Thailand Re-thinking Economic Nationalism?

[shygye]

But, before I have only seen currencies worth less outside. For example the Soviet ruble or in the 80's the Indian rupee. Is someone covering a short on the baht?

[HeartThais]

It's because the thai banks are not allowed to engage in swap contracts unless it is to hedge an onshore loan. So they can swap dollars/pounds/euros for baht but not the other way around.

 

So if you are a foreigner wanting to invest in something that requires thai baht, you have to find a non-resident bank holding baht reserves willing to enter a swap contract with you. When the contract comes due, you need to find thai baht to give back. Since the amount of baht being held by non-residents is limited, the price of the offshore baht goes up.

[Gadfly]

How could anyone get it so ass backwards? I guess getting the name wrong was a clue. I am referring to HeartThais:

 

This is an economic principle called the unholy trinity. â?¦Capital controls are the only way to manage an exchange rate while keeping an independent monetary policy.

 

â??Unholy Trinityâ? â?? Is this Ozzy Osbourne's contribution to economic thinking? Besides getting the name wrong, HT also got the concept ass backwards. Assuming HT was referring to the "impossible trinity", a recognized economic concept rather than a heavy metal song (the description is so screwed up I really canâ??t tell), he really did it get ass backwards since it explains why capital controls are bad policy.

 

The impossible trinity is an economic doctrine providing that it is impossible to have (1) a fixed exchange rate, 2) free capital movement and (3) an independent monetary policy. As the correct name suggests, the doctrine describes what you cannot do. It describes three things you cannot simultaneously have. To suggest that the impossible trinity justifies the use of capital controls is absolutely ridiculous. It states the exact opposite. You donâ??t need an economics textbook for this one; it is on the web:

 

The idea of the impossible trinity went from theoretical curiosity to becoming the foundation of open economy macroeconomics in the 1980s, by which time capital controls had broken down in many countries, and conflicts were visible between pegged exchange rates and monetary policy autonomy. While one version of the impossible trinity is focused on the extreme case - with a perfectly fixed exchange rate, with a perfectly open capital account, a country has absolutely no say on monetary policy. But the real world has thrown up repeated examples where when the capital account becomes fairly open, the greater the exchange rate rigidity, the lower the monetary policy autonomy.

 

In the modern world, given the growth of trade in goods and services, capital controls are easily evaded. In addition, capital controls introduce numerous distortions. Hence, there is virtually no important country which has an effective system of capital control.

 

(Translation: only banana republics try this stunt.)

 

Under these conditions, the impossible trinity asserts that a country has to choose between reducing currency volatility, or running a stabilising monetary policy. It cannot have both.

Impossible (not Unholy) Trinity vs. Source of HT / TH's Economic Theories

 

And then the statement: "It is probably true that Jews were behind the attack", and then trying to make that look it is not really anti-semtic because TH, ehr, HT, is really only saying that Jews are smart. Is anyone buying any of this?

 

Interesting how HT shares ThaiHome's (TH) views. TH helpfully points out that HT has made profound contributions to this board in just a few posts. HT and TH. Yeah, I'd say all of this sounds fanatastic - as in fantasy land.

 

Now Letâ??s return to the real world of Thailandâ??s â??craftyâ? economic policy makers and see what fiasco it really is.

 

Let's look at the record; that is, what has actually happened. What have Thailandâ??s capital controls actually done - and what have they not done. Well, they caused the market to collapse by nearly 15% in two scant hours. The market would have gone down further, but the SET stopped trading. And the Gov of the Bank of Thailand said, on the record, that is OK "because only foreigners were hurt". This was not only untrue, it was an amazingly stupid thing to say even if you are an economic nationalist, which is now self-evident.

 

The capital controls were supposed to stop the Bahtâ??s appreciation. That obviously hasnâ??t happened. It was an absolute fiasco.

 

But the capital controls did manage to destroy the credibility of Thailand monetary authority with the international financial community. That is always good for investment.

 

But wait, there is more - the plans to amend the Foreign Business Act. The proposed amendments will make companies that are perfectly legal now absolutely illegal the day after the law is passed. The government has admitted this, but explained that the foreign community doesnâ??t understand why Thailand needs to change the law.

