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Indonesians would have been definitely better off had their Government been advised, or at least permitted, to do what Western Governments are doing now.

S. Venkitaramanan

The current ongoing financial turmoil in the US and Europe has, no doubt, had its repercussions in Asia. What is surprising is the relative calm which Asia has displayed in responding to the financial crisis. It does not mean any silent gloating with a dose of schadenfreude. It only means that the Asian economies have handled the problem of regulation and capital flows in a more mature way than the advanced countries of the West.

This line of thought was triggered on reading an insightful article by Mr Kishore Mehbubani, a Singaporean diplomat, entitled “Why Asia stays calm in the storm?” in the Financial Times of October 29. Mr Mehbubani presents a well-argued thesis that this difference in approach is a result of the fact that the Asian nations had learnt the bitter lessons of the crisis of the 1990s.

He also reflects on the fact that while there is a great deal of media attention paid to various responses of Europe and America to the crisis and its origin, the media would seem to ignore the calm and steady responses of Asiatic nations, particularly China, India and Japan, as well as Asean nations. It is significant that the three anchor Asian economies of China, India and Japan have provided hope that there may be “some pillars of stability in the swirling storm” of the present mayhem.

The author reflects on the fact that it was just 10 years ago, when European and American policy-makers were advising the policy-makers of Asia to do exactly the opposite of what they are now doing to mitigate the crisis. They had then advised Asian policy-makers not to rescue the failing banks but to raise interest rates and balance their budgets, precisely the opposite of what they are themselves doing now.

Millions of Indonesians and Thais would have been definitely better off if their Governments had been advised or at least permitted to do what Western Governments are doing now. The author says that those miserable Indonesians and Thais, who suffered as a result of wrong policy advice by the West, would have been well-justified to demand an apology from the American and European Governments, who had prescribed the wrong medicine ten years ago.

Apparently, the philosophy of the American and European ideologues is that “others should do what they say” and “not do as they do”. This reflection does not amount to any gloating on the part of Asians. It is only an indication of the fact that the Western insistence on deregulation and withdrawal of the State from financial markets has been proved to be wrong.

Mehbubani’s article reflects on the fact that at a recent summit in Beijing, the Chinese and the Indian Prime Ministers had emphasised the need for regulation as well as concentrating on the real economy. These were based on lessons from the crisis in 90s, learnt by Asia, but not by Europe and America.

The present debate between the West and the East illustrates the importance of Asia’s ideological belief that a Government qua Government has a definite place in economic management. Asian policy-makers, the author points out, had been puzzled when the former US President Ronald Reagan stated that “Governments are not a solution to our problem, Governments are the problem.”

The author recalls how in a recent testimony to the US Congress, Alan Greenspan has acknowledged that financial institutions could not be trusted to self-regulate themselves. They have to be regulated by Government. In a remarkable mea culpa, Greenspan has pointed out that his deregulation of financial institutions was, to some extent, responsible for the onset of the sub-prime crisis and hence the present global turmoil.

It is relevant to point out that some other US observers commenting recently on the financial crisis remarked that the then Prime Minister of Malaysia, Dr Mahathir Mohamed, had, in 1998, blamed hedge funds for the dislocation of the Malaysian economy and the devaluation of the Malaysian currency.

The Malaysian Prime Minister was then accused of being anti-semitic and attacked for criticising hedge funds. He had also wanted to exercise control over capital flows to keep the economy in a stable condition. In retrospect, the advice of international policy-makers to Dr Mahathir seems to have been flawed. Those critics of Dr Mahathir must be now regretting their advice, since they are trying to do what they prevented Dr Mahathir from doing.

Be this as it may, Mr Mehbubani points out that virtually all Asian Governments believe that the invisible hand of the market has to be balanced by the visible hand of government. Asian emphasis on this aspect may prove a real asset in the prevailing storm.

Returning to the article, it points out that in the past, Asian Governments had expected Western counterparts to be models of good governance. The author quotes a story of how a European banker earlier this year had consulted the Reserve Bank of India to learn how to get a banking licence in India. He was briefed on the conditions, which included a requirement that the Indian authorities would also assess the regulator. The European banker smiled and said “No problem. We have an excellent regulation.”

The Indian officer is reported to have remarked that after the sub-prime crisis, we are not sure of US regulation. “Nor after Northern Rock, are we sure of UK regulation and after the catastrophic losses at Union Bank of Switzerland, we are not sure of Swiss regulation.”

In short, the golden standards that the West assumes it had in the field of regulation have completely vanished. This emphasises the Asian realisation that they must again forge their own standards.

Mr Mehbubani has quoted an executive of the Singapore Government Investment Corporation as having said we should guard against over-regulation and protectionism as part of a retreat from globalisation. These comments reflect the Asian concern that the Americans and Europeans, hitherto the custodians of a liberal international economic order, might retreat into protectionism. They easily gain resonance in the context of Barack Obama’s statement on offshoring.

Mr Mehbubani admits that Asian societies are aware that they are becoming one of the largest beneficiaries of globalisation and must act with greater responsibility in stabilising the global economic system. He points out that a sizeable population of nearly 1.7 billion will be housed in the free trade areas under contemplation by Asean countries. This growing interdependence will be a pillar of stability in the international financial system.

He points out that the recent Beijing summit pointed out there is a remarkable contrast between the attitude of the Americans and Europeans on the one hand and Asians on the other. While the Prime Minister of China emphasises the development of real economy and Dr Manmohan Singh emphasised the importance of global governance, the West seems more concerned with less fundamental questions, such as the appreciation of the Chinese currency.

Mr Mehbubani points out that few Asians have lost optimism for the future. They have no illusions about the crisis, but are confident that they remain on the right trajectory to deliver the Asian century.

Ten years is a long period in history. In this period of time, Asia has demonstrated that its model of growth of a strong State and an emphasis on regulation and growth of the real economy are better guides to policies in overall economic management than the Western mistaken thesis that the markets know best and the State should remain out of the picture.

More Stories on : Economy | Financial Markets | S Venkitaramanan

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