22nd February 1998

IMF - fallacies in retrospect

Restrospective analysis appears to be the only reliable assessment of economic situations. Interestingly everyone is not only wise after the event but are free to change their views once events have taken place. In fact the views of individuals and prestigious and powerful institutions are changed drastically once a situation changes.

This phenomenon is most evident in the recent analysis of the East Asian and South and South East Asian economic crisis.

Prior to the crisis everyone spoke in glowing terms of the economic performance of East Asian countries. They went so far as to dub it the East Asian Miracle. There were lessons to be learnt from them for other developing countries. The East Asian Miracle was to be emulated by other Asian coutries particularly South Asian countries which lagged far behind in their economic growth and income levels. In fact, it appeared that economic theory was being re-written on the basis of the East Asian miracle.

Institutions like the World Bank and IMF told other countries that they should follow the path of these Asian tigers. They impliedly or explictily stated that these countries succeeded because they had liberalised trade regimes and had liberalised their capital markets.

If other countries wanted to prosper they had to follow the path and lessons of these Asian countries. In fact, in a World Bank sponsored book on the East Asian Miracle, they went so far as to say that where these countries do not follow the recipe of multilateral institutions such deviations should not be followed by other countries.

These deviations were mainly interventionist policies of East Asian governments. It is argued that even if there are deviations the tigers possess their own peculiar capabilities of using interventionist actions to their advantage.

Given the Asian crisis thought processes have changed drastically. Economists, investors, analysts, the IMF and the World Bank, all see a multitude of errors and blemishes in these economies and the policies they followed. Most significantly they failed to observe the foundational weakness of these economies: they had borrowed too much.

Now that debt is becoming unbearable owing to the currency devaluation. The IMF policies might aggravate the problem by starting a period of economic stagnation and deflation and in turn reduced world trade.

The liberalisation of the capital account, which was considered so essential to further economic growth of other Asian countries, is now thought to be a weakness. Not so long ago the multilateral agencies advocated the liberalisation of the capital account for countries like India and Sri Lanka.

The arguments that were made by others to be cautious were considered unsound from the point of view of economic theory and practice. The liberalisation of the capital account, they argued, would strengthen the balance of payments of these countries.

Now the self same persons and institutions who argued for the liberalisation of the capital account speak of the liberalised capital markets as being a deficiency. The vulnerability of these economies to movements of capital, which de-stabilised these economies, was not seen earlier.

Now the prescription would be that developing countries should not liberalise their capital account and perhaps have some measure of control to ensure greater stablility of their economies.

Autocratic governments were seen as being helpful to economic growth. Democracies were seen as hampering good decision making and effective implementation of economic policies. Even transgressions of human rights and democratic freedom in these countries were largely overlooked as an excuse for economic growth and prosperity.

Now there is a new trend of thought. The crisis is seen to be partly caused by their autocratic rulers. The lack of checks and balances which operate in a democratic system is seen as having resulted in corruption, crony capitalism and poor decision making. So the prescription may very well be to adopt democratic forms of government.

The overall thrust of our comment is this: one should not suspend critical judgment of political regimes or economic policies merely because they appear to be successful. All the facts of a situation must be critically examined and a judgment made on the basis of the facts.

To advocate a series of policies at one time and to reverse these at another merely on the basis of success or failure do not speak well for analysts of sort and from whatever institution. We should all know that once again the multilateral agencies have in fact made grievous mistakes in judgment and there is no assurance that they would not be making such mistakes in the future.

No insititution, however powerful, has a claim to infallibility. The world would be a better place if we could examine economic and social phenomenon on the basis of facts rather than prejudices, actual contexts rather than theroretical models.

Currency: China to push convertibility despite Asia crisis

SHANGHAI, Feb 19 (Reuters) - China will press ahead with plans to liberalise its markets and make its currency fully convertible despite Asia's financial crisis, a senior central banker said on Thursday.

"We will make efforts to achieve full convertibility of the yuan," said Di Weiping, executive vice president of the Shanghai branch of the People's Bank of China.

China made the yuan convertible on the current account in late 1996, but Di said the date for achieving capital account convertibility would depend on the country's pace of economic development.

"Now it is difficult to say specifically how much time it will take to realise convertibility on the capital account," he told a seminar on emerging markets and financial services.

The current account mainly includes trade and services while the capital account covers long and short-term capital flows. Chinese officials had set a target of 2000 for making the yuan fully convertible but that has long since slipped and bank officials have said it could take years.

Analysts have said Asia's financial crisis, which saw a sudden capital outflow from a number of countries, had likely convinced China's planners to think twice about making the yuan fully convertible anytime soon.

The lack of full convertibility for the yuan had sheltered China from a sudden outflow of funds, they said.

Di said full convertibility would also depend on China's overall economic health as well as the pace of reform of the financial system and struggling state industry.

The ailing state sector is a major borrower of bank funds, and much of that debt may not be repaid. Di said so far the direct impact from the Southeast Asian crisis had not been serious.

"I don't think it will slow down the steps to open up the (China's) financial market."

But he added the turmoil was expected to affect China's foreign trade, investment by the affected Asian countries in China and economic relations with other nations.

Weaker currencies around the Asian region coupled with the strength of the yuan against the U.S. dollar had made China's exports look expensive compared with goods from other Asian countries, which could slow overseas sales this year.

British trade ties grow with ex-colony Hong Kong

HONG KONG, Feb 19 (Reuters) - Britain said on Thursday its trade and investment ties with its former colony of Hong Kong had forged ahead since the territory's transfer to China last year, and London hoped to see the relationship blossom further.

British exports to Hong Kong surged 10 percent to 3.2 billion sterling (US$5.25 billion) in 1997, London's resident envoy, Sir Andrew Burns, said. Britain handed Hong Kong back to China on July 1.

The figure made Hong Kong Britain's third largest non- European market. Just under a quarter of the exports were re-exported from Hong Kong to mainland China, underlining the ex-colony's role as a gateway to Chinese markets.

Burns, head of the largest British consulate in the world, was positive about how Hong Kong had fared. He noted it had still an "open government, tolerant society and a liberal economy" and said London remained committed to the place.

"Britain remains deeply engaged in Hong Kong at every level. We have a unique and modern relationship," Burns told the Chinese Manufacturers Association of Hong Kong.

But he signalled Britain would not turn a blind eye to any back-pedalling on the handover treaty which made the city a highly autonomous entity under a "one country two systems" principle.

"We will not shrink from speaking out if we think any aspect of the Joint Declaration comes under threat.

But equally, we are not in the business of maintaining a running commentary on everything that is done here," Burns said.

Burns said he intended to develop and multiply Britain's links with Hong Kong, a city of 6.6 million people. He said the two sides could form a trade bridge between their continents.

"Britain is the trading heart of Europe and you are at the trading heart of Asia," he said. "We want to make sure Hong Kong's voice is heard in Europe," he said, and London would use its stint as President of the European Union to promote that.

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