 

Now look at all of this from the perspective of foreign investor. Doesn't this give you a warm and fuzzy feeling. Seriously, with this sort of track record, would you seriously consider making a serious investment in Thailand with this government in power?

 

The only saving grace is the new Finance Minister, who called it like it is. Investors will look at the policy here; not the spin.

 

The last economic team wasnâ??t crafty. And they were not only economic nationalists; they were also incompetent (these two traits seem to go together).

 

It's time for Thailand to wake up and smell the coffee. And economically illeterate apologists for absurd policies aren't doing Thailand any favors.

 

Singapore Steve is spot on about investor sentiment about Thailand. No amount of spin will change this.

 

 

 

 

 

[SingaporeSteve]

I heard an interesting view today on this - seemingly all this anti-foreigner sentiment is being perceived at coming from the current government rather than the civil service (where I believe it actually originated from for the most part) and the incumbant Ministers just went along with it, as basically they did not know any different. However lots of what is happening is starting to hurt the poor guy (no surprises there) and the comment I heard today was that the 'people think this govt is bad and the former PM was better for the poor people'.

 

The example was from Issan workers employed in Pattaya on housing construction - anybody with half a brain cell could predict that this area would be the first and probably hardest hit under the changes to the laws. These changes were proposed as soon as Thaksin took his sabatical and were done so by the 'civil service' who were basically running the country without an elected govt. However the perception among many people is that the military installed govt is the cause of the problem. I really do wonder at what PR skills these guys have and how they have allowed such a predictable situation to turn quite ugly.

 

PS as for Heart Thai's comments - I have not a clue - way beyond my understanding - when I look at an investment, I judge the risk versus the potential reward in simple cash terms - I dont look at hedging and everything else he mentioned - as it is I feel safer keeping my cash under the matress/in the bank/outside of the country etc than building another business here at this moment in time.

 

Cheers

SS

[HeartThais]

â??Assuming HT was referring to the "impossible trinity", a recognized economic concept rather than a heavy metal song (the description is so screwed up I really canâ??t tell), he really did it get ass backwards since it explains why capital controls are bad policy."

 

It's called unholy trinity, impossible tinity, trilemma, and numerous other things depending on who you ask.

 

"The impossible trinity is an economic doctrine providing that it is impossible to have (1) a fixed exchange rate, 2) free capital movement and (3) an independent monetary policy."

 

Read what you posted again carefully. If you have a fixed exchange rate and you have an independent monetary policy, why the hell would you need capital controls? I said you can't float an exchange rate and then use monetary policy to then manage the exchange rate and also to have an independent policy. That's exactly the same thing as above. If you are going to get all your info from wikipedia, the least you can do is try and understand what it is you are reading.

 

"To suggest that the impossible trinity justifies the use of capital controls is absolutely ridiculous."

 

It doesn't justify anything. It says you have to pick two out of three. You can either try and attempt to control the exchange rate without capital controls (i.e. pegging) and have independent monetary policy. Or you can float the exchange rate, have capital controls to control the exchange rate and independent monetary policy. You could float the exchange rate, not have capital controls, have an independent monetary policy if you are willing to have no control over exchange rate. But it absolutely does say that if you want to unpeg your currency and still manage it, you cannot have an independent monetary policy without capital controls.

 

"It states the exact opposite."

 

No. You just don't understand what it is saying.

 

"The idea of the impossible trinity went from theoretical curiosity to becoming the foundation of open economy macroeconomics in the 1980s, by which time capital controls had broken down in many countries, and conflicts were visible between pegged exchange rates and monetary policy autonomy. While one version of the impossible trinity is focused on the extreme case - with a perfectly fixed exchange rate, with a perfectly open capital account, a country has absolutely no say on monetary policy. But the real world has thrown up repeated examples where when the capital account becomes fairly open, the greater the exchange rate rigidity, the lower the monetary policy autonomy."

 

Read the last part of that again.

 

"And then the statement: "It is probably true that Jews were behind the attack", and then trying to make that look it is not really anti-semtic because TH, ehr, HT, is really only saying that Jews are smart. Is anyone buying any of this?"

