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| The currency crisis in East and South-East
Asia by Dr. J. B. Kelegama Continued fron yesterday Malaysian Premier, Mahathir Mohamed and some economists in Asia argue that the currency crisis was deliberately engineered by foreigners in order to force East and South-East Asian countries to accept IMF tutelage and open up their markets for foreign trade and investment. The drastic fall in property prices in East and South-East Asia have whetted the appetite of American business houses to own such properties. The Market value of assets in Indonesia is about one-fifth of what it was in 1996, in South Korea about half and a substantial part of them are for sale. Transnational corporations who want to break into or expand the Asian market are actively engaged in purchasing assets of troubled firms. General Motors for example, has bought out President Suharto's half-brother in a joint venture in Indonesia, and is negotiating a new joint venture with Daewoo automakers in South Korea; Ford Motors is proposing to take a bigger stake in Kia. Motors in South Korea; Procter & Gamble has purchased a paper-making company from Sangyong Group in South Korea; Coca Cola has increased its shareholdings in Thailand and South Korea. Foreign banks will soon be purchasing or merging with domestic banks. City Bank is studying the books of the First Bangkok City Bank while AIG — a US insurance company has bought into Bangkok Investment, one of the two surviving finance companies. IMF reforms resulted in the transfer of about 20 percent of the Mexican banking system to foreign ownership. The rapidly developing countries of East and South-East Asia had been successful by following their own strategy of development which combined selective State intervention with market forces which was at variance with the free market approach advocated by the IMF. The problem now is the likelihood of this strategy being thrown overboard under IMF's tutelage and the Asian Tigers like South Korea, Thailand and Indonesia accepting and proceeding along the lines of liberalization, free trade and free markets without economic sovereignty. Whether such a sudden reversal of strategy of development replacing the Traditional economic culture with a new one would enable these countries to resume rapid growth remains uncertain. Regulation of international capital markets Mahathir Mohamed, the Prime Minister of Malaysia called the prevailing form of foreign currency trade "unnecessary, unproductive and immoral" and should be declared illegal and stopped. With foreign exchange trade far in excess of the value of global trade — about 20 times — the market transactions had long ceased to reflect the need for risk protection in trade. "Other than profits and losses to the traders involved there is really no tangible benefit for the world from this large trade. No substantial jobs are created nor products or services enjoyed by the average people." He wanted anarchy in the international financial system stopped and secrecy to be replaced by transparency and appealed for "prosper-thy-neighbour" instead of "beggar-thy-neighbour" practices of the currency markets and called on the WTO to formulate regulations for the currency trade. Western financial analysts and economists dismissed Mahathir Mohamed's criticism of currency speculators as nonsense and blamed the Asian financial crisis on weak economic fundamentals. Recent events and studies, however, appear to vindicate Mahathir Mohamed. It was on 27 October 1997, when Dow Jones index plummeted over 7 percent on account of the Asian turmoil, even while the US Treasury Secretary was boasting that the "fundamentals of the US economy are strong and the prospects for growth are strong," that some financial analysts opened their eyes and realised the havoc caused by the unregulated speculation of funds dealing with derivative. Michael Metz, the chief investment strategist of Oppenheimer & Company, when interviewed by CNN stated: "These derivatives have too much leverage. They are uncontrolled. With $ 4000 under them they can control $ 80,000 worth of stocks. This is crazy. This causes enormous risks and it is highly speculative." Professor G. K. Helleiner, an eminent Canadian economist, has called for a new global framework to oversee international financial markets. He has pointed out that private capital is highly fickle and volatile and a multilateral framework is needed both for the conduct of international finance and for sound global macroeconomic governance in the interests of stability and development. He has proposed that this matter should be studied by a UN panel and followed up with an international conference sponsored by UN on financial reforms. Sri Lanka Sri Lanka's current account deficit in 1996 was 3.9 percent of GDP which was lower than Thailand's 8.1 percent, Malaysia's 6.3 percent and South Korea's 4.8 percent; it was slightly lower than Indonesia's 4.1 percent. In 1994, however, Sri Lanka's deficit was 6.5 percent of GDP and in 1995, 4.9 percent. There was no speculative attacks on the Rupee in 1994 when the deficit was 6.5 percent (even higher than Malaysia's deficit of 6.3 percent in 1996). Similarly, Pakistan's current account deficit in 1996 was 7.0 percent of GDP but there was no assault on the Pakistan rupee by