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Madeleine Wackernagel : TAKING STOCK
Mahathir Mohamed, the Malaysian premier, was right in criticising the currency speculators at this week’s G15 meeting, but for the wrong reason. Since the crisis first struck in Thailand in July, the economies of South-East Asia have borne the brunt of the currency and stock-market fallout. Much of that was irrational, a result of the herd mentality that characterises market activity. But much more was based on the structural problems inherent in many Asian economies.
Mahathir has been on a collision course with the markets since July, when he first blamed George Soros, the United States financier, for the Malaysian currency’s woes. That didn’t convince anyone, and when he continued his onslaught, the ringgit was the only loser. To date, it has depreciated by 40%.
His muddled thinking in calling for legislation to regulate currency trading was amply demonstrated by this statement: “People can still speculate when there are rules and regulations. People are speculating in the stock market where there are rules and regulations. Rules and regulations will not eliminate speculation,” Mahathir said.
But he is certainly going to give this confused economic analysis a try. Hence the G15 will present their proposals for regulating the market to the International Monetary Fund and World Bank next month. It will take more than rules to put Malaysia’s economy back on track, however.
Globalisation, that new catchword of the Nineties, has its downside, and the emerging markets are particularly vulnerable, as was amply demonstrated in the stock markets. But as the Minister of Finance, Trevor Manuel, pointed out to the African Economic Research Consortium this week, times of turmoil also present opportunities.
He referred to the 1996 rand crisis as being one such occasion, serving to sharpen economic policy thinking and resulting in the growth, employment and redistribution strategy: “Out of the turmoil came the opportunity to put in place a set of mutually reinforcing policies designed to transform the economy whilst maximising the benefits and minimising the risks associated with rapid globalisation.”
We’re not quite there yet, as Manuel acknowledged. And while it is inevitable that investors will not be discerning when it comes to avoiding risks in emerging markets, South Africa has survived the worst of the past weeks’ fallout fairly intact.
Unlike the Asian tigers, which are being forced to learn harsh lessons. In Thailand, site of the first attacks, the prime minister resigned this week amid increasing economic chaos. Since July, when the Thai authorities had to admit defeat and devalue the baht, the currency has fallen to an historic low of 41 to the dollar. An $18- billion rescue package, provided by the fund, has failed to stop the rot. Now, the government and the fund have to consider their next step as the search for a successor begins.
Chavalit Yongchaiyudh, the Thai premier, came under pressure for not implementing the fund’s conditions; usually, it is the fund that is vilified. In the event, the market rewarded the ex-prime minister with a 6% gain, signalling its hope that the next incumbent would be more disciplined.
Indonesia suffered a similar fate: a $23- billion aid package agreed with the fund in response to the banking crisis was not regarded as sufficient to reverse the country’s economic decline. Reports that President Suharto had rejected the offer because of the conditions attached did not help to boost confidence.
Politics, not economics, is invariably at the heart of any economic crisis, a point amply demonstrated in the Asia-Pacific region. Held up as a paragon of economic virtue, with growth rates of 8% and more for the past decade, the Asian tigers have become complacent.
Galloping growth alone can no longer paper over the socio-economic cracks that are widening across the region. As the fund- induced austerity measures bite, the prospect of job losses will cost the politicians in terms of popularity, much of it the result of cronyism and patronage.
As Manuel discovered soon after taking office, far from being amorphous, the markets are very powerful, and not keen on being hoodwinked. South-East Asia has had its wake-up call and Mahathir would do well to listen.