| |
KAUTILYA
Contagion
Time Again?
Two countries—Turkey and Argentina—face
a crisis and receive emergency aid
By
Jairam Ramesh
While
the world's attention is focused on the deceleration of the US economy
after an unprecedented nine and a half year expansion and its impact on
global trade, exchange rates and capital flows, two other countries are
in financial crisis. They have received huge bail-outs coordinated by
the IMF.
The first
to receive an emergency loan was Turkey in the third week of December.
The loan amounted to $7.5 billion and came after interest rates had zoomed
to over 1,000 per cent, foreign-exchange reserves were depleted by almost
a fourth and the stock markets tumbled to about half the value at the
beginning of 2000. The immediate provocation for the turbulence in the
financial markets was a crisis of confidence in the banking system. The
eruption first took place in Turkey's ninth largest private bank and soon
snowballed, leading to a wider liquidity crunch as foreign investors started
liquidating their assets and cut lending. What aggravated the situation
was a criminal investigation into the affairs of some private banks taken
over by the government for clean-up before privatisation. As corruption
got uncovered, ironically as part of a process of bringing about greater
transparency, investors were unnerved by what more lay hidden in the banks.
At about
the same time that Turkey was going through its travails since the last
week of November, Argentina also hit skid row but with a far greater intensity.
Argentina has been facing numerous political problems arising out of an
uneasy coalition in power at Buenos Aires and from prickly relationships
between this federal coalition and the provincial governments. While 1999
was a year of deep recession, 2000 has been no better with GDP growth
expected at less than 0.5 per cent but a positive growth rate nonetheless.
It was the fear of default on its foreign debt in the face of continued
lack of growth and political wranglings that undermined investor confidence
in Argentina since October 2000. Two weeks ago, after protracted negotiations
with creditors and bankers, the Argentine Government unveiled a massive
$39.7 billion aid plan. Of this, the IMF's share is $13.7 billion, the
World Bank and the InterAmerican Development Bank will give $2.5 billion
each and private banks about $20 billion. Interestingly as a further demonstration
of its growing economic clout, Spain has chipped in with $1 billion. This
package will help see Argentina through 2001. The country is being keenly
watched as it accounts for about a quarter of tradable emerging market
debt. Turkey invites attention since it is seeking to join the European
Union.
Actually,
Argentina is of interest for another reason. Since April 1991, it has
adopted what economists call a "currency board" system for managing
its exchange rate. Under this, the Argentine currency is fixed at a rate
of one peso to the US dollar, full convertibility is established between
the two currencies and the central bank is required to maintain foreign-exchange
reserves totalling 100 per cent of the domestic money supply. What this
means is that you cannot increase domestic money supply unless you can
increase the size of your dollar holdings. In effect, what a currency
board does is to shift the burden of monetary policy and to some extent
fiscal policy as well to the external sector of the economy. This currency-board
arrangement is usually used by small trade-dependent economies like Hong
Kong. But it is also seen as the last resort for a country facing hyper-inflation
needing to signal a credible commitment to sound macroeconomics. Inflation
in Argentina in 1985 was 672 per cent and as if this was not enough, it
zoomed to an astronomical 3,080 per cent in 1989. In contrast, inflation
in 1998 was 0.7 per cent and a negative 1.4 per cent in 1999. Thus, the
currency board has helped Argentina lick its endemic hyper-inflation disease.
But there have been costs: the peso's steady appreciation, which has made
imports cheaper and exports non-competitive, and growing unemployment,
currently higher than 12 per cent. In addition, total external debt of
Argentina has sky-rocketed from $66 billion in 1991 to about $145 billion
now, showing how dependent growth has become on external borrowings-something
that we ourselves experienced in the middle and late 1980s. Argentina
may now be looking forward to America's slowing down since that could
result in lower international interest rates and a weaker dollar.
Financial
markets impose a punishment that is wholly disproportionate to the crimes
that governments commit. Turkey and Argentina are more aggressive reformers
than India. Yet they have had to bite the dust, for the time being at
least. Our problem, however, arises not so much from a vulnerable external
or banking sector as it does from an increasingly sluggish rate of growth
in the "real" economy It is true that you fall harder when you
run faster. But a homoeopathic pace of reforms also takes a heavy toll.
(The
author is with the Congress party. These are his personal views.)
Top
|
|
METRO TODAY
As
the Government brings in more people and mops more money in taxes, it
must be seen to be rewarding those who come forth and pay up, writes India
Today Associate Editor V. Shankar Aiyar in 