India, China and other Asian economies are well on the recovery path even as the rich world struggles even though both groups of countries have been supported by a surge in government spending.
One reason why fiscal expansions have been more effective in this part of the world is that Asian consumers have low debts and regional banking systems are in pretty good shape, which means that the extra money pumped in by the government is being spent and lent out rather than used to reduce debt burden.
This fact points to a deeper reality: Macroeconomic success has microeconomic foundations. This is a reality that regional governments need to keep in mind as they start withdrawing fiscal accommodation and create space for a recovery in private consumption and investment demand to make the current regional recovery sustainable.
A new report released this week by the Asian Development Bank throws the spotlight on small and micro enterprises that employ at least half the non-farm labour force in most Asian countries; and nearly nine out of 10 such workers in the case of India.
These enterprises have been particularly hit hard because of the collapse in exports, though this is truer of export-oriented Asian economies rather than a more domestic demand-led economy such as India’s.
The broader point is that economic recovery will have to take the needs of such enterprises into account, rather than those of large enterprises alone. Access to finance, new technology and new markets should be a critical part of this strategy, as well as stronger property rights so that collateral can be offered to banks and growth of clusters which provide network externalities.
Not everything can be done in a jiffy. But as the debate rapidly moves beyond how to stabilize the economy to ways of getting back to the recent growth trajectory, economic policy should recognize that labour-intensive small and micro enterprises need more attention.
This also ties in with a more realistic vision of inclusive growth based on the creation of non-farm jobs rather than the current strategy of huge fiscal transfers to the poor.
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