By the time this article appears in print on Tuesday, June would have ended. Slowly, but still only very slowly, there is a creeping realization that we might be in for bigger trouble in the next few years.
Regardless of the pain that we endure this time, and no matter what the duration is, the most effective insurance against recurrent crises is acknowledging what went wrong. For the slate to be wiped clean, egos need to take a few knocks. Countries and people—big or small—are finding that almost impossible.
In recent years, Vietnam was wooed by investors much more feverishly than India was. Its real estate equalled Singapore’s in valuation in 2007. The Ho Chi Minh Stock Index reached a peak of around 1,300 in February 2007. After being Asia’s fastest rising market (in US dollar terms) in 2005 and in 2006, the index went up by 40% in the first two months of 2007. Now, the index is trading at below 400.
The non-deliverable forward (NDF) contracts on the currency—the Vietnam dong—has priced in a 30% depreciation against the dollar. The country has an inflation rate of around 26% and trade deficit as a percentage of GDP that is almost as high. The NDF market has it right. As inflation kept rising steadily, the country did not allow the currency to appreciate in its boom years, 2005-07, when it would have hardly caused a ripple. Now, the government is working overtime and adopting all methods possible to prevent the currency from weakening! That is the lot of many other Asian nations, too.
How did Vietnam end up with such a high rate of inflation and trade deficit? For starters, it could not or did not privatize as many state enterprises as it promised it would. The reserve price was set too high for some of them. The government thought that private investors would buy at any price. State-owned banks lent freely to state-owned enterprises. Credit growth was as high as 50%. The country believed that it had already become the next China. It indeed has the potential to be so. But, potential is realized only over time. Short cuts in economics result in short circuits.
Even as the contours of the crisis began to take shape, the government acted with reluctance. Interest rates have been raised from 8.75% to 14%. But, with inflation at 26%, real rates have to rise at least 3-4% more. The government is now wielding the axe on public sector trophy projects. The government is addressing the exchange rate vulnerability arising from a high trade deficit in a non-transparent way by going after the messengers. The reason is that the government has decided that the growth rate of the economy cannot drop below 7%.
In general, countries should strive to grow at their potential rate of growth, but not necessarily year after year. In fact, attempts to meet preset annual growth targets impair long-term economic performance. The government’s reluctance to fully acknowledge the mistakes made and to accept the consequences of rectifying them suggests that Vietnam has not possibly put the worst behind it.
Parallels—although thankfully of a much smaller magnitude—with India exist.
The disappointment in the case of India is failure not just of the government but of the Opposition, the private sector and citizens, too, to engage in a healthy and constructive debate on the path and speed of economic progress. It appears that almost everyone was and still is engaged in “arriving there” as fast as possible. The government, even as it was not ready to acknowledge the shining India in 2004, went for growth with no breaks. The resulting damage to fiscal health will take years to repair.
Lesson for all of us—governments, private sector and people—is that we need devil’s advocates around us, paid only to criticize and only to point out all that could go wrong with our assumptions and decisions. That is the only way to avoid the next crisis. On most issues, there is no dearth of wisdom or awareness. Often, we learn that some insiders have often warned of the dangers of our follies and choices, only to be brushed aside or treated more shabbily.
Recently, The New York Times published an email (“E-Mail that investors might like to read”, 29 June) written by a senior official in UBS in which he suggested that the bank face up to the non-performance of a particular investment product and absorb the losses rather than engage in subterfuge and face worse consequences. He was ignored and the bank faces a raft of lawsuits. Somehow, that episode captures all that went wrong with the world in the last eight years which has happened to coincide with the two terms of President George Bush.
The way to avoid the next crisis is to learn to deal with criticism, and not the critics.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer & Co. Ltd in Singapore.These are his personal views and do not represent those of his employer. Your comments are welcome at firstname.lastname@example.org