Geneva. DEVELOPMENT: UNCTAD Warns India, China About Foreign Capital

By Ranjit Devraj Reprint | | Print |

Ranjit Devraj

NEW DELHI, Sep 19 2000 (IPS) - The big Asian economies of India and China grew by a healthy seven percent last year, but they are in danger of repeating the recent history of some East Asian nations, warns the United Nations Conference on Trade and Development (UNCTAD).

“What UNCTAD is telling India and China is: ‘don’t let capital harm your countries and maintain capital account controls’,” said leading Indian economist, Sunanda Sen who released and interpreted UNCTAD’s ‘Trade and Development Report (TDR) 2000’ here, Tuesday.

According to Sen, the late 1990s Asian financial crisis has taught nations like India, the importance of controlling their ever- widening fiscal deficits and maintaining large foreign exchange reserves, as they open up their economies to the world.

According to UNCTAD, China’s expected entry into the World Trade Organisation (WTO) will lead to considerably larger capital inflows.

“China’s impending membership of WTO is expected to provide a timely boost to economic growth by helping to expand exports and attract new FDI (foreign direct investment), but it may also lead to considerable adjustment costs at least in the short term,” said the report.

According to Sen, developing nations will have to be cautious with foreign capital.

“Developing countries need capital from outside but they must learn to differentiate between long-term capital and the speculative short- term portfolio investments,” she said.

“Typically, surges in capital flows are associated with the widening of the gap between domestic income and absorption and with rising external deficits, which often result from the effects of capital inflows themselves,” the UNCTAD report said.

Sen, who teaches economics at New Delhi’s premier Jawaharlal Nehru University, said while the former Asian “tiger economies” have made a spectacular recovery from the crisis, “it does not mean they are roaring again.”

While money was flowing back to countries like South Korea as foreign direct investment (FDI), most of it went into mergers and acquisitions, which changed ownership patterns, but did not necessarily increase output.

“The present recovery may be transitory and is after all based on a crisis which could easily have been avoided in the first place,” Sen commented.

Moreover, the recovery in East Asia has not been uniform. Malaysia recorded double-digit growth in the first months of this year with little help from multilateral financial bodies.

But, Indonesia is facing a more uncertain future with considerable downside risk, noted the report.

Malaysia, Sen noted, took various measures to control capital flight and there was a clear lesson here for India, China and other Asian countries.

In the 1990s, Indonesia, Malaysia, South Korea and Thailand went through a pattern of capital surges followed by spectacular reversals in the closing years of the decade.

According to UNCTAD, not only are the root causes that led to the Asian crisis, still with us, but “further fault lines have emerged.”

While East Asia is well on the road to recovery, incomes at the end of 1999 were still below 1996 levels in Indonesia and Thailand. A comparison of investment ratios shows that in all four countries, these are now well below levels attained before the boom in capital flows.

According to the UNCTAD report, investment ratios in the four countries are unlikely to return to the former peak levels even after the recovery is completed and productive capacities fully utilised.

The recovery has also not helped reduce unemployment levels in these countries. In South Korea, where the national income at the end of 1999 was higher than pre-crisis levels, the unemployment rate was four percent more than before the crisis.

In Malaysia, the joblessness rate is two percent more compared to the pre-crisis level.

The UNCTAD report noted that this is one of the major reasons why the reduction in poverty levels has so far lagged behind economic recovery in East Asia.

“Indeed empirical studies show that there is a significant asymmetry in the impact of growth and crises on poverty in developing counties,” the report said.

“There is a growing opinion that structural and institutional weaknesses laid bare by the crisis need to be corrected,” it said.

The report advises developing Asian nations to take advantage of the process of globalisation, while taking care to avoid the risks associated with this.

“To that end, reforms should aim at reduced state intervention, modernisation of corporate and financial structures, deregulation of product and labour markets and increased openness to forcing corporations, investment and trade,” it said.

“Greater transparency and improved disclosure of macroeconomic variables and of corporate and financial data are essential ingredients of reforms to safeguard against the risks associated with closer integration with the world economy,” it added.

Both Sen and the UNCTAD report also spoke of the importance of trade among Asian countries.

“…signs of a convergence in export structure among countries in the region, pose the danger of heightened price competition, a tendency which is only likely to be exacerbated by the entry of new competitors from countries such as China and India,” said the report.