currency speculators. The main reason why Sri Lanka, or for that matter, other South Asian currencies, have not been targeted by currency speculators is that these countries have not been the recipients of significant speculative short-term investments or short-term bank or other foreign credits unlike the countries of East and South East Asia. In other words, Sri Lanka has been spared because it has no money to be worth attacking. In 1995, for instance, private portfolio equity flows to Sri Lanka amounted to $ 61 million (to India $ 1,517 million and Pakistan $ 729 million) as compared to $ 4,873 million to Indonesia, $ 2,299 million to Malaysia, $ 2.154 million to Thailand, $ 1,961 million to Philippines. Sri Lanka received less than 3 percent of what was received as private portfolio equity investments by Malaysia or Thailand in 1996. The picture was not different in private credits; private net debt flows to Sri Lanka in 1996 amounted to a mere $ 15 million $ 775 million in India and $ 305 million in Pakistan) in contrast to $ 4,921 million to Thailand, $ 3,825 million to Malaysia, $ 2,428 million to Indonesia and $ 1,116 million to Philippines. Sri Lanka received less than 1 percent of net debt flows to Thailand or Malaysia. In the three year period 1994-1996, foreign resource flows to Sri Lanka were approximately $ 32 million in portfolio equity investment and $ 702 million in net private debt. These are in contrast to the resource flows to the four Asian countries — Indonesia, Malaysia, the Philippines and South Korea of $ 30,300 million in portfolio equity investment and $ 328,000 million in net private debts. Sri Lanka and other South Asian countries were thus not favourite markets for speculative foreign investors. This was not for want of trying on the part of these countries to attract foreign capital by various incentives and concessions. The stockbrokers in these countries are still lamenting the lack of foreign investors to push up the stock prices. For whatever reasons, foreign investors were not enamoured of South Asian markets and preferred the East and South-East Asian markets. Perhaps they yielded higher profits. Economic analysts considered the presence of foreign investors in those stock markets as a sign of success and their absence in South Asia as a weakness. This alleged weakness has now turned out to be a blessing in disguise; the lack of short-term investments and credits has insulated the South Asian economies from the Asian currency crisis. The second factor is the restrictions on capital movements into and out of the country since the time of the second world war. Although Sri Lanka opted in 1977 for an open market economy and trade and exchange liberalization and had in fact liberalized current account transactions, it did not go so far as to liberalize the capital account of the balance of payments. Foreign borrowing was strictly controlled until 1997 when the Budget allowed exporters with adequate foreign currency exposure to borrow foreign funds from the funds available in the foreign currency banking units and domestic banking units of commercial banks. The scheme is operated according to Central Bank regulations that banks' net foreign liabilities should not exceed 15 per cent of their capital funds, and there is therefore no open door for capital movements yet. Thus, commercial banks or other firms cannot borrow foreign funds freely nor can foreign banks lend to domestic banks at will. All the South Asian countries have capital account controls. China, as mentioned earlier, remained initially untouched by the Asian currency crisis because of its rigid control over capital movements. The fact that China received more foreign capital than any other developing country in recent years despite its strict capital account controls also indicates that there is little substance in the argument that capital convertibility would ensure a larger inflow of foreign investment. Finally, Sri Lanka's rupee was not pegged to the US dollar as the East and South-East Asian currencies, and therefore 'floated' or depreciated from 1977 in response to market forces. The dollar peg kept the exchange rates of the East and South-East Asian currencies stable against the US dollars for many years and consequently appreciated when the dollar appreciated against other major currencies. Thus, while these currencies remained at the same exchange rate with the dollar the Sri Lankan Rupee depreciated year after year gradually from Rs. 9.00 to the dollar in 1977 to Rs. 30.76 in 1987 then to Rs. 56.70 in 1996 and to Rs. 62.00 now. Between 3 November 1997 and 9 February 1998, the Sri Lanka Rupee depreciated by 6.9 percent in the process of floating according to market forces; this was certainly less than the depreciation of the Indonesian Rupiah, Malaysian Ringgit, Thai Baht and the Korean Won caused by speculative attacks, but more than the depreciation of the Singapore dollar (6.4 percent) and the Taiwan New Dollar (5.1 percent). As the Rupee is floating "freely" there is no incentive for the currency traders to attack it and there is no need for the monetary authorities to spend its limited external reserves in defending it. While capital controls have prevented the free movements of foreign funds into and out of the country, the depreciating rupee may have discouraged both