Unclear happenings

Thinking about the present crisis is a kind of mental pushup. It might hurt the brain (if it has not already hurt the heart), as one has to use certain obscure cerebral muscles that may not have had much use in the recent past. There is a spectacular disagreement between theory and what is really happening. Despite the fact that uncertainty is woven into the very fabric of all economic theories, they churn out predictions. There seems to be a mystery for which there are no clues -- only guesses -- some valid, some false. One has to forget normal reality and expect shock and disbelief.

Niels Bohr, one of the founders of the quantum theory, said that any one who wasn't shocked by the quantum theory doesn't understand it. This may amply apply to the present crisis. No one seems to know what is happening. Indeed, all these happenings defy explanation by classical economic means. Theorist Heinz Pagels said in The Cosmic Code that the human brain may not have evolved enough to understand quantum reality. Unfortunately, this also seems to be applicable to the current economic situation. If all this is making you queasy, don't worry. You're not in bad company.

There is one thing I feel sure about, though it could also be only a probability since there is an inherent uncertainty in economic theory which cannot be reduced by any amount of data and ingenuity. With the falling trade barriers between nations, capital has flowed faster around the globe and diplomacy by the developed world has become much more subtle compared to the old gunboat diplomacy. The developed world has convinced developing countries that globalization is to the benefit of the developing world.

Southeast Asia has believed in free trade and has systematically broken down its trade barriers. I get a chill down my spine whenever I imagine the plight of this country should the rupiah stabilize at the current rate, let alone depreciate further. After the IMF bailout of Mexico, foreign lenders took comfort that they would be rescued if the going got rough and so they lent more than they should have to Asia. They knew that if a country was big enough, the IMF would underwrite private and public liabilities.

In my opinion, the borrowers of offshore credit should have to repay their loans based on the projections of their financial statements with the assumption of say a 7 percent depreciation against the U.S. dollar. The lenders, who had agreed to these projections, should have to absorb the exchange loss. If the lenders cannot afford to absorb these losses, the developed world, which has had a crucial role to play in this crisis, should absorb the losses. This is a very small price for the lenders and the developed world to pay for creating havoc in the lives of the people in this part of the world. They probably deserve a much bigger penalty.

This thought, based on justice, fairness and equity, could be tinkered with after more technical and legal details are studied.

D. PRABHAKAR

Jakarta