Krishna Kant also distinguished himself by his outstandingly paranoid speech. True, he was not alone in this; Prime Minister Mahathir of Malaysia outdid him. But then, Mahathir has cause to feel needlessly burned. He ran the Malaysian economy with exemplary success, and then the cursed currency market had to ruin it all for him. Now he declares himself in favour of controlling capital flows.
But he will not. He will continue to make threatening noises because he earns publicity that way. LDC-style paranoia makes the Kants of the underdeveloped world warm towards him; it gets him headlines at the time of Fund-Bank meetings where Chidambar-am does not even get a footnote. But Maha-thirs radical postures are not enough to get him attention; he gets them because he has run an astonishingly successful economy.
How did he do it? While our Prime Ministers were haring off to Harare and Havana attacking the evil capitalist nations and thinking they were doing good work he was flying off to Japan and persuading Japanese companies to come and invest in Malaysia. Not just the Mitsubishis and the Sumitomos. He went to obscure southern prefectures and talked to small businessmen, asking them to come and set up ancillary industries in Malaysia. He was taming and defanging his customs administration to ensure that imports from Japan were inside Malaysian factories within five hours of landing. He matched Japanese just-in-time manufacture with right-on-time customs and always-on-call administration. And when he had trouble, he would go to Tokyo and ask for help. He found out that the Japanese were amongst the worlds most generous people, and he took the benefit of their generosity.
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Because he did all this for years, he is now in a position to say boo to Soros. For he has so much Japanese investment in Malaysia that Japan will support him in a crunch. Even without the investment, he has proved himself as a trustworthy partner of Japan; and Japan is known for backing its allies. The massive $29 billion standby that Indonesia has got from the International Monetary Fund was not picked out of the air; behind it was considerable lobbying, amongst others from Japan. If a first-rate country backs a third-rate country, the prime minister of the latter country can strut about. (Here I am adopting our Prime Ministers ratings. Britain is a third-rate country. US is a first-rate country; China can aspire to that status if it invites Gujral. Japan and Germany are second-rate countries. All the rest are third-rate.)
That is why Mrs Gandhi could strut about. That is why, for years, her loyal civil servants could rail at the hated capitalists in the various meetings of the international institutions. That is why Rajiv Gandhi could host the Group of 77 in Hotel Fort Aguada in Goa. They had the Soviet Union to prop them up. A third-rate country is as strong as its patron makes it.
But it is not longer permissible for our leaders to do so, for the patron has lost strength and spirit. Bereft of patrons, India is a third-rate country, full stop. It is not so third-rate as Pakistan or Djibouti, but it is subject to the same unfair, unequal international rules of the game as they. If their rulers carry oversized egos, they can suffer as badly as the people of Iraq.
For our diminished leaders, it is comforting to go to less developed get-togethers and hear fellow-rulers bitching away about the iniquity of the world and the injustice of industrial countries. It is perhaps harmless as long as it is confined to sound-proofed conference rooms in out-of-the-way countries. But if our leaders retain their illusions when they come out of conference, there is only loss of opportunity and possible catastrophe for the country in store.
If a country is short of capital, it can grow faster by getting it from abroad. This much is obvious even to Gujral and his colleagues, who strain every muscle to get foreign investment. The difference between foreign and domestic investment is that there is an exchange rate between foreign investment and its returns or repatriation, and there might be an exchange controller who can block or delay interest, dividend or repatriation. The risk of an obstructive exchange controller is removed if a currency is made fully convertible; India will get more foreign investment, and on better terms, if Reserve Bank is deprived of the power of stopping outward remittances. Thailand, Malaysia and Indonesia defanged their central banks; as a result they received many times more foreign investment than India even after our reforms.
But incoming foreign funds tend to have three effects. First, they tend to appreciate the domestic currency against foreign currencies. A higher value of the domestic currency would make imports cheaper to domestic buyers and exports more expensive to foreign buyers. It would worsen the balance of trade and tend to reduce domestic production. Second, the influx of foreign funds would increase the supply of funds and reduce their prices: it would tend to reduce interest rates and raise stock market prices. The lower cost of money would stimulate domestic investment. Third, the funds would finance new investment; the credit expansion they engender would finance further investment. Thus total real investment would rise, and therewith, production and employment. If the inflow is large enough, there may be a shortage of domestic investment opportunities, and money may go into property investment, asset speculation and quite possibly fraud.
All these things happened in the South-east Asian countries to a varying extent. Above all, there was over-expansion of lending, a shortage of lending opportunities, and speculation in the property and stock markets. The resulting asset bubble was bound to burst. It has; many lenders and investors have made losses, and many of them are foreign. Mahathir thinks the Malaysian bubble burst because Soros pricked it. He is wrong; it burst because it was a bubble that grew uncontrolled.
The lesson is not to abuse foreign devils, abjure foreign capital or ban speculation; to do so will only reduce capital inflows and increase their cost, and thereby reduce the countrys growth rate, and remember, every increase in the growth rate brings a rise in standards of living and reduction in poverty. The solution is to learn to manage an open economy with a very few strategic weapons the budget, the interest rate and the exchange rate and to regulate the asset and financial markets so as to prevent unsustainable price cycles. Our rulers fear full convertibility because they have not learnt the art of minimum management. No wonder; retarded drivers would want to limit car speed to a crawl.