Private investment and demand is yet to pick up in recession-hit developed economies which confront high unemployment and unprecedented levels of public debt which would take years to overcome. While Asia may be leading the current global recovery, developing countries in general would experience a hardening of terms of external finance and possible reductions in capital flows including FDI, apart from weakened external demand.

The messages from the report are hardly promising for countries like India hoping to get back to pre-crisis 9 per cent growth by 2011, given the prospect of higher borrowing costs and lower credit levels flows. Higher international capital costs over the medium-term would keep developing country growth rates below potential and well below recent highs, the Bank said.

The current pace of global recovery could also slow as the impact of fiscal stimulus wanes and both the Bank and IMF have therefore cautioned against premature withdrawal of stimulus measures in general though domestic conditions including fiscal space may vary among countries in regard to scaling down the level of support or exiting monetary policy accommodation.

The Bank notes South Asia seems to have escaped the worst effects of the crisis with its GDP growth at 5.7 per cent in 2009 and, with relatively resilient domestic demand coupled with fiscal stimulus measures in some countries and remittance inflows, the region could well record 6.9 per cent in 2010 and 7.4 per cent in 2011. India's growth is projected to rise from 6.0 per cent in 2009/10 to7.5 and 8.0 per cent over the next two fiscal years.

Global GDP, which declined by 2.2 per cent in 2009, is expected to grow 2.7 per cent this year and 3.2 per cent in 2011, according to the latest World Bank estimates.. Prospects for developing countries are for a relatively robust recovery, growing 5.2 per cent this year and 5.8 per cent in 2011 — up from 1.2 per cent in 2009. GDP in rich countries, which declined by 3.3 per cent in 2009, is expected to increase much less quickly—by 1.8 and 2.3 per cent in 2010 and 2011. World trade volumes, which fell by a staggering 14.4 per cent in 2009, are projected to expand by 4.3 and 6.2 per cent this year and in 2011.

The report suggests that developing countries could proactively counter the lingering negative fall-out from the global crisis by tapping the enormous growth potential that domestic savings represent, strengthening their financial systems, reducing operating costs and increasing productivity and thereby regain the higher growth path that the crisis has derailed. The Bank also calls for expanding regional cooperation in trade and finance.

Large fiscal imbalances and extended period of weak external demand would increase pressures on Government coffers with rising public sector financing requirements and higher interest rates crowding out private investment. At the same time, failure to mop up excess liquidity in banking system or to bring down large fiscal deficits could lead to higher inflationary pressures. Adverse weather or policy actions could also cause food prices to rise significantly in 2010.

Expected progressive tightening of monetary conditions over the forecast horizon will contribute to an easing of inflationary pressures by 2011 across the region, the Bank said. Some recovery in external demand for goods and services is anticipated while improving consumer and business confidence, combined with the lagged effects of expansionary monetary and fiscal policy measures and a positive turn in the inventory cycle, should contribute to strengthening domestic demand in South Asia.

Speaking on the role of Asia in the evolution of post-crisis global economy, IMF Managing Director Mr. Dominique Strauss-Kahn says “this is a historic moment for Asia“ which would need to adapt to the new challenges. Many Asian countries are already “moving rapidly to identify the key elements of a new model that can deliver sustained growth.” This included the realisation that there are limits to the pace of export growth and that domestic and regional demand would need to play an increasingly important role in underpinning Asia's growth.

On resumption of capital flows to the region, the IMF Chief noted that policymakers in recipient countries are concerned now with how to manage these flows—their impact on exchange rates, domestic demand, financial stability—and the danger of asset bubbles. “Loose” monetary conditions may also be generating bubbles in local real estate and asset markets, the Bank report said.

China has indeed moved to rein in excessive bank lending. The Central bank has asked banks to balance their lending to avoid abrupt fluctuations, after having raised the reserve requirement on banks earlier in the week by 0.5 percentage point. China has been most successful in reviving growth in the latter half of 2009 and the World Bank projects growth to rise from an estimated 8.4 per cent in 2009 to 9.0 per cent in 2010 and in 2011.

IMF says Asian economies have to step up public investment with its significant long-term development needs including in infrastructure and education. Investment in low-carbon, or “green” growth would also be useful. Technological innovation is key to managing climate change at a reasonable cost. Innovation in Asia is already making major contributions, Mr. Strauss-Kahn says. In China a shift towards stronger private consumption will be essential for developing new sources of growth.

The region's long-term success will also depend critically on the active participation of Asian nations in international efforts to build a stronger global economy. As Asia's economies have risen in global stature, so too has their voice on the international stage—and their responsibility to help find solutions to global policy challenges. (IPA Service)