Amid the appreciating baht, Thailand should seize the chance to make economic structural adjustments to depend more on domestic investment, particularly in technology, for higher production competitiveness rather than on exports, a seminar heard yesterday.
“A major obstacle to Thailand’s economic development is a very high reliance on exports,” Chalongphob Sussangkarn, former finance minister and a distinguished scholar at the Thailand Development Research Institute (TDRI), told the seminar on “The Baht and Long-Term Economic Structure”.
Since the 1997 financial crisis, Thailand has increasingly depended on exports, which made up 75 per cent of gross domestic product in 2011 compared with only 45 per cent in the mid-1990s.
Instead of over-reliance on manufacturing for exports, Thailand should shift to importing technology, whose costs now are much lower because of the strong baht, and that might help the country break through the middle-income trap, said Somchai Jitsuchon, a research director for inclusive development at the TDRI.
Ammar Siamwalla, a distinguished scholar at the institute, proposed wage increases as the government’s long-term policy target. It should play a role in raising wages and allowing the exchange and inflation rates to adjust themselves, and that could prompt a more rapid change in demand for technology, which would help upgrade manufacturing.
For long-term economic expansion, Thailand needs to move from an importer of technology to a developer of technology, said Vimut Vanitcharearnthum, an associate professor at Chulalongkorn University. This would require human-resources development, besides the short-term solutions for the exchange rate.
If the exchange rate reflects Thailand’s economic fundamentals, there should not be much concern over appreciation or depreciation of the baht, said Somprawin Manprasert, an assistant professor of economics at Chulalongkorn.
If markets reflect the fundamentals, “we should turn to improving the economic structure and enhance competitiveness in the quality of products and services. If we still focus on the exchange rate and exports, we may not be able to come across such short-term issues,” he said.
Pipat Luengnaruemitchai, an assistant managing director at Phatra Securities, proposed four alternatives for exchange-rate management. First, authorities could let the baht rise and manage capital outflow through the promotion of investment in other countries. Second, the central bank could intervene to curb the baht’s climb.
Third, the central bank could cut the policy rate, though there are risks of inflation and asset bubbles. Fourth, capital-control measures could be taken; however, economic efficiency could be impaired.
If authorities do not allow the baht to appreciate according to the market mechanism, inflation could accelerate, and that might affect the Bank of Thailand’s monetary policy to target inflation, he said.
With the current market volatility as a result of short-term capital movement, the central bank should employ a combination of monetary tools, instead of only the policy rate, Chalongphob said.
To manage the exchange rate, the central bank may trade foreign currencies like its counterparts in China and Japan did previously, he said, adding that reserve requirements could be used for financial institutional stability, monetary-policy targeting and macroeconomic management. If the reserve requirement is set too high, banks will be unable to lend more.
Capital controls may be used here in the same way as in other countries. Authorities in Hong Kong and Singapore used capital measures, such as the collection of higher fees and taxes from foreign investors, to rein in surging property prices, he said.
First published in The Nation Website, 12 March 2013