Thailand Re-thinking Economic Nationalism?

[playtheblues]

Just jumping aboard into this interesting discussion for a short remark. The idea of capital controls for developing countries to help recovery from self feeding speculative financial crises have been supported by at least one high profile economist like Paul Krugman. I dont know if Jeffrey Sachs agreed with him.

 

The "unholy trinity" might better be discussed in terms of logic rather then theory, as a matter of disparity between number of equations and unknowns in a simple equation system. In other words you can only have one monetary policy goal at the same time, either exchange rate or price stabilty.

 

It was such a long time since I used to think in economic terms so I might be confusing the concepts...

 

 

 

[limbo]

The risk' date=' 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.[/quote']

 

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.

 

[color:red]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.[/color]

 

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.

 

HeartThais,

 

First off, thanks to all who participate for this very interesting discussion.

 

Are you referring to this quote from Gadfly;

 

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.

 

This is a very scary development IMHO and something that may affect lots of current foreign business owners and may stop other potential investors, like Singapore Steve, from investing anything at all in Thailand.

 

My understanding is that reports in general state, that Thailand currently is missing out on many large investments, multimillion && investments, due to it's current policies. This in contrast to what you write.

 

Are these economists or financial experts in those companies not savvy enough to see that is actually good to invest in Thailand right now, according to you?

 

[HeartThais]

My understanding is that reports in general state' date=' that Thailand currently is missing out on many large investments, multimillion && investments, due to it's current policies. This in contrast to what you write.

 

Are these economists or financial experts in those companies not savvy enough to see that is actually good to invest in Thailand right now, according to you?

[/quote']

 

You are mistaking my point of view. I'm not looking at Thailand from the view of an outside investor looking to make money. I'm looking at it from someone who is primarily interested in the long term prosperity of Thailand. If Thailand improves their standard of living while foreign investors lose tons of money, I'm okay with that because I am advocating a Thai policy, not a foreign investor policy.

 

Thailand may be losing investments but you can't just say that is good or bad without looking at the whole picture. Take housing as an example. In a very hot housing market, people will be buying houses like crazy. Would you look at that deal flow and say it means that the housing market is healthy? Would you say it is because houses are becoming more valuable in real terms? Not necessarily. In a bubble, it's because everyone thinks that they can sell the house for more than they bought it for.

 

Thailand does not want big boom and bust cycles to happen. It is in the interest of outside investors, especially short term ones, to want the market to be volatile. However, long term investors do not want huge cycles, they want steady growth. It is in the interest of Thailand to match their financial growth with real productivity gains. Otherwise, they will have huge boom and bust cycles.

 

Also, you have to realize that there are two types of foreign investment. One is Thai companies looking for loans from foreign investors. In this case, Thais own the assets of production. They are the ones who benefit from the investment. The other is foreign investors looking to buy Thai assets. In that case, it is foreign investors who are benefiting the from Thai assets. The Thai people benefit if and only if they are receiving education or infrastructure. They don't benefit that much if they just allow foreigners to come in, exploit their cheap labor and then leave after the labor becomes relatively more expensive.

 

I do not specialize in emerging markets but from what I know, I would not invest long term in Thailand. I don't think Thailand has made a serious commitment to improving their internal business infrastructure and educating their people. There are some short-term gains in the export market due to cheap labor but that will not last forever. Unless they have a plan like India to move into higher end services or China to move into higher end manufacturing or South Korea to move into technology, they will forever be stuck in low growth. I think if you invest in Thailand today, you are investing in cheap labor which will eventually go away. Investing in cheap labor is more or less baht and thai inflation speculation. How long Thailand can keep labor cheap is the question and judging by the pressure on the baht, I don't think for very long.

 

I don't like the outlook for Thailand. I feel like with all this capital inflow and ongoing trade balance surplus, they will eventually have to expand the money supply which will lower interest rates and increase inflation. If they don't match productivity gains with the inflation, Thais will be worse off than before while foreign investors leave having made their money off Thai cheap labor. This has nothing to do with the capital controls. It has everything to do with what I perceive as not enough thoughtful planning of the Thai economy.

 

I might, however, invest in Thailand as long as I could use cheap labor and pull up stakes at any time. I would basically invest in businesses that would not require huge capital investments in infrastructure. I'd want a business that employs as many Thai people as possible without spending much in infrastructure. Is this the kind of investment that Thailand wants?

[playtheblues]

...then, of course, in practise you can have it both ways, by "sterilizing" the increase in money supply from exchange rate manipulations by bond market operations. So to hell with logic (or just add an equation to the system, whichever you prefer).

