Prachai: Baht should move freely

[rickfarang]

From 30 March 2003 Bangkok Post

http://www.bangkokpost.net/Business/30Mar2007_biz03.php

 

ECONOMY / INDUSTRIALIST'S SUGGESTIONS

 

Prachai: Baht should move freely

 

BUSRIN TREERAPONGPICHIT & SOONRUTH BUNYAMANEE

 

Instead of intervening in the baht and shouldering accounting losses, the Bank of Thailand should allow the local currency to strengthen freely and provide subsidies to exporters instead, according to industrial tycoon Prachai Leophairatana.

 

Curbing the baht's rise had become too costly for the country, said Mr Prachai, the founder and former chief executive of Thai Petrochemical Industry, now known as IRPC Plc and controlled by the state oil company PTT Plc.

 

If the currency was allowed to move freely, he said oil and capital goods would be cheaper.

Prachai: ``Subsidise affected exporters''

 

''The stronger baht will improve the country's current account,'' he said. ''Definitely, it will hurt exporters, particularly those who rely heavily on local content such as rice, tapioca, and cement. However, the government could help by subsidising them.''

 

Mr Prachai, who is now chief executive of TPI Polene Plc, said he was not an economist but his theory was drawn from his long business experience.

 

For industrial products such as electronics and textiles, the government could offer subsidies in proportion to their local content. Other countries including the United States and China have also done this for yearsis it true? can anybody check?, he claimed.

 

''We have opened room for currency arbitrage by manipulating the baht, resulting in a widening gap between onshore and offshore quotes,'' he noted.

 

There are many tax and non-tax mea sures that could be used to subsidise exporters once the baht is allowed to strengthen freely without breaking international trade rules, he said. Mr Prachai also suggested that the government push up growth to 10% this year so that local businesses would have a chance to survive and consumption would improve. ''To do so, the central bank could increase the money supply by issuing more banknotes.''

 

Backed by huge foreign reserves of US$69 billion, Thailand could increase its money supply to four trillion baht from around 900 billion baht now.

 

According to Mr Prachai, every dollar in foreign reserves could back the issue of $1.6 in money supply.

 

Citing the financial crisis in 1997, Mr Prachai said that instead of increasing the money supply to revive the economy, the government of the day chose to cut off the main bloodline by closing 56 finance companies, a move that exacerbated the crisis.

 

''I understand the Bank of Thailand's concern about inflation if the money supply increases but such an assumption is based classic economic theories,'' he said.

 

''In the current world, dynamic economic theories are more appropriate. Inflation should not be a concern if the increased money supply is used to finance productive activities.''

 

Mr Prachai blamed M.R. Pridiyathorn Devakula, the former finance minister, for putting brakes on the economy.

 

''The government insisted that the economy was growing fine and unemployment was not on the rise. But everyone in the business circle can tell you otherwise. A significant increase in the workforce in the agricultural sector clearly implies that workers have moved

 

[back to their farms] from the manufacturing sector due to shrinking business activities,'' he said.

 

Mr Prachai also noted that the government always bragged about the sufficiency-economy policy without providing a correct interpretation of it.

 

''Sufficiency economy does not mean you can ignore growth in terms of economic value. Without growth or enough resources, how can you be sufficient?'' he questioned. ''Wealth distribution is one of the most significant elements of the sufficiency economy, alongside social security. If the government allows business activities to run smoothly, with liquidity circulating normally, it will reap the gains in the form of more taxes.''

 

Based on his experience, there is a correlation between economic growth and local cement consumption. Every 1% drop in GDP generally results in a 2% decline in local cement consumption.

 

Since local cement consumption in the first quarter fell 10%, overall economic growth during the period must have slid by 5%, he said. As a result, the government needs to drive the economy up by 9% for the remaining nine months to maintain growth of 4% for the entire year, and by 15% to achieve a 10% expansion, he said.

