traditionally, profligate politicians have been held in check by financial orthodoxy, not least the risk of alarming investors and ratings agencies by running up debt. But with global interest rates at historic lows, many of these fears have vanished.

Activist central bankers can take much of the credit. Prior to COVID-19, many analysts expected the gradual winding down of a decade of extraordinary monetary activism. But led by U.S. Federal Reserve Chair Jerome Powell, global central banks have only grown bolder in the pandemic's aftermath, flooding markets with liquidity and supporting struggling businesses.

Supporters of Aung San Suu Kyi after the general election in Yangon on Nov. 9. Myanmar’s efforts come in a country where tax revenues add up only to 5% of GDP.    © Reuters

Investors now expect a "lower for longer" rate scenario for the foreseeable future. "We remain committed to using our tools to do what we can, for as long as it takes," as Powell put it in September.

This represents a major shift, as author Sebastian Mallaby wrote recently. "Taken individually, either the global financial crisis of 2008 or the global pandemic of 2020 would have been enough to change public finances, driving governments to create and borrow money freely," he claimed. "Combined, these two crises are set to transform the spending power of the state. A new era of assertive and expansive government beckons."

And it is this change -- which he dubs the age of "magic money" -- that has changed the landscape for Asian governments. A handful of richer economies like Hong Kong, Singapore and Taiwan could draw on fiscal reserves to support emergency spending. But most have relied instead on plentiful and easily available debt instead, uninhibited, at least for now, by worries about rating downgrades or bond market vigilantes.

Take Malaysia again. Traditionally, it has followed fairly orthodox spending policies. But in August it hiked its self-imposed debt-to-GDP ceiling to 60%, the first increase in a decade. Now its latest debt-fueled budget will leave a fiscal deficit hovering around 6%, almost double the level last year.

Even once-austere bodies like the International Monetary Fund are now egging on emerging markets to spend their way out of COVID-19 recessions. "In the past, the government would have been much more careful about breaching spending limits," says Ong Kian Ming, the Malaysian former deputy minister. "Any reservations that governments like Malaysia may have had about fiscal deficits ... has for now been de-prioritized."

Elsewhere, Asia's emerging-economy central banks have begun to experiment with the kind of unorthodox monetary policies once thought possible only in much richer nations. In July, Bank Indonesia shocked investors with plans to buy up $40 billion of its own government bonds, in effect monetizing the state's debts. The Philippines' central bank has taken similar steps, albeit at a smaller scale. Such moves would once have set off bright red flashing warning lights, suggesting an attitude of reckless fiscal profligacy and signaling problems of inflation down the line. For now, investors have simply shrugged and moved on.

The result of all this will be sharply higher debts and deficits. Globally, the world faces a "debt tsunami," in the words of a recent report from the Institute of International Finance, a financial services research group. It suggests global debt levels will balloon by a record $15 trillion this year, with especially sharp increases in emerging markets.

In Asia, research from Nomura suggests the fiscal deficits of around a dozen major economies will jump to 7% of GDP next year, up from a little over 2%. Meanwhile, government debts across emerging Asia will jump to 77% of GDP by 2025, roughly twice the level prior to the pandemic, according to recent IMF data. That is still far lower than the levels expected in advanced economies, where debts will rise to more than 125%. But for a region used to traditionally smaller states, and low levels of debt, it nonetheless represents a significant shift.

Commuters ride a train in Kuala Lumpur. Malaysia's latest debt-fueled budget will leave a fiscal deficit hovering around 6%, almost double the level last year.   © AP

Cheap money, costly debt

Caution is clearly needed in thinking about Asia's new magic money era.

"There is a substantial body of informed opinion that would urge caution against thinking that you can borrow more and more, and it is all for free," as Tharman Shanmugaratnam, Singapore's cerebral senior minister, put it during July.

Pandemic-driven recessions will hit government finances by reducing the overall size of regional economies, and thus their space to finance future debts. The specter of ratings downgrades and defaults could return quickly, as shown by the case of Zambia, which skipped a recent bond payment, throwing its economy into crisis.

In Asia, poorer countries like India and Pakistan need to tread with particular care, given both have been hit badly by the pandemic while suffering from generally shaky public finances. "Asian governments might get bigger but not necessarily stronger, because of all this debt," suggests Jyoti Shukla, head of the World Bank's Singapore Infrastructure and Urban Hub.

Nor does lavish pandemic spending necessarily mean a permanent increase in state size. In most cases, Asia's rescue packages have aimed to tide citizens and businesses over until a vaccine can be deployed next year. Stimulus programs have also focused on temporary cash transfers, rather than whole new categories of state action, like building more generous health care or pension systems.

For decades leaders like Singapore’s Lee Kuan Yew, right, and Malaysia’s Mahathir Mohamad spoke proudly of Asia’s tradition of small, nimble public administration. (Source photos by Manami Yamada and Nobuo Watanabe)

Still, emergency moves to raise and spend money have an uncanny knack of becoming permanent. Even the notion of an income tax, for instance, was first introduced by British Prime Minister William Pitt The Younger in 1798, as a supposedly temporary effort to fund his wars against Napoleon.

There remains much still to admire in Asia's traditional small government approach, argues Ludger Schuknecht, a German economist and former deputy secretary-general at the Organization for Economic Cooperation and Development, a club of rich countries. The likes of Singapore and Taiwan -- both of which spend about 18% of GDP on their governments -- deliver outcomes that are comparable in many areas to vastly larger states, like France, which last year spent 56%.

"The best you can say is that Asian governments are smaller, and therefore now have room to grow, carefully and cautiously, into new areas," Schuknecht suggests. "But they certainly should not seek to emulate Europe, where too many governments will emerge from the crisis dangerously indebted."

