The Hindu Business Line : Tales of horror for a good night's sleep

THESE are supposedly feel-good days when you can trash all medicines and skip the appointment with your doctor. Yet, it was only about seven years ago that East Asia was rocked by turmoil, reminds Dr Padma Desai retracing the story in Financial Crisis, Contagion, and Containment: From Asia to Argentina where she examines the origin of the collapse.

The book from Oxford University Press (www.oup.com) "attacks head-on, fundamental questions about the compatibility of small emerging country economies with inherently volatile global financial markets," as Paul Volcker observed. Prof Paul Krugman praised the work as "the best book yet about the financial crises that have swept the world in recent years."

And Dr Padma Desai asks questions that spill over to the blurb: "Why is the US relatively successful at weathering economic ups and downs? Why is Japan stuck in policy paralysis? Why is the European Central Bank unable to achieve both inflation control and stable growth? How can emerging markets avoid turbulence amid free-flowing speculative capital from private lenders of the developed centre?"

The preface does some plain-speaking: "My policy judgments flow from relevant facts and unfolding events rather than from esoteric conceptualising or random stone throwing." And some shocking one-liners, such as: "The IMF, I feel, is neither good nor bad; it is simply incorrigible."

If you feel good about financial globalisation, please appreciate that it is a complex process — "in which the animal spirits of risk-prone, return-savvy investors from the developed market economies with global, electronic reach collide with the weak financial institutions, traditional corporate practices, and vulnerable political arrangements of emerging market economies with disastrous consequences for the latter." So, take care.

Asian crisis had lessons to teach: "Emerging market economies should first remove the regulatory handicaps in their banking and financial institutions before plunging headlong into free capital mobility to minimise the negative impact of speculative movements. They should free up trade before allowing unrestricted entry of short-term capital. They should encourage foreign direct investment that brings capital and technology."

In the absence of these, "haste not only made waste but it also brought into disrepute the allocatable efficiency of global markets in moving loanable funds aimed at raising collective gains."

A cartoon that Bangkok Post carried on July 3, 1997 showed a mountain of currency on the left hand side of an equation, and a candy on the right. The caption read: "What you get for your baht." It was July 2, 1997 that is marked all red in the chronology of the Asian crisis because on that day, "the Thai authorities ended their defence of the Thai baht allowing it to float."

Thus, après baht, it was le deluge, when "the fall of the baht set off a process that reverberated the region in a full-blown panic attack by speculators on the Malaysian, Indonesian, and Philippine currencies."

A chapter titled `The Contagion' reasons that contagion arises because modern economies are linked via trade and finance. "Common lenders can not only transmit a crisis but aggravate it as well." Banks are not the only actors in financial markets. There are "hedge funds that channel financial flows in diverse economies by acquiring their currencies, and mutual funds and institutional investors." Horror tales, one might dismiss them as; but knowing them can give you a good night's sleep.

Another topic is titled: `How much corruption? Does corruption matter?' "Corruption, like adultery, exists across cultures but is difficult to measure," writes the author. "It is equally difficult to define." The animal can take two forms: Rent seeking or profit seeking. "The former arises when cronies are given exclusive rights in production or distribution activity resulting in efficiency losses and growth impairment." The latter is when "cronies capture shares in profit-making enterprises, siphon off the profits abroad, and invest less at home."

An engaging debate is whether corruption retards growth or greases the wheels of economic progress. Corruption, in the form of rescuing cronies from trouble, may be feasible in normal times, but not during a crisis.

The book looks at "a cautionary tale of two countries — capital account convertibility in China and India." The good news is that "the two countries have retained their policy-making autonomy".

Dr Padma Desai takes pleasure describing the "extensive restrictions" on forex transactions that prevailed till recently — implemented by regulations which "in their extensive crossing of every t and dotting of every i, displayed the strangulating talent of Indian bureaucracy to its fullest." The formulation was designed "to close all loopholes via a liberal sprinkling of `to', `from', and `with'." However, "this steel-plated armour of regulations began to be loosened two decades later."

Economics@thehindu.co.in

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Tales of horror for a good night's sleep