- The Washington Times - Tuesday, August 11, 2009

KUALA LUMPUR, Malaysia | Aggressive stimulus spending by governments helped the world avoid a second 1929-style Great Depression, but full economic recovery will take two years or more, Nobel Prize-winning economist Paul Krugman said Monday.

Mr. Krugman said the worst of the global crisis is over, with economies and exports showing signs of stabilization. Still, recovery was likely to be “disappointing,” as government spending isn’t sustainable in the long run, and the unemployment rate is still lagging behind, he told a two-day world capital markets conference here.

There isn’t likely to be any “Phoenix-like” recovery, such as in the 1997-98 Asian financial crisis, where the economies expanded dramatically, led by a sharp rebound in exports, he said.

Asia is likely to see a faster rebound than the U.S. and Europe, partly driven by the recovery in manufacturing exports, Mr. Krugman said.

In the clearest sign yet that the recession may be ending, the U.S. Labor Department on Friday reported that the jobless rate in the world’s largest economy dipped for the first time in 15 months while workers’ hours and pay edged upward.

It said a net total of 247,000 jobs were lost last month, the fewest in a year and a drastic improvement from the 443,000 that vanished in June. Still, the job market remains shaky. A quarter-million lost jobs are a far cry from the employment growth needed to put the national economy on solid footing.

President Obama has urged Americans to be patient and give his $787 billion economic stimulus package of increased government spending and tax cuts time to take hold. Most of the money will flow in 2010.

Mr. Krugman said there is still room for the U.S. government to increase spending to boost growth, despite concerns over its swollen budget deficit.

He said there was a need to restructure the global financial system and impose tighter regulations to avoid a repeat of the economic crisis, but expressed concern that the momentum for reforms appeared to be easing.

“We do not have the political will to do that just yet. … I suspect clever people can still make a lot of money from the financial system in the next few years,” he said.

Earlier, Malaysian Prime Minister Najib Razak urged regulators worldwide to jointly create a compatible, sustainable and effective surveillance system to prevent future market crashes. That includes keeping a close eye on risk-taking activities and means having a common procedure for intervention if there are signs of irrational excess, he said.

“Overreliance on self-regulation is a mistake,” he said. “Global regulators should err on the side of investor protection and financial stability rather than rely on a ‘buyer beware’ regulatory regime.”

Singapore Finance Minister Tharman Shanmugaratnam and Hong Kong Secretary for Financial Services and the Treasury K.C. Chan warned against being too hasty, saying greater regulation of financial institutions must not come at the expense of innovation and growth.

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