Krugman: Long recovery ahead

Kuala Lumpur - Aggressive stimulus spending by governments helped the world avoid a second Great Depression but full economic recovery will take two years or more, Nobel Prize-winning economist Paul Krugman said on Monday.

Krugman said the worst of the global crisis was over with economic and exports growth showing signs of stabilisation. Still, recovery was likely to be "disappointing" as government spending wasn't sustainable in the long-run and unemployment rate 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.

"We have managed to avoid a second Great Depression... but full recovery is at least two years and probably more," Krugman said.

Asia is likely to see a faster rebound, than the US and Europe, partly driven by the recovery in manufacturing exports, he said.

In the clearest sign yet that the recession may be ending, the US Labour Department last Friday showed 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 Barack Obama has urged Americans to be patient and give time for his $787 billion stimulus package of tax cuts and increased government spending to take hold. Most of the money will flow in 2010.

Krugman said there was still room for the US government to increase spending to boost growth, despite concerns over its swollen budget deficit.

Krugman, who teaches at Princeton University, won the Nobel Prize in Economic Sciences last year for his analysis of how economies of scale can affect international trade patterns. He also writes columns for The New York Times.

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 warned.

- AP