This article first appeared in Forum, The Edge Malaysia Weekly on July 13, 2021 - July 19, 2021

After a year and a half of enduring the Covid-19 pandemic together, countries are separating into two groups. One set, comprising large developed economies such as the US and Europe, as well as China and several smaller nations such as Israel, the United Arab Emirates and Singapore, is vaccinating their populations so rapidly that they will achieve a high degree of protection from the virus soon.

It will not be long before these nations — accounting for roughly less than a third of the world’s population — will be able to speedily open up their economies to normal activities, including allowing travel to safe countries without the onerous quarantine requirements. The rest of humanity will have to continue suffering new waves of infections and all the restrictions and dislocations that they bring, for at least another year, or longer.

Sadly, the divergence in national fates will not end with this pandemic. The same factors that led to differing outcomes in containing the pandemic will also produce disparate trajectories as countries face up to a period of greater turbulence in the world over the coming years.

Why this greater turbulence? Well, start with geopolitics — a highly unsettled world is likely to emerge from the ­US-China clash: We will see a degree of economic bifurcation as these rivals impose financial and technological restrictions on the other. There could be proxy wars or conflicts.

In addition, climate change is accelerating, producing unpredictable extreme weather events and other difficulties. One has only to observe the recent extreme heat in various parts of the world as well as the higher frequency of extreme storms in other regions to appreciate this risk.

Moreover, the radical monetary and fiscal policies employed to combat first, the global financial crisis, and now, the pandemic, will, we believe, almost certainly spark off financial disturbances of some kind over time.

And, we are also entering a period of wide-ranging technological changes. Many of these will be exciting and contribute to a healthier, greener and more dynamic world, whether it is the surge in renewable energy sources or the groundbreaking biomedical improvements or the transformational possibilities promised by artificial intelligence and robotics. But these changes will inevitably also cause dislocations as jobs are lost, incumbent companies that are too slow to change go bust and supply chains are reconfigured.

We could go on but you get the picture — the near future is going to be a period of tumult.

If there is one big lesson from the pandemic, it is about how important strong state capacity is in dealing with crises, whether pandemics or financial shocks or geo­political bombshells or technological dislocation.

State capacity has many dimensions. The most important is the ability to deliver public goods — things that only governments, not companies or individuals, can provide to its people. In the case of the pandemic, a robust healthcare system made the difference between a high fatality rate and a low one — hospital capacity, trained medical professionals, sound policymakers and regulators who could oversee crisis management, inventories of vital drugs, oxygen, life-saving equipment and so on.

But state capacity goes beyond just the public healthcare system. It includes:

•    Sufficient policy space: This became painfully evident when many countries found that they could not provide fiscal support on the scale that stronger countries could because their public debt position was too high or their tax base too narrow, such that high public deficits might lead to a downgrade of their sovereign rating or pressures on their currency. Similarly, not many countries could provide monetary largesse on the scale that the developed economies could. Their central banks had not built sufficient credibility with financial markets and feared that loose monetary policies would lead to weak currencies and high inflation.

•    Administrative prowess: Several governments were quick to impose lockdowns and other restrictions on social and economic activity to control the infections — but could not enforce this effectively because enforcement agencies were either corrupt or too poorly equipped to do so. Others announced ambitious spending programmes to assist the people and boost demand — but disbursement was slow and the economy did not get the support needed on time.

•    Good quality decision-making processes at the top level: The governments that performed better had invested in early warning systems, extensive data collection and processes that had been tried and tested. They appointed technocrats on the basis of merit and listened to them. And the governments comprised political leaders who had a high degree of social responsibility. Such high-quality systems become critical when countries face a crisis where there is huge uncertainty and where the price of making the wrong call can be extremely painful — as in this pandemic. The better-structured systems made superior judgement calls and so did better for their people. It was not as if better-performing countries such as China and Singapore got everything right, they certainly made mistakes. But such systems enabled these countries to quickly rectify themselves when errors were made. For example, China was initially slow to recognise the dangers developing in Wuhan but once the central government realised the precariousness of the situation, it mounted a solid effort which eventually turned the situation around. Similarly, in Singapore, the infection risks in the foreign worker dormitories had been underestimated but it was able to overcome that setback relatively quickly.

