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    Southeast Asia
     Feb 2, 2007
Page 1 of 2
Thailand's new economic logic
By Shawn W Crispin

BANGKOK - Thai Prime Minister Surayud Chulanont says his interim government has launched a "year of great reforms", with changes aimed at putting the economy on a more sustainable long-term track. Many foreign investors, on the other hand, are howling that recent government policies are woefully out of step with market mechanisms and, if not reversed, could eventually cause Thailand's economic demise.

So who's right? In an effort to erase ousted prime minister Thaksin

Shinawatra's legacy, Thailand's new military-appointed government is indeed leading the country in a fundamentally different economic direction. Foreign investors and the market-fundamentalist Western media have roundly blasted Bangkok's recent decisions to impose capital controls, limit foreign ownership for certain service-sector investments, and broadly implement King Bhumibol Adulyadej's untested "sufficiency economy" concept.

Many investors voted with their feet when the capital controls were first imposed in mid-December, driving down the Thai bourse 18% in a single day. But after equity investors were exempted from the controls, the stock market has recovered most of those losses, and now big foreign hedge funds have flocked to Bangkok to seek out potential opportunities amid the policy confusion.

Meanwhile, the Thai currency, the baht, has continued to appreciate against the US dollar, trading at a recent high of about 33 to the greenback in offshore markets despite the capital controls on currency transactions. After introducing widely perceived nationalistic amendments to the Foreign Business Act in early January, major export-oriented multinationals, including China's Huawei, Japan's Panasonic and the United States' Ford, have since made major new commitments to their Thailand-based operations.

If Thailand is headed for economic doom, it's not yet apparent. Rather, a grudging consensus is emerging among more seasoned Thai observers that there is a technocratic logic to the government's thinking. Although not admitted publicly, the capital controls policy was likely designed as preemptive action against an anticipated major global economic shift: the steep and long-term decline of the US dollar and economy.

The Bank of Thailand is not the region's only central bank grappling with the financial wisdom of accumulating ever more US-dollar-denominated assets. For China, which has accumulated more than US$1 trillion in foreign denominated reserves, or nearly 42% of its gross domestic product (GDP), through years of runaway trade surpluses is actively pursuing new ways to hedge its massive stock of depreciating dollars.

Albeit on a smaller scale, it's an equally important issue for the region's other export-geared, dollar-earning economies, including Malaysia, Singapore and Thailand, where respectively exports account for 108%, 197% and 70% of GDP. That Thailand is now partially turning away from the openness that previously fueled its economic boom, bust, and recent strong recovery is particularly significant. And it could yet herald a broad regional move away from reliance on Western capital and export markets and toward more inward-looking and even protectionist economic strategies.

Historical vanguard
If so, it wouldn't mark the first time that Thailand was on the vanguard of a sweeping regional economic trend. Throughout the 1980s and 1990s, Thailand was at the front edge of Asia's export-driven economic emergence. Then, Japanese multinational corporations rapidly transformed Thailand's backwater economy into an export-fueled global powerhouse. Thailand also famously led the region into financial crisis in 1997, when foreign investors perceived cracks in the debt-driven facade and underscored the economic risks to developing economies of unregulated short-term capital flows.

Thailand's new direction is partially a nationalistic reaction to that bitter experience, driven a decade later by traditional elites now represented in government. The prevailing confusion surrounding the sudden implementation of capital controls and anti-foreign amendments to the Foreign Business Act, followed by earnest assurances by senior officials that Thailand will continue to engage with the global economy, has purposefully obfuscated the government's inward-looking intentions.

The Bank of Thailand has somewhat disingenuously maintained that the motivation for imposing capital controls was to protect Thai exporters from an appreciating baht. Yet Thai exports surged 17% last year, higher than consensus projections and in spite of a 15% appreciation of the baht against the dollar. The more complicated explanation for the central bank's move is precisely the opposite: that Thailand is now exporting too much, not too little.

Respected Thai economist Supavud Saicheua - on all accounts a dedicated free marketeer - makes that contrarian argument in an exceptional new research report, in which he argues that Thailand

Continued 1 2 

Thailand's man in the hot seat (Dec 22, '06)

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