Mumbai, Feb 13: The Asian model of economic growth has not failed. What has happened is that Asia's excessive dependance on the private sector has caused a temporary breakdown of the financial superstructure. This was stated by S Venkitaramanan, former RBI governor at his valedictory address at the concluding session of the three day conference of the Asia Pacific Regional Committee of the International Organisation of Security Commissions, here on Friday.Venkitaramanan went on to call the crisis a faliure of market forces. Lenders who had advanced billions of dollars in short term credit to the economies, cannot absolve themselves of the responsibility for the crisis they caused by refusing to renew the loans. ``And they are supposed to be experts in due diligence'', he said.
He added that the globalisation of financial flows has introduced an entirely new volatile and sometimes irresponsible element in the world economy. The problem now, he said, is that the operators in the market for foreign exchangewho trade in trillions of dollars are not regulated. This is contrary to the stock markets which involve much less funds, he added. The problem is further accentuated by the fact that much of the forex trading is done by the bank dealers who have subtantial balance sheets to back them and who derive a good part of their profits from these transactions by way of speculation.
The former RBI governor went on to say that it was the exchange trading desks of banks aided by leveraged funds of operators based offshore which caused the catastrophe. ``They act on instinct and a base profit motive. It is asthough a carefully crafted work of art is allowed to be destroyed by a set of urchins and vandals, all in the name of market forces'', he said.
Venkitarmanan also said that many of the troubles of the region could have been avoided if short term inflows were regulated beforehand. ``Countries invited trouble by allowing unlimited access to short term loans for long term purposes'', he said. He was also of the viewthat Asia missed an opportunity when the `Bailout Fund' proposed by Japan and other countries was shot down by the IMF and the USA, on the mistaken notions of turf and the need to affirm USA's undisputed role in global finance.
``A US$ 100 billion bailout fund formed out of contributions by South East Asia's then strong currencies would have more than warded off the attacks of spculators, provided it was supported by appropriate monetary policies'', he said. He hopes now that the US Congress is giving a tough time to even a modest proposal for recapitalising the IMF, the idea would be revisited.
Venkitaramanan called the attention of the gathering of regulators to the fallacy that lies behind the attitude of private lenders to Asia. Most of them ran to the exit doors at the least sign of fragility, he said. ``What will happen if their temperamental approach were imitiated by the Asian lenders to the developed world?'', he asked. Asia has lent its reserves of nearly $500 billion to USA and other Westerncountries. "No economy, even the strongest in the world today, can escape doom if its credit support is suddenly withdrawn'', he said.
As solutions to the cause of restoring order to the chaos of global finance, Venkitarmanan said that there is a need to reconcile the new IMF doctrine of encouraging full capital convertibility with the chaos that unregulated market players bring about. ``Whether we need to return to an idea of a band of exchange rates is yet another opinion that is worth pursuing'', he added.
In conclusion, he called for the setting up of a regulatory system for global finance to prevent trouble before hand rather than engage it to clean up after speculators wreck economies.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
