The Worst Seems Over

The US Treasury, under Robert Rubin, has also conducted swift and effective commercial diplomacy. It is reported to have pressured several US banks into rolling over East Asian short-term debt while simultaneously pursuing aggressive reforms with the East Asian governments. Reassured, the markets seem to be slowly undergoing a change of mood. No longer is the international financial community predicting gloom, doom and disaster. This ought to do market confidence a world of good and, although there will be some hiccups along the way, from now on there will probably be slow reversal in the recent disastrous fortunes of the East Asian economies.

 

The inferences for East Asian countries have already been spelt out by a host of experts, namely, that they need to set their financial sector in order so that cronyism in bank lending many believe that this lies at the heart of the problem can give way to more acceptable norms. But there are some lessons for the rest of the world, too. First is that unlike in 1929 and, indeed, because of it the world has learnt an important lesson: in a globalised economic system, one set of players cant let another set go under without suffering the severely adverse consequences also. Second, because the world has realised this, it has devised systems that more often than not work. Third, in spite of the increase in the number of such crises in the last 25 years, not only have the effects been localised Latin America, East Asia, Eastern Europe these regions have managed to come out of the crises more quickly than in the past. It took the world 15 years and a world war to come out of the Great Depression of 1929. In

contrast, Latin America took around eight years from 1982 to 1990 to get back to normal. The East Europeans managed to get back in about five years from 1991 to 1996. And, if they get their reforms right, the chances are bright that East Asian countries will start growing once again in about three or four years. In other words, the duration of such crises is shortening.

It seems reasonable to predict from this that the consensus towards globalisation, which seemed to have taken a knock in recent months, will be restored quickly. Certainly, ideas like the Tobin tax, a special agency to guarantee international debt with special drawing rights, etc., will now go to the back-burner. However, the crisis does represent an opportunity to review the IMFs approach. Such a review must be undertaken quickly.