KUALA LUMPUR — A budget shortfall may yet prove to be a "friend" of governments reeling from the global downturn, as they strive to raise spending on projects crucial to prodding their respective economies, a Nobel laureate yesterday said.

Paul R. Krugman, who won the Nobel Prize for Economics last year, said a fiscal deficit arising from increased public spending is needed since the private sector is still cautious about the prospects of the global economy.

"A budget deficit is sometimes necessary. When you have this crisis, the government can be the borrower of last resort and a source of sustenance," he said during the World Capital Markets Symposium here.

"In a crisis, [a] deficit can be your friend."

Mr. Krugman, who teaches at Princeton University, noted that the global financial crisis has caused private borrowings to dip, leaving the government with burden of spurring economic activity.

"There has been a collapse in private borrowings and investments. There has been a collapse in domestic demand...Everyone in the economy has been slashing spending except the government," he said.

"It [deficit due to higher borrowings] will be a problem in the future, but it will prove to be a great support to the economy."

The importance of public spending, Mr. Krugman stressed, is highlighted by the fact that monetary policy easing has its limits, given the market uncertainties.

He added that the ideal amount of fiscal gap and stimulus package depends on the situation of each country.

Mr. Krugman said the stimulus programs of governments have allowed the global economy to avert a Great Depression similar to that experienced in the 1930s. However, he said it may take at least two years before a full recovery is achieved.

"We seemed to have avoided a second Great Depression...A combination of aggressive efforts to stabilize financial markets and deliberate stimulus brought us to a rough stabilization...But full recovery [will take] at least two years and probably more," Mr. Krugman said.

"By analogy, we know that in 2001, the [US] recession proper ended in November 2001. But you did not see actual growth at a pace that was sufficient to add jobs and that [happened] in the third quarter of 2003," he recalled.

He added that countries affected by the current crisis may not bounce back quickly as those hit by the 1997 Asian Financial Crisis due to the worldwide decline in exports.

"The Asian crisis from 1997 to 1998 was followed by a phoenix-like recovery. That is not going to happen. That recovery was due to surging exports...We have a problem unless we can find a planet we can export to."

Laura D’ Andrea Tyson, economic adviser of US President Barack H. Obama, said the decline in international trade should prod Asian countries to strengthen their domestic demand and to generate jobs.

"We are in a situation where private sector demand has plummeted...Asian countries have to find a little more of their growth coming from domestic demand," she said in a press conference.

Ms. Tyson, who was head of the White House Council of Economic Advisers in the Clinton administration, said this can be done by providing additional capital to small businesses and increasing investments on health.

"They [governments] can create more opportunities for small and medium-sized business. They can spend more on domestic demand programs like health care which generates a lot of jobs and domestic demand internally and they are not export-driven," she said.

Ms. Tyson, a professor of Haas Business School in the University of California, Berkeley, said multilateral lenders and emerging markets should come up with programs aimed at helping those that incurred huge deficits.

"Think about surplus countries and if there is a way the Asian Development Bank, World Bank and International Monetary Fund can recycle these surpluses to help some weaker emerging markets that do not have their own ability to run government debt," she said.

"It can be in the form of guarantee programs or specialized lending programs that can be financed by surplus emerging countries to help deficit emerging markets."

In the same event, Malaysian Prime Minister Sri Mohd Najib Tun Haji Abdul Razak cited the need for global cooperation in regulating financial markets to reduce risks and to promote greater transparency.

"At the global level, there must be strong oversight of markets and risk-taking activities in common terms, adequate ring-fencing of capital and client assets when such activities are conducted across borders," he said in a speech.

"Modern markets are too large, too interconnected and too complex to operate on a laissez-faire basis...Regulators around the world must begin to work together to create a comprehensive approach to ensure compatible, sustainable and effective regulatory surveillance."

The Malaysian leader also urged his fellow Asian leaders to continue working together to address poverty and to build infrastructure.

"We must work closely together to seek common advantage, eradicate poverty and to lift more of our population into the middle income group," Mr. Najib said.

"Asian countries must cooperate in the building of our water, power and transportation infrastructures. These goods that empower will directly impact the have nots in our communities and allow them to participate in building an independent future."

Philippine government economic managers have widened this year’s deficit cap to P250 billion from P199.2 billion previously, citing the need to raise expenditures on social services and infrastructure. The government has floated a P330-billion stimulus package that consists of budget increments, tax cuts and additional benefits from social security institutions.