There are other dangers, too. Rather than a new era of activist government, rapid increases in spending could simply lead to crony capitalism, with recovery packages funneled to favored businesses and regime insiders. The coming years also risk a shift away from the kind of market-led reforms that have until recently dominated the region's economic thinking, suggests Sean Turnell, who fears that lower-income countries like Myanmar now must guard against a self-defeating return to inefficient, state-led growth.

"We need a bigger state in terms of spending on health and education, but not a bigger state in terms of the role for state-owned enterprises," he says. "So you have to stare down these vested interests that scream for greater projection."

Even so, politicians around Asia find themselves looking at what might be possible in the pandemic's aftermath. States need not balloon in size, Singapore's Shanmugaratnam suggests, but they must ready themselves both to take on new responsibilities and to respond to new demands from citizens in the post-COVID era, not least in the face of long-term trends like aging and rising inequality.

"You don't necessarily have to be very large, but you have to be very good at the most important things you should be doing, and go about it with the spirit of an activist," he said earlier during the pandemic, while calling for a "new compact" between citizens and the state.

Might this kind of vision for activist government now bring an intellectual shift too? In his memoir "From Third World to First," Singapore's founding patriarch Lee Kuan Yew gave a typically punchy defense of Asia's small-state tradition.

"We have arranged help, but in such a way that only those who have no other choice will seek it," he wrote. "This is the opposite of attitudes in the West, where liberals actively encourage people to demand entitlements with no sense of shame, causing an explosion of welfare costs."

This ideological commitment to fiscal prudence and limited government has proved remarkably resilient. Governments around Asia consumed on average no more than a fifth of GDP in the decades prior to the global financial crisis in 2008, the lowest of any region in the world, according to the ADB. States in Europe, by contrast, took in around 45% on average.

Pedestrians stroll through Singapore's financial district. The IMF expects government debts in Asia to hit 77% of GDP by 2025, double the pre-pandemic level. (Photo by Akira Kodaka)

Yet attitudes to bigger government had already begun to change quietly across much of Asia in the years prior to COVID-19, in ways that may already have begun to erode Lee's small-state consensus. Japan, which spends around 40% of its GDP on its state, already looks almost European. In fits and starts, countries from China to South Korea have also begun to build something approaching a modern welfare state, providing more generous and comprehensive support in areas like pensions and health care.

From Malaysia to the Philippines, other governments have experimented with handing out direct cash transfers to poorer citizens. And previously frugal states like Singapore have launched programs to support everyone from younger children and older citizens, shepherded by politicians like Shanmugaratnam, whose political and ideological instincts in truth have more in common with moderate European social democrats than they do with zealous Asian fiscal conservatives.

A gradual shift toward bigger government should even have been expected prior to COVID-19, given a long-term trend that suggests nations will tax and spend more as they grow richer. There is even a name for this: "Wagner's Law," named after the German economist Adolph Wagner, who in the 19th century predicted that state spending would grow ever higher as societies developed, and politicians responded to citizens' demand for greater public goods and social security. It is for this reason that nations like Indonesia, whose government now boasts a paltry tax-to-GDP ratio of just 12%, have made raising more revenue and growing the size of the state an official policy objective.

Asia's experiment with larger government comes at an interesting geopolitical moment, too. Regional leaders once looked westward for inspiration on public services reform. But disastrous pandemic responses from the likes of American President Donald Trump and Britain's Boris Johnson have undermined faith in once-admired Western models, denting along with them the ideas of freedom and limited government that thinkers in the U.K. and U.S. have often espoused.

"It is hard to see a coherent pattern overall in terms of what kind of state has done well during the pandemic," suggests political scientist James Robinson, co-author of "Why Nations Fail," a book about economic development. "But Western societies with a very individualistic post-Thatcher-and-Reagan public services models certainly seem to have been more vulnerable to this kind of shock."

Central banks' "magic money": Bank Indonesia headquarters in Jakarta. (Photo by Ken Kobayashi)

Indeed, it may be that the search for models of better government will now begin to turn the other way. Asia's governments have traditionally been smaller than their Western counterparts, but they have also been more interventionist and less anxious about state power in areas from industrial policy to civil liberties.

As the world looks for ways to re-imagine the state in the aftermath of COVID-19, it makes sense to look toward Asian governments like South Korea and Taiwan, which both performed well during the pandemic by mixing high state capacity with plenty of technological innovation, rather than countries in Europe or North America, which performed much less well.

"Western governments are taking a page from their Asian rivals and moving away from the free-market doctrine that defined their economic thinking for decades, instead embracing greater state control of business activity," as one recent article put it in The Wall Street Journal, traditionally a bastion of U.S. conservative thinking.

Others are optimistic that Asia itself can become a pioneer, developing new models of governance that others might emulate, while also solving many pressing regional problems. More public spending does bring risks of waste and cronyism, suggests Kanni Wignaraja, an assistant secretary-general at the United Nations Development Program, who has been studying the region's stimulus programs. But, managed carefully, the post-pandemic moment also presents opportunities to invest in new public health infrastructure to prevent future pandemics, she claims, or to channel stimulus funding into areas like renewal energy or sustainable development.

There are plenty of other reform opportunities too, from making tax systems more progressive to beginning to push back once again against deep social and gender inequalities, many of which have widened during the pandemic.

"You'll see in the coming years a rare chance literally to redefine the role of the state in Asia," Wignaraja says. "A reset will be difficult. But it could be possible, with the state returning post-COVID-19 in a way that is bigger and better. The old way of doing things hasn't worked. So why not try something new?"

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