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COLUMN

Asian giants lead the way out of recession

JASPAL BINDRA
Six months after leaders from the world's leading economies joined 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 1930s. 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 tire 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 1930s. 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 1990s when a hurried rise in tax rales, 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 pat-
terns 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 tire 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.
The water is the Standard Chartered Bank CEO for Asia