regimes and inadequate capital. This, in essence, spells out the problems confronted by emerging markets, rather than current account deficits, large net foreign exchange exposures or constraints on exchange rate fluctuations because of fixed exchange rates. For example, large current deficits are not necessarily dangerous, because the composition of capital account surpluses used to finance such deficits may be long-term. Nor are foreign exchange exposures a problem if they are managed properly and attendant risks recognised. Fixed exchange rates are not per se a problem if one gets the exchange rate right. However, if one gets the exchange rate wrong, a well-functioning international financial system will seek out anomalies in policy alignments and exchange rates and set them right, Mr Greenspan has argued.
Arbitrage will then force prices to change until expected returns have been equalised. In countries where the exchange rate has not been properly aligned, there have been outbursts against currency speculators and there is some sympathy for such arguments in India as well. However, speculators rarely succeed in dislodging an exchange rate that is firmly rooted in compatible policies and cost structures... We used to describe capital flight as hot money. But we soon recognised that it was not the money that was hot, but the place it was running from. That precisely is the problem. There is a great deal of complacency and smugness in India about what has happened in South-east Asia. India opted for a steady state rather than a big bang. South-east Asia demonstrates that this was the right thing to do. Paraphrased somewhat, the argument translates into one for slower and fewer reforms. However, this is a misinterpretation of the currency crisis. What the currency crisis establishes is greater vulnerability of domestic economic systems to external changes and the need for further reforms, particularly in the financial sector. Nonetheless, there are those who ask whether the price of so sophisticated a financial system is too high. Would it not be better to slow it down a bit, and perhaps achieve a system somewhat more forgiving of mistakes, even recognising that such a slowing may entail some shortfall in long-term economic growth? Those who argue thus, in North Block, the Reserve Bank or elsewhere, are well-advised to read the answer to that question that Mr Greenspan himself raised.
