The past few months have seen a slew of analyses of the SE Asian crisis, with every analyst and commentator preferring his view of the reasons for the debacle. These range from technical reasons such as the tying of the baht to the dollar to wholesale condemnations of the `Asian way'. Small wonder that, at the end of all the economists' deliberations, the reader is often thoroughly confused. Part of the reason for that, of course, is that the experts do not agree among themselves. Consider, for instance, the present row over the IMF's prescriptions, with even the World Bank criticising its sister organisation for its one-size-fits-all solution.So what can be rescued from this pot-pourri of opinions? One clear fact is that the market is no respecter of ideologies. The crisis has affected state-interventionist Korea as much as the free-trade SE Asian nations.
Currency speculators have, over the last few years, targeted successfully the French franc, the pound sterling, the Mexican peso and now the Eastand SE Asian currencies. There has been no discrimination between the developed and developing world-all that the speculator is bothered about is his profit, and he doesn't give a hoot which currency contributes to it. The conspiracy theories floated by Mahathir Mohammad, at one end of the political spectrum, and our home-grown leftists, on the other, are accordingly baseless. Next, there seems to be little sense in bothering about a long-run equilibrium for an exchange rate. Even if such a chimera exists, it doesn't seem to be a useful guide for action.
Dealers are concerned with tracking currencies minute-by-minute and they make their money that way. Ask them where a currency will be six months from now and the odds are that you'll be met with a blank stare. The long run is composed of a series of short runs -- making money always takes place in the short run. All the talk of fundamentals, therefore, is important only to the extent that it influences expectations.
The other fact is that markets arevery susceptible to excesses. Bubbles in asset prices have been a feature of markets for centuries, and current crises merely prove the point. Sure, there has been no shortage of commentators exhorting us to learn any number of lessons from the Asian debacle, but history seems to prove that, sadly, few lessons will be learnt.
If the IMF or private bankers, for that matter, didn't learn from the debt crisis of the eighties, from the pound being forced out of the ERM, from the peso crisis, the chances are that they won't be ready for the next crisis either. The problem is that in any boom, there are always glib justifications for the boom, which may sound silly with the benefit of hindsight, but sound eminently sensible during times of optimism. The only explanation so far is that" markets are like that only".
Now given the fact that the reasons for the crisis are unclear and there is every possibility of the entire problem recurring without notice, the focus of attention should shift to what can be doneonce a crisis occurs. The present arrangement of cobbling together an IMF package once a country is deep in the throes of a crisis is hardly a solution.
Consider what happens at present. A crisis occurs, private investors and lenders withdraw funds from the country while the government tries to screw up enough courage to approach the IMF. Turning to the IMF when a country's finances are already in a mess is like trying to get a loan when the wolf's at your door. The problem is that finance is international, while the measures to deal with a financial crisis are primarily national. What we need is the old vision of Keynes and Harry White, the Bretton Woods scriptwriters, of the IMF as a central banks' central bank. Financial crises of the Asian type are, at least initially, crises of illiquidity, and the immediate announcement of lines of credit from the IMF would do much to mitigate panic.
Conditionalities can then be put in place to take care of structural lacunae, if any. Whatever be the solution, it isclear that we will continue to live in a world plagued by financial volatility, and ways and means to combat the consequences of such volatility need to be put in place before the next crisis strikes.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
