OSAKA – Is it going to be a case of deja vu all over again with a new financial crisis about to hit Asia and many rapidly developing countries as rumors of the U.S. Federal Reserve tapering its $85 billion a month in asset purchases morph into actual facts?
Most economists would say “no,” there is little reason to worry since on most of the important aspects developing countries, and Asian ones in particular, have built up better defenses, many of which were not available to them in the 1990s.
But they should heed the advice of Christine Lagarde, managing director of the International Monetary Fund, who said that the world needs to build up “further lines of defense” against a possible crisis. India is clearly in the immediate firing line and vulnerable on several important points.
Already, the so-called emerging markets have been badly hit by the rumors of tapering. Altogether, stock markets of developing countries have lost more than $1 trillion since May when Fed Chairman Ben Bernanke first testified to the U.S. Congress that he could “take a step down” in the bond purchases.
Currencies have also been badly hit, with the Indian rupee, the Brazilian real, Indonesia’s rupiah, Turkey’s lira and the South African rand all weakening. The Malaysian ringgit and Thai baht also hit three-year lows. The rupee fell to an all-time low of 66 to the U.S. dollar and has dropped by 44 percent in two years, and by about 18 percent this year.
Lagarde loftily lectured the central bankers at their meeting in Jackson Hole, Wyoming, about the need for “lines of defense that reflect our interdependence, our common purpose, and our mutual responsibility for the global economy.”
But as far as the prime mover in the asset purchases drama is concerned — the U.S. Fed — frankly it could not give a damn about the rest of the world. Fed officials made it plain that they care only about the United States.
Attempts in Jackson Hole to talk about joint action, especially to protect weaker countries, fell on deaf ears.
Dennis Lockhart, president of the Atlanta Fed, even spelled it out in an interview with Bloomberg Television, saying: “You have to remember that we are a legal creature of Congress and that we only have a mandate to concern ourselves with the interest of the United States. Other countries simply have to take that as a reality and adjust to us if that’s something important for their economies.”
So that’s the American raspberry to global interdependence or the need to take a worldview. One day the U.S. may have to consider that the rest of the world is fed up with its arrogance, and that could be a blowback factor, but evidently not yet. Money from the U.S. moves world markets on the way in and on the way out, for good or ill. Countries must hope that their defenses are strong enough.
There are marked differences between 1997 and now in the case of most of Asia. Stephen Schwartz, chief Asia economist for BBVA, who worked for the IMF at the time of the 1997 crisis, has pointed to six major ones, including: exchange rates that are floating rather than pegged to the U.S. dollar; a good war chest of foreign exchange reserves; greater transparency on reserves and on nonperforming loans; stronger current account balances (though India and Indonesia are not able to boast of much); less debt in foreign currencies; and banking reforms.
If the 1997 Asian crisis was a perfect storm of a 10, then Schwartz rates the current situation as a 3. However, like typhoons, financial crises have a way of blowing up suddenly and equally suddenly veering off course. As in weather and life, so in financial vulnerability, the weak are the most at risk.
For the strong Asian economies, their growth rates are higher and their economic prospects are more promising than those of the West. Even with rumors of tapering of quantitative easing, money has started to flow back into the U.S. One of the problems is that financial markets especially have a tendency to overreact, so a flood can too easily turn into a tsunami.
But the recent history of the American recovery has been mixed. Even with interest rates at record lows for years aided by the massive quantitative easing, the markets have rejoiced and set new records; but the real economy, especially in terms of employment and the purchasing power of ordinary Americans, has lagged. With the U.S. growing at 2 percent, Chinese growth of 6 to 7 percent will offer more opportunities.
India, as so often, is the exception that proves the rule. Its growth has plummeted from 10 percent just three years ago to 5.5 percent. Amid all the cries of gloom and doom, this is still a rate of which most countries, apart from China possibly, would be proud and happy.
Prime minster Manmohan Singh has proclaimed loudly that this is not a crisis similar to that of 1991 when India had barely enough money in its foreign exchange coffers to pay for a couple of weeks of essential imports.
As Singh said, the rupee is floating and India has enough forex reserves for seven months of imports.
India does not face a balance of payments crisis, nor is it facing a conventional cyclical slowdown, but it is caught in several crises that are feeding on each other. The current account deficit is 4.8 percent; the government budget deficit is 9 percent of gross domestic product; consumer price inflation is 10 percent. The weak rupee is also adding to inflation and to the current account deficit.
On top of this there have been home-grown problems, or in the case of onions, a lack of growth that led to scarcity, soaring prices and the government scrambling to import this essential ingredient of home cooking, whose prices rose from 20 rupees a kilo to almost 100. Onions, as commentators have pointed out, are both tasty to eat, but potentially poisonous for politicians when housewives complain that they cannot afford them.
Beyond this India suffers from medium- and long-term structural deficits, including a culture of what J.K. Galbraith called “post office socialism,” meaning a faith in bureaucratic control and disregard for profitability and efficiency. In spite of some recent cuts in red tape, getting permission for new ventures is slow and painful.
Some Indian economists welcome crises because they say that only then will leaders be forced to take brave but necessary decisions. But next year is election year, and it would be a foolhardily brave leader who dared to savagely cut subsidies for fuel and food that would reduce the budget and current account deficits and restore investors’ faith.
Indeed, the lower house of Parliament has just passed a $20 billion plan to give cheap food to 800 million poor Indians.
That massive number also exposes another of India’s critical weaknesses. It has hundreds of millions in the newly enriched middle classes, but many more hundreds of millions of people who have been left behind. Mukesh Ambani, chairman of Reliance Industries has reportedly lost $5.6 billion in dollar terms because of the falling rupee and has only $17.5 billion left. Many Indians, meanwhile, would be thankful to make $560 a year.
Kevin Rafferty is a professor at the Institute for Academic Initiatives at Osaka University.