 

 

[shygye]

Wasn't he the guy that ran TPI into the ground? Didn't he screw over the foreign creditors by "selling" the debt to a Thai?

[Lord Toad]

Reading his ideas I think I know why his company went broke!

Letting inflation out of the bax and ignoring it will cuase massive problems in the future.

Subsidising exports is clearly illegal under WTO rules.

But yes there are thing that need to be done, and done urgently. But it looks to me like this government can't agree when to cross the road let alone how to manage an economy!

[Gadfly]

Khun Prachai (and at least one member of this board) exemplify a very backwards view of economic policy making in Thailand: use government restrictions, subsidies and other measures to "protect" local interests here from the international market and globalization generally:

 

Subsidising exports is clearly illegal under WTO rules.

 

Not only illegal, but very foolish. Bascially, what you are doing is taking money from Thai taxpayers to support Thai businesses that are not competitive in international markets. This is a bad idea in so many ways it's hard to know where to begin, but let's try.

 

First, this eliminates the incentive for Thai businesses to become more competitive. Why spend money on more effecient technology or invest in other areas where Thais have competitive advantage when the government subsidizes you in areas where you are clearly ineffecient?

 

Second, once the subsidies begin, they are damn hard to stop. Vested interests with strong political connections will be the beneficiaries of those subsidies. And they will use the profits they get from those subsidies to make sure politicians who support those subsidies get re-elected. (Actually, we see this already in Thailand, and yes, the US, but that doesn't make it a good idea.)

 

Third, I would have thought Thailand could spend its tax money more wisely. Right now they are breaking patents (compulsory licensing) because they don't have enough money to prop up their health care system. And not just on HIV drugs, but drugs for diabetes and chronic heart conditions. Meanwhile, Thailand continues to promote itself as a prime medical tourism destination.

 

The policy makers here need to move in the direction of greater liberalization. Thailand is in the mess it is today because of protectionist, anti-market and, quite frankly, xenophobic anti-foreign measures.

 

Fortunately, the new Finance Minister, a Cambridge educated economist, recognizes this and is saying the right things. Let's hope he can get this government to also start doing the right things.

 

 

 

[HeartThais]

"Subsidising exports is clearly illegal under WTO rules."

 

Unless the US is doing it.

 

"First, this eliminates the incentive for Thai businesses to become more competitive."

 

Yes, just like the way subsidies has stunted the American agriculture sector. Oh wait, the US agriculture sector is the most productive in the world. Ooops. Bad example... I'm sure Gadfly can come up with a real world example where subsidies have ruined a sector.

 

"Why spend money on more effecient technology or invest in other areas where Thais have competitive advantage when the government subsidizes you in areas where you are clearly ineffecient?"

 

Because no matter how much you are being subsidized, you always want more money. Businesspeople generally don't just sit around and agree with each other 'Hey! Stop improving. We have this nice subsidy going so if we all just don't improve, we can all enjoy it together.' Generally, companies compete with one another to make more money and drive out their competitors. Where do you get your business and economics knowledge from?!!!

[Gadfly]

"Subsidising exports is clearly illegal under WTO rules."

 

Unless the US is doing it.

 

"First, this eliminates the incentive for Thai businesses to become more competitive."

 

Yes, just like the way subsidies has stunted the American agriculture sector. Oh wait, the US agriculture sector is the most productive in the world. Ooops. Bad example...

 

No, this is an excellent example. The US shouldn't subsidize agriculture. And the US doesn't provide subsidies in those areas where US agriculture is the most productive (if it really is productive, by definition, it cannot be receiving subsidies). The US is providing subsidies to sectors that are not sustainable, and this is a bad policy.

 

So, you have cited an excellent example of very bad economic policy in the US. It's bad environmentally, fiscally (who wants their tax dollars propping up businesse that aren't viable) and its unfair. And if it isn't illegal under WTO rules, it should be.

 

But I am not an economic nationalist. This means I am not going to blindly support an unfair trade and bad economic policy just because it is a US policy. Why don't we apply these same standards to Thailand?

