A gram of prevention is worth of kilo of cure:
Preventing another 1997 meltdown
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Returning from the World Economic Forum on East Asia in Singapore Finance Minister Chalongphob discussed the 10-year anniversary of Thailand’s 1997 economic crisis yesterday in a press conference.
He stressed that it is important for Thailand to have a system to oversee and protect the country from financial and fiscal risk. (Source: Ministry of Finance, photos)
For further reading, read Dr. Chalongphob's recent retrospective analysis of the 1997 economic crisis.
Watch the videocast of the 10-year economic crisis retrospective held at the Woodrow Wilson Center for Scholars in Washington D.C. last month.
Compare Thailand's baht appreciation problem with India's similar "enviable" problem in an Economist Intelligence Unit Briefing.
Check out the private investment indicators at the Thailand's Board of Investment website. One of these indicators is "imports of capital goods", likely to be affected by baht appreciation, making machine and capital good imports necessary for investment and continued growth more expensive.
Also read the speeches and press releases of Thailand's Finance Minister at the Ministry of Finance website as they become available.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What are the two risks that might contribute to another economic crisis, according to Dr. Chalongphob?
2. What negative economic effects on the Thai and world economy have the enormous global trade imbalances such as the American trade deficit had?
3. What have the negative effects of baht appreciation been on Thailand's economy?
4. How has baht appreciation hindered private investment?
(Use inference and knowledge of macroeconomics)
5. What is likely to cause instability in international financial markets?
6. Which countries should cooperate more to reduce the risk of sudden destabilising changes?
7. How should these countries cooperate?
8. What policy approach should the Thai government avoid at the local rural or provincial level, according to Dr. Chalongphob?
9. Why is fiscal transparency necessary?
10. What Thai government agencies should communicate more, according to Dr. Chalongphob?
(Use inference)
11. How were foreign reserves measured before the 1997 crisis? How should they have been measured?
12. What were the causes of the 1997 crisis, according to Chalongphob?
Bangkok Post Article June 27, 2007
Risks for new crisis emerge
Chalongphob points to two key factorsWICHIT CHANTANUSORNSIRI
Global trade imbalances and the impact of government spending on the fiscal position are the two key risks that need to be closely monitored to ward off another economic crisis, says Finance Minister Chalongphob Sussangkarn. "We can see the two risks vaguely even now, thus we should be prepared to respond to them in the future," he said yesterday at a talk focusing on the progress made in the 10 years since the economic crisis that began on July 2, 1997.
Dr Chalongphob said global financial markets continued to be highly volatile due to the world's trade imbalances in which the United States runs an enormous trade deficit. The phenomenon has increased inflows to Asian countries and shaken the financial markets.
The resulting baht appreciation has hindered Thailand's exports and private investment.
"It is expected that these imbalances will be drastically adjusted one day. This is because inflows from the US won't last forever, while the dollar has adjusted only slightly so far. The concerns over that adjustment could cause instability at the global level," he said.
Dr Chalongphob said that regional countries should seek greater co-operation in their official reserve management, now amounting to a combined $3 trillion.
Locally, the government's economic policies could undermine the stability of the fiscal position if they are oriented toward political objectives and crafted in the same way as the deposed government's "populist policies".
"We could face fiscal instability unless we have a good monitoring system. We should have transparent fiscal management so that the society can monitor it," he said.
Dr Chalongphob said the Bank of Thailand should propose its policy framework to the government annually and continue dialogue over policy implementation. "Dialogue between the central bank and other agencies would help create a better balance in its policies. ... To create a balanced policy, the central bank should listen to many stakeholders, while maintaining its independence," he said.
He said one observation drawn from the crisis was that the country had hardly exchanged ideas with the international community, especially countries that had faced an economic crisis.
As part of the process of change, he said the ministry would submit bills on financial reforms including the Bank of Thailand Act, Currency Act, Financial Institutions Act and Deposit Protection Act to the National Legislative Assembly.
"We should not be complacent that the crisis won't happen again or we won't ever be where we were before the crisis. At that time, we weren't alone in having so much confidence in our economy. Other countries did too," he said.
