Managing director general of the Asian Development Bank (ADB) Rajat M. Nag is confident that Asia will successfully weather the current financial crisis in less than two years. However, he cautions that developing countries need to ensure that their social expenditure does not come down as a result of the crisis. Nag spoke in an interview on the sidelines of the India Economic Summit organized by the World Economic Forum. Edited excerpts:
How does ADB see the current financial crisis? What are the immediate challenges for Asia and India?
Positive note: ADB managing director general Rajat M. Nag says Asia will come out of the financial crisis sooner than the rest of the world. Harikrishna Katragadda / Mint
The world economy obviously has worsened considerably. We see 2008 to be a difficult year and 2009 to be worse. Asia has already been affected severely and China and India obviously cannot avoid (a downturn). Having said that, we also feel that Asia will come out of it sooner than the rest of the world. As a matter of fact, we believe that Asia will be the engine of growth (for the world) and within Asia, China and India will be the engines of growth. So overall, difficult times (are) ahead this year and next year. But the situation in Asia is more optimistic than many people think and I think there is bit of an over reaction. For the world as a whole, we see the growth rate to be around 3.7% (this year), (and) next year it may shave off probably 2%. Developing Asia (excluding Japan) may grow at around 7.5% this year and under 6% next year. Within that we see China growing at 9.7% this year and 8.5% next year. India similarly may grow at 7.5-7.8% this year and next year, probably, growth will slip to slightly over 6%. So the story that emerges in our mind is China, India and Asia will grow but grow at a lesser rate than we have seen in the past five years—but still it will be a healthy clip. But is that healthy clip healthy enough to contain the rising unemployment and the rising poverty? The answer is no. China and India need to grow almost at 7-8% just to keep pace with the rising population, to keep unemployment and poverty low. Yes, it is going to be a very difficult period, but we think in the next four-six quarters, Asia will move up, sooner than the rest of the world.
But if the US and the European Union are going into recession, then don’t you think it is very optimistic to assume that Asia will recover in the next four quarters?
The markets of Europe and the US are certainly very important for Asia. Asia exports 60% of its output to G-3 (Japan, euro zone and the US). But what we are also seeing is an increase in domestic consumption, particularly in China. Domestic consumption is around 40% of GDP (gross domestic product) in China. Authorities in China are working towards getting that figure up. India’s domestic consumption is higher at around 55% of the GDP, but still there is scope (for this to increase).