Emerging market stars have lost their lustre
Investors withdrawing money over fears of Fed tightening monetary supply
A man counts Indian rupee banknotes near the Bombay Stock Exchange building in Mumbai. Photograph: Dhiraj Singh/Bloomberg
India, 1991. Thailand and east Asia, 1997. Russia, 1998. Lehman Brothers, 2008. The euro zone from 2009. And now, perhaps, India and the emerging markets all over again. Each financial crisis manifests itself in new places and different forms.
Back in 2010, José Sócrates, who was struggling as Portugal’s prime minister to avert a humiliating international bailout, ruefully explained how he had just learned to use his mobile phone for instant updates on European sovereign bond yields. It did him no good. Six months later he was gone and Portugal was asking for help from the IMF.
This year it is the turn of Indian ministers and central bankers to stare glumly at the screens of their BlackBerrys and iPhones, although their preoccupation is the rate of the rupee against the dollar.
India’s currency plumbed successive record lows last week as investors decided en masse to withdraw money from emerging markets, especially those such as India with high current account deficits that are dependent on those same investors for funds.
The trigger for market mayhem in Mumbai, Bangkok and Jakarta was the realisation that the Federal Reserve might soon begin to “taper” its generous, post- Lehman quantitative easing programme of bond-buying. That implies a stronger US economy, rising US interest rates and a preference among investors for US assets over high-risk emerging markets in Asia or Latin America.
The fuse igniting each financial explosion is inevitably different from the one before. Yet the underlying problems over the years are strikingly similar. So are the principal phases – including the hubris and the nemesis – of the economic tragedies they endure. No one who has examined the history of the nations that fell victim to previous financial crises should be shocked by the way the markets are treating India or Brazil today. First comes complacency, usually generated by years of high economic growth and the feeling that the country’s success must be the result of the values, foresight and deft policymaking of those in power and the increasing sophistication of those they govern.
Sceptics who warn of impending doom are dismissed as “Cassandras” by those who forget not only their own fragilities but also the point about the Trojan prophetess: it was not that she was wrong about the future, it was that she was fated never to be believed.
So high was confidence only a few months ago in India – as in Thailand in the early 1990s – that economists predicted that the local currency would rise, not fall, against the dollar.
Indian gross domestic product growth had topped 10 per cent a year in 2010, and the overcrowded nation of 1.3 billion was deemed to be profiting from a “demographic dividend” of tens of millions of young men and women entering the workforce. India was destined to overtake China in terms of GDP growth as well as population size.
‘Sense of entitlement’
Deeply ingrained in the Indian system, says Pratap Bhanu Mehta, head of the Centre for Policy Research in New Delhi, was an “intellectual belief that there was some kind of force of nature propelling us to 9 per cent growth . . . almost of a sense of entitlement that led us to misread history”.
In the same way, the heady success of the southeast Asian tigers in the early 1990s had been attributed to “Asian values”, a delusional and now discredited school of thought that exempted its believers from the normal rules of economics and history because of their superior work ethic and collective spirit of endeavour.