Ten years later

This week marks the tenth anniversary of the East Asian crisis of 1997. When it happened, it was seen by many to mark the end of the great Asian growth story. As things turned out, however, it really didn't take very long for the countries most affected by the crisis to recover. Some of them may not have returned to the growth rates they had achieved before the crisis, but by and large, there is little doubt that the crisis did not precipitate a significant structural change in their growth trajectories. With India joining the party during the past few years, the region has emerged as the powerhouse of global growth; what's more, it is likely to continue to play that role for a long time to come. Given the increasing significance of the region in the global economy, it is pertinent to ask whether, over the last ten years, these economies have done what is required to prevent another crisis, whose global impact will be that much larger than the previous one.

The answer to this is, broadly speaking, yes. The one significant change in the macroeconomic environment of the region is the huge build-up of foreign exchange reserves. Given that the first manifestation of the crisis was Thailand's running out of reserves while protecting the baht, it was only natural that the countries in the region would see the accumulation of reserves as a critical component of their defences against a recurrence. Even as their exposure to global capital flows has increased over the decade, they have succeeded in building up war-chests that can see them through any conceivable shock. Of course, even though the accumulation of reserves was viewed in terms of the so-called "precautionary" motive, it simultaneously served the purpose of preventing their currencies from appreciating. Given the high (though decreasing) dependence of these countries on exports, resisting appreciation was an integral part of their strategy to maintain competitiveness.

In effect, then, these countries came out of the crisis with their export-led growth strategy largely intact. But, they bought themselves a huge amount of protection in the form of the foreign exchange reserves. What price did they pay for this protection? Something we are becoming increasingly familiar with in India""the monetary challenge of sterilising the reserves, without which the risks of spiralling inflation would increase significantly. The efficient way to do this, if it must be done, is through the use of bond markets, which these countries did not have much of and, for a variety of reasons, still don't. In their absence, the burden of sterilisation falls heavily on the banking sector, in the form of restrictions on lending based on the foreign exchange that is flowing into the system. Bank profitability and, consequently, the system's ability to invest in growth, diversification of products and services and technology suffer. This is the price these countries pay; time will tell whether it is too high or not.

There is, however, one clear political message in the way in which the affected countries dealt with the crisis. When in trouble, their experience suggests, the only one you can rely on is yourself. Not for them any more the uncertainties of IMF programmes or US intervention on behalf of American banks. Self-reliance is one thing that the mountains of reserves guarantee, and who is to judge what price is too high for that?