Nobel Laureate Robert Mundell and Thailand's economic agenda at the annual Fiscal Planning Office Symposium
By Jon Fernquest[Introduction|Article]
[Reading Questions|Answers]
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The recent annual symposium of the Fiscal Planning Office (FPO) provides readers with a mini-overview of Thailand's recent economic history.
Today's article from the Bangkok Post also looks at how economic policy will be conducted under the new constitution.
A keynote address by Nobel Laureate economist Robert Mundell provided focus to the meeting with some basic principles from international economics such as the Mundell Trinity, the impossibility of a country pursuing three important economic objectives simultaneously:
1. Free capital flows
2. Fixed exchange rates
3. Domestic autonomy (in economic policy)
Here are definitions for the highlighted vocabulary above:
nurturing - helping grow
symposium - conference of experts discussing a subject
keynote address - important speech to start and give direction to a meeting
simultaneously - at the same time
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What is economist Robert Mundell's "Impossible Trinity" ?
2. What happened to the Thai economy when Thailand's economic policymakers ignored Mundell's Trinity?
3. What economic situation results from flexible exchange rates, free capital flows, and government spending to stimulate the economy?
4. Why is close coordination in fiscal and monetary policy needed for economic growth?
5. Is central bank independence compatible with close coordination in fiscal and monetary?
6. How will close coordination between fiscal and monetary policy be achieved in the new constitution?
7. What new objectives does are included in fiscal spending under the new constitution?
8. What policy constraints and conflicts did the Thaksin administration face?
9. What monetary and fiscal policies did the Thaksin administration pursue in the end?
10. What kind of import beneficial to the economy does a strong baht allow?
Bangkok Post Article September 18, 2007
ECONOMY / FORECASTING AND POLICYMAKINGBalance of policies key to nurturing growth
WICHIT CHANTANUSORNSIRIFiscal and economic policies need close co-ordination to support overall macroeconomic growth, according to Finance Minister Chalongphob Sussangkarn.
Dr Chalongphob, in an opening address to the annual FPO Symposium, hosted by the Fiscal Policy Office, cited Robert Mundell's "impossible trinity" as an important lesson regarding the constraints of policy.
Dr Mundell, the 1999 Nobel laureate for economics, theorised that it was impossible to have free capital flows, fixed exchange rates and domestic autonomy in economic policy.
Thai policymakers, however, ignored the concept, and liberalised capital flows even while maintaining a fixed exchange-rate regime.
Heavy capital inflows later forced policymakers to raise interest rates to help curb inflation and the overheating economy, resulting in an interest-rate gap of as much as four percentage points with US rates, in turn contributing to additional inflows.
fiscal - related to government spending and taxation
macroeconomic growth - growth of a country's economy
symposium - conference of experts discussing a subject
a trinity three things that go together in one whole
Robert Mundell's "impossible trinity" - the theory that it is impossible to have at the same time, the following three things: 1. free capital flows, 2. fixed exchange rates, and 3. domestic autonomy in economic policy
constraints - limitations on action, rules and controls that limit freedom of action
Nobel laureate - winner of Nobel Prize
autonomy - ability to make decisions without being influenced by outsiders
liberalised - make more free, reduce restrictions
regime - following a system or set of rules
curb - reduce
overheating economy - economy with higher levels of economic activity than it has capacity to support, so there is inflation of wages and raw materials, etc (many have claimed recently that the Chinese economy with its very high growth rates is showing signs of overheating)
Dr Chalongphob noted that Dr Mundell also considered another danger in policymaking: flexible exchange rates and free capital flows resulted in ineffectiveness in fiscal policy.
"If we use fiscal policy to spur growth, market liquidity declines, resulting in higher interest rates, which in turn draws capital inflows and leads to currency appreciation," he said.
As a result, close co-ordination in fiscal and monetary policy was crucial for economic growth.
Dr Chalongphob said the new constitution required the Bank of Thailand to submit its monetary policy framework to the cabinet for approval, reducing the potential for conflicts with fiscal policy.
Once approved, the central bank would have freedom to conduct policy within the framework.
effective (adjective) - working well and producing intended results
ineffectiveness (noun) - when something does not work well and produce intended results
spur growth - starts growth, creates growth
market liquidity - the amount of money or credit available for lending through banks (government spending "crowds out" private investment)
crucial - extremely important
Dr Chalongphob added that the new constitution had considerable implications for budget management, as fiscal policy now had to consider new objectives such as creating new retirement pension programmes and funding programmes for 12-year student education and assisting the homeless.
