The end of Thai central bank independence?
Stable long-term policies or political interference? (04-07-07)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Once upon a time, flawed monetary policy in states around the world caused economic instability.
Then, during the last 20 years or so, central bankers around the world mastered their craft:
1. They have chosen limited objectives.2. They have persisted with these objectives, over long periods of time, and eventually achieved these objectives.
3. They have learned not to be "jerked around" by different interest groups who want policies to help their industry.
4. They have learned not to jump from objective to objective as political pressures dictate.
5. For example, jumping from the objective of limiting inflation, then to reducing unemployment, then to lowering government debt refinancing costs, and then to preventing exchange rate appreciation or depreciation.
6. They've learned that central banks simply can't meet all these objectives with the limited means at their disposal.
These points were made in a recent commentary on the history of central banking and economic stability written by Dr. Brad DeLong professor of economics at UC Berkeley. Also see the good critical discussion at Economist's View of his article.
This general idea is known as "The Great Moderation," set forth in a 2004 speech by Ben Bernanke, currently head of the US central bank. Briefly:
"In the last 10 to 15 years, there is good evidence that many modern central banks have become relatively adept at manipulation of the money supply, leading to a smoother business cycle, with recessions tending to be smaller and less frequent than in earlier decades, a phenomenon that has been termed 'The Great Moderation'"
(Source: Wikipedia)
Today's article by Thitinan Pongsudhirak, head of ISIS at Chulalongkorn University, is critical of recent moves to do away with plans for Thai central bank independence. If the central bank is not independent, political pressures may well lead to policy failure as it has in the past, he basically argues.
For further reading, read an article in today's Bangkok Post on the pressure being exerted by the export sector on Thai monetary policy, a good case study of what Thitinan Pongsudhirak's op-ed piece is criticising.
To be fair, South Korea favored the export sector during its successful export-driven growth under Park Chung-Hee, so there is some precedent for economic intervention on the side of export sectors. Economist Anne Krueger discusses in a 2006 IMF article the credit rationing that South Korea favored its export sector with in its successful industrial policy.
Read a Bangkok Post article published this week on the debate over separating bank supervision and foreign reserve management from central bank responsibilities, leaving only domestic monetary policy as a BOT function.
Read past articles on Thai monetary and foreign exchange policy.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. Will recent changes in proposed laws governing central bank decisionmaking increase or decrease political interference in these decisions, according to the author?
2. What kind of forms can political interference in central bank decision-making take? (Use inference and express opinion)
3. When was the baht first floated? Was it floated voluntarily?
4. When did efforts to free the BOT from political interference first start? What form did they take?
5. What effect did democratisation in the late 1980s have on government policy, according to the author?
6. Over the last 10 years how has the BOT tried to recover from the 1997 crisis?
7. What are the names of the three central bank governors that have served after the 1997 crisis?
8. What contributions have these governors made to central bank governance?
9. Under Finance Minister Chalongphob has the BOT gained or lost autonomy? Why?
How? (Give details)
10. What are the benefits of central bank autonomy combined with inflation targeting?
11. How did the flotation of the baht after 1997 change the way that the value of the baht is determined?
Bangkok Post Article July 02, 2007
OPINION / MANAGING THE ECONOMYThe Bank of Thailand then and now
By THITINAN PONGSUDHIRAKRecent changes have put the central bank back in the precarious position of being subject to political pressures
A decade after its debacle in mismanaging the baht, from a century-long peg to a forced flotation that brought on the infamous and contagious economic crisis in 1997, the Bank of Thailand has come full circle. Legal efforts after the 1997 crisis to free the central bank from political interference by amending the Bank of Thailand Act have come to naught. Recent BoT interest rate cuts in response to blatant government preferences to boost growth are an indication that the central bank's macro-policy autonomy and management has been reversed back to its pre-1997 position.
It is an ironic turn of events because the finance minister behind the reversal is none other than Chalongphob Sussangkarn, a pro-market career academic economist and a would-be technocrat who is in office during an interim, unelected government under military rule. Mr Chalongphob, in effect, is supposed to be a technocrat on the side of the BoT, but instead he has practically put the central bank back into the hands of elected politicians who will come to power after the election.
The impact of this move is far-reaching. Without policy-making autonomy at the BoT, monetary policy and financial sector supervision and regulation will be increasingly guided and controlled by the finance minister and swayed by government and cabinet preferences and policy objectives.
