I met Paul Krugman in 1998. He had come down to Kolkata to speak to a group of businessmen. Going through that interview on the evening when it was announced that Krugman had been awarded the 2008 Nobel Prize in economics, I was struck by the enduring relevance of his comments.

Those were the days when the world was hobbling back to health after the Asian financial crisis. Krugman was a debunker even then. He had written an article in Foreign Affairs in 1994— “The Myth of Asia’s Miracle"—at a time when global investors and multilateral organizations such as the World Bank were effusive in their praise of the miraculous growth rates that countries such as South Korea, Thailand and Indonesia were maintaining.

In what he termed a cautionary fable, Krugman cited the work of economists Lawrence Lau and Alwyn Young to show that Asia was growing because of greater use of labour and capital rather than due to higher productivity. Such growth was not sustainable in the long run. Asia would fall into the same trap that the Soviet Union did after the 1960s. This prediction became prophecy when these very Asian economies tumbled into a financial crisis all at once three years later.

The epicentre of the 1997 crisis was Asia. There were subsequent tremors in Russia and parts of Latin America. But parts of the underlying story were remarkably similar to what we now know happened in the US and Europe through this decade—asset bubbles, loose monetary policy, hype and hubristic investment houses. That crisis and this one have intersecting themes. And lessons that can be transferred.

I had asked Krugman what the policy lessons for India were. He said there were separate lessons for the real sector and the financial sector. There was no reason to question the conventional wisdom on the real side of the economy: Open markets are good and competition is good. He also said India’s fiscal deficit in 1998 was at “scary levels". But there was a case for more circumspection on the financial side: Developing countries such as India were vulnerable to self-justifying crises of confidence. (The financial crisis of 2008 may demand a qualification: All financial systems are vulnerable to panic attacks.)

These lessons are still relevant for India. It is tempting to see the clear failure of global financial markets to do their main job—efficiently transferring money from risk-averse savers to risk-taking entrepreneurs—as a failure of the market economy. It could just be a hop, skip and jump from here to a more general rolling back of economic reforms.

India, thankfully, did not go down that path. The National Democratic Alliance government headed by Atal Bihari Vajpayee came to power in 1998. It started off with swadeshi and protectionist inclinations. But it learnt along the way. Import duties were brought down, there were a few privatizations, the way was paved for the telecom revolution of this decade and the parliamentary deal to cut the fiscal deficit was pushed through.

The pace of financial sector reforms was slower—but there was progress there as well. Indians already had few restrictions on trade, tourism and other items on the current account. The finance ministry and the Reserve Bank of India also gradually made it easier for individuals and companies to invest and borrow abroad.

The splendid economic boom after 2003 was partly because of these reforms and partly because of a strong global economy. The latter is now headed for a recession. India needs to push ahead with reforms if it is to minimize the blow a global recession could inflict—and if it is to prepare to benefit from the upturn.

That may or may not happen soon. Many economists are now asking whether the world will slip into a long depression as it did in the 1930s or stagnate as Japan did in the 1990s. “Many of the themes of the 1930s are back," Krugman had told me in that interview. He wrote a popular book in 1999 with an ominous title: The Return of Depression Economics. That was Krugman the journalist at his best: lively and provocative.

There, Krugman made a case for rethinking the way the world economy is run, much like his intellectual hero John Maynard Keynes did in 1930. “…We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand," Keynes had written then.

Krugman wrote somewhere at the end of this book in the same vein: “The truth is that pride is a luxury none of us can afford in a world that has turned out to pose unsuspected risks… Even more important than pride as an obstacle to sensible action, however, is prejudice—by which I mean the adherence of too many influential people to orthodox views about economic policy that are no longer relevant to our changed world."

But what part of economic knowledge is relevant and what part is not? It is hard to tell.

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