Mr PM, look for our Dragoslav, not at Bank-Fund combine

'Big bang for financial reform' 'Bigger bang for the Indian Rupee'- This is how the pink media has welcomed Prime Minister Manmohan Singh's shocking advice to the RBI to revisit the issue of complete convertibility of the Rupee. Within hours the RBI has begun working on it and in four months the advice will be actualised, the pink papers say. In simple terms, full float of the Rupee means that Indians can handle, say, the US dollar or Swiss Franc almost as freely as they handle the Rupee. They can buy dollar stocks in New York like they buy Rupee stocks Mumbai.

Indian banks can access dollar funds abroad as freely as Rupee funds here. Global interest rates will beat down the rates here. Global games will be played in national markets. If New York stocks catches cold Mumbai stocks will sneeze. Currency convertibility is the ultimate in globalisation. The world praises us to day for calibrated globalisation process, and we are regarded as a model. But that is precisely what is being reversed by this stunning announcement, almost an arrogant one. It is dangerous, too dangerous, an undertaking.

A decade ago, the present Finance Minister had proposed precisely what the Prime Minister now has. But, within months came the Asian economic collapse precisely due to full convertibility and saved us from that fatal idea. The crisis set the economies South Korea, Taiwan, Thailand, Malaysia, Indonesia and Philippines back by decades. Once praised by the West and the World Bank and International Monetary Fund as 'Asian Tigers' the crisis turned Tigers into mousses. But, the poor Asian nations had only followed the Bank-Fund prescriptions! The fact remains that Bank-Fund combine was the author of what was known as 'Washington Consensus' of which full convertibility was the core, which was evolved in the 1970s.

Till the day before the Asian collapse the Bank-Fund experts held the Tigers out as the model for the rest to follow. But once they collapsed, the very Bank-Fund mandarins began faulting them, ridiculing their model as 'crony capitalism', also blaming them for premature convertibility! But, who is to decide on when that maturity comes? The Asian Crisis did not come suddenly, without warnings. Mexican and Latin American economic collapse had already highlighted the high risk of full currency float. Similarly in early 1990s Europe also experienced unmanageable crisis in what was known as Exchange Rate Mechanism [ERM].

In the year 1993 Akio Morita, the celebrated Chairman of Sony Corporation Japan wrote a letter to the Group 7 leaders who met in Tokyo warning that unbridled currency market speculation spurred by full convertibility was the root cause of most economic crisis, including Japan's in 1990s. He pointed out that currency speculation to actual trade was 100 to 1, yes hundred to one! He said no government or even all governments put together could save the world from crisis caused by currency trade, which full currency float inevitably brings about. He said that there could be no free global trade without a global currency, for which a global government is a must! Yet the Bank-Fund combine kept insisting on full convertibility as the ideal destination till the Asian Crisis forced them scoot. More. The Bank-Fund combine had prescribed full convertibility for normally functional economies only. It also advised the nations which had collapsed precisely because of full convertibility to go for heavy Bank-Fund borrowing and continue the convertibility! Ironically countries which followed their advice never got out of crisis. And only those that defied them could weather the crisis. Take for instance Russia and Yugoslavia.

Russia heeded the Bank-Fund advice, borrowed heavily to tide over its crisis and is even today not fully out of debts and crisis. But see how Yugoslavia which defied Bank-Fund advice fared. In 1990s the Yugoslav economy, like Russia's, was collapsing. Inflation was running at over 3 million percentage points -- yes, three millions, the highest ever in world history. With the result, the Yugoslavians had lost faith in their currency, the Dinar. But, the Yugoslavian government rejected the Bank-Fund advice to borrow and keep its currency floated. Instead it accepted the advice its senior economist Dragoslav Avramovic and issued a second currency, Super Dinar, a limited currency, to circulate side by side with original Dinar, the popular currency. On Drag's advice the Super Dinar, not the original Dinar used by the common people, was floated fully.

The idea was to avoid full convertibility by limited convertibility. This too was just a psycho-therapy to get the Yugoslavians regain confidence in their currency, the popular Dinar. It worked. The 3-million percentage points turned nil, yes nil, in a week, yes in a week! And exchange reserves rose by 60% in just three months. The successful Super Dinar, which prevented full convertibility of the popular Dinar, was named after Dragoslav. He is no more now. The loud Bank-Fund mouth was shut. Even a decade later, not a whisper about the Yugoslavian miracle is known!

Similarly in the Asian crisis Malaysia followed the Indian model of limited convertibility and refused to heed Bank-Fund advice. But here Man Mohan Singh has returned to the antiquated Bank-Fund prescription. He is commending what the Bank-Fund itself has stopped insisting publicly at least. The PM says that as compared to 1997 when the Asian crisis occurred, much water has flown down the Ganges since then'. Our position is comfortable; we can go for full convertibility, he says.

Obviously the PM is looking to the Bank-Fund combine, not a Dragoslav among us. But does he realise the risk to which he is exposing the nation over a billion, banking on benefits that are transient? This move indicates not only how distanced he is from Indian realities, but also from economics other than Bank-Fund's! The CPM has rightly called this as a disaster. Will the BJP support this disaster?