Fixed exchange rate would benefit Thailand

Bangkok Post, November 12, 2007

Mundell: Dollar basket would stabilise rates. Thailand's accumulation of foreign reserves boded well for the economy in the future, according to Robert Mundell, the 1999 Nobel laureate for economics.

But countries such as Thailand would do well to move away from flexible exchange rates to a fixed- rate system such as a currency board or dollar-basket to better stabilise rates, Prof. Mundell said.

Asian countries have built up massive dollar reserves over the past several years through market intervention in a bid to maintain currency stability.
Thailand's foreign reserves stood at $82.6 billion as of Nov 2, compared with $67 billion at the end of 2006 and $52.1 billion at the end of 2005. But even with central bank intervention, the baht has appreciated by 17% against the dollar since January 2006.   

The accumulation of dollar reserves through market intervention by Asian countries has prompted criticism by some western policymakers, a view that Prof Mundell did not necessarily share.

"It's not clear that [Asian countries] are doing the wrong thing in intervening. In 1997, the Asian economic crisis started when the region was caught with too little reserves," Prof. Mundell told the Bangkok Post.

"For Thailand, the question is whether a stronger baht is sustainable. If the baht appreciates, then only weakens later, then [allowing currency appreciation] is a mistake."

Prof. Mundell, 75, is a pioneer of modern international-economics, notably for his work on international monetary flows and the theoretical groundwork leading to the introduction of the euro.

The Columbia University professor said it was the uncertainty of foreign exchange rates that was the major problem for countries. "A fixed rate, not like the systems used in Asia in 1997, but say a currency board, would help alleviate uncertainties," he said.

"No one should think that the dollar is an unstable currency. The US won't let ini1ation rise. Fixing the baht to a dollar basket will help stabilise the baht, better than an inflation-targeting scheme."

Monetary policy in Thailand since the 1997 crisis has been based on maintaining ini1ation within a set range.

But Prof. Mundell said such policies created their own uncertainties.
"Lots of countries have bought the argument that flexible exchange rates gives greater freedom," he said.

"But there's a reason why finance ministers, and to some degree, central bankers, like inflation targeting, and that's because it's a soft option. Targets can be changed. Fixed exchange rates give a sense of permanence."

Prof. Mundell, who supports the concept of a single global currency, said it was difficult to see Asia moving towards a single currency similar to the euro.
"Asia can't have a single currency without a defence alliance. It has to be a secure area. You wouldn't have been able to have the euro if France and Germany had not been able to reconcile their differences," he said.

"In Asia, you have political tensions, between China and Japan, with China and Taiwan. And I think that even if Japan was willing [to adopt a single currency], China wouldn't. They see their future as one with strong growth."

Prof. Mundell said recent volatility in the global financial markets should be considered in perspective. "2007 has been a great period for the world economy, with very strong growth in the US, Europe, China and emerging markets."

"Yes, August saw a big liquidity scare due to sub-prime mortgage crisis. I'm not going to say that it was a non-event, but the prompt action by the European Central Bank to inject ?94 billion in the market in one day, that was mind-boggling. This action saved the system."

He shrugged. "The nagging effect of the sub-prime crisis is not something that the world economy can't weather."

ProfMundell is in Bangkok this week as part of the International Peace Foundation's Bridges programme, which aims to facilitate dialogue and communication between Southeast Asia and the rest of the world through ties between Nobel laureates and local institutions.

Prof. Mundell is to give a speech at Siam University today on globalisation and development strategy, followed by a speech tomorrow on the international exchange rate system at the University of the Thai Chamber of Commerce.

"Free trade means integration with the global economy. The question is how open do you want to be? The consensus is that highly open is good. But it's probably not always so," he said.

"For an economy like Thailand, with a relatively large population and low per-capita income, I'm not sure that free trade is the best approach. Actually, the question isn't really free trade, but rather to what degree? What industries should be protected so they can grow to compete in the future?"

Prof. Mundell said Thailand needed to develop specialised niche markets and establish itself as a global brand to I compete in the world markets.
"Thailand is big in some ways, small in others. You need to be agile with changing markets. There are a whole range of commodities that Thailand can produce for itself," he said.

Development and growth also should focus on sustainable long-term strategies, rather than immediate gains.
"Thailand used to be heavily forested, now it is less so. This is the bad kind of development," Prof Mundell said.

"Take selling tin. Yes, you count this as part of gross domestic product. But it is a depletion of basic- resources. You are selling off something from future generations. "

A well-known "friend of China," Prof. Mundell is an honorary professor at dozens of universities in China and head of several research institutes.
He said Thailand needed to consider its strategy vis-a.-vis Asia's "800-pound gorilla," and seek ways to capitalise on China's rapid economic growth. "I wouldn't necessarily consider [China] a threat," Prof. Mundell said.
"I would think that Thailand could find goods that are complementary, and benefit from the strong growth of the neighbour next door. But again, it depends on finding the right niche."

For details on the Bridges programme and its events, see