Stay alert on west woes: Zoellick to Asia

World Bank president Robert Zoellick has cautioned that Asian policymakers would have to remain sensitive to the developed world’s problems while managing their own economies.

“I don’t believe the United States and the world will go into a double-dip (recession) but there is a high degree of uncertainty. I think in the case of the US economy, we are likely to see ongoing slow growth, ongoing high unemployment. The reason that I and others like (International Monetary Fund managing director) Christine Lagarde have been highlighting events in the euro zone is that these can have ripple affects all around the globe, not only in terms of the financial and capital markets but also in terms of confidence,” Zoellick said.

In a situation where a number of Asian economies, including India and China, are battling stubborn inflationary pressures, the added risk from uncertainty in America and Europe means policymakers in this export-driven region would have to remain alert during “a very sensitive time for economic management.”

“Given the events and uncertainty that comes out of the developed world, it is far less clear what would be the demand that comes out of the developed world, what would be the confidence of consumers and business. And, so, this is going to be a challenging period for Asian monetary and fiscal authorities, and they are going to have to read the circumstances as they proceed,” he said.

India
While inflation remains a primary short-term issue for Asian economies such as China and India, “each country’s action to deal with inflation depends on their unique circumstances,” added Zoellick.

Although a combination of currency appreciation and fiscal and monetary measures could help control China’s inflation, others like India would need to address supply-side constraints, he said.

“I think India’s circumstance is somewhat different and I think India faces a number of supply-side bottlenecks. The government’s action to address those supply-side bottlenecks is a sensible approach,” he stated.

Adding, however, there was a requirement for “more fundamental changes in policies” and a need to “bring in more competition in different sectors”, possibly alluding to plans afoot in New Delhi to further open sectors such as banking and retail.

India’s headline inflation in July was 9.22 per cent, down from 9.44 per cent in June, though food inflation moved beyond 10 per cent in August, the highest in four months. In China, too, inflation soared at 6.5 per cent in July, much higher than the annual inflation target of four per cent.

EU, US
Compared to the situation in the European Union, where countries are contending with a debt crisis and prospects of a weakened banking system, he said America’s challenges were less “imminent” and not “quite as market-sensitive”.

European leaders, however, had reached a “key decision point” in the process of creating a long-term road map for putting struggling economies back on track, he warned.

“I think you need to see the interconnections and the leaders of Europe, the parliaments and the public are going to have to decide how they fit together, where they are willing to work together and the effects on debt and banks,” Zoellick said.