What lessons should India draw from the Asian currency crisis? Many layfolk believe the tiger economies made the mistake of going too fast, and India should desist from doing so. Prime Minister Inder Gujral has expressed this view more than once.
This is plain wrong. It is simply not true that Asia’s problems-and some of them are truly horrendous have anything to do with speed.
The fastest-growing country in Asia has long been China. And China has remained unaffected by the currency crisis. By contrast the Philippines has been badly hit, and it is the slowcoach of ASEAN with GDP growth averaging barely 3.5 per cent annually in the 1990s. This is much slower than India’s current growth rate, and in fact, is roughly equal to the Hindu rate of growth in our first three decades of independence which, as we all know today, was pathetically slow. This didn’t save the Philippines. So stop listening to those claim the Asian crisis proves that speed is a sin and sloth a virtue.
Okay, okay, say the critics, let us not focus on speed of GDR But doesn’t the Asian crisis show that we should go slow on opening up our economy?
Wasn’t that she undoing of the crisis-hit countries ? Well, the most open economy in the region by far is Hong Kong, and it has withstood the financial hurricane swirling through the region. The next most open economy, Singapore, has also weathered the storm. Next in openness probably comes Taiwan, which has also survived. On the other hand, Korea, the least open barring China, has suffered badly. Indonesia, the worst hit, has by no means been the fastest liberaliser. It still has a rule obliging foreign investor to sell 51 per cent of their equity to locals within 20 years. This rule is frequently waived, yet its very existence implies relative’ slowness in opening up. Indonesia has also been hauled up in the World Trade Organisation for breaking agreed trade rules to favour the car project of Suharto’s son.
Okay, admit the critics, let us not talk of opening up in general, but surely you admit that the crisis shows the dangers of having capita account convertibility too sooni Up to a point yes. But real lesson is more complex. The evidence on convertibility is actually ambiguous.
Indonesia adopted capita] account convertibility way back in 1970, yet suffered no currency crisis for 28 years. This suggests that today’s problem is not just convertibility. Hong Kong, Singapore and Taiwan went for capital account convertibility long before crisis-hit countries like Thailand and the Philippines.
Some simple-minded souls say the crisis shows we should not rely too much on markets, and should have more government controls. Yes, there were certainly some market problems like blind financial panic. But most of the problems in Asia were caused by government intervention of the wrong sort. These ranged from fixed exchange rates to supporting favoured industrialists (one taxi company in Indonesia with just $ 9 million of sales in 1996 was able to float bonds worth $ 270 million simply because one of President Suharto’s progeny was a part-owner). The issue is not and never has been one of controls versus decontrol. It is about having regulations in the right place and abolishing them where they exist in the wrong places.
In sum, the crisis cannot be explained away by any simple rule of thumb like going too fast or having too few controls. The truth is rather more complex. Each country had different problems, and we need to learn from each.
I find many people taking comfort, even pride, in the fact that the rupee has not caught the Asian flu. Some even claim this shows how wise has been our path and how unwise those of our fast-growing neighbours.
This is utterly hilarious. Here is India, with a per capita income of $ 320, taking comfort from the problems of Thailand, which has a per capita income of $3,000. Now, poor people often take gleeful comfort in the problems of the rich, but that does not solve their own problem of poverty. Nor do the problems of the rich prove that policy incompetence that leads to poverty is superior. In the succinct words of blues singer Sophie Tucker, ‘I’ve been rich and ‘I’ ve been poor, and rich is better.’
We need to learn from Asia’s mistakes. But we need much more to learn from its successes. A miracle economy that stumbles after a decade of fast growth is much better off than one that never grew fast in the first place. We need to see how we can replicate the dynamism of east and South-East Asia while steering clear of that region’s risks. Elucidating that merits a whole Swaminomics by itself, and I will address it next week.
This week, I will limit myself to emphasising how dearly I wish we in India were facing the problems of Thailand rather than our own. At the end of all the financial carnage, Thailand is going to remain several times richer than us. At our current rate of growth, we will double our living standards maybe every 15 years. At that rate, it will take us fifty years to get to Thailand’s current living standard. Any Indian’ who sneers at Thailand’s plight is like the fox in Aesop’s Fables who consoles himself that the grapes are sour.