Thailand's Economic Crisis & the "Triangle of Impossibility" Economic Model.   Term Paper ID:27270 Click to get this paper

Essay Subject: Detailed analysis of Thailand's 1997 financial crisis. Discusses the "Triangle of Impossibility" model, which consists of a fixed currency rate, free capital movement, & an independent monetary policy.... More...

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Paper Abstract: Detailed analysis of Thailand's 1997 financial crisis. Discusses the "Triangle of Impossibility" model, which consists of a fixed currency rate, free capital movement, & an independent monetary policy. Paper Introduction: Thailand's Economic Crisis and the "Triangle of Impossibility" Economic Model Introduction The "Triangle of Impossibility" economic model theorizes that it is dangerous, if not impossible for a small economy to maintain three desirable (politically) yet contradictory national goals. When it does, the end result is a macroeconomic crisis like the one currently going on in Thailand today (Na Thalang, 1997, 14). The three paths that Thailand is pursuing, suggests Na Thalang, are a fixed foreign exchange regime, free capital movement, and an independent monetary policy. After a brief economic snapshot of Thailand, these three divergent paths will be explored to determine if: A) the theory is valid, and B) if it Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Bangkok Bank Public CompanyLtd. monetary policy entails increasing the money supply during a recession to stimulate spending, and conversely, restricting the money supply during inflation to constrain spending (McConnell & Brue, 199 , 321).Usually its an agreement between a government, and the government-supportedbanks to determine: 1) how much money at any one time can be incirculation; 2) how much that money will cost in interest; 3) how muchdirect foreign investment will be allowed; and 4) how much will it cost toimport products, goods and services. Reflections on teaching in Siam. Thailand: Meltdown in progress?Business Week International. This led real estate firms to experience illiquidity and other financial problems (Limthammahisorn, 1997).It is a truism in world economic studies that every cause has an effect,sometimes multiple effects. Although the BOT attempted to curb inflation by keeping interest rateshigh since 1994, "it could not prevent foreign capital from flooding theThai market to arbitrage for interest rate differentials" (Na Thalang,1997, 15). 24). They are the wheels" (Murray, 1997, A1). Shari, M. Reports of king's illness rock ashaky Thailand: Stocks fall as parties squabble over leadership,International Herald Tribune, A1. The three paths that Thailand ispursuing, suggests Na Thalang, are a fixed foreign exchange regime, freecapital movement, and an independent monetary policy. Thai borrowers were spoiled by the belief that the ever-lasting fixed currency regime would protect them from foreign exchange risks. Linking a nation's currency to the dollar (or yen, or British pound orSwiss Franc) is a safe idea for growth with a couple of basic cautions: A)the nation must maintain a trade surplus to keep its balance of payments inorder; and B) the nation must protect its internal consumer markets.Thailand did neither. Mongkut and his son who succeeded himwere quick to open the nation to Western technology which helped develop anindustrial base that includes textiles, cement, electronics, petroleum,refining, transportation equipment, tourism, food processing. Na Thalang andothers point out the Thai central bank failed to adequately and properlyregulate the banking and financial system, "which set the stage for thebubble economy and the rise in problem loans that would becomeunsustainable when exports or the economy are to slow down" (Na Thalang,199714). [On-line].Available: http://www.dismal.com/thoughts/ asian_crisis.stm Crampton, T. What was so was so, what not so, not so. In other words, wait until the dam breaks beforeyou try to fix it. (1997, December 8). One of those analyses arguedthat the Asian Crisis highlights the crucial role that finance plays in thecapitalist economies: "Financial markets don't just oil the wheels ofgrowth. A primer on the Southeast Asianfinancial crisis. Strategy review takes on urgency.The Nation, 34. In this case, trying to stabilize the currencyresulted in high interest rates that had the effect of making fundmobilization difficult, which in turn had the effect of turning the Thaistock exchange bearish. Limsamarnphun, N. (1997, July 7). Thailand's Economic Crisis and the "Triangle of Impossibility" Economic ModelIntroduction The "Triangle of Impossibility" economic model theorizes that it isdangerous, if not impossible for a small economy to maintain threedesirable (politically) yet contradictory national goals. In my head be many, many facts of which am being wishing to know whether true or not (Leuenowens, 1898, 113).In a way, that 1867 letter from the King of Siam sounds much like today'seconomists trying to puzzle out the macroeconomic crisis in Thailand. and IMF efforts to deal with the Asian problems. . 3534: 22(2). As Limsamarnphunpoints out: Thai society will not be able to take up the Singapore model [extreme controls of capital and interest] due to cultural reasons. Our leaders in government and bureaucracy have to think more strategically (Limsamarnphun, 1997, 11). Gary Ciminero in a thoughtful essay points out that Thailand followedthe pattern of its neighbors (Japan, Korea, China, and Malaysia) andexploited its low-wage/low-skilled labor forces, to lure foreign directinvestment (FDI) to build plants to build "screwdriver plants" (Ciminero,1997) that would assemble and ship consumer electronics products and otherlabor-intensive goods. As Ciminero points out, "In recent years. Thailand QuikFacts (1995). The Thai stock market consequently boomed again in 1993-1995. Floating exchange does let governments develop arelatively independent monetary policy; while governments with fixedexchange rate systems trade an independent monetary policy with the abilityto manage price stability. . Capital inflow also places a big constraint on the BOT to managean independent monetary policy (Limsamarnphun, 1997, 4). There are pros andcons constantly being argued concerning fixed foreign exchange and floatingcurrency