commercial banks and local firms from borrowing funds: the depreciating rupee meant an ever increasing debt burden internms of rupees. Short-term private debt is therefore small - only Rs. 61,121 million or about $ 1,077 million at the end of 1996. It formed only about 12 percent of the country's total external debt. The Asian currency crisis may, however, affect Sri Lanka indirectly through its effect on the country's trade and foreign capital investments. The massive currency depreciation in Asian countries has provided a competitive advantage to their exports over their competitors, although a part of this advantage would be reduced by the rising costs of their imported inputs. Sri Lanka competes with East and South-East Asian countries in some agricultural commodities like tea (with Indonesia) rubber (Malaysia, Indonesia, Thailand) and coconut (Philippines) and a few industrial products like clothing (garments) leather products, rubber products and toys. Whether the export prices of such products have actually come down in terms of dollars and how far is not yet known, although Sri Lankan exporters have voiced their fears. The fall in tea production in Kenya and the large-scale purchases by Russia may, however, maintain tea prices at current levels. Beside there are quality differences between Sri Lankan and Indonesian teas and the Indonesian tea auctions are conducted in dollars not rupiahs. Rubber prices have fallen but it is not certain whether this has been caused by competition form South-East Asia. Garments exports do not appear to have suffered a serious setback yet. Colombo Stock Market prices rose from 1996 to 1997 by about 27 percent when East and South-East Asian stock prices were falling but fell from November 1997 to February 1998 by about 9 percent (see table II). Is this related to the Asian crisis? Sri Lanka's trade They are actually more important as sources of imports than as export markets as imports from them far exceed exports to them. Deflation and low growth may reduce the demand for imports and some of Sri Lanka's exports may therefore be adversely affected. Hong Kong and Singapore, however, are the largest markets outside Japan and they have not been as badly hit as the others by the crisis. Almost all the East and South-East Asian countries are major suppliers of imports to Sri Lanka except for the Philippines. If the currency depreciation reduces their prices, Sri Lankan consumer stands to gain, but it is not clear yet whether imports from them have actually declined in price. On the other hand, cheaper imports may pose a threat to some import-substitution industries; textiles for instance, on which the government quite rashly, abolished import duties recently is likely to face stronger competition. Cheaper tour packages resulting form currency depreciation are also likely to increase the number of Sri Lankan tourists to East and South East Asian countries. On the other hand, Sri Lanka may receive less tourists from these countries. Some of the East and South-East Asian countries are also major foreign direct investors in Sri Lanka, particularly South Korea, Hong Kong, Singapore and Malaysia. If the current recession, reduces their investments abroad, Sri Lanka is likely to receive less capital from them and face cancellation or postponement of agreed investment projects. Already Malaysia has postponed some of its new investment proposals for Sri Lanka and other countries may follow suit. Further, as these countries are already taking measures to restrict immigration of unskilled workers from neighbouring countries, there will be fewer employment opportunities in them for Sri Lankans. Concluded |
| Vajpayee on nuclear blasts Statement
by Prime Minister Atal Bihari Vajpayee in Parliament on
May 27, 1998. In 1963, an agreement was concluded to ban atmospheric testing but by this time, countries had developed the technologies for conducting underground nuclear tests and the nuclear arms race continued unabated. More than three decades passed and after over 2000 tests had been conducted, a Comprehensive Test Ban Treaty was opened for signature in 1996, following two and a half years of negotiations in which India had participated actively. In its final shape, this Treaty left much to be desired. It was neither comprehensive nor was it related to disarmament. In 1965, along with a small group of non-aligned countries, India had put forward the idea of an international non-proliferation agreement under which the nuclear weapon states would agree to give up their arsenals provided other countries refrained from developing or acquiring such weapons. This balance of rights and obligations was absent when the Nuclear Non-Proliferation Treaty (NPT) emerged in 1968, almost 30 years ago. In the 60's our security concerns deepened. But such was our abhorrence of nuclear weapons and such our desire to avoid acquiring them that we sought instead security guarantees from major nuclear powers of the world. The countries we turned to for support and understanding felt unable to extend to us the assurances that we then sought. That is when and why India made clearly inability to sign the NPT. The Lok Sabha debated the NPT on 5 April, 1968. The then Prime Minister, late Smt. Indira Gandhi assured the House that "we shall be guided entirely by our self-enlightenment