Bull run in western bourses not a bubble, says Sachs Our Bureau NEW DELHI, Jan. 12 THE Director of the Centre for International Development at Harvard University and advisor to several emerging economies, Prof. Jeffrey Sachs, feels that the current bull run in western bourses, particularly the US, is not a real `bubble' in the making, whose bursting may be the forerunner to a fresh world-wide financial crisis. ``I agree that we do have a bit of bubble mentality developing in the US. There is indeed some overvaluation of stocks due to a lot of financial froth being added. But at the core of this euphoria is the reality of a science-based economy, driven by remarkably efficient institutions producing new knowledge,'' Prof. Sachs said. Noting that since 1996, there has been additional wealth creation through capital appreciation of stocks to the tune of $8 trillions in the US alone, Prof. Sachs likened this process to the over-optimism accompanying the setting up of railroads and the trans-Atlantic telegraph cable during the latter half of the 19th century. ``We are in the midst of a similar acceleration in the generation of scientific and technological ideas and the structural changes that go along with these. There are obviously risks to this dynamism. But it is not without substance.'' According to him, this dynamic acceleration was evident not just in information technology, which has entirely changed the way corporations conduct day-to-day business as well as the way universities carry out research or even how schoolchildren pursue their education and do their daily homework. It is also being manifested in areas such as biotechnology, pharma and agri-business. ``We have almost reached the stage where the complete mapping of the human genome is a reality. Besides, a lot of work is being done in the search for the genetic basis of new diseases.'' Moreover, what is interesting is that these changes are taking place not only in the US, but even in Europe, which only till recently was supposed to have been afflicted by `Eurosclerosis' arising from severe fiscal stresses and overbearing Governmental regulations and subsidies. Prof. Sachs felt that the pace of globalisation and progress in the days to come will be decided not by global inequalities in wealth or income but by the huge wedge developing between the technological haves and have-nots. ``Nowhere is this chasm more evident than in India, where you have one section of society in Bangalore, Chennai, Mumbai and Delhi that is fully integrated into these dynamic processes under way in the core western economies, and an entire northern and eastern region with high illiteracy and fertility rates that is nowhere close to becoming part of this absolutely thrilling leading edge of the global economy,'' he said. According to Prof. Sachs, the real challenge for multilateral institutions such as the World Bank would be to act as ``mobilisers of S&T resources'' to bridge the growing gap between the knowledge haves and have-nots so that the latter too can integrate themselves to the dynamic core of the global economy. He said there were many emerging economies that were close to the dynamic core by virtue of their proximity to industrialised country markets (Mexico, Poland, Hungary, etc.) but also on account of their underlying economic strengths (Korea, Taiwan, China, Malaysia, etc.). ``These countries are prone only to temporary financial shocks on account of euphoric capital inflows followed by sudden panic outflows. The 1997 East Asia currency crisis does not represent a refutal of the underlying dynamism of these economies. The crisis was purely a financial one involving a build-up of short-term capital liabilities and accompanying vulnerability to panic outflows. The problem was exacerbated by the faulty response of the International Monetary Fund to the situation (by insisting that these countries pursue deflationary policies and steeply raised short-term interest rates),'' he noted. Prof. Sachs defended this point by referring to the rather `weird' case of Korea, which registered a growth of 7 per cent in 1996 and 5-6 per cent in 1997, before declining by 7 per cent in 1998, only to strongly rebound by 10.5 per cent last year. ``Countries with strong economic fundamentals may be prone to panic situations and financial vulnerability. But they are also in a position to record steep economic recovery after the panic subsides.'' He ruled out a fresh global financial crisis arising from a possible devaluation of the yuan, in response to the severe deflationary trend and faltering exports being experienced by the Chinese economy, of late. ``Although China has itself denied this possibility, I do not think the devaluation of the yuan will lead to a repeat of the 1997 Asian crisis. At best, it may force other countries, including India, to adjust their exchange rates accordingly,'' he felt. A major difference here, Prof. Sachs noted, was that China as well as India had not accumulated any excess short-term liabilities, prone to sudden panic withdrawals. ``They have been sensible in this regard, unlike the East Asian economies. So a devaluation of the yuan, I feel, would not cause too many problems,'' he added.
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