 

You want an example of where subsidies and protectionism have stifled innovation - look at India. The textile industry has been protected for years and has steadily become less productive. India is developing fast now, but not because of growth in protected areas.

 

And don't you think in a country like Thailand tax dollars could be put to better use than propping up guys like Prachai? Thailand has limited financial resources. Instead of giving the money to vested interests and fueling further corruption, why not invest in infrastructure?

Or use it help pay for the health care system instead of breaking patents to provide low cost rheumatism and diabetes drugs for Thais and to subsidize Thailand's medical tourism industry.

 

[HeartThais]

"The US is providing subsidies to sectors that are not sustainable, and this is a bad policy."

 

I'm actually against subsidies, quotas. I was just pointing out that your ideology that subsidies decrease productivity growth is unsupported.

 

 

"You want an example of where subsidies and protectionism have stifled innovation - look at India. The textile industry has been protected for years and has steadily become less productive."

 

Oh, which protections were you talking about? You mean all those economic incentives to make Indian apparel cheaper to increase exports? Those subsidies? Ummm... India has an export QUOTA on textiles. They were designed to protect developed nations (like the US, Europe) from the flood of cheap foreign clothing.

 

http://en.wikipedia.org/wiki/Multi_Fibre_Arrangement

 

Please stop making stuff up. Btw, while the US was suffering from the disincentive to improve due to the quota protection provided by the MFA, we somehow became 3 times more productive in textiles than India. Sure is a hell of a disincentive! I wonder what would have happened without that protection!

[Gadfly]

Quotas, subsidies and tariffs are all bad policies measures. You admit so yourself: â??I'm actually against subsidies, quotasâ?Â

 

But then, in an astounding leap of logic, say that subsidies and quotas increase productivity. Your exact words: â??I was just pointing out that your ideology that subsidies decrease productivity growth is unsupported.â?Â

 

Youâ??re against subsidies, but believe they increase productivity growth? You are confused. You can post a thousand links to websites, but that is not substitute for clear thinking. And it doesnâ??t make your posts any less confused.

 

Indeed, I can use your own posts to establish your confusion without having to cite any outside sources. Makes it easy â?? like shooting fish in a barrel.

 

And you missed the point about protectionist policies in India in the area of textiles. I wasnâ??t talking about the Multi Fibre Arrangement, which I also think is bad protectionist policy. The Multi Fibre Arrangment is unfair, but that wasnâ??t the point.

 

The point was that domestic protectionist laws in India had caused significant damage to the Indian economy and that the recent reversal of direction (albeit not enough) has helped India tremendously. In 1990, FDI in India was a scant USD 1.7 billion; by 2000 it reached US$22 billion. The 1990s were economically Indiaâ??s most successful post-independence decade. Do I really need to provide cites to websites to back up the fact that â??[t]he 1990s were economically Indiaâ??s most successful post-independence decadeâ?Â. You say â??stop making stuff upâ? â?? do you seriously dispute these sort of things? This is what we are talking about here, and you apparantly think this is all made up.

 

Let's stay focused on the subject - subsidies for Thai exporters. (Your link is to a discussion of the Multi Fibre Arrangement, which is entirely irrelvant to this discussion.) Where is the evidence to show that subsidies increse productivity? That is what this discussion is about. You subsidize something, it creates incentives to invest in something that is not otherwise economically viable. Doesn't sound smart to me.

 

And doing this when Thailand is having budgetary problems? Let's be clear on what this is about: taking Thai tax money and instead of using it to develop infrastructure or fund a medical care system, you give it to guys like Prachai? Doesn't sound like a good idea to me.

[HeartThais]

"Your exact words: â??I was just pointing out that your ideology that subsidies decrease productivity growth is unsupported.â?Â

 

Youâ??re against subsidies, but believe they increase productivity growth? You are confused. "

 

No, you just can't follow basic logic. Saying that subsidies do not decrease productivity growth is not the same as saying they increase productivity growth.

