Thailand 'could grow with capital controls'

The Nation, February 13, 2008

Nobel laureate points to stability of fixed exchange rate regime and emphasises the success of China Published on November 12, 2007

A medium-sized and open economy such as Thailand would do better by fixing its currency to a pool of international currencies rather than subjecting itself to a floating regime, a leading academic said yesterday.

"In my view, the International Monetary Fund has gone down the wrong road, with [excessive] influence by the United States calling the shots," said Professor Robert Mundell, the 1999 Nobel Laureate for Economics.

Mundell rekindled the debate on exchange policy with his second visit to Thailand under the "Bridges: Dialogues Towards a Culture of Peace" series.

He will be a keynote speaker at a seminar today called "The Sufficiency Economy and Globalisation" organised by Siam University as part of its celebration of His Majesty the King's 80th birthday.

Like Professor Joseph Stiglitz, the 2001 Nobel Laureate for Economics who was in Bangkok two weeks ago, Mundell stresses the importance of economic stability and certainty. Stiglitz did not oppose capital controls if they helped to prevent excessive flows of currencies, which can wreck havoc on an economy.

Mundell, who is often called the father of the euro, noted major changes since his last visit to Thailand a few years ago. He said Asia had recovered from the 1997 economic crisis, while the growth of China had made a major impact on Asia and the rest of the world.

The euro is solidly entrenched and now regarded as the world's No 2 currency. The world economy has done well, spurred on by strong growth rates in four major economies. But the surge in oil prices has further impacted the US trade balance and therefore its exchange value, he said.

Mundell saw the ongoing US sub-prime mortgage problem as a blip and not a crisis. "I am not that pessimistic. The US economy will grow by 2 per cent or more next year. It's not that bad."

He said it would take a global crisis before there was a better realignment of global exchange policy away from the US dollar. The best combination would be a dollar-euro partnership. In Asia, if Japan and China can come to a consensus on an Asian monetary regime, then the baht could work with other Asean currencies as a subregional currency bloc to the yen-yuan regime.

Mundell cited examples of many fixed exchange regimes with clear-cut mechanisms helping economies to thrive if speculation can be avoided and stability reassured. These included Austria and the Netherlands from the 1970s to the 1990s and, of course, Hong Kong.

The economist, who now teaches at Columbia University in New York, said economies such as China have benefited enormously from the fixed exchange regime and stable price levels.

Mundell said these countries now saw the need for international monetary reform. "They don't like the situation of bilateralism [yuan and US dollar] and the bashing from the US … you have to manage interdependence, trade balance and exchange regime."

Smaller countries such as Thailand should use their vote in the International Monetary Fund to push for changes.