Another important takeaway from the pandemic is that the make-up of the economy is another determinant of good performance. Remember how Thailand was fairly effective last year in containing the pandemic — and yet suffered a terrible body blow to its economy. This was because the economy was heavily dependent on tourism, which of course dried up almost completely when the pandemic spread. A number of features of a country’s economy are important in shaping its resilience to exogenous shocks:

•    First, how diversified is the economy in terms of growth engines? The more there are separate sources of growth, each independent of the others, the more likely the economy is to weather storms like a pandemic or a global financial shock. No one sector should have a preponderant influence on the economy. The economy should also have an export base that is varied, not wholly reliant on a single product (such as oil) or depending excessively on a single export market. The diversity should also extend to sources of government revenue so that the government’s ability to support the economy is not damaged during an economic shock.

•    Second, a sound financial system helps provide a buffer against shocks. Having banks that are strongly capitalised and well supervised, with robust risk management practices and underpinned by a healthy credit culture helps greatly — otherwise if the economy tanks and borrowers stop servicing their loans, banks could fail or cut back sharply on credit, and so aggravate a slowdown into an economic collapse.

•    Third, how robust are the external accounts? In another crisis, an economy could find itself with plummeting exports, which deepen existing large external balance of payment deficits. That could trigger a run on the currency and add to the country’s woes.

•    Fourth, having strong indigenous production capacity in key areas: South Korea and Taiwan have strong locally owned companies that governments can turn to for help in a crisis. In both countries, indigenous firms stepped up to the plate to manufacture face masks or ventilators or vaccines. An economy that is too heavily oriented towards foreign-owned MNCs might not be able to respond as quickly or as effectively in an emergency.

Top-down policymaking is certainly important but it won’t be enough if it is not matched by common sense and self-discipline at the grassroots level. The experience in the pandemic shows that some communities, somehow, are simply better at handling a crisis than others. Where there is a strong sense of community, underpinned by a high level of social trust, people tend to be prepared to accept restrictions on their freedoms, which are necessary to deal with the crisis. This applies to little things such as wearing masks or to understanding why travel to other regions have to be forsaken, even during festive periods. This sense of community is also helpful in getting people to accept the need to vaccinate themselves — both to protect themselves and to ensure that herd immunity is achieved for the entire community.

Another dimension of community strength is the degree of trust in society. Are people susceptible to fake news and mischievous claims designed to spread alarm and confusion? The trouble is that social media platforms can spread wild ideas in a community unless trust levels in society are high.

All these elements — state capacity, diverse economic structure and a strong community — showed their utility during the current pandemic. But they will be indispensable not just when dealing with pandemics but also when facing up to other potential upheavals.

In the world of greater disruption that we fear, unless governments in underperforming countries make considerable efforts to address the weaknesses that have been exposed, we will again see the same group of countries come through in better shape while the others suffer.

So, a key question is: Will we see reforms to overcome failings in the countries where the pandemic had severe consequences? There are a number of reasons why we tend to be hopeful in this regard for our region.

•    First, the pandemic has been the equivalent of a massive earthquake in the political system. The political elites have been shaken to the core. This was a crisis where political failure had terrible consequences in terms of lives lost and livelihoods destroyed — these are things that produce visceral feelings among people. Apparently “strong” leaders who were clever at projecting an image of toughness and decisiveness have been shown to be frauds — and voters have taken note. So, it cannot be business as usual once the crisis is over. Political leaders will feel compelled to show that they are responding with measures to address failings. Those who fail to do so could face ouster.

•    A second reason for hope is that this region has demonstrated that it can undertake big changes after a crisis. One reason why the economic resilience of Southeast Asia has improved so much since the Asian financial crisis is the thorough-going reforms in the financial sector and in macro-economic policies that followed that crisis. Also, in the years leading to this pandemic, governments across the region were already showing a keenness to push reforms. Look at the huge improvements in rankings in the World Bank’s ease of doing business survey, of countries such as Indonesia and the Philippines. There have been courageous policies to cut popular fuel subsidies and other fiscal reforms as well.

If the optimistic view is borne out, then there is hope for the region. Otherwise, we will have two worlds — one where citizens enjoy good and secure lives and another where people have to consign themselves to despair.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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