The Thai baht, which had been the best-performing currency in 2006, crumbled a couple of weeks ago, right after I wrote a glowing article about Bangkok, following which (although not a result of) the Thai central bank imposed some extremely foolish restrictions on capital inflow. The restrictions were partly reversed the next day, but the baht remained depressed and Thai credibility remains damaged yet again. |
Of course, knees started jerking everywhere. I got a gleeful mail from a friend who firmly believes India doesn't need capital account convertibility; George Soros, who happened to be visiting India at the time, said the same""no need right now; and even the celebrated Joseph Stiglitz, in a lecture at the Reserve Bank, reiterated his belief that capital account liberalisation is not necessarily a good thing""look at China, he said, they don't have an open capital account and still get the lion's share of FDI. |
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And, of course, there was the chorus: Remember the Southeast Asian crisis of 1997 (which, as we all remember, was triggered by a sharp devaluation of the Thai baht). |
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Fair enough, I say. But, if we are looking at the downside of Thai economic policy, isn't it only sensible to look at the upside as well? |
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And if we do, we find""surprise, surprise""that despite the much higher financial volatility (including the shocking collapse in growth from 1996 to 1998, when per capita income fell by 40%), Thai per capita GDP more than quadrupled from $695 in 1980 to $3,141 today. Over the same 27-year period, Indian GDP per capita merely trebled, from $266 to $826. Thus, an average Thai""despite the growth collapse""did almost 50% better than an average Indian over this period. |
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Importantly, since a rising tide lifts all boats, it is also very likely that the poorest Thais have also been able to improve their lives by much more than the poorest Indians. [If you take a longer history, the numbers skew even more dramatically in favour of the poor Thai""since 1960, Thai GDP has grown over nine times, while Indian GDP has grown by only around 450%.] To be sure, a significant part of India's poor performance was due to the close-minded economics we followed for much of this period. But the point I want to make is that the "riskier" policies run by the Thai authorities have, over the past generation and a half, helped their poorest people far more than the risk-averse policies run by the Indian government. |
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Incidentally, extending this anecdotal evidence from Thailand to a whole swathe of "emerging" economies, both in Asia and Latin America, throws up the same evidence""that more open policies lead both to higher growth and higher financial volatility. |
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Now if we are to choose between high growth/high risk and lower growth/lower risk, I think it is worth recognising that just as returns from growth are not evenly distributed""the rich and vested get the lion's share of the gains""so, too, the terrors of volatility affect people disproportionately. People who are more deeply vested in the financial system will suffer a larger impact from market volatility than people who are less so. For instance, someone with 50% of his wealth in the stock market will be hurt much more if the market tanks than someone who has just 10% of his savings""or none of it""invested. Thus, from the point of view of the impact of horrendous market volatility, the poor are likely to be much less affected. |
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Of course, there are secondary effects to market volatility""the impact on the underlying economy, salaries, growth, and so on. But these are most often temporary""or, certainly, they were in Thailand. In the 10 years following the Southeast Asian crisis, Thai per capital income growth (at 70%) has been more or less the same as India's, which is 75%. |
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This begs the question: when the government or the RBI or anybody says they fear the excessive volatility that could result from liberalising more rapidly, on who's behalf are they afraid? Is it on behalf of all Indians, importantly including the millions who are affected by market volatility in only a secondary (or even tertiary) way? Or is it on behalf of themselves""we were unaffected by the Southeast Asian crisis!""and the small, though growing, proportion of the population that is vested in financial markets? |
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Mind you, I am not imputing any villainy to these beliefs. It is only natural when you see something terrifying to put yourself in those shoes and say, Whoa....not for me. |
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But I think a deeper look at how markets work and how they affect economies, particularly in this globalised world, shows that a more open economy, notwithstanding the likelihood of foolish policies from time to time, is in the best medium-term interests of the country, most of all the least represented part of our population, for whom life today is far more volatile than the most fearsome financial tsunami. |
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Let's take the right cues from Thailand. |
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