[playtheblues]

I agree with much of what you say, which in some ways can be boiled downed to the basic -Solow if I recall correctly - model of growth as a function of capital AND exogenous factors such as technology (and education). So not only productiviy of labour counts but also productivity of capital.

 

Does anybody recall the controversial and at the time much discussed article by Krugman in 1993 or 94 in Foreign Affairs: "The Myth of the Asian Miracle"? Based on Solow, Krugman argued, as I remember it, that the Asian fast growth - he referred to Singapore and compared it to the Soviet economy - was mainly based on massive increase in capital , hence dramatically increasing capital to labour ratio. Of course, giving the working force more machines boosts labour productivity but to sustain growth and overall productivity you must also increase capital productivity. This can only be done by technological innovation and higher skilled labour by innovations and better education, the two factors which until then Krugman considered insufficient in most Asian economies.

 

Well, Paul Krugman might partly have been wrong, but partly also right. Singapore has since then basically maintained growth but it also massively invested in education and new technology. So has South Korea.

 

But not Thailand which is why increasing capital inflows into Thailand AS SUCH will not do much to maintain high sustainable growth rates. Massive innovational, technological, infrastructural and educational measures must be undertaken to maintain adeqaute productivity of capital. Foreign investment into Thailand can thus not only be financial, it must carry new technology and education with it.

[SingaporeSteve]

In my scenario we were looking at growing our business in Thailand from existing cashflow - ie diverting what we could have paid as dividends and instead using that money to grow the business and achieve greater economy of scale. However in light of the economic concerns I have, we have canned it and will instead keep the cash as cash and return it to our shareholders. Odds are they will then choose to take it out of Thailand and put it somewhere else. Incidentally, this has not come about due to capital controls - to me that is academic in our scenario - we are just concerned that our current exposure is high and based on the perceived risk, we decided not to add to it, but to start drawing out cash and NOT re-investing it here for the time being. Who knows, maybe that will change, but for now, we are not choosing to invest more than we already have and are actually looking at reducing our exposures wherever we can. For us, its a paper excercise due to the way we structured the company in the beginning - we deliberately lent the company large amounts of money which it then repays or reinvests as the shareholders feel fit - none of them actually need the cash our company generates, hence in the past our approach has been to keep re-investing however that is now changing and everyone is agreed that we draw the cash out and move it.

 

Cheers

SS

[SingaporeSteve]

Just as an aside - and in very simple terms, I dont know of anyone who holds a CEO position in a MNC based in Thailand who would have the 'balls' for lack of a better word, to go back to their board of directors in home base and say "Guys, now is the time to invest $500m in a new plant in Thailand". To me, that sums up the position about current reality.

 

Cheers

SS

[HeartThais]

...then, of course, in practise you can have it both ways, by "sterilizing" the increase in money supply from exchange rate manipulations by bond market operations. So to hell with logic (or just add an equation to the system, whichever you prefer).

 

Right. That's what I meant by maintaining a peg or managed float without capital controls while maintaining an independent monetary policy. If you can pull it off, of course you don't want to use capital controls. You can sterilize as long as the central bank has enough reserves to reverse all the transactions messing with your exchange rate. When it really gets f*cked up for the central bank is when it thinks it has enough reserves to withstand an attack but it doesn't. That's how people like Soros breaks central banks... by understanding better than the central banks where their breaking points are.

 

I'm not sure what the conventional thinking is lately but when I was in university, the general thinking was that sterilized interventions were not considered to be effective except against short term speculative attacks and even then if your currency is too far out of line, you are hosed. Not even the Bank of England could withstand the well-timed onslaught of Soros. Sterilized intervention is like losing your job and then giving your wife money from your private stash so that she doesn't find out. You better hope she suddenly decides to stop shopping before you run out of cash. Japan is the #1 holder of US dollar reserves and it still didn't have enough reserves to defend their yen in late 90s.

[John Jay]

...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.

 

Thaihome is unable to respond to your implication that he and HeartThai are the same person based simply on the fact that they share some opinions that differ from yours. He wishes to say that it would be nice if he could be as eloquent in expressing his opinions on the Thai economy, but unfortunately he is not, so he gladly passes the torch to someone obviously much more qualified and expressive.

J_J

[playtheblues]

I also believe that the Soros pound attack example was quite relevant for comparison with the 1997 Thai crises. The scenario I was referring to was rather the previous and present case in Thailand where the speculation semms to be towards a stronger, not a weaker baht. Intervening to stem the baht rise by buying foreign exchange would as such increase money supply and thus interfere with THE monetary policy goal of price stability (note that the policy goal of any central bank is price stability and not exchange control). Thus the need for sterilization buy soaking up money from the market by bond operations. Of course this is a short term remedy.