Thank God the Committee on convertibility of the rupee has laid stiff conditions for its introduction. The anxiousness to move fast on this front, however, arises from a perception that it would help the inflows of foreign investment (FI) and pull our rates of growth to higher levels. That may indeed be true, for now. The question, though, is whether such growth will be sustainable. For what we take today, we have to repay tomorrow.

Foreign investors keep harping on the need for easy repatriation, and that is the raison d'etre for convertibility. This indicates that they are here as long as the sun shines. Once opportunities ebb, they will certainly bid us adieu, as is already happening in countries like Malaysia. We have to, therefore, examine what convertibility holds for us in the long run.

All the countries which have had 5 per cent plus growth rate in the last decade have had high levels of FI in the recent period -- 1994 to be precise. They include all the East Asian countries, plus Chile. The conclusion is that FI leads to growth. Let us accept this proposition notwithstanding the contrary evidence of some countries. Peru and Brazil, for example, have had negative rates despite having attracted high levels of FI.

Let us now step back and examine what has happened to those countries which were in the same enviable position 15 years ago. That may give us some indication of what may happen to Malaysia at al 15 years hence. Among the larger developing countries with a population of more than 5 million, the maximum decline of FI since the eighties has been in Venezuela, Costa Rica, Ivory Coast, Cameroon and Niger, in that order. All these countries had attracted FI of more that $2 per capita in 1980. In 1994, they attracted FI of less than 88 cents per capita, down by more than half.

Let us examine their performance today. Three out of these five countries have had zero or negative rates of growth in 1980-92: Cameroon -6.92 per cent, Ivory Coast -4.6 and Niger -2.1. Venezuela, despite oil revenues, managed a paltry 0.70 per cent. Costa Rica, a benevolent dictatorship of sorts, was the only one to hold on at 2.8 per cent. In each of the other four countries, growth rates have declined as the FI flows have ebbed. Cameroon's has come down from 2.4 per cent to -6.9 per cent. Ivory Coast from 2.1 to -4.6, Niger from -1.5 to -2.1 and Venezuela from 1.9 to 0.7. The conclusion is inescapable. A decline in FI inflows has led to this decline in growth rates. The factories established and employment generated has somehow hurt in the long run. FI does lead to growth as long as it continues to pour in. But when the torrent becomes a trickle, growth stops.

The South Asian countries have had an enviable record of having managed low but decent rates of growth without FI in the eighties. India, Sri Lanka, Bangladesh and Nepal have had nominal FI till the mid-nineties, yet managed to obtain rates of growth of 2-3 per cent. Even in 1994, we had growth rates of 5-6 per cent with a paltry FI of 60 cents per capita.

Should we then run after FI and introduce convertibility to that and? The choice before us is as follows. One, we may obtain decent and not so low rates of growth without FI as we had been doing before globalisation. We may try to do better by improving the domestic business environment. This was the real contribution of Manmohan Singh. Two, we may go for FI-based growth. initially this will do wonders, but will be transient. As and when this flow of FI reverses, we may find ourselves in a soup.

Why should FI hurt? Why should Dhabol 1995 hit India 2010? One possibility would be that domestic businesses get psyched out with these torrential inflows. We lose the habit of using our little savings and develop a dependence syndrome. Thus FI, instead of supplementing domestic business growth, replaces it. What about China, though? Perhaps the final report card is not yet out. China has had a history of one step forward, two steps back. The Great Leap Forward of 1956 and the Cultural Revolution of 1965 are not so old yet. The next decade will bring out the true colours of their miracle.

This is not to say that we are okay. We are not. We need convertibility. We need an aggressive foreign economic policy. But in due time. First we have to put our own house in order. Introducing convertibility now would amount to a case of being penny wise and pound foolish.

The writer is a political economist

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.