Mundell's ideas find few takers

The Nation (Financial Report), November 13, 2007

THAI AUTHORITIES and market-watchers are opposed to Pro. Robert Mundell's idea of Thailand adopting a fixed exchange-rate regime, saying the cost would be too high and, it would be hard to implement.

The 1999 Nobel laureate in economics suggested last weekend that Thailand switch from the manage-float system to a fixed-rate regime like the currency board or US-dollar basket system" to help stabilise the baht. He cited the success of some countries, such as Austria, the Netherlands for some period, and China.

However, the Bank of Thailand (BOT) is opposed to reverting to a fixed exchange regime which bought the Kingdom to grief during the economic crisis, and said it clearly preferred a floating rate regime and inflation-targeting.

Amara Sriphayak, senior director of the BOT's Monetary Policy Group, yesterday said a fixed-exchange rate would need tremendous and constant intervention, to maintain the, baht at a certain level and that no one knew what an appropriate Level was.

As a result the central bank would have to absorb excess liquidity in the system, bringing about increasing costs for the country, because if the liquidity were not absorbed, inflation could rise.

"It is impossible to fix the currency at any particular rate, because we must spend huge resources to stabilise the baht,? she said.

The managed-float system allows the BOT to slow down the rapid appreciation of the baht properly, in order to help the business sector adjust to the changing environment.

Aside from the baht, the Kingdom's competitiveness should be, taken into account with inflation, the so-called real effective exchange rate, Amara said, adding that oil-price hikes u would also put pressure on inflation.

Amara said market-oriented trading of the exchange rate has currently helped check retail oil prices, due to the strong baht, because the crude oil price continued to skyrocket relentlessly.   

The baht yesterday hit a three-month record high at 33.82 to the dollar after the currency opened at 33.88/33.90.
The baht closed at 33.84/33.85

Kobsidthi Silpachai who works with market and economic research and the capital market business at Kasikorn bank, believes the baht should not be fixed to the US currency. He said the role of the dollar in the global market in fact had been declining and is being replaced by the euro.

?If the baht were fixed to the dollar, Thai' economic policy would also need to follow that of the United States, including the policy signal rate. It [the fixed currency system] is already outdated," he said.

Deputy Prime Minister Kosit Panpiemras said big countries would have to make a move first if they wanted to align their exchange rates, as suggested by Mundell. It would take time before countries could review their coordination of exchange rate polices, said Kosit.

Jean-Pierre Verbiest, the Asian Development Bank's country director for Thailand, said Mundell's other idea of a common currency in Asia was interesting but difficult to apply.
He said there were several aspects of diversity among Asian countries that would make it difficult to implement an Asian common currency.

Speaking at Siam University yesterday on "Economic Development by Fitting Globalisation in National Development Strategy", Mundell suggested an Asian common currency might help the region avoid a financial crisis like the one in 1997. However, a monetary union in Asia is not feasible, because the region is not a security zone like Europe.
He said Asia might closely coordinate exchange-rate policies under the Asia-Pacific Economic Cooperation forum. We need to rethink exchange-rate policies with honesty, reasonableness and transparency. The system of ?managed flexible exchange rates' has been a failure,? said Mundell.

He also called for a restoration of an international monetary system. He blamed the International Monetary Fund (IMF), influenced by the US, for advocating a floating exchange rate when it stepped in to bail out affected countries during    the 1997 crisis.

He said the IMF had been wrong. The IMF then believed that a flexible exchange rate would eliminate the need for foreign-exchange reserves but that now central banks in Asia were building up reserves.

The IMF also believed that a flexible exchange rate would eliminate capital controls, but capital controls are everywhere. It also wrongly diagnosed that a flexible exchange rate would eliminate global imbalances.

He said since then, the yen had appreciated against the dollar and Japan still had huge trade surpluses with the US.

Mundell suggested the world needed to be anchored to two, three or four currencies the US dollar, the euro, the yen and the yuan - as a step towards a more reasonable international monetary system.

He praised the sufficiency-economy philosophy, saying it should be applied at the international level, because it was not inconsistent with market economies. It complements a market economy, which is driven by selfishness.