and the considerations of national security". She highlighted the shortcomings of the NPT whilst re-emphasising the country's commitment to nuclear disarmament. She warned the House and the country "that not signing the Treaty may bring the nation many difficulties. It may mean the stoppage of aid and stoppage of help. Since we are taking this decision together, we must all be together in facing its consequences". That was a turning point. This House then strengthened the decision of the Government by reflecting a national consensus. Our decision not to sign the NPT was in keeping with the basic objective of maintaining freedom of thought and action. In 1974, we demonstrated our nuclear capability. Successive Governments thereafter have continued to take all necessary steps in keeping with that resolve and national will, to safeguard India's nuclear option. This was also the primary reason underlying the 1996 decision in the country not subscribing to the Comprehensive Test Ban Treaty (CTBT); a decision that met the unanimous approval of the House yet again. Our perception then was that subscribing to the CTBT would severely limit India's nuclear potential at an unacceptably low level. Our reservations deepened as the CTBT did not also carry forward the nuclear disarmament process. On both counts, therefore, yet again our security concerns remained unaddressed. The then Minister for External affairs, Shri I. K. Gujral had made clear the Government's reasoning to this House during the discussions on this subject in 1996. The decades of the 80's and 90's meanwhile witnessed the gradual deterioration of our security environment as a result of nuclear and missile proliferation. In our neighbourhood, nuclear weapons increased and more sophisticated delivery systems were inducted. Further, in our region there has come into existence a pattern about clandestine acquisition of nuclear materials, missiles and related technologies. India, in this period, became the victim of externally aided and abetted terrorism, militancy and clandestine war through hired mercenaries. The end of the Cold War marks a watershed in the history of the 20th century. While it has transformed the political landscape of Europe, it has done little to address India's security concerns. The relative order that was arrived at in Europe was not replicated in other parts of the globe. At the global level, there is no evidence yet on the part of the nuclear weapon states to take decisive and irreversible steps in moving towards a nuclear-weapon-free-world. Instead, the NPT has been extended indefinitely and unconditionally, perpetuating the existence of nuclear weapons in the hands of the five countries who are also permanent members of the UN Security Council. Some of these countries have doctrines that permit the first use of nuclear weapons; these countries are also engaged in programmes for modernisation of their nuclear arsenals. Under such circumstances, India was left with little choice. It had to take necessary steps to ensure that the country's nuclear option, developed and safeguarded over decades not be permitted to erode by a voluntary self-imposed restraint. Indeed, such an erosion would have had an irremediably adverse impact on our security. The Government was thus faced with a difficult decision. The only touchstone that guided it was national security. Tests conducted on 11 and 13 May are a continuation of the policies set into motion that put this country on the path of self-reliance and independence of thought and action. Nevertheless, there are certain moments when the chosen path reaches a fork and a decision has to be made. 1968 was one such moment in our nuclear chapter as were 1974 and 1996. At each of these moments, we took the right decision guided by national interest and supported by national consensus. 1998 was borne in the crucible of earlier decisions and made possible only because those decisions had been taken correctly in the past and in time. At a time when developments in the area of advanced technologies are taking place at a breathtaking pace, new parameters need to be identified, tested and validated in order to ensure that skills remain contemporary and succeeding generations of scientists and engineers are able to build on the work done by their predecessors. The limited series of five tests undertaken by India was precisely such an exercise. It has achieved its stated objective. The data provided by these tests is critical to validate our capabilities in the design of nuclear weapons of different yields for different applications and different delivery systems. Further, these tests have significantly enhanced the capabilities of our scientists and engineers in computer simulation of new designs and enabled them to undertake sub-critical experiments in future, if considered necessary. In terms of technical capability, our scientists and engineers have the requisite resources to ensure a credible deterrent. Our policies towards our neighbours and other countries too have not changed; India remains fully committed to the promotion of peace with stability, and resolution of all outstanding issues through bilateral dialogue and negotiations. These tests were not directed against any country; these were intended to reassure the people of India about their security and convey