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DEMAND now, balance later: this may be one way of viewing the needs of the global economy.
Helped by huge policy stimulus aimed at boosting demand, the world economy looks set to hit bottom this autumn, before beginning a slow, painful recovery.
A key aspect of this recovery will be the need for more balance, with the West spending less and saving more, and regions like Asia and the Middle East saving less and spending more. Emerging economies were not the problem in this crisis, but they clearly are part of the solution.
Two fundamental factors led to this crisis: an imbalanced global economy and a systemic failure in the financial system of the West. Both need to be addressed. Yet there is a danger that one of the unintended consequences of the financial crisis is that it may prevent us achieving global balance.
One of the problems of the 1944 Bretton Woods agreement was that it placed no obligations on savers - that is, countries with current account surpluses. The responsibility fell on countries with deficits to take corrective action.
Now, 60 years later, this shortcoming in the Bretton Woods system needs to be addressed. Germany and Japan are among the savers, but the real focus will be on emerging economic regions such as the Middle East and Asia that have accumulated large surpluses.
Between 2001 and last year, the increase in current account surpluses for emerging economies was US$665 billion ($960 billion) - of which China's alone was US$343 billion. Savings flowed 'uphill' to the West, fuelling its debt-driven boom.
The West has lost the moral authority to tell emerging economies what to do. It was common to hear in recent years a siren of Western voices telling the likes of India, China and others to open up their economies. The trouble is this loss of moral authority could not have come at a worse time. Now is indeed the moment when it is in the best interests of many emerging economies to do what others have urged, and deepen and broaden their financial sectors. This is a necessary step - not because the West says so but because it is in their own best interest.
The challenge is that for emerging economies to switch to domestic driven growth would not only take time but also require them to open up their capital markets. Even emerging countries that run deficits but which have young populations and thus need to attract capital inflows need to open up their financial sectors. But just as they need to open their capital markets, they may be wary of doing so because of the problems they have just seen unfold in the West.
To shift from high savings to increased demand requires many things. At this year's annual meeting of the Asian Development Bank (ADB), its president Kuroda Kuroda's call for a shift in the region's growth model was accepted in principle. He called for better social safety nets, help for small- and medium-sized firms and further development of Asia's bond markets.
All are important, but Asia needs to avoid building social safety nets on Europe's expensive scale. China has already started to take steps to improve its safety net and this will be an important step, aimed at reducing precautionary savings amongst the public. Yet China also suffers from very high corporate savings and this will not be reduced by a social safety net. Instead, companies can be encouraged to pay dividends. Also, if China's bond market were developed, firms will be able to raise funds when they are needed, thus reducing the need to hoard.
Indeed, across Asia there is a need for deeper, broader financial markets so the private sector can grow, firms can invest, people can borrow against future income, and countries can have the capacity to absorb bigger future capital inflows.
One of the many lessons of the 1997-98 Asian financial crisis was the need for countries to open up their financial sector at a speed best suited to their domestic needs. One size does not fit all. Yet, whatever the speed, countries in the emerging world must not fall into the easy trap of not moving ahead on this now.
Some recent policy developments in the US and Britain have not been driven by market forces. This - together with the fact that financial protectionism may be on the rise - might make it very hard for policymakers across the emerging world to pursue with enthusiasm market opening strategies. If this persists, then it may be one of the big casualties of the financial crisis.
Far better they learn from the West's problems and make sure they don't repeat them. Avoid the lack of risk and liquidity management, avoid the greed that helped fuel asset price inflation. These are the lessons for the emerging economies to heed. Politicians and policymakers across the emerging world must, however, ensure they press ahead with market opening strategies.
They should do this now, not because the West tells them to, but because it is the policy that is in their best domestic interests. If they make the changes, they would improve the chances of all, the West as well as Asia, in achieving a more balanced global economy.
The writer is chief economist and group head of global research at Standard Chartered Bank.
The challenge is that for emerging economies to switch to domestic driven growth would not only take time but also require them to open up their capital markets...Whatever the speed, countries in the emerging world must not fall into the easy trap of not moving ahead on this now. By Gerard Lyons
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