regimes. These events did not occur in isolation, or inthe three-part sequence described here.) Limthammahisorn traces the eventsfrom mid-1995 to July 2, 1997 as one of "catch up and bad judgement"(Limthammahisorn, 1997). Liberalizing the financial services andcapital accounts must also be accompanied by prudent supervision of thebanking and financial system" (Limthammahisorn, 1997). With the removal of theexchange rate guarantee by the Bank of Thailand in the wake of the bahtfloat, fewer people will be willing to or have enough courage to invest"(Limsamarnphun, 1997, 21). Thus, "stock marketbearishness caused financial institutions, which had invested in thebourse, to suffer substantial losses. McConnell & Brue (199 ) define it as: . SouthEast Asia's learning difficulties (1997, August 16). (1997, July 28). . The Wall StreetJournal, A1(3). Economics principles, problemsand policies, 11th Ed. Reserves are formed by capital inflow that exceeds the current account deficit. . (1997, August). In an ironicsymmetry, linking the baht to the dollar accounted for Thailand'sastounding economic growth, and unlinking it, as it did in July of 1997 ledto the current downturn. As Limsamarnphun analyzes, the crisis is due tothe absence of a 'powerful brake' on the free-wheeling economy of the pastdecade, "without which a lot of foreign money was used for speculativepurposes, especially for real estate and stocks. Letus continue, then, examining Thailand within the model of the "Triangle ofImpossibility."Triangle Leg 1: Thailand's Fixed Foreign Exchange Regime In the early 199 s, the Thai government and its banking systemsdecided to "peg the baht" to the United States dollar, joining the otherworld currencies linked to the dollar (Shari & Corben, 1997). (BOP) account deficit of dangerous proportions:8.3% in 1995, 7.9% last year and estimated at 7.5% this year even beforethe devaluation" (Ciminero, 1997). Now I am man and world has changed too lot. (Once again, this is just a "hindsight model" used foranalysis of the past only. altering the economy's money supply for the purpose of stabilizing aggregate output, employment and the price level. TheEconomist, 344: 12. The FederalReserve System is a prime example of a controlled or regulated monetarypolicy. Independent Economic Advisory Alert. Limthammahisorn notes: The result has been a building boom. Murray, A. Ciminero, and other analysts (Crampton, 1997, A2)point out that as long as the baht was pegged to the dollar, Thailand wasviewed as even more attractive for FDI and foreign portfolio investment inits securities market (Limsamarnphun, 1997, 4). References Ciminero, G.L. They forgot that eventually the external debts must be repaid by net export earnings (Na Thalang, 1997, 16).Triangle Leg 2: Thailand's Free Capital Movement A 1997 White Paper published by the Bangkok Bank and authored byWatsaya Limthammahisorn traces the free capital movement as beginning in1991 when the Bank of Thailand began a series of measures to free upmovement of capital accounts to attract more foreign funds into the countryand to bolster the capital market: "It hoped that it would still have anindependent monetary policy. Our government is the referee, but the problem is that governments have yet to learn to master this role. Confidence calls for fullacceptance of IMF plan. Leuenowens, A. . That usually triggered a mental connectionto the musical comedy, "The King and I" which is an unfortunatehomogenization of a thoughtful book by British teacher Anna Leuenowens, whowas hired in the 186 s by Siam's forceful and Western-leaning king,Mongkut, to teach his royal children about the Western world. & Brue, S.L. Limthammahisorn, W. After a briefeconomic snapshot of Thailand, these three divergent paths will be exploredto determine if: A) the theory is valid, and B) if it serves as a rationalbasis for understanding the economic crisis in Thailand.Economic Snapshot of Thailand Until this year, when most people heard the name Thailand, they had tobe reminded it was once Siam. Financial crisis in Japan, SouthKorea and Thailand: A comparison White Paper. Na Thalang concurs in this analysis: The currency peg system opened the floodgates to foreign capital. Limsamarnphun, N. (1997, July 31). An "independent" monetary policy such as Thailand has had sincethe early 199 s is one in which controls are placed on the economic growthin an "ad hoc" situation. (1997, September 2). The factthat they were economically sound in theory but not in practice led theThai merchants, bankers, and government to expect unabated continuedgrowth. . (1898). London:Cavalier Publishing. . However in 1996, the Thai economy slowed down markedly in the wake of the implementation of a restrictive policy to contain inflation since mid- 1995. . Confidence in the Thai macro- economy was lost as a result. . The Nation, 11. Capitaloutflow put pressure on the baht because there was more demand for the USdollar than the Thai currency" (Limthammahisorn, 1997). Given the large influx ofinvestment, "it is no surprise that the country typically runs a largenegative balance of payments (BOP) on net investment income" (Ciminero,1997). Limthammahisorn's lengthy analysis suggests that theindependent monetary theory might have been workable had it not been for afated 1993 decision when the government decided to ease restrictions againto get more capital in and allowed for the establishment of OffshoreInternational Banking Facilities (OIBFs) in a desire to become world-classplayers: This led to a large inflow of cheap funds from overseas into the country. These are all inter-related and must be kept in balance, as theFederal Reserve System attempts to do in the United States. In particular, finance and securities companies were muchaffected as their exposure to the real estate sector was substantial, withcredits extended to real estate" (Limthammahisorn, 1997).The Triangle Collapses The first two legs of "Triangle of Impossibility" economic model thetriangle as a "fixed foreign exchange" and "free capital movement" were, inand of themselves, adequate engines to fuel the Thailand economy. [On-line]. Summers was also quoted in Na Thalang's analysis following a speechSummers gave at a recent Congressional Economic Leadership Instituteaddress, supported the Mundell-Fleming model: "With hindsight, the lessonof