Exchange-rate volatility portends crisis
OUR BUREAU
HYDERABAD, Dec 28: Noted economist PR Brahmananda on Sunday cautioned that the exchange-rate instability experienced by the east Asian economies portended turbulent times for world economies in general and developing countries in particular. Delivering the Special Amrit Jubilee Lecture on the Implications of the New Exchange Rate Paradigm at the 80th Annual Conference of the Indian Economic Association (IEA), Brahamananda said the lacunae in the global exchange-rate mechanism today could drive the world towards a crisis.However, while economic blocs like the European Union had insulated themselves against such instabilities, developing countries, too, would have to follow suit with a common exchange-rate agreement which will have to extend to a common monetary union if it has to be effective internally and externally. A coordination of internal economic policies is called for Asian countries will have to form at least two to three such unions, the economist felt. In the immediate context however the
world would be dominated by three currencies, the US dollar, the euro and the yen with the possibility of the Chinese yuan joining the league of strong currencies later. There will have to be a tripartite agreement on the overall growth rate of money supply in the aggregate of these three countries which could, in fact, emerge as an alternative to the Bretton Woods dispensation of special drawing rights (SDR), in the absence of a majority support to the latter procedure. In the absence of such a tripartite agreement as also the absence of widespread support to the SDR regime, each country would aim at a lowest feasible growth rate of money supply to protect its own exchange rate. "This in the context of an upsurge in world growth would lead to falling prices of traded commodities which would seep to other commodities", Brahamananda held. "In such a situation and with the world having bid adieu to gold as the basis of international money with an alternative in sight, the possibility of a chaotic outcome
does exist and cannot be ruled out", he stressed. The world today is linked more powerfully than in the 30s and certainly more pervasively by the great revolution telecommunications and IT while a great portion of it has become an open economy with currency convertibility. in this context shocks transmit themselves everywhere very quickly and there are feedback repercussions, he said. In this context, Brahmananda felt that when a country seeks to get internationalised in the current scenario, it has to bring down the inflation rate and prospective inflationary expectations to that prevalent in developed countries. This requires massive fiscal discipline and a very strong central banking system free from the albatross of non-commercial lending and high margins."The emerging international monetary and exchange rate paradigm thus places cardinal emphasis on domestic economic management not only during crises situations but also during normal periods," he said. In effect, it was restating that in the absence
of an international coordinating authority the burden of adjustments is wholly internal for almost all countries.
Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.
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