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May 14, 1998


Expert blasts India for 'slow' reforms

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India has been tinkering with the economic liberalisation process so far without any seriousness and for the present it should not go in for capital account convertibility, says Dr Deena Khatkhate, consultant to the World Bank and the Asian Development Bank.

While foreign direct investment is to be encouraged whole heartedly, one has to be cautious about short-term capital inflows. He said that capital account convertibility is a capital myth and its benefits have not been proven empirically.

Dr Khatkhate was delivering a lecture on 'Chasing shadows: Asian financial crisis and the International Monetary Fund' at a well- attended meeting held at the Indian Merchants Chamber.

He ridiculed the view that India was wiser because it had not opened up its economy fully unlike the east Asian counties which were facing a serious financial crisis for the past one year. He said the Indian economy could not be compared with east Asian countries. ''Only those who have risen high face the risk of a fall. Those who have not risen face no such risk,'' he quipped.

He said the East Asian crisis took everyone by surprise because of its suddenness, scale and the massive rescue operations. East Asia had until recently been a marvel to western countries and developing countries alike.

Unlike Latin American countries, drawn into a vortex of financial and currency crisis, East Asian countries had high savings and investments rates, more egalitarian income distribution and moderate inflation. Most capital flows financed investment rather than consumption, he said.

It was difficult to explain why these economies were dragged into a turmoil, he said. It was paradoxical that the cognoscenti and international institutions like the IMF blamed the very policies which hitherto served the countries well, he pointed out.

The crisis only worsened after the implementation of remedies based on this diagnosis. The crisis started to simmer down only after the countries themselves took steps to roll over short-term foreign exchange liabilities and transform them at subsequent stages into medium-term bonds. This implied that the crisis was a short-term liquidity shortage which had been allowed to fester into a solvency crisis by wrong policy advice with mounting costs of adjustment, he said.

The east Asian crisis has raised more basic issues about the existing international monetary system's sustainability to deal with the problems of global finance. One thing that became transparent is that a thorough overhaul of the Bretton Woods system -- the IMF and the World Bank -- should be at the top of the agenda of all countries, Dr Khatkhate added.

Replying to a question, he said that he was not optimistic about India if its current pace of reforms were any indication. Not only the public sector, but even the private sector companies were afraid of facing foreign competition, he said. ''The private sector must face competition in its own interest. India should also seriously go about reforms in the financial sector and in labour laws,'' he said.


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