IT would be entirely mistaken to draw an overly-optimistic conclusion from the 4.1 per cent gross domestic product growth in the second quarter of the year. Undoubtedly, the rise in the GDP signifies that Malaysia is out of recession, confidence has returned and recovery should be gaining momentum. The positive key indicators are unequivocally good news for many who were badly wounded in the past two years of contraction.

But it is too early for Malaysians to rejoice. As cautioned by Prime Minister Datuk Seri Dr Mahathir Mohamad, over-optimism may breed complacency at a still crucial time when the country needs dedication, commitment and perseverance to ensure a total recovery and its sustainability. Nor was he being pessimistic in his assessment that Malaysia is not fully out of the woods yet.

Several factors abound. As recognised by Dr Mahathir, corporate restructuring still leaves much to be desired. The corporate sector should be inspired by the financial reforms and take the cue, without much prodding from the authorities, to raise productivity, transparency, stricter auditing and protect the rights of minority shareholders.

The legal and regulatory framework have been improved to facilitate good corporate governance but all these would be in vain if some unrepentant companies persist in letting their actions belie their words. The breathing space provided by the fixed exchange rate and selective capital controls should be judiciously and expeditiously used by these companies.

Another factor is that Malaysia is vulnerable to shocks from abroad. If China were to experience a crisis and devalue the yuan, regional confidence would take a knock. Harder knocks will come by if the United States' economy and its demand for electronics decline or worse, Wall Street takes a dive. There will be a setback if Japan slides further and the European Union fails to absorb more goods from the developing countries. The point is, the unexpected can happen and will jeopardise the recovery process.

The sustainability of the present international economic system is in question. The plunge in commodity prices, particularly oil, and prices of manufacturing exports have affected export earnings and import demand of many economies. Although world trade in volume terms grew by about 3.5 per cent last year, its value in dollar terms fell for the first time in the current phase of globalisation since the 80s. This is why Dr Mahathir has been actively looking for markets in non-traditional areas.

As articulated by Dr Mahathir, as long as the flaws in the international monetary system are not corrected, small nations - like little boats in a turbulent sea _ remain vulnerable. Domestic reforms are worthwhile and should be vigorously pursued. But without the regulation of short-term capital flows and the activities of their economic agents, the results of the reforms will prove meaningless.

Many proclaim Asia's astonishing bounce-back. But they overlook the lesson in the near-collapse of Daewoo, Korea's second largest conglomerate, in late July. Three days before the episode, the Organisation for Economic Co-operation and Development had pronounced that Korea "has been remarkably successful in overcoming the financial crisis at the end of 1997.

Supportive macro-economic policies and the progress in structural reform have laid the foundation for a positive growth in 1999". Had it not been for the Korean Government's bail-out, Daewoo's near-death would have triggered off a chain of bankruptcies and a collapse of the financial system as many banks and investment trust companies were exposed to its domestic debts of US$50 billion and US$9.9 billion in foreign debts. It serves as an indicator that the recent recovery may be nothing more than the lull before the next storm.

Clearly, we cannot afford the luxury of complacency. Our recovery process is still an unfinished battle which requires the rakyat's perseverance and hard work.