The United States may be the epicentre of the global financial crisis, but the economies of Asia are not immune to the web of woes.

Asia's having special trouble with inflation which is threatening to spiral deep into double digits in several nations.

Angel Gurria is the Secretary General of the Organisation For Economic Cooperation and Development. He is speaking to Jim Middleton.

Jim Middleton: Secretary General, thank you very much for your time

Angel Gurria, Secretary-General, OECD: Thank you.

Jim Middleton: More than one economist has described the current global financial turmoil as the worst since the great depression of the 1930s. Do you think that's a fair assessment?

Angel Gurria: I think the situation is complex and the mix is new certainly, the fact that we have an economic slow down, practically all over the world, the fact that we have financial turbulence and the fact that the prices of oil and food and metals and other commodities have spiked sometimes rather dramatically together with what I would call a global crisis of confidence all add up to a rather complex, certainly difficult, but new situation. I don't think it's comparable to the 30s or any of the other crises we had before because the features are quite different but certainly it puts to policy makers a very great challenges.

Jim Middleton: Speaking of those challenges then, how is confidence to be restored, how much longer does this have to run?

Angel Gurria: It will run a little longer than we thought originally. We thought that by the end of '08 we'd be moving towards normality in the new year of '09. Now it looks like 2009 will be the year in which we prepare for normality in 2010. So basically we've moved back the return to normality by about a year given that the problem continues to manifest itself, to unravel in that it just prolongs the pain, if you will. The confidence problem is more serious than we thought and we're not just talking about sub prime losses, we're talking really about the clogging or the partial paralysis of the financial system of the world which is critical to the well functioning or the good functioning of the economic system in general.

Jim Middleton: Yes, it really is the case, is it not, that the world economy cannot function without credit markets in which both buyers and sellers of credit do have confidence?

"Not being distracted by the these winds of turbulence and just maintaining your strong fiscal position."

Angel Gurria: Exactly and that is what's gone and that's where the policy makers have to work very hard at getting it back. You say well what is needed? We've identified a number of areas; the financial stability forum is working on the regulatory part, the supervisory part is also important but of course keeping on the straight and narrow both on the fiscal as well as on the monetary policy side, not being distracted by the these winds of turbulence and just maintaining your strong fiscal position, countries that have achieved a surplus, keeping the surplus like in the case of Australia which is so exemplary and where your debt is actually in net terms disappeared, and now you are using those resources that you used to pay for the interest on the debt on social and human capital which is a much better use of the taxpayers' resources.

Jim Middleton: Exemplary perhaps but talking about the key, what remains probably the key economy in the world, and that is the United States, it is inevitable, isn't it, that the United States economy will emerge from this crisis significantly weaker. What do you think the long-term implications of that are for the world economy?

Angel Gurria: The United States economy is an enormous powerhouse. Now it's hit on one of the big sources of growth of the past, which is the housing. That continues to suffer and the problem with the housing is that the people who today have a negative value in their houses which means they owe more on their mortgage than the house is worth and therefore they are probably going to, if not deliver the keys back to the bank, they're at least going to feel very prudent and very cautious in how much they spend because they feel poorer than they were before; they are not going to change the car, they are not going to change the refrigerator or go on an expensive vacation.

"The US economy is going to come out with lower interest rates and the enormous power of consumption."

That means that the wealth effect of having falling housing prices is going to have a contractive effect on the economy as a whole. However, once the housing market is sorted out with the new legislated supports and once the unravelling of all these foreclosures in the mortgages is done, which, as I said, unfortunately may take the rest of the year, I think the US economy is going to come out with lower interest rates and the enormous power of consumption and of course the great flexibility of the US economy is going to show again. The problem is that this is not just the US economy. The slow down is seriously affecting European economies and it's even reducing the rather dizzying rate of growth of economies like the Chinese or the Indians by about maybe a couple of points in each case.

So it is having a worldwide, no such thing as decoupling, you know, no perfect decoupling. Certainly even Australia, which was better prepared than many other countries because of its reforms of the last few years and even having announced very courageously that it will stick to its budget surplus and launching a lot of reforms, even Australia is going to grow less than expected this year and next.

Jim Middleton: The United States has special problems but Asian economies appear to have a particular problem with inflation at the moment, much worse than the rest of the world. Are you convinced that the Asian economies are doing enough to get the inflation dragon back in the cage?

Angel Gurria: I think they are underestimating how dangerous, how pervasive, how destructive it can be to let inflation into your living room and staying there because these are countries that have hundreds of millions of very poor people and inflation affects the poorest the most. These are the people who don't have assets that will go up with inflation, who don't have savings in the banks that will be paid a positive rate of interest. So they will suffer a lot.

These are people who only have their work and inflation affects their purchasing power and also it's enormously destructive in terms of social cohesion and political stability. So they should do everything in their power in order to avoid the inflation because then if inflation sits in people's minds other than only in the prices, people will start acting and reacting as if inflation were going to be a permanent feature and that will tend to make it stay longer.

Jim Middleton: Let's turn to another international economic issue, that of climate change. Are you sympathetic with the arguments of the development giants like China and India that they should not be forced to act unless the industrialised nations accept their responsibility for having created the problem in the first place?

Angel Gurria: Yes, I think that we should be sensitive to that argument but this is not going to work. If India and China and Brazil and Mexico and South Africa and Indonesia et cetera are not in the formula, are not in the deal, we at the OECD have clearly calculated that right now the responsibility is roughly about a third of the OECD countries, the developed countries, a third in the so called bricks, including … Indonesia and India and then add a Mexico and add some others there. That means the developing countries large emerging economies together with Brazil, China, India, et cetera, that a third and then the rest of the world about a third.

"What is out of any doubt and cannot be under any discussion is that everybody has to be a part of the solution post Kyoto."

But if you take a picture to 2050 and extrapolate today's trends, the bricks, the large economies are going to grow enormously in their weight and in their responsibility for the problem. So it's OK to have a hard discussion about who pays for what. What is out of any doubt and cannot be under any discussion is that everybody has to be a part of the solution post Kyoto. Post 2012 we cannot afford the luxury that we had in Kyoto of having countries like the United States or China or India or Brazil stay out of the obligations. It's not going to work for the world, we're going to have too much warming and therefore the consequences are going to be too dire and that's a scenario we don't want to contemplate. The best, I would say the only solution and certainly the least costly solution is for all these countries to participate.

Jim Middleton: Angel Gurria thank you very much for joining us on Asia Pacific Focus.

Angel Gurria: Thank you very much.