determination that this Government, like previous Governments, has the capability and resolve to safeguard their national security interests. "The Government will continue to remain engaged in substantive dialogue with our neighbours to improve relations and to expand the scope of our interactions in a mutually advantageous manner. Confidence building is a continuous process; we remain committed to it. Consequent upon the tests and arising from an insufficient appreciation of our security concerns, some countries have been persuaded to take steps that sadden us. We value our bilateral relations. We remain committed to dialogue and reaffirm that preservation of India’s security create no conflict of interest with these countries. India is a nuclear weapon state. This is a reality that cannot be denied. It is a not a conferment that we seek; nor is it a status for others to grant. It is an endowment to the nation by our scientists and engineers. It is India’s due, the right of one-sixth of human-kind. Our strengthened capability adds to our sense of responsibility; the responsibility and obligation of power. India, mindful of its international obligations, shall not use these weapons to commit aggression or to mount threats against any country; these are weapons of self-defence and to ensure that in turn, India is also not subjected to nuclear threats or coercion. In 1994, we had proposed that India and Pakistan jointly undertake not to be the first to use their nuclear capabilities against each other. The Government on this occasion, reiterates its readiness to discuss a "no-first-use" agreement with that country, as also with other countries bilaterally, or in a collective forum. India shall not engage in an arms race. India shall also not subscribe or reinvent the doctrines of the Cold War. India remains committed to the basic tenet of our foreign policy — a conviction that global elimination of nuclear weapons will enhance its security as well as that of the rest of the world. It will continue to urge countries, particularly other nuclear weapon states to adopt measures that would contribute meaningfully to such an objective. A number of initiatives have been taken in the past. In 1978, India proposed negotiations for an international convention that would prohibit the use or threat of use of nuclear weapons. This was followed by another initiative in 1982 calling for a ‘nuclear freeze’ — a prohibition on production of fissile materials for weapons, on production of nuclear weapons, and related delivery systems. In 1988, we put forward an Action Plan for phased elimination of all nuclear weapons within a specified time frame. It is our regret that these proposals did not receive a positive response from other nuclear weapon states. Had their response been positive, India need not have gone for the current tests. This is where our approach to nuclear weapons is different from others. This difference is the cornerstone of our nuclear doctrine. It is marked by restraint and striving for the total elimination of all weapons of mass destruction. We will continue to support such initiatives, taken individually or collectively by the Non-Aligned Movement which has continued to attach the highest priority to nuclear disarmament. This was reaffirmed most recently, last week, at the NAM Ministerial meeting held at Cartagena which has "reiterated their call on the Conference on Disarmament to establish, as the highest priority, and ad hoc committee to start in 1998 negotiations on a phased programme for the complete elimination of nuclear weapons with a specified framework of time, including a Nuclear Weapons Convention. The collective voice of 113 NAM countries reflects an approach to global nuclear disarmament to which India has remained committed. One of the NAM member initiatives to which we attach great importance was the reference to the International Court of Justice resulting in the unanimous declaration from the ICJ, as part of the Advisory Opinion handed down on 8 July, 1996, that "there exists an obligation to pursue in good faith and bring to a conclusion negotiations leading to nuclear disarmament in all its aspects under strict and effective international control". India was one of the countries that appealed to the ICJ on this issue. No other nuclear weapon state has supported this judgement; in fact, they have sought to decry its value. We have been and will continue to be in the forefront of the calls for opening negotiations for a Nuclear Weapons Convention, so that this challenge can be dealt with in the same manner that we have dealt with the scourge of two other weapons of mass destruction — through the Biological Weapons Convention and the Chemical Weapons Convention. In keeping with our commitment to comprehensive, universal and non-discriminatory approaches to disarmament, India is an original State Party to both these Conventions. Accordingly, India will shorty submit the plan of destruction of its chemical weapons to the international authority — Organisation for the Prohibition of Chemical Weapons. We fulfil our obligations whenever we undertake them. Traditionally, India has been an outward looking country. Our strong commitment to multilateralism is reflected in our active participation in organisations like the United Nations. In recent years, in keeping with