A variety of arguments are being used to persuade us about the merits of full convertibility. The Economist points out that countries opting for controls will be denied a cheap source of capital; there are practical difficulties in establishing the control mechanisms; governments are not omniscient and markets perform a better job than policy-makers. Bhalla says the main cause of the Asian crisis lies in peggingcurrencies to the dollar, rather than allowing them to float freely. The Economist says resources garnered from abroad are not well used by the south-east Asian economies and if foreign banks had been permitted in these countries, the results would have been very different.

Overvaluation of the S-E Asian currencies was partially responsible for the Asian crisis. Would letting the currencies float freely have helped matters? This is what economist Mihir Rakshit said in the September 1997 edition of the ICRA bulletin: "...there is no hard evidence to suggest that before 1997 the Bank of Thailand intervened significantly in the currency in order to maintain an overvalued exchange rate...The central bank intervention in this period was directed primarily towards ironing out erratic fluctuations in the exchange rate." In the December 1997 issue of the bulletin, Rakshit also points out that Indonesia and Malysia had a much more flexible exchange- rate system and adjusted their currencies to inflation.

ButBhalla's case seems to be that exchange rates should not be managed at all. Well, exchange rates were freely floating after the collapse of Bretton Woods, and look what happened to the dollar. It appreciated 67 per cent during 1980 to 1985 with the dollar selling for 263 yen in early 1985. Thereafter, it reversed course and by early 1988, it was worth only 120 yen, falling further to 105 yen in June 1993. Economists and politicians sympathetic to free markets had experimented with freely floating exchange rates, and found their behaviour to be vastly different in practice than what was expected in theory. At GATT's 40th anniversary bash, Maggie Thatcher's chancellor of the exchequer Nigel Lawson admitted that freely floating markets had failed to produce medium-term speculators, who stabilised currencies around economic fundamentals. Obviously, if exporters and importers are not certain about what a currency is worth, trade will suffer. Small wonder that the Bretton Woods system of fixed exchange ratesproduced the highest growth rates. After 15 years of experimenting with floating exchange rates, US Fed chairman Paul Volcker said: "It is hard to see how business can effectively calculate where comparative advantage lies where relative costs and prices among countries are subject to exchange rates swings of 25-50 per cent or more. There is no sure or costless way of hedging against all uncertainties."

Moreover, inflows of portfolio capital into S-E Asian countries, attracted by the boom, could overvalue the currency without any government intervention. That is precisely what would have happened in India in 1994 if the RBI had not kept the exchange rate down. "Only an untutored economist would argue," writes Bhagwati, "that free trade in widgets and life insurance policies is the same thing as free capital mobility." Capital markets tend to overshoot, yanking capital in and out of countries, causing immense pain to the real economy--a view shared, among others, by George Soros, who should know.

One ofthe immediate causes of the S-E Asian debacle was the devaluation of the yuan. But these countries had weathered such shocks before, including the debt crisis of the eighties. What was different this time around was openness on the capital account. In particular, had the freedom given to Thai banks to borrow abroad in 1993 not been allowed, the history of S-E Asia could have been very different.

Nor were these nations profligate with their usage of funds. Rakshit points out that the incremental capital output ratio was close to 4.8 during 1990-95, compared with Mexico's 7 for 1990-94. All financial markets are afflicted with a herd mentality, and indiscriminate lending in a boom is the norm rather than the exception. The Economist's prescription of allowing in foreign bankers is peculiar, given their record in the eighties debt crisis, or in lending to Russia or even in lending to S-E Asia itself. And so far as the cheap source of capital is concerned, portfolio flows need to be differentiated from FDI,which creates jobs and output. China has had no difficulty in attracting large amounts of FDI despite having capital controls. When European currencies can be forced off the ERM, small currencies can easily get swamped. And relying for your capital on the trillion dollar a day forex market, where speculative transactions make up 99 per cent of trades, is the sort of a thing which Keynes had in mind when he said: "When the capital development of a country becomes the byproduct of the activities of a casino, the job is likely to be ill done."

That is not to say that practical shortcomings of capital controls do not exist. But the fact remains that it is precisely some amount of capital controls that have enabled us, and China, to escape the worst of the contagion so far. Of course, capital controls by themselves may not suffice. The savings and loan problem in the US, the Latin American debt tangle, the Mexican peso crash and now the Asian and Russian meltdown all reflect drastic changes taking place in theglobal economy, which manifest themselves as financial crises. Both governments as well as markets have failed to tackle the problem, and there is no reason to think such crises will not recur.