Lessons For India From The Asian Crisis

The writer visited Hong Kong, Malaysia and Thailand for an on-the-spot study of what went wrong. These nations gave maximum incentives for industrialisation be it duty-free import of machinery or tax exemptions on profits and opened up their gates for imports of luxury items like expensive cars. As success went to the head, free import of perishable consumer products was also allowed. Whilst the government did a good job in encouraging private entrepreneurs to develop infrastructure areas like power, roads and bridges, no one seems to have bothered about capital and recurring costs. Most projects suffered from padding to pay for corruption at various levels.

 

Huge projects with massive capital expenditure were sanctioned as larger the project, the greater the scope for making money. Luxurious apartments, hotels, office buildings attracted more investments than factories. There was a mushroom growth of banks, finance companies and companies engaged in property development. Banks and finance companies borrowed short-term funds freely in foreign exchange and advanced them in the local currency to property developers. This tempo was maintained even when it became abundantly clear that there were no takers for such property. To hide the figures of non-performing assets, roll-overs/renewals with interest were resorted to with no cash flowing in. Newly developed properties looked like ghost dwellings at night.

Thailands industrialisation started in the early eighties and gathered momentum as the years went by. Since its own consumption was limited, most manufactured goods were exported. In the initial years, low cost was a major advantage. As Japanese costs went up and the yen became strong, Bangkok and adjoining areas (within a radius of 200 km) developed fast and became a sourcing point. This unexpected growth brought about all round prosperity. Per capita incomes increased manifold and so did living standards. In Bangkok, existing hotels had more employees than guests. Yet, more and more starred hotels came up. The results is that you can now get a room in a first class hotel with American breakfast for as little as $50 per night in the heart of Bangkok.

A weak government facing the threat of being eased out any moment could hardly be expected to stand up and guard the nations interest. During the discussion on a no confidence motion in Parliament, charges of corruption in the administration were freely traded. Thailand ultimately has a new government now. It is in distress, imports have become prohibitively costly, the economy is already in recession, and it will take more than a clean leader to change its course. Some commentators fear that the eight-party coalition may soon fall victim to internal bickering that could threaten economic reforms.

Malaysia bears a close resemblance to Thailand in over-building, over-capacity and heavy borrowing. A foreign speculator attacked not only the local currency but also played havoc in the derivatives market and underlying cash market, including resorting to short selling. Thus the theory usually advanced to justify derivatives trading, i.e. to provide a hedging facility, is not correct. The government tightened the screws on bank lending in August and gave up fighting to defend the ringgit.

Malaysias imploding stock market reflects a new crisis of confidence in the countrys ability to cope with the financing problems threatening some blue chip companies. The stock collapse may set off a chain reaction which could weaken Malaysias brokerage and banking sectors and ultimately erode its real economy, which is still generally sound. One casualty of the economic slowdown will be several large infrastructure projects which will have a ripple effect.

Indonesias current economic crisis is rooted in excessive foreign debt. The problems are largely caused by private, not state, debt. The finance ministers tough decision on bank closures has earned him many powerful critics, but he is seen as a pillar of the technocrats. The financial health of the economy has been weakened by the falling rupiah. Foreign loans equaled 25 per cent of Indonesias gross national product last year. The falling domestic currency is forcing companies to hedge their position by purchasing dollars, weakening corporate profits and driving the rupiah down further.

On his confidence building trip to Southeast Asia, the IMF managing director reposed confidence in the Indonesian reform package approved by the IMF in November. The core of the reform programme is in banking and restructuring of the financial sector. An aid package of over $30 billion has been organised by the IMF. But it has failed to deliver financial market stability in return for fiscal and monetary austerity. Sky-high interest rates have started choking the economy.

There is an Indian saying that those living beyond their means invariably head for financial crisis. The recent events have shown that this is true for nations and regions as well. Non-convertibility of the Indian rupee on the capital account was shielding it in the last five months but events in South Korea and Japan are impacting the currency market. India and China are being seen as wise countries which did not succumb to the pressure or temptations to open their eco-nomies beyond their absorbing capacities. They did not agree to make their currencies convertible on capital account or introduce derivatives trading in the financial sector. Between the demands of the FIIs and the interests of the nation, the latter is more important.

(The author is president of the Stock Exchange, Mumbai)