Such an outcome will make monetary policy prone to political machinations and politicisation, much as we saw prior to 1997, when democratisation in the late 1980s empowered elected politicians to shunt aside a five-decades-old technocracy, which comprised the National Economic and Social Development Board, the Budget Bureau and the Ministry of Finance, with the BoT as anchor.
The politicisation along with the penetration and capture of the technocracy by vested interests represented by elected politicians led to the financial sector mismanagement that culminated with the insolvency of the Bangkok Bank of Commerce, the over-leveraged crises and shoddy credit culture in the banking and non-bank sector, and the disastrous and demoralising defence of the baht's peg.
Previously the pre-eminent gatekeeper of Thailand's sustained economic growth, the BoT suddenly became the chief institutional culprit for all that went wrong in 1997.
For the past 10 years, the central bank has tried to restore its lost prestige and credibility by codifying its legal independence from the finance ministry, similar to central banking models in developed economies such as the United Kingdom's and New Zealand's. Because BoT governors in the past were answerable to the finance minister, as long as the finance ministry was headed by a like-minded technocrat as opposed to an elected politician, the central bank governor's functional autonomy was assured, even if legal independence was not stipulated.
Two governors over the nine years after the crisis, MR Chatumongol Sonakul and MR Pridiyathorn Devakula, laid the groundwork for legal central bank independence and inflation-targeting. Both had strong personalities and considerable domestic stature who had been appointed from outside the BoT.
MR Pridiyathorn, in particular, made much headway in formalising central bank independence after the military coup last September when he became finance minister. But Mr Chalongphob, his successor, has just set the BoT back a decade.
That Mr Chalongphob has reasserted control over the central bank governor is attributable to several factors. First, he needs maximum command of macro-policy at this time as the government of Gen Surayud Chulanont is embattled owing partly to the economic slowdown and sagging consumer and investor sentiments. Government pressure on Mr Chalongphob, and in turn on BoT Governor Tarisa Watanagase, is too much to resist. Second, Ms Tarisa has been a weak governor. More a run-of-the-mill bureaucrat than an effective, staunch central banker who brooks no political interference, she has little stature domestically, and is thus in no position to stand her ground as BoT chief. Ms Tarisa also has received little support from Prime Minister Surayud or other senior cabinet members.
Third, the BoT is still reeling from its controversial capital controls imposed last December in a vain attempt to stem the baht's appreciation. As a macro-policy institution, the BoT was hard-hit by its ineffectual exchange rate management. Finally, Mr Chalongphob has argued his case on the grounds of democratic accountability and the government's need to synchronise fiscal and monetary policies. These are the two principal limitations of legal central bank independence. But in countries with inflation-targeting and independent governors, such drawbacks are more than compensated by stable monetary policy and price stability free from political meddling.
Due to the public's lack of sophistication and knowledge on the subject and to the myriad contentious issues and problems that have diverted attention away from the BoT's legal setback, Mr Chalongphob's reversal of central bank independence has incurred few criticisms. As an interim finance minister in a supposedly technocratic cabinet, Mr Chalongphob has missed an opportunity to fortify the BoT's institutional integrity. His argument on the BoT's democratic accountability is dubious.
If Mr Chalongphob is willing to defer other legal measures, such as the proposed land and inheritance taxes, to the next elected government, why does he have to axe central bank independence at this time? His rollback of central bank independence will further bureaucratise the BoT, which will increasingly resemble just another bureaucratic agency rather than a once-vaunted bastion of Thailand's famous but faded technocracy. It is unlikely that future elected politicians will grant legal independence to the central bank. When macroeconomic pressures gather force again, as they did in the early 1980s and mid-1990s, the BoT will hardly be better equipped to handle them.
The most salient positive outcome of the 1997 crisis is the baht's costly flotation, which has shifted much of the tricky burden of currency management from the BoT to the market. But financial sector management remains susceptible to poor prudential supervision and regulation. When the next bout of financial sector challenges takes place, the Surayud government may well be seen as having bungled opportunities to set things right for Thailand's macro-policy management.
The writer is director of the Institute of Security and International Studies, in the faculty of political science at Chulalongkorn University.