 

It's no secret that Jews control much of the capital flow as well as the jewelry trade. This is a direct function of their prohibition from owning property. I was making the point that a lot of people look at people like Soros and say he's a jew and lots of investment banks are run by jews so there must be a jewish conspiracy. I was pointing out it was all coincidence.

 

"Yeah, I'd say all of this sounds fanatastic - as in fantasy land."

 

Whatever you may think... I'm not sure where this personal attack is coming but chill out dude.

 

"The capital controls were supposed to stop the Bahtâ??s appreciation. That obviously hasnâ??t happened. It was an absolute fiasco."

 

Because they gutted it after they implemented it. Also, it obviously did slow the appreciation of the baht as is apparent from the fact the offshore rate shows a stronger baht.

 

"But the capital controls did manage to destroy the credibility of Thailand monetary authority with the international financial community. That is always good for investment."

 

Listen, we can debate economic theory but let me put this in terms you might understand. You can't just give money to a country and expect it to be good for it. It's like giving a BG lots and lots of money. For a while she's really happy. And then more and more BG's get rich and sooner or later the price of things go up and so they need to raise prices. Eventually it's no longer a great deal to be paying BGs so you stop. Now the BGs have no money but prices have gone up. Lots of them have to go back home or lower their prices to the point that the foreigners come back and give them more money. But they are now no better off than before and the BG economy is wholly dependent on the wealth of foreigners.

 

Now, if the BGs are using that money to go to school or more buffalo, the foreigner can leave and she will still be able to make a living. The point is you can't just say foreign investment is absolutely good. You have to make sure that foreign investment is consistent with your internal goals and your plan for improving real productivity. If it is true that Thai stocks are only returning 5% and 15% in baht appreciation, it means that productivity is growing very slowly but investment is coming in very fast. You are looking at a developing country and judging it using the criteria used for a well-developed country that can efficiently use most of the capital it receives.

 

Let's put it another way. Say you have a source of cheap loans up to $1M. Say that you have no idea how to invest it but you can go to school for $100,000. You should only borrow that $100,000 because you don't have a plan for using the rest it and you will just be paying interest on it no matter how cheap it is. However, a person with no discipline will take the $1M because they will think, I'll just spend the extra 900K and either pay it back or declare bankruptcy.

 

"The only saving grace is the new Finance Minister, who called it like it is. Investors will look at the policy here; not the spin."

 

He is spinning, IMO.

 

"It's time for Thailand to wake up and smell the coffee. And economically illeterate apologists for absurd policies aren't doing Thailand any favors."

 

Sorry that you feel that way. I don't think I'm economically illiterate but you know what, if you think I am, I don't really care.

[HeartThais]

And I'd like to add Gadfly, that contrary to your implication that the free flow of capital is more important than managing an exchange rate to a country's future economic health, I'd say look to the countries that have improved themselves and the ones who haven't. Actually, I don't even think you realize that's what you are implying but in the way you chose to interpret the unholy trinity, it's clear that's where you place your priority.

 

Korea, Taiwan, Singapore all focused on export first which meant they also focused on keeping their currency cheap. Their competitive advantage used to be cheap labor, like Thailand, but they all invested heavily in their infrastructure - primarily education so that when labor wasn't cheap anymore, they could still grow. India is the most recent example of a country that started out with cheap labor but are now experiencing incredible growth through education. These countries didn't grow from just some massive influx of foreign capital. They did it by making sure that the capital they were getting was being used wisely. This was accomplished through very controlling governments that basically dictated how the country should develop, not by letting market forces decide how resources should be allocated.

 

If Thailand wants a similar growth trajectory, history suggests it should maintain a trade surplus, control their exchange rate from appreciation, and use the time (because they can't maintain a trade surplus and devalue their currency forever) to invest wisely on improving productivity. Free flowing foreign capital by itself is not the answer.

 

But of course, none of us really want this because that would mean we can't get cheap hookers anymore. We'd prefer that Thailand just stay unproductive, depending on foreign capital forever. Well, that's what I prefer because I would personally rather have cheap hookers than see Thai people become prosperous. Thais might have a different set of priorities.

[HeartThais]

Btw, Gadfly. Thanks for the wikipedia pointer. I had forgotten who had come up with it (I'm not an economist, I'm in finance).

 

From your link: "The formal model for this hypothesis is the Mundell-Fleming model developed in the 60s by Robert Mundell and Marcus Fleming."

