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Saravanan Ramasamy

he world economy is indeed At this juncture, one cannot afford to
at a crossroads. At one end of ignore the 1930s debate between Keynes
the spectrum, some countries and Hayek, which is dubbed as one of
are increasing their deficit the great debates of the century. On 17
spending to revive economic October 1932, the Times published a let-
activities. At the other end, some coun- ter from John Maynard Keynes and five
tries are pursuing quantitative easing other academic economists (Keynes for
in the form of cheap credit to stimulate short), who made the case for spending.
investment, vis-à-vis consumption. Both Keynes viewed depressions as caused by
policies, although pursuing different spending deficits, which could be made
paths, are aimed at pulling economies up by spending.
out of the downward spiral and plac-
ing them back on the road to recovery.
Nevertheless, the reality is that recovery
seems to be lacklustre in spite of these
stimulus initiatives, which has given rise
Hayek argued
to claims that over-consumption and that the existence of
under-saving have to run its course and long-run cheap credit, as
cannot be speeded up by any form of fis- a result of quantitative
cal or monetary stimulus. easing, would give
rise to potential



However, Keynes’ view attracted con- Hayek argued that the existence of long- Keynes and Hayek might be long gone
tention from Hayek. This was when, run cheap credit, as a result of quantita- but their century-old debate is relevant
after two days, on 19 October 1932, tive easing, would give rise to potential to modern economic thoughts. Today,
four professors from the University of malinvestments. They argued that not all Keynes’s theory has attracted criticism in
London (Hayek for short), responded investments are equally productive. As the context of the current environment.
to the Keynes letter and one of the an example, Hayek questioned the stim- Critics of Keynes often argue that creat-
signatories was Friedrich A. Hayek, an ulus effects that new municipal swim- ing incentives for people to spend more
Austrian-born economist. Hayek ques- ming baths could have on the economy don’t always mean life is getting better.
tioned whether new public debt in a from a contemporary viewpoint. They It boils down to how much is being spent
weakened economy is the path to recov- claimed that the economic downturn and on what. For example, cutting taxes
ery. While Hayek believed that revival of caused by over-consumption and under- while starting a war in Iraq was no way
investment is desirable, they questioned savings had to run its course and could to create a healthy economy. At the same
the form taken by the investment and not be speeded up by any form of fiscal time, construction of highways which
the shape of the resultant spending. or monetary stimulus. are hardly used by vehicles or shop-
ping malls which are not frequented by
shoppers may contribute to the Gross
Domestic Product (GDP) growth but are
they healthy for an economy? Keynesian
economics was apt in the 1930s when
communism was a powerful force. Back
then ‘stimulus’ was not misspent on cor-
porate bailouts and unscrupulous wealth
Indeed, Keynes himself famously
said ‘when the facts change, I change my
approach’. Thus, applying Keynes’ pre-
scription, in its true sense as developed
in the 1930s, to remedy the current eco-
nomic malaise may not be appropriate. It
is against this backdrop that some
economists, policy makers and
They claimed that inves
investors are skeptical over US
the economic downturn Fed
Federal Reserve Chairman
caused by over- B
Ben S. Bernanke’s recent
ddecision to pump a further
consumption and under- UUS$600 billion into the
savings had to run its eeconomy. In an attempt to
course and could not be ccriticise Bernanke’s move,
speeded up by any form Ji
Jim Rogers, Chairman of
of fiscal or monetary Ro
Rogers Holdings was quoted
stimulus. in a recent lecture at Oxford
University, as saying that ‘give
the guy a printing press, he’s going
to run it as fa
fast as he can’.
At the same time, expecting Hayekian
‘natural forces’ to run their course to
revive the downturn caused by over-
consumption and under-savings may not
materialize in today’s world. The global
financial market is submerged by sys-
temic risks and the remedy in the form
of ‘natural forces’ is deemed to be next



