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hands at the G20 meeting in London, the global economy is slowly but
certainly emerging from the slump, led by the resurgent economies of
Asia. For the first time in the modern era, countries with diverse
political ideologies and at different stages of economic and social
development have made common a cause to tackle the world's first
truly global economic crisis and prevent a repeat of the Great
Depression of the 1930 s. They have done so by keeping interest rates
low and by taking concerted steps to provide unprecedented amounts
of financing to banks, businesses and consumers. China is recovering
from its most severe slowdown in decades to report a 7.9 percent
growth in the second quarter from a year earlier, up from 6.1
percent in the previous quarter. India has reported a 6.1 percent
growth in the same quarter. All the major Asian economies have
returned to growth, including Japan. Even Germany and France are back
on the growth path. Yet, this is no time for complacency. The US
economy, the world's biggest and still the main engine for global
commerce, remains in recession -- its deepest and longest since the
1930 s. Companies are still shedding jobs and millions have been
forced back into poverty. Meanwhile, financial institutions worldwide,
after writing off credit losses worth more than $1.6 trillion, are
still cautious about making loans and investments. These are red
flags, which should provide enough reasons for global policy makers
to carry on with the well-orchestrated fiscal and monetary stimuli
embarked upon less than a year ago. Governments and central banks
will need to map out an equally well- coordinated exit route to
reabsorb the unprecedented levels of liquidity when the global
economy is securely out of the woods. That time has not arrived yet.
Indeed, the follow-up G20 meeting in Pittsburgh could not have come
at a better time. Global leaders must know that the ongoing global
recovery will remain fragile as long as rising unemployment in the
US, Europe and Japan is reversed and until consumers in those
economies start loosening their purse- strings after repaying some of
their debts and rebuilding their savings. Any move at this stage to
tighten monetary and fiscal policies, especially in the developed
world, risks the world economy repeating Japan's mistakes during the
1990 s when a hurried rise in tax rates, without simultaneously
loosening of monetary policy, triggered a financial crisis and
eventually led Japan into the path of quantitative easing in 2001
which lasted for five years. The resulting surplus of liquidity
amassed by Asia's export-oriented economies found their way to the
west, through investments in western government bonds, helping keep
global interest rates low and perpetuating the excessive spending
patterns of consumers in the US and western Europe. Although
exporters in Asia have seen their trade surpluses shrink dramatically
this year as consumers in the west cut back on spending following the
onset of the economic and financial crisis, it will be some time
before we see a substantial pick up in consumer demand in the east,
enough to offset the slump in western consumption. Paving a
consumption-led growth path for Asia is essential but it will take
years to implement. It will require Asian governments to provide
social safety nets and healthcare guarantees for its citizens so that
consumers do not have to save excessively for the rainy days. It
will also require Asian governments to carry on with economic reforms
to create jobs and increase overall efficiency and productivity. It
will require deepening and broadening of the region's capital markets
to prepare them to absorb large amount of capital generated by the
region's own savers. Asia's reliance on equity capital markets to
fund corporate investments often leads to excessive volatility and,
in some cases, asset bubbles. Meanwhile, the lack of deep and liquid
corporate debt markets prevents the companies from accessing
long-term capital. It is clear by now that the west will take a long
time to repair the damage to its economies caused by the financial
and economic crisis and return to a sustainable growth path. The
onus for engineering a relatively quick recovery now largely rests
with China, India, Korea, Indonesia and the other large emerging
markets. Indeed, these emerging economies have played their new roles
with aplomb so far. It is perhaps pertinent to remember that the
leading emerging economies in Asia -- G20 members China, India, South
Korea and Indonesia -- are largely driven by domestic demand. The
comparatively low levels of consumer debt, high savings and large
populations mean that these economies could surprise on the upside as
they move to a consumption-led growth model. Asia's biggest economies
have also pledged to further the Doha round to give a much- needed
fillip to world trade. This is a welcome development as protectionist
sentiment, particularly in the west, risks stifling growth and
perpetuating global poverty. Meanwhile, China and India have both
pledged to play a constructive role in limiting the damage caused to
the environment from their growing economies at the UN climate
change talks in Copenhagen later this year. Developed economies among
the G20 member nations have a particularly important role to play
in Asia's efforts to curtail greenhouse gases while maintaining the
region's growth trajectory. Japan and Korea are already thinking of
innovative ways to share their advanced technology and to finance
their use in the rapidly developing countries of Asia. The emerging
powers deserve greater control over international financial
institutions such as the IMF and World Bank, reflecting their
increased economic contribution and role in international trade. As
the world recovers back to health, policy makers should not succumb
to the temptation to undo the gains achieved since London. The need
of the hour is to maintain the pro- growth fiscal and monetary
stimuli, keep working at restoring confidence in the financial
markets by reducing complexity and leverage and fixing the imbalances
that caused the biggest economic turmoil in our lifetime.
