Nobel prize laureate urges system reform

Bangkok Post, November 14, 2007

IMF made mistake dismissing US dollar. Thailand's foreign exchange system should change to help reduce volatility in the baht, said Nobel economics laureate Robert Mundell.

Prof. Mundell said the flexible exchange rate system that the world adopted six decades ago had proved wrong, and that its advocates had three misperceptions.

One was that a country adopting flexible rates would no longer need high foreign reserves.

Yet foreign reserves have in fact risen sharply in recent decades to $5 trillion today.

Second was that countries operating under flexible rates would need no exchange controls. Yet many countries today impose some form of control.

Third was that a flexible system would allow no imbalances the financial system.

"But there are imbalances in the world today like we never had before, between the US, Japan and China," he said yesterday in a speech titled
"Remaking the international exchange rate system" at the University of the Thai Chamber of Commerce.

Prof. Mundell, who earned the Nobel prize in 1999 for his Work regarding exchange rate regimes and "optimum currency areas", said world currency would improve market efficiency, but would be difficult to adopt due to the need for all countries to comply with set conditions.

He said for Thailand, adoption of a basket approach where the baht was tied to various major currencies would benefit the country.

"The country should not return to an explicit fixed exchange rate as in the period before 1997 economic crisis as it would lose control over monetary policy," Prof Mundell said.

"When the dollar goes into cycle, a country that is fixed to the dollar would have a little bit of difficulty. The dollar, euro, yen, plus, the Chinese renminbi, given that it is expected to appreciate in the future, could probably be in the basket. You could add a little bit of UK pounds. Asian countries should find a new global anchor for their currencies."

Prof. Mundell said the dollar was expected to remain the international standard for some time to come.

"It's impossible to have a dollar crisis. There will still be the dollar standard. And 70% of the world's settlement is in the form of the dollars," he said.

"I read the newspaper this morning. Thailand has a problem with the dollar. Colombia and Korea have a problem with the dollar. It [flexible exchange rate] does not function well. You can reform it."

Prof. Mundell said he had an optimistic view on the US economy that it would not slide into a recession, but would post slower growth this year.

He said the International Monetary Fund erred in announcing that the greenback was overvalued as it causes market jitters, which further dampened the dollar.

"The IMF was completely irresponsible in saying the dollar was overvalued. This has contributed to the crisis we have," he said.

Prof. Mundell said the Bank of Thailand was right in intervening the foreign exchange market to not let the baht appreciate too rapidly.

He was less supportive of the central bank's move last December to impose a 30% reserve requirement on foreign inflows.

While capital controls was an option to help stablilise flows, Prof. Mundell said he personally disliked controls as "it reflected a symptom of a bad system."