the new challenges, we have actively promoted regional cooperation — in SAARC, in the Indian Ocean Rim-Association for regional Cooperation and as a member of the ASEAN Regional Forum. His engagement will also continue. The policies of economic liberalisation introduced in recent years have increased our regional and global linkages and the Government shall deepen and strengthen these ties. Our nuclear policy has been marked by restraint and openness, It has not violated any international agreements either in 1974 or now, in 1998. Our concerns have been made known to our interlocutors in recent years. The restraint exercised for 24 years after having demonstrated our capability in 1974, is in itself a unique example, Restraint, however, has to arise from strength. It cannot be based upon indecision or doubt, Restraint is valid only when doubts are removed. The series of tests undertaken by India have led to the removal of doubts. The action involved was balanced in that it was the minimum necessary to maintain what is an irreducible component of our national security calculus. This Government’s decision has therefore, to be seen as part of a tradition of restraint that has characterised our policy in the past 50 years. Subsequent to the test Government has already stated that India will now observe a voluntary moratorium and refrain from conducting underground nuclear test explosions. It has also indicated willingness to move towards a de-jure formalisation of this declaration. The basic obligation of the CTBT are thus met; to refrain from undertaking nuclear test explosions. This voluntary declaration is intended to convey to the international community the seriousness of our intent for meaningful engagement. Subsequent decision will be taken after assuring ourselves of the security needs of the country. India has also indicated readiness to participate in negotiations in the Conference on Disarmament in Geneva on a Fissile Material Cut-off Treaty. The basic objective of this treaty is to prohibit future production of fissile materials for use in nuclear weapons or nuclear explosive devices. India’s approach in these negotiations will be to ensure that this treaty emerges as a universal and non-discriminatory treaty, backed by an effective verification mechanism. When we embark on these negotiations, it shall be in the full confidence of the adequacy and credibility of the nation’s weaponised nuclear deterrent. India has maintained effective export controls on nuclear materials as well as related technologies even though we are neither a party to the NPT nor a member of the Nuclear Suppliers’ Group. Nonetheless, India is committed to non-proliferation and the maintaining of stringent export controls to ensure that there is no leakage of our indigenously developed know-how and technologies. In fact, India’s conduct in this regard has been better than some countries party to the NPT. India has in the past conveyed our concerns on the inadequacies of the international nuclear non-proliferation regime. It has explained that the country was not in a position to join because the regime did not address our country’s security concerns. These could have been addressed by moving towards global nuclear disarmament, our preferred approach. As this did not take place, India was obliged to stand aside from the emerging regime so that its freedom of action was not constrained. This is the precise path that has continued to be followed unwaveringly for the last three decades. That same constructive approach will underlie India’s dialogue with countries that need to be persuaded of our serious intent and willingness to engage so that mutual concerns are satisfactorily addressed. The challenge to Indian statecraft is balancing and reconciling India’s security imperatives with valid international concerns in this regard. The House is aware of the different reactions that have emanated from the people of India and from different parts of the world. The overwhelming support of the citizens of India is a source of strength for the Government. It not only tells that this decision was right but also that the country wants a focused leadership, which attends to national security needs. This the Government pledges to do as a sacred duty. The Government have also been greatly heartened by the outpouring of support from Indians abroad. They have, with one voice, spoken in favour of the Government’s action. The Government conveys its profound gratitude to the citizens of India and to Indians aboard, and looks to them for support in the difficult period ahead. In this, the fiftieth year of our independence, India stands at a defining moment in our history. The rationale for the Government’s decision is based on the same policy tenets that have guided the country for five decades. These policies were sustained successfully because of the underlying national consensus. The present decision and future actions will continue to reflect a commitment to sensibilities and obligations of an ancient civilisation, a sense of responsibility and restraint, but a restraint born of the assurance of action, not of doubts or apprehension. The Gita explains (Chap. VI-3) as none other can: This passage interprets as a process to reach a goal; action may reflect tumult |
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