THE RIGHT STUFF: John Rutledge says it will take more policy moves for the U.S. economy to see light at the end of tunnel (HU YUE)

As clouds gather over its economic prospects, the United States seems to still have a long way to go toward riding out the recession. In striking contrast, emerging Asian economies are becoming a stabilizing force in the global battle against the economic crisis. John Rutledge, former economic advisor to U.S. presidents Ronald Reagan and George H.W. Bush, discussed this issue in an interview with Beijing Review reporter Hu Yue on the sidelines of the Boao Forum for Asia on April 17-19.

Beijing Review: Several U.S. economic indicators are turning around, such as the consumer confidence index and the manufacturing business index. How likely is it that the U.S. economy has entered a period of recovery?

John Rutledge: The economy is a very complicated sector involving 300 million Americans making a living and the stock market on top of it. So it is hard to predict an early recovery when a rising number of Americans are still worried about their jobs and housing debt.

The depth of the economic woes would defy any quick fix to turn around the deepening gloom. The demise of many established financial institutions came swiftly, and the prices of money market funds fell below $1 for the first time in history. All those catastrophes dealt a heavy blow to both the economy and people's confidence.

To thaw the credit freeze, the U.S. Treasury Department and Federal Reserve have shoveled billions of dollars into the financial markets. I believe that is why the U.S. stock markets and international commodity prices saw a substantial rally from March to April. But the real economy that concerns numerous jobs and paychecks also fell off the table and has not come back. I believe it will take some time for the capital market rally to work through the real sectors, perhaps one or two years.

Jobs hold the key to the broader eonomy because they are the source of new products and services as measured by the GDP. Most Americans have little savings and live by spending this week's paycheck. So if job losses proliferate, the economy will drift into serious trouble. The sound health of the stock market will extend some support to the real economy, but we just have to wait longer for an end to the crisis.

What do you think are the biggest challenges confronting U.S. policy-makers in pulling the economy out of its quagmire?

Facing the severe credit contagion, policymakers have no other choice but to pump ample liquidity into the banking system, or rather quantitative easing. But as soon as they are convinced that the growth engine is restarted, they will have to take out the excess money in case of dollar depreciation and serious inflation.

The trick lies in when and how properly to drain the excess liquidity. There will be a second recession problem if they pull out too fast, and an inflation problem if too slowly.

Another concern is that the U.S. government's stimulus package is little weighted toward infrastructure construction, which is an efficient way to create jobs and growth for the future. Only around 4 percent of the bailout package is in construction-related investment. Obviously, China has attached importance to infrastructure spending, and is now braced for a quick recovery of its economy.

Meanwhile, U.S. government spending is taking an escalating share of the GDP, putting a heavy burden on the already fragile economy for a long time.

Asian emerging economies are also feeling the pain of the global recession. What do you think they should do to fight the crisis?

I believe the biggest contribution Asian countries can make to the world economy is to maintain their stability and growth as they are already doing. Asian countries still have very high savings rates and sound capital bases, which are very important to economic stability. To retain their financial health, they should take a gradual approach in opening up their capital markets so as to fend off Western speculators. Closer coordination and cooperation between them can also help regain growth momentum and foster prosperity in the region.

It is unavoidable that fast growth incurs some side effects, such as environmental pollution and energy waste. But some Asian countries such as China have been moving fast to fix them as they shift to more energy-efficient and environment-friendly growth models.

How do you think the unprecedented financial crisis will change the business world?

I think the business world will learn a serious lesson from this crisis. As Americans tend to save more and spend less on consumer goods, export-driven economies such as China and the southeast Asian countries will receive a hit. But as long as the change does not happen too fast, the export countries will still have time to adjust themselves.

It is true that people can learn something from the pain. I believe global entrepreneurs will be more careful with their strategies even after the world economy recovers its health. They will use less debt, keep more cash, and seek a stable position in competition.