Pump growth in the short-run,
suffer inflation in the long-run?
The politicization of Thailand's central bank
By Jon Fernquest |
Police officers making monetary policy in Thailand?
Strange, but true.
Perhaps not in keeping with international standards of central banking in which most central bank officials are economists or have a strong background in economics.
The current national police chief is a board member of the Bank of Thailand's monetary policy committee (MPC).
A long-term inflation targeting policy was put in place by Thailand's central bank after the 1997 financial crisis and follows international standards in monetary policy (Read policy history at the BOT).
The MPC has recently been stacked by the PPP with political appointees who favour replacing inflation targeting with "growth targeting" goals that seem to favour increasing GDP growth in the short-term to 6% before the next general election in 2009.
The only problem is that boosting growth before an election like this also risks boosting inflation after the election. This could cause even greater economic problems in the long-run (Read a previous article).
Professor Thithinan Phongsudhirak of Chulalongkorn writes today in the Bangkok Post how the current political conflict has entered the realm of monetary policy:
THAI POLITICS
Autonomy is imperative for Bank of Thailand
THITINAN PONGSUDHIRAKThursday August 21, 2008
The Bank of Thailand's new 12-member Monetary Policy Committee approved last month by Prime Minister Samak Sundaravej's cabinet is conspicuously political.
Half of the new board comprises current or former bureaucrats closely aligned with the prime minister's ruling People Power party.
Moreover, the recent cabinet reshuffle has brought in two new faces, the chief economic adviser and deputy finance minister, who have openly called for looser and "growth-targeting" monetary policy.
With inflation running at more than twice the current benchmark rate of 3.5%, the BoT is biased towards inflation-targeting in the face of the government's preference for lower interest rates.
The long-running conflict between the BoT on one hand and the government and finance ministry on the other, is likely to intensify for the rest of this year and beyond.
However, the BoT's functional autonomy and its "inflation-targeting" objectives are likely to be maintained, owing to sustained pressure by the anti-government movement both inside and outside parliament.
If it had its way, the government would prefer to replace BoT Governor Tarisa Watanagase, who was appointed during the coup period. But this would be a huge gamble and would give virulent anti-government groups, revolving around the People's Alliance for Democracy (PAD), ample ammunition in their efforts to topple the Samak administration.
Instead, Finance Minister Surapong Suebwonglee has gone through the back and side doors by reshaping the MPC's composition and by appointing Deputy Finance Minister Suchart Thadathamrongvej to do the government's bidding.
As a host of critical judicial cases await court verdicts, Mr Samak and his cabinet ministers are in all kinds of legal trouble, and the PPP could end up being dissolved by the Constitution Court for vote fraud.
A looming general election appears on the near-term horizon, probably in the first half of 2009. The government thus wants to boost GDP growth to around 6% to lay the electoral groundwork and shore up its popularity.
In fact, Mr Suchart has blatantly called for the benchmark rate to climb down to 2% to prop up growth. Virabongsa Ramangkura, the prime minister's new chief economic adviser, echoes a similar line.
Taking pressure off from Finance Minister Surapong, who is being investigated for legalising the underground lottery from the time he served under former prime minister Thaksin Shinawatra's tenure, Mr Suchart and Mr Virabongsa have argued that inflationary pressure will be well over the average in any event, and thus becomes secondary to addressing the people's hardship by lowering rates and bolstering economic growth by boosting investor and consumer confidence.
Their posturing has not affected the BoT's integrity and position. What will be crucial, however, is the MPC board. Half are ex-officio members from the BoT, economic planning agency and budget bureau. But the other half are holdovers and associates from the Thaksin era and from within the PPP's inner circle, including a former Thaksin adviser as MPC chairman and the current national police chief as a board member.
These six PPP-associated appointees are expected to exert pressure to bring down the benchmark rate.
But the anti-government groups, led by the PAD in the streets and the Democrat party in parliament, are on to the new MPC's vested interests.
Already the Democrats have asked the Administrative Court to annul the new MPC board. The PAD and certain segments of the press have attacked the government for endorsing the new MPC.
The government is too weak in credibility and popularity to reply forcefully, and is expected to rely on its quiet penetration and meddling with the BoT through its MPC appointees.
As a result, the face-off and stalemate in Thai politics has entered the BoT, with the MPC as yet another battleground.
