Rely not on fickle global capital

The problem with Thailand, says Sivaraman, arose from an unsustainable current-account deficit. But how was this deficit sustained? Was it not the huge international capital flows that provided the dollars? The problem faced by a country getting huge inflows is what to do with the dollars. If they are used to build forex reserves, an equivalent amount of domestic currency has to be printed to purchase them and that leads to inflation. If they are used to import capital goods, domestic capital-goods industry cries foul. If they are used to import consumption goods, thenthe current deficit gets out of hand, as it did in Thailand. The fundamental problem is that of absorbing huge amounts of foreign money, not the current-account deficit.

The problem with Indonesia, says Sivaraman, arose because the corporate sector resorted to heavy short-term borrowing. Is that not an indicator that long-term borrowing, usually at lower rates, was simply unavailable? It was only because Indonesian companies were hooked on the idea of pushing ahead fast with the assistance of the international capital flows, whatever their costs, that they did such a foolish thing.

The fact of the matter is that one cannot give birth to a child in less than nine months. If you push faster, all you get is an abortion. That is the central message of East Asia. And the logic of international capital flows rests on pushing faster. It is not that the Asian countries were not developing before these capital flows started. If they did not have a transparent financial sector now, neither did they have oneearlier.

As for these countries pushing for further liberalisation despite these problems, we have an interesting precedent. In the early Eighties when the Latin American debt crisis broke loose, the IMF and the World Bank kept pushing for yet more reforms and the Latinos gleefully followed. Now the same Eighties are being called the "lost decade"! Sivaraman’s friends from China and Singapore may in due time find out that this opening up may lead them into not one but many lost decades.

This is not to say that we should shut ourselves out from the international marketplace. Not at all. We must build an aggressive export policy, devalue our currency in keeping with the trends for other exporting countries, invest in export-oriented infrastructure, liberalise labour laws, fight our patents cases aggressively, develop commodity cartels and make our financial sector more transparent. But one thing we must not do is to try to push our economic growth by resorting to large-scale foreign borrowing.

It is saidin our tradition that satsang influences one’s thinking. A man is judged by the company he keeps. One realises that Sivaraman is an IMF employee and must keep company with the global-capital lobby. But if he keeps inner satsang with India, he may not go astray as he has done.