"This line of thinking led to a narrow perspectives like measuring official reserves with imports, instead of short-term debt. The central bank might have won a battle against speculators only to find itself losing a war because it had exhausted all official reserves."
The 1997 crisis, he said, stemmed from a weak economy, mistakes in foreign-exchange policy, premature financial liberalisation and an imbalance in the financial information available.
Vocabulary (in discussion above)
trade imbalances - large trade deficits (US) and surpluses (China) that continue to grow larger and larger
ward off - prevent
hindered - prevented from happening
private investment - non-governmental investment by businesses, either from domestic or international sources (See private investment indicators at the BOI)
drastically - extremely, greatly
drastically adjusted - changed a lot
reserve management - central bank buying and selling of foreign currencies to control exchange rate
undermine - make weaker, make more likely to fail
Bank of Thailand Act - Thailand's central bank (See website)
Currency Act, Financial Institutions Act, Deposit Protection Act - names of Thailand's laws relevant to economic policy (Read the law)
complacent - doesn't change a situation they should change
line of thinking - way of thinging about a problem
stemmed from - a problem or condition x comes from or is caused by y (See glossary)
premature - happened early
financial liberalisation - when laws regarding financial institutions and transactions become less strict and people are allowed more freedom of action (See glossary)
Answer Key:
1. What are the two risks that might contribute to another economic crisis, according to Dr. Chalongphob?
a. Trade imbalances.
b. Impact of government spending on the fiscal position.
2. What negative economic effects on the Thai and world economy have the enormous global trade imbalances such as the American trade deficit had?
a. Volatile global financial markets.
b. Increased (short-term capital) inflows into Asian countries.
3. What have the negative effects of baht appreciation been on Thailand's economy?
They have hindered:
a. Exports
b. Private investment
4. How has baht appreciation hindered private investment?
(Use inference and knowledge of macroeconomics)
Private investment consists of investment by businesses, not the government. Capital good imports that accompany private investment become more expensive with baht appreciation. (See the private investment indicators at the BOI.)
From macroeconomics also remember:
Y = C(+Y) + I(-r,+Y) + G + (Ex - Im)
If imports (Im) get more expensive and exports decrease, then GDP (Y) decreases and private investment (I) decreases.
5. What is likely to cause instability in international financial markets?
Concern over a large drastic adjustments in trade imbalances such as a sudden depreciation reducing the American trade deficit.
6. Which countries should cooperate more to reduce the risk of sudden destabilising changes?
Regional countries, the countries in ASEAN and Southeast Asia.
7. How should these countries cooperate?
They should cooperate in their "official reserve management," that is the foreign exchange reserves, the foreign currencies they accumulate by buying and selling (intervening) in foreign exchange markets.
8. What policy approach should the Thai government avoid at the local rural or provincial level, according to Dr. Chalongphob?
Asian governments should avoid policies that:
a. Are oriented towards political objectives.
b. Undermine the stability of the Thai government's fiscal position (like the previous government's populist policies did)
9. Why is fiscal transparency necessary?
If the government's fiscal position can be monitored (fiscal transparency) then fiscal instability can be avoided.
10. What Thai government agencies should communicate more, according to Dr. Chalongphob?
(Use inference)
The Bank of Thailand should:
a. Propose policy to the government annually.
b. Maintain a continual dialogue with the government over policy implementation
c. Listen to the many stakeholders while maintaining its independence.
("Dr Chalongphob said the Bank of Thailand should propose its policy framework to the government annually and continue dialogue over policy implementation. "Dialogue between the central bank and other agencies would help create a better balance in its policies. ... To create a balanced policy, the central bank should listen to many stakeholders, while maintaining its independence," he said.")
11. How were foreign reserves measured before the 1997 crisis? How should they have been measured?
a. Foreign reserve (adequacy) was measured with imports.
b. Foreign reserve (adequacy) should have been measured with short-term debt.
Thai banks borrowed at short maturities and lent at much longer maturities.
This maturity mismatch caused problems when foreign lenders recalled their short maturity loans
12. What were the causes of the 1997 crisis, according to Chalongphob?
a. a weak economy
b. mistakes in foreign exchange policy
c. premature financial liberalisation
d. an imbalance in the financial information available.
