A quick first trip to Ho Chi Minh City—formerly Saigon—reminded me of the pervasive influence of the West that would be hard to shake off. The hotel where I stayed had announced a week-long US beef fest. Vietnam is celebrating US beef. Well, times have changed and, in this instance, for the better. A member of Parliament proudly told me that his child would be appearing for an interview to join Cambridge University next year. Asia might be doing well up to secondary education, but when it comes to centres of higher learning, the West is way ahead of the rest.
But the pernicious influence of the West has also been in evidence in Vietnam over the last several years. Hailed prematurely as the next China, capital flowed into the country too much, too soon. Indigestion followed. That is, current account deficits widened and inflation shot up. Politicians developed cold feet because they became complacent. The result is four years of stagnation, currency devaluation, high interest rates and an economic growth rate that tiger economies would be embarrassed to own up. The good news is that Vietnam might be on its way to putting these four years behind it as inflation slowly peaks, the currency becomes less expensive and policy realism sets in.
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It would be silly to blame Western capital alone for these bouts of economic volatility that developing nations suffer from. Local policy errors and hubris have to be a part of the cocktail to bring about the hangover. But there is a compelling case to be made for the onrush of Western capital in search of quick and higher returns as the cause that fuels errors of passion and policy in fledgling economies.
A similar cocktail is being whipped up again. The ingredients might be slightly different, but the end result being sought is the same: developing nations must be pushed back from their seemingly inevitable march to capture the heights of global economic dominance, materially and otherwise.
Just last week, the Bank of England quietly announced a £75 billion increase to its asset purchase programme. That is their quantitative easing programme—version two. The European Central Bank might have desisted from cutting interest rates, but it announced two unlimited repurchase programmes for 12 and 13 months. It offered to buy covered bonds issued by banks for about €40 billion. In the meantime, the chairman of the US Federal Reserve has not only promised to keep the federal funds rate at zero per cent for the next two years, but has also threatened additional measures.
These desperate measures fly in the face of the current inflation rates that are far away from the deflation zone. The headline consumer price inflation rate in the US is 3.8% and the core inflation rate is 2%. In Britain, the headline inflation rate is 4.5% and in the euro zone, it is 2.5%. In other words, zero nominal policy rates and flooding of the economy with freshly printed currency notes are pushing real rates of interest deep into negative territory while working to reduce the purchasing power of these currencies. US real short rates were +4% in the 1990s and now they are -4%. The West is producing stealth inflation. These are the people who solemnly profess their faith in price stability and in maintaining the strength of their currencies.
Inflation is a transfer of wealth from savers to borrowers and it respects no borders. Developing nations have placed their faith and reserves in the currencies of the developed world. These currencies have depreciated in nominal terms and inflation would further diminish their purchasing power. This is a particularly bad outcome for Asia that has invested huge sums of money in foreign currencies through its central banks and sovereign wealth funds.
In the 1990s, in the Asian crisis, Western creditors, institutions and governments punished Asian nations for their borrowings by speculating against their currencies, pushing their yields higher and by imposing onerous debt repayment conditions. Now, they are punishing Asian nations for having responded to that crisis with higher foreign exchange reserves by debasing their own currencies.
For the West, it is once again, “Heads I win, tails you lose.” The tragedy is that they achieve this outcome by employing the age-old tactics of “divide and rule”, and emerging Asian powers still fall for this game. Asian countries failed to put up a common candidate to replace Dominique Strauss-Kahn at the International Monetary Fund.
It is not too late to wake up. Asian countries should begin by raising capital control walls and by refusing to come to the rescue of Western banks and sovereigns. This is war and Western talking heads beseech the weaker ones to play by the rules of the game, even as they scream “print” at their governments. It is time to call them out.
V. Anantha Nageswaran is an independent macroeconomic and investment strategy consultant, based in Singapore.Your comments are welcome at email@example.com