 

As you will see from the link to the Mundell-Fleming model from inside your wiki reference:

 

"The Mundell-Fleming model is frequently referred to as "the Unholy Trinity," the "Irreconcilable Trinity," the "Inconsistent trinity" or the Mundell-Fleming "trilemma.""

 

You almost had me doubting my own memory of the theory there for a while. I think unholy trinity is a much catchier name than the impossible trinity. Anyway, I try not to get my economic theories from wikipedia or the news... neither are really all that reliable.

[HeartThais]

PS as for Heart Thai's comments - I have not a clue - way beyond my understanding - when I look at an investment, I judge the risk versus the potential reward in simple cash terms - I dont look at hedging and everything else he mentioned - as it is I feel safer keeping my cash under the matress/in the bank/outside of the country etc than building another business here at this moment in time.

 

Cheers

SS

 

My question was, what is this risk you are perceiving that is keeping you from investing? That the Thai government will keep your money? That your money will be trapped in banks? If anything, true foreign investors should feel happy that the government is doing this. Usually businesses are not profitable right away and you need to be investing money, which in your case is probably dollars or pounds. During the investment period, you don't want the baht to be appreciating rapidly or you will be buying fewer thai assets with the same amount of money. In fact, so many foreign businesses hate currency volatility so much they will hedge out that risk completely.

 

Am I the only one that sees a contradiction between a government trying to stabilize a currency and flight of true investments? It doesn't make sense to me.

 

In my view, these measures really only impact two things: short term capital which is mostly the concern of financial institutions and currency speculation. It also affects anything that are derivatives of short term capital or currency speculation.

 

I think this whole knee-jerk reaction to capital controls is mostly media driven. I do not believe that the Thai stock market crashed because of uncertainty. I believe that it crashed because most of those stock bets were bets on baht appreciation. It was a market correction. Of course no foreigner wants capital controls because they are designed to protect Thailand against foreigners.

 

Contrary to Gadfly's statement about banana republics, there are many countries who have succeeded with capital controls. South Korea had some of the strictest capital controls in place during many years of high growth. China's capital controls (plus its subordinated monetary policy) is what protected it from the asian meltdown of 1997. Is Russia a banana republic? Is Spain? How about the US prior to 1974? Was America a banana republic in 1973 or just too stupid to understand what Gadfly understands so easily?

 

However, they cannot succeed forever unless there is a periodic re-valuation to let some of the steam escape. Capital controls are a way to buy time, to stabilize the economy while you get your sh*t in order. I do agree that without a plan, capital controls are meaningless. But then again, doing nothing could be more painful.

 

So if you really think that the Thai economy is growing, you should welcome the capital controls because they create a more stable environment for your business to operate in.

[shygye]

The risk, HT, is that SS new biz could be declared illegal and be forced to shutdown or sold at fire sale prices to hi-so Thais! Also more captial could be tied up with 0% return.

[HeartThais]

The risk, HT, is that SS new biz could be declared illegal and be forced to shutdown or sold at fire sale prices to hi-so Thais! Also more captial could be tied up with 0% return.

 

This is not a capital control issue. Government seizure of your business is a risk but I don't see how it is directly related to capital controls. The FEAR of the government seizing your business might be related to capital controls but this is an irrational fear, in my opinion, if it is keeping you from opening a business. This is the kind of generalized, poorly connected public fear that creates market opportunities for finance professionals.

 

However, someone mentioned something about some kind of legislation that allows the Thai government to seize businesses or something. I don't know anything about that. That I WOULD worry about. Not the capital controls.

 

Re: capital being tied up, I agree with you. But that's the purpose of the controls; to deter people who are short-term investing in Thailand using liquid investment vehicles like stocks, short-term loans, etc. They want long term investors who are in it for the long haul.

 

If you are looking to invest long term, you can do it as long as you hedge your investment with a currency swap. It is simple. It just means that you are locking up today's exchange rate for the entire amount of your investment for at least one year. Basically, you swap dollars for baht today, invest the baht, at the end of the year you give back exactly the amount of baht you received from the bank and you get back exactly the amount of dollars you gave up. That way you cannot make or lose money on baht fluctuation, only on the business itself.