 

"Indeed, I can use your own posts to establish your confusion without having to cite any outside sources. Makes it easy â?? like shooting fish in a barrel."

 

Yes, you clearly have a superior grasp of logic as demonstrate above. I respectfully defer.

 

"And you missed the point about protectionist policies in India in the area of textiles. I wasnâ??t talking about the Multi Fibre Arrangement, which I also think is bad protectionist policy."

 

You chose textiles, not me.

 

"The point was that domestic protectionist laws in India had caused significant damage to the Indian economy and that the recent reversal of direction (albeit not enough) has helped India tremendously."

 

Which protectionist laws are you talking about if not the MFA? I know of no other significant export/import laws relating to textiles.

 

"In 1990, FDI in India was a scant USD 1.7 billion; by 2000 it reached US$22 billion. The 1990s were economically Indiaâ??s most successful post-independence decade. Do I really need to provide cites to websites to back up the fact that â??[t]he 1990s were economically Indiaâ??s most successful post-independence decadeâ?Â."

 

Another incredible logical step. You chose textiles. And then you talk about FDI. How much of that $22B FDI went into textiles? Most of it went into telecom and programming outsourcing.

 

""You say â??stop making stuff upâ? â?? do you seriously dispute these sort of things? This is what we are talking about here, and you apparantly think this is all made up."

 

I asked for an example where protectionism has hampered productivity growth. You chose Indian textiles. And then I pointed out you botched it by choosing an industry that has protectionist policies AGAINST rather than for them. And now you try and connect textiles with the recent FDI. Riiiiight. I get it now.

 

Also, you confuse FDI with productivity growth. They are two very different things. Go re-read that link I gave you on the definition of FDI.

 

"Let's stay focused on the subject - subsidies for Thai exporters. (Your link is to a discussion of the Multi Fibre Arrangement, which is entirely irrelvant to this discussion.)"

 

I just wanted to show you make stuff up. You make statements like "Indian textile productivity went down due to protectionism" and completely make it up.

 

"Where is the evidence to show that subsidies increse productivity?"

 

I never said that. You made that leap. Subsidies are not designed to increase productivity. They are designed to protect an industry from being completely annhiliated while they become competitive. It is a way to buy time. Not every country has something in the world they are better than everyone else at. Often they need to choose to take second or third place or even 20th place just to survive. And to get to second or third place without getting destroyed, they need all of the citizens of the country to make a concerted effort in that direction through the form of subsidies.

 

For a real world example of this, look at Microsoft. Their strategy for years was to underprice their software to keep competitors out. After that, they achieved world dominance and reaped the benefits. Subsidies are a form of forced saving.

 

"That is what this discussion is about. You subsidize something, it creates incentives to invest in something that is not otherwise economically viable. Doesn't sound smart to me."

 

What exactly would sound smart to you?

 

Oh, I know! Free markets = good! Everything anti-free markets = bad! No need to know history! No need to know law! No need to know economics or finance! Just Free Markets! Hooray! HOw'd I do?

[Gadfly]

Subsidies are not designed to increase productivity. They are designed to protect an industry from being completely annhiliated while they become competitive. It is a way to buy time. Not every country has something in the world they are better than everyone else at. Often they need to choose to take second or third place or even 20th place just to survive

 

Yeah right, Mr. Prachai needs government subsidies to survive. And there wonâ??t be any problems getting him and his ilk give up those subsidies after they use the money to become â??become competitive.â? Does anyone really believe this?

 

You claim my views are as simple as â??free market -= goodâ?Â. Who is really being naive here?

 

The exact opposite of what you describe will happen. Theyâ??ll become more less competitive and more dependent on government largesse. Khun Prachai will throw a nationalistic temper tantrum if anyone even suggests taking his subsidies away once he starts suckling that government teat. Look at what he did with TPI. You mentioned â??historyâ? â?? well there is a little history that seems to have been forgotten.