The anti-government groups have become the unwitting guardian of central bank autonomy, indirectly shielding Mrs Tarisa and the BoT's monetary policy autonomy by their sheer animosity towards Mr Samak, Mr Thaksin and their allies. This stalemate at the national level can be expected to be at work at the BoT's MPC in a proxy fashion when it meets to discuss macroeconomic conditions next week.
As long as BoT officials can make their case convincingly for fighting inflation rather than pumping growth, the MPC will be divided and under pressure to go with sound macroeconomic analysis.
As the global economic downturn deepens and oil prices ease at least in the short term, price instability may not be as an immediate a concern as previously. The merits and imperatives of macroeconomic stability, not the electoral cycle, should underpin monetary policy.
Time and again, it has been shown that the BoT lacks the mandate to effectively carry its inflation-targeting policy regime. Explicit legal independence from the cut and thrust of Thai politics, rather than unreliable functional autonomy, is needed at the central bank, despite the twin shortfalls of democratic accountability and coordination with fiscal policy.
Until then, public pressure in the streets and elsewhere is needed to prevent the Samak government from ramming its "growth-targeting" goals through monetary policy.
The writer is Director of the Institute of Security and International Studies, Faculty of Political Science, Chulalongkorn University.
Vocabulary:
Monetary Policy Vocabulary:
monetary policy - controlling the growth and stability of an economy by controlling the supply of money, availability of credit and loans, and the cost of money (interest rate) (See Wikipedia)
a central bank - the government bank that controls a country's money supply as well as monetary policy (See Wikipedia)
Bank of Thailand (BOT) - Thailand's central bank (See website)
monetary policy committee (MPC) - the group of people at the BOT in charge of formulating monetary policy (Read description)
inflation targeting regime or policy - using monetary policy to keep the inflation rate low and steady
growth targeting - using monetary policy to achieve higher growth (instead of keeping the inflation rate low and steady)
autonomy - ability to control yourself and make your own decisions (rather than being told by someone else what to do)
central bank autonomy - when the central bank is allowed to formulate policy itself (without interference by politicians for their own short-term goals)
functional autonomy - allowed to function without outside interference
a mandate - have authority necessary to carry out a policy
lacks the mandate to effectively carry its inflation-targeting policy
coordination - working together to achieve a goal
(monetary policy) coordination with fiscal policy -
"growth-targeting" goals - when the policy goal is to increase growth
General Vocabulary:
stacked - appoint many people who favour your policies to a committee or political decisionmaking group
an imperative - an important thing that must be done
conspicuously - very easy to see, obvious
conspicuously political - very easy to see that it is political
X comprises Y, Z,... - X has as members Y, Z,...
bureaucrats - permanent workers in government departments
closely aligned with - work together with closely towards common goals
cabinet reshuffle - changing and shifting the people in the cabinet
the cabinet - the people who work with the Prime Minister in formulating policy
biased towards Y - tend to choose Y (rather than other options)
intensify - growing greater and stronger
objectives - goals, things you work to achieve
would be a huge gamble - is very risky, may or may not be successful
virulent anti-government groups - very very anti-government
ample ammunition - lots of things they can use to attack with
topple - make fall or collapse (for example make the government fall)
the composition of Y - the various parts or members of Y and how they are put together
reshaping the MPC's composition - changing the
do the government's bidding - do what the government wants
critical - extremelly important
a host of Y - a lot of Y
a host of critical judicial cases
court verdicts - decisions of courts on legal cases
Y dissolved - group Y officially broken up, so that it no longer exists
vote fraud - cheating to increase your vote during an election
looming - about to happen in the near future
on the horizon - in the near future
the near-term - the near future
lay the electoral groundwork - lay the foundation for an election
shore up - make stronger (in places it is currently weak)
shore up its popularity - make popularity stronger
blatantly called for - did not try to hide or call for quietly
benchmark rate, benchmark inerest rate -
underground lottery - illegal lottery
bolstering economic growth - increasing economic growth
integrity - basing of one's actions on an internally consistent framework of principles
crucial - extremely important
ex-officio - membership on a committee because of a position held
holdovers - left over from the past, still remains from the past
associates - people you are closely connected to in your work
the PPP's inner circle - the group of powerful people who control the PPP
vested interests -
weak in credibility -
meddling - interfering
face-off -
stalemate -
unwitting X - be X, but not know you are X
animosity - hatred and anger
sheer animosity - very strong hatred and anger
sheer animosity towards Mr Samak
a proxy - working for someone else
the electoral cycle -
underpin X - support X, serve as a foundation of X
shortfalls - do less than expected
democratic accountability - must keep your promises to the people who elected you