At the same time, the constitution also stipulated that the government must maintain fiscal discipline and stipulate the source of funds for government spending.
Conflicts between monetary and fiscal policy were common during the Thaksin Shinawatra administration, as the government pushed for lower interest rates to spur growth and ease pressure on the currency to appreciate.
The central bank, however, resisted cutting rates due to fears of inflation and pushed instead for an increase in fiscal investment to spur growth.
Narongchai Akrasanee, the chairman of the Export-Import Bank, said fiscal policy needed to be flexible, multi-dimensional and transparent.
Tax revenues should be derived from consumption rather than revenues, he said, while subsidy programmes should be clearly outlined under the public service obligation (PSO) programme.
retirement pension - the money saved by households for use after their retirement from work
stipulated - a clearly stated condition that something must be done (in a constitution, a law, a contract, or other agreement)
transparent - when the public can see what is happening (nothing is hidden or secret like corruption)
subsidy - money given to special programs by the government
Monetary policy, meanwhile, should focus on exchange-rate stability, increasing channels for savings and support development of the financial markets, Dr Narongchai suggested.
Pisit Leeahtam, a former deputy finance minister, noted that the 1997 crisis had severely affected funding channels for small businesses."We should look at this problem again, and consider how we can help small businesses gain access to finance," he said.
Supavud Saicheua, a managing director of Phatra Securities, said that in an efficient global market, policies that deviated from market expectations would have immediate consequences.
He said Thailand needed to prepare for rising interest rates and inflation in the global market, pushed in part by the collapse of the US sub-prime market, as declining economic growth and consumer spending in the US would affect the Thai economy.
He suggested that Thailand accelerate its imports of capital goods and scrap the 30% reserve rule on foreign inflows to remove distortions in the market.
funding channels - ways of financing, ways of getting money to run business
sub-prime market - real estate loans to borrowers who normally would not qualify (who have a bad "credit record")
distortions in the market - factors that prevent the market from having a normal market determined price where supply equals demand
Answer Key:
1. What is economist Robert Mundell's "Impossible Trinity" ?
A country cannot pursue three important economic objectives at the same time in their economic policies, namely:
a. Free capital flows
b. Fixed exchange rates
c. Domestic autonomy (in economic policy)
2. What happened to the Thai economy when Thailand's economic policymakers ignored Mundell's Trinity?
a. Thailand liberalised capital flows with a fixed exchange rate.
b. Heavy capital inflows resulted.
c. Inflation and an overheating economy resulted.
d. Policymakers were forced to raise interest rates to curb this inflation.
e. This made Thailand's interest rates more attractive than those of the US
f. Capital inflows from the US resulted.
3. What economic situation results from flexible exchange rates, free capital flows, and government spending to stimulate the economy?
Currency appreciation. 1. Government spending to stimulate the economy ("using fiscal policy to stimulate growth") leads to 2. decreased market liquidity which leads to 3. higher interest rates which leads to 4. increased capital inflows which leads to 5. currency appreciation.
4. Why is close coordination in fiscal and monetary policy needed for economic growth?
Because the economic objectives of Mundell's Trinity are spread over both monetary and fiscal policy, so the choice of which will chosen as policy priorities requires coordination.
5. Is central bank independence compatible with close coordination in fiscal and monetary?
The central bank is free operate within the cabinet approved framework, but not independent to adopt a framework of its own choosing, for instance, if exporters pushed it to do so.
6. How will close coordination between fiscal and monetary policy be achieved in the new constitution?
The central bank is required to submit its monetary policy to the cabinet for approval.
7. What new objectives does are included in fiscal spending under the new constitution?
a. Creating new retirement pension programmes.
b. Funding programmes for 12-year student education.
c. Assisting the homeless.
8. What policy constraints and conflicts did the Thaksin administration face?
a. Reducing interest rates would have stimulated growth and reduced currency appreciation, but...
b. Reducing interest rates would have increased inflation.
c. So they did not cut interest rates, but increased government spending instead.
9. What monetary and fiscal policies did the Thaksin administration pursue in the end?
a. Did not cut interest rates.
b. Increased fiscal spending to increase growth.
10. What kind of import beneficial to the economy does a strong baht allow?
Imports of capital goods, machinery and equipment crucial to new more advanced areas of export production, for instance.