multiplied rather than reduced risks in

the financial system. To back their claims,
they reported that between 1960 and 2007,
total debt in the US economy rose 64 times
while GDP rose just 27 times. What’s
more staggering is that the US economy
witnessed an explosion in financial debt
by 490 times and an increase in household
debt by 64 times over the same period.
The complacency of so many players in
the financial market towards these devel-
opments eventually led to a massive build-
up of systemic risks.
Neither Keynes’ nor Hayek’s prescrip-
tions serve as the best remedy for the cur-
rent global downturn, but there are defi-
nitely many takeaways for economists and
policy makers. Revival of the economy can-
not be solely dependent on government-
QQQETP is poised to QQQWhile the overall plan sponsored stimulus packages. Neither can
we solely rely on natural market forces
change the government’s is set to propel Malaysia to take its course. We need to find the
role from being the main towards becoming a high- middle ground by having a government-
coordinated recovery programme, driven
propeller of growth to a income developed nation, by healthy market forces.
coordinator and facilitator ETP should proceed at a In the Malaysian context, the recently
announced Economic Transformation
of private sector-led growth. measured pace, taking into
Plan (ETP), at this juncture, is moving
account the need to pro- in the right direction. ETP is poised to
QQQThe key to success, tect vulnerable groups. The change the government’s role from being
the main propeller of growth to a coordi-
however, will hinge on investments channelled nator and facilitator of private sector-led
implementation, which into the 131 identified entry growth. The ETP roadmap was developed
through labs and a series of forums where
needs to be laser-sharp, point projects (EPPs) must the best minds in government and private
focused and sustained. deliver immediate results sector were brought together to develop
by anchoring on improving ideas into actions. The key to success,
however, will hinge on implementation,
Malaysia’s Gross National which needs to be laser-sharp, focused
Income (GNI). and sustained. While the overall plan is
set to propel Malaysia towards becoming
a high-income developed nation, ETP
to impossible. In today’s world, Hayek Crisis and Challenges for Asia’, Dr. Michael should proceed at a measured pace, tak-
would not have questioned the stimulus Lim and Dr. Lim Chan of the Institute ing into account the need to protect
effects that new municipal swimming of Southeast Asian Studies (Singapore) vulnerable groups. The investments chan-
baths can have on the economy. Rather, claimed that the excess liquidity on the nelled into the 131 identified entry point
his questions would focus on the role of supply side was equally matched by projects (EPPs) must deliver immedi-
financial markets in transforming savings excesses in financial innovations on the ate results by anchoring on improving
into fruitful investment, given the surge demand side. They further argued that Malaysia’s Gross National Income (GNI).
in innovative financial instruments. financial innovations such as mortgage- If these aspirations can be achieved, the
In their recently published book enti- backed securities, collateralized debt obli- century-old Keynes vs. Hayek debate is
tled ‘Nowhere to Hide: The Great Financial gations, and credit default swaps have set to find an amicable ending. Q



ses came from International Finance

Corporation (IFC) and covered 176 pri-
vate equity funds in emerging markets.
...the winners in private equity Nine hundred forty two data points from
in emerging markets create deals by these funds, spanning 75 emerg-
ing markets, were analysed. Since 2000,
value through operational IFC has committed nearly $3 billion to
improvements, rather than about 160 private equity funds.
leverage, and have a strong The full report of the study, New
Markets, New Rules: Will Emerging
local presence. Markets Reshape Private Equity?, can
be downloaded at http://www.bcg.com/
exper tise_impact/PublicationDetails.
Attractiveness Index. Some of the most signal a new age for private equity, with a aspx?id=tcm:12-64912
promising markets according to this anal- new centre of gravity and different rules,
ysis were Brazil, India, Malaysia, Poland, plus potentially very different players in
South Africa, and Turkey, while certain the future, including the possibility of The IESE Business School of the
countries such as Russia and Argentina local firms in emerging markets emerging University of Navarra is one of the world’s
appear to offer less potential due to their as tomorrow’s giants. Given the impor- top ten business schools and has pioneered
weaker socioeconomic environments. tant role that private equity has played in executive education in Europe since its
Although China’s socioeconomic envi- developed-world stock markets in recent foundation in 1958 in Barcelona. The Boston
ronment is not especially strong, its sheer years, its shift to emerging markets has Consulting Group (BCG) is a global man-
size is likely to make it a major destina- potentially much wider implications.” agement consulting firm and the world’s
tion for private equity investors. The primary data for the analy- leading advisor on business strategy. Q
To succeed in emerging markets, how-
ever, private equity firms will have to apply
different business models than those that HOW TO RIDE THE WAVE
have worked so successfully in the past
in developed markets. For example, the
research by IESE and BCG found that
• Emerging markets’ share of private
minority stakes in businesses not only
account for 86 per cent of all transactions equity deals has increased from 5
in emerging markets but also produce per cent to 30 per cent over the last
three times the returns of majority stakes, decade, rivaling the proportion of
which are the norm in developed markets. deals in the United States and Europe
Investments in businesses that are focused - and it is expected to increase.
on domestic markets also produce 18 per
• Returns from emerging markets have
cent higher returns than investments in
internationally oriented companies do. more than tripled since the 1990s to more than 17 per cent
In addition, the winners in private today.
equity in emerging markets create value • The most attractive markets combine economic scale and
through operational improvements, rather favorable socioeconomic conditions, such as Brazil, Turkey,
than leverage, and have a strong local pres- and Malaysia. Other high-profile markets such as Russia and
ence. On average, the returns of domestic
Argentina appear to offer less potential.
and international funds with local offices
are more than five times higher than inter- • ‘Western’ investors will have to rethink their business models
national funds without local offices. to succeed, including accepting minority rather than majority
“The overriding conclusion of the stakes in businesses, and generating value via operational
study is that emerging markets have come improvements rather than leverage.
of age for private equity investors,” says • Local private equity firms in emerging markets could be
Heino Meerkatt, a senior partner and
tomorrow’s giants.
managing director at BCG, and one of the
leaders of the study. “Our findings also