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

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).

What we are saying is economic growth in China and Asia has to be consumption-driven than exports to the G-3. The other thing we should also look at is ways to increase trade within Asia. The US and Europe remain a very important market, no doubt. But Asia should be an important producer and consumer of its own output. So, Asia should be a destination for its own production.

But this is something futuristic. This cannot happen in four or six quarters.

No, it is not futuristic. This is happening. East Asia already trades 55% of its output within the region. India’s trade with China, Japan and Asean (Association of Southeast Asian Nations) is increasing. That is the structural shift which will have to happen. Our forecasts are not based on any dramatic shift, (and) as you rightly said, it cannot happen overnight. But that is the basis of our saying that Asia certainly will come out of the crisis sooner.

The G-20 met recently. Do you agree that given the current scenario, we need a coordinated approach to solve the crisis?

I very strongly support the G-20 call for coordinated action. But coordinated does not have to be identical. For example, China, which has announced a $586 billion (about Rs28.7 trillion) fiscal stimulus, has more fiscal space than India. India can’t have the fiscal stimulus of the same magnitude. But the approach has to be coordinated. It is very important that countries do not follow a beggar-thy-neibhour policy, be it on trade, fiscal stimulus or be it on monetary policy. But each country should design the programme to suit its needs.

But do you think India should also provide a fiscal stimulus to growth?

To the extent possible. But I think, for India, because of its fiscal deficit already being high, the important thing will be first to implement the projects and programmes which it has already approved.

It is very important to see that every rupee that is now being invested is productively employed. In India’s case, I think the fiscal space is more constrained, but still there is some room.

After the dust settles, do you think the centre of financial power will shift more towards Asia? How should Asian countries prepare for such a change?

No doubt about it. You already saw that happening at the G-20 summit. China and India played a very important role. I am very pleased that the world looks at it that way. Not as one side losing power and the other side gaining power, but in a spirit of cooperation that was obvious in Washington. It is now very obvious that China, India and Brazil will have a greater seat at the table. How should Asia prepare for it? I think Asia should play its role not only as a growing economic power but also as a responsive economic power.

I am very pleased that Prime Minister Manmohan Singh said that protectionism is not acceptable and we should be open. I would say it is a good time to restart Doha Round (of World Trade Organization talks).

What challenges have the current crisis brought to ADB and how is the bank preparing to face them?

For ADB, the most immediate challenge is our own capital base to be able to respond to the demands of the member countries. The most important thing for us is to be able to provide financial assistance to our countries. But simultaneously, we have to make sure that our AAA rating is never compromised. Our AAA rating requires us to maintain lending and borrowing constraints so that the market recognizes that we are attractive financially. The crisis has revealed that our capital base is not adequate to respond to the needs. The other point, in a way, for ADB and other institutions, is probably to have much more in-depth economic surveillance and monitoring, because we did not foresee it (the financial crisis) coming and it is fair for people to say why didn’t you. Maybe we should have spent more effort in looking at the risks from the financial bubble which was building up elsewhere.

How will the current crisis affect the poor and millions living on the edge of poverty? What happens to the Millennium Development Goal (MDG) targets now?

I am really glad you raised it. The people who are below the poverty line did not really benefit from the boom but are now paying a price for the bust. They are paying the price because their income has been jeopardized, (and) they are getting laid off. But there is also the risk that governments might not be spending enough on the social expenditure, on schools, on health, on public food distribution, on school feeding programme, on social safety.

It is very important that governments keep a very strong focus on making sure that social expenditures are not curtailed. It is also very important that governments recognize that MDGs, off track in Asia on many scores, don’t slip (further). That is a very big concern.