Vocabulary (in discussion above)
objectives - goals
persisted - kept to their plan, maintained stable effort over a long period of time (without jumping around and changing all the time)
jerked around - change course of action frequently (under outside pressure)
interest groups - groups of people that want certain government policies that help their business, they try to persuade (lobby) the government to change to this policy so they can gain from it
political pressures - different political interest groups who want different things, try to change policy for their own benefit
limiting inflation - keeping inflation low and steady
reducing unemployment - which means increasing employment (which is probably a better way of looking at it in Thailand because there are many under-employed people, motorcycle taxi drivers, for instance)
lowering government debt refinancing costs -
preventing exchange rate appreciation or depreciation - preventing the currency from appreciating (getting more valuable) or depreciating (getting less valuable), appreciation makes exports less competitive, depreciation makes loan repayments more difficult, any increased exchange rate movement or volatility, in general, makes predicting future prices more difficult and thus makes business plans and doing business more difficult
the limited means at their disposal - have only a few ways (or tools) to achieve their objectives
The Great Moderation - over the last 10 to 15 years the theory that modern central banks have become skilled at controlling the money supply which has led to a smoother business cycle with recessions tending to be smaller and less frequent than in earlier decades
op-ed piece - an newspaper article that expresses the opinion of the opinion of an individual contributor who is sometimes but not always affiliated with the publication.(See Wikipedia on editorial)
precarious - not in control of events, uncertain, unstable
put in the precarious position of - put in a position of uncertainty and lack of control
a debacle - a complete failure
a peg, the baht's peg - when a currency is tied to or fixed to another currency like the US dollar (it can move around a little though, within a band or range)
flotation - letting the exchange rate and value of currency be determined by market forces
come full circle -
Bank of Thailand Act - the law governing the operation of the Bank of Thailand, Thailand's central bank
naught - zero
come to naught - resulted in nothing, not successful
blatant - easy to see (something bad)
autonomy - independent (not influenced or controlled by others)
ironic - a difference between what appears to be the meaning and the actual meaning, and this ambiguity is part of the meaning (See Wikipedia on irony)
turn of events - a particular series of events (among all the possible different series of events that could have happened)
an ironic turn of events - something happened different from what you would have expected
technocrat - a government bureaucrat trained in engineering or economics and devoted to the power of innovative policy, also a member of a highly skilled elite group (note: often used with a negative meaning)
swayed by - influenced by (someone causes you to change your decision)
prone to x - has the tendency or habit of doing x
prone to political machinations and politicisation -
shunt aside - move aside
National Economic and Social Development Board - (See website)
Budget Bureau - Thai government agency in charge of planning the government budget
Ministry of Finance - Thai government ministry in charge of economic policy (See website)
BoT - BOT, Bank of Thailand, Thailand's central bank (See website)
vested interests - people with who will gain or lose depending on the outcome of events (have an interest in outcome of the events)
culminated in x - event x happened at the end
insolvency - bankruptcy (no money left to keep running your business with)
Bangkok Bank of Commerce - (See Wikipedia)
over-leveraged - borrowing too much money (debt to equity ration too high for given kind of business and given business conditions)
shoddy - sloppy, not done with though and care
shoddy credit culture - people borrow money without thinking hard about whether they can pay the money back
pre-eminent gatekeeper -
culprit - guilty person, the person who committed a crime
prestige - value in other people's eyes, people look up to
credibility - believability
restore its lost prestige and credibility - once again people believe and value
functional autonomy - works without outside interference
stipulated - state clearly that something must be done (for example in a condition in an agreement or contract (See glossary)
laid the groundwork for - made preparations for
inflation-targeting - a monetary policy with the central bank estimating and making public a projected target inflation rate, then attempting to steer actual inflation towards the target, using of interest rate changes or open market operations (because interest rates and the inflation rate tend to be inversely related, the likely moves of the central bank to raise or lower interest rates become more transparent under a monetary policy of inflation targeting; See Wikipedia and Economist)
stature - importance and reputation
considerable domestic stature - very important person within the country
headway - progress
made much headway in - made a lot of progress in
reasserted control over - regained control
embattled - under attack (forced to defend itself)
a run-of-the-mill - ordinary, nothing special
a run-of-the-mill bureaucrat - an ordinary bureaucrat
brooks no x - will not allow any x, at all
brooks no political interference - will not allow anyone to interfere in their private political affairs
in no position to -
stand her ground -
is thus in no position to stand her ground -
reeling from - (like someone who is dizzy, can't walk straight, and is about to fall down)
capital controls - (See Wikipedia)
in vain - useless
vain attempt - useless attempt
stem - stop
stem the baht's appreciation -
accountability - having to prove to people that you made good decisions or that you were successful, being punished when you fail
democratic accountability -
monetary policy - (See Wikipedia)
stable monetary policy -
meddling - interfering in the private business of others
political meddling -
sophistication -
lack of sophistication -
myriad - very many
contentious - causing argument and disagreement
myriad contentious issues -
diverted - move away from
diverted attention away from -
incurred x - x happened and x was bad and costly (for example, incurred costs, incurred fines, incurred criticisms)
incurred few criticisms -
dubious - unbelievable, difficult to believe, questionable
defer -
once-vaunted - people once bragged about how successful it was, but no anymore
a bastion of x - a place where x still exists in stregth
once-vaunted bastion of x - a place that was once famous for x
salient - noticeable, visible, can be seen
the most salient positive outcome of - teh most noticeable positive result
prudential -
prudential supervision and regulation -
a bout of -
bungled - done incorrectly and unsuccessfully
Answer Key:
1. Will recent changes in proposed laws governing central bank decisionmaking increase or decrease political interference in these decisions, according to the author?
Recent changes in proposed laws will increase future political interference in central bank decision-making.
2. What kind of forms can political interference in central bank decision-making take? (Use inference and express opinion)
The most recent example are exporters lobbying for action by the BOT to keep the baht from appreciating.
3. When was the baht first floated? Was it floated voluntarily?
In 1997 on July 2nd, 10 years ago this week. It was not floated voluntarily. It was a "forced flotation."
4. When did efforts to free the BOT from political interference first start? What form did they take?
Efforts began after the 1997 crisis. The Bank of Thailand act was going to be amended. Pridiyathorn planned for it to be amended to include central bank independence. Chalongphob decided against this after he took over.
5. What effect did democratisation in the late 1980s have on government policy, according to the author?
a. Elected politicians started making policy that technocrats in government ministries had once made.
b. The vested interests that the politicians represented gained control.
c. The financial sector was mismanaged
d. The 1997 economic crisis occurred.
e. The BOT was blamed for everything
("Such an outcome will make monetary policy prone to political machinations and politicisation, much as we saw prior to 1997, when democratisation in the late 1980s empowered elected politicians to shunt aside a five-decades-old technocracy, which comprised the National Economic and Social Development Board, the Budget Bureau and the Ministry of Finance, with the BoT as anchor."
"The politicisation along with the penetration and capture of the technocracy by vested interests represented by elected politicians led to the financial sector mismanagement that culminated with the insolvency of the Bangkok Bank of Commerce, the over-leveraged crises and shoddy credit culture in the banking and non-bank sector, and the disastrous and demoralising defence of the baht's peg."
"Previously the pre-eminent gatekeeper of Thailand's sustained economic growth, the BoT suddenly became the chief institutional culprit for all that went wrong in 1997.")
6. Over the last 10 years how has the BOT tried to recover from the 1997 crisis?
a. By codifying its legal independence from the finance ministry
b. Using central banking models similar to those in developed economies such as the United Kingdom and New Zealand.
c. As long as the finance ministry was headed by a like-minded technocrat as opposed to an elected politician, the central bank governor's functional autonomy was assured, even if legal independence was not stipulated, because BoT governors in the past were answerable to the finance minister.
7. What are the names of the three central bank governors that have served after the 1997 crisis?
a. MR Chatumongol Sonakul.
b. MR Pridiyathorn Devakula
c. Dr. Tarisa Watanagase
8. What contributions have these governors made to central bank governance?
They laid the groundwork for:
a. central bank independence laws
b. inflation-targeting
9. Under Finance Minister Chalongphob has the BOT gained or lost autonomy? Why?
How? (Give details)
The BOT has lost autonomy to the Finance Ministry.
The reasons given are:
a. The need for democratic accountability.
b. The government's need to synchronise fiscal and monetary policies.
The last question is a trick question, because the answer is that "How?" is not given. Details are not given.
10. What are the benefits of central bank autonomy combined with inflation targeting?
a. Stable monetary policy.
b. Price stability free from political meddling.
c. Freedom from interest groups forcing to make changes in prices favorable to them.
11. How did the flotation of the baht after 1997 change the way that the value of the baht is determined?
After the baht was floated the market determined its value more than the BOT, although the BOT still intervenes.
