Vikalpa: The Journal for Decision Makers

A year has passed since the onset of the Asian financial crisis. We are not sure that we have seen the final act of the drama. The East Asian experience shows that if there is an open capital account, the recipient country must have a stricter system of monitoring the inflows. A supervisory control over the financial system must also be very stringent. A loose domestic financial system and large capital inflows are the worst combination. It invites danger. According to Rangarajan⁄ the lesson to draw from the East Asian crisis is that the capital account liberalization and reform of the financial system should move in tandem.

This paper by Vivek Moorthy evaluates the policy choices and factors that have contributed to the Asian crisis. It is argued that the interaction between rela - tively closed and weak banking systems and liberalized financial flows played a major role in the crisis. Data on capital flows to Taiwan suggest that the prospect of an IMF bailout is likely to have induced risky private capital flows to East Asia. The appropriate policy response is not to impose sweeping controls⁄ as is often being recommended, but to partially restrict capital inflows while simultaneously free up limited outflows, and also expose the banking and financial services sector to more external competition.

The Asian crisis did not involve generalized financial panic. Stock markets behaved rationally and the crash in exchange rates is explained by the presence of credit risk. According to Jayanth R Varma, the crisis highlights the need for better risk management at the national level focusing less on the size of the external debt and more on its currency and maturity composition. There should be more freedom in capital outflows and less reliance on the banking system. IMF assistance to crisis stricken countries should be in the form of a currency swap which addresses the root cause of the crisis and subjects the IMF itself to financial discipline.

The East Asian crisis occurred despite highly impressive macroeconomic performance and prudent fiscal policies pursued by the severely affected countries which enjoyed excellent international credit rating till June 1997. The crisis came as a rude shock to the international financial community and the policy-makers on account of its unprecedented magnitude and global impact. In this paper, Bakul Dholakia argues that the crisis resulted from a strong combination of mutually reinforcing factors such as appreciation of real exchange rates, high levels of current account deficit, extremely high growth of short-term external debt⁄ and highly fragile financial sector. According to Dholakia⁄ the overall impact of East Asian financial crisis on the Indian economy can be described as moderate. The slow-down of India's industrial growth and exports and fall in the stock market since the last quarter of 1997 can be attributed more to the climate of political uncertainty than the East Asian crisis. Given the favourable macroeconomic fundamentals⁄ Indian economy currently does not face any threat arising from the Asian virus.

This special volume of abstracts, focused on the East Asian economic crisis, captures the interpretations of various experts in the field. These extended abstracts are based on selected articles and speeches reflecting on the rise and fall of these economies, on the probable causes and the suggested cures, and on their implications for the different economies, including India. We look forward to your comments on this special volume.

Abstracts of Indian Management Research is a regular feature of Vikalpa and is sponsored by the Indian Council of Social Science Research.

This paper by Madhusoodanan applies the variance ratio tests under the null hypotheses of homoscedasticity as well as heteroscedasticity, to the Indian stock market. The tests are conducted at the aggregate level of market indices and disaggregate level of individual stocks. The results indicate that random walk hypothesis cannot be accepted in the Indian market. Both the market indices the author tested showed persistent behaviour, while most of the individual stocks also showed evidence on persistence. The variance ratios were significant under heteroscedasticity in most of the cases where it was significant under homoscedasticity assumption. This implies that heteroscedasticity does not play a major role in the Indian market.

The case featured in this issue discusses Zambia's agricultural development particularly in the context of the new economic environment. Zambia is unique compared to most developing countries in that its share of agriculture in national income is less than 20 per cent while its share of work-force is over 80 per cent. Even the percentage of people living in absolute poverty is high. Also⁄ labour in general is underutilized and 75 per cent of agricultural labour compose of women. Thus⁄ according to Bhupat Desai and Namboodiri⁄ there is a compelling case for developing agriculture.

Readers are invited to send their responses on the case to Vikalpa office.

In this article⁄ P P Gupta discusses some of the value systems and personnel policies which he feels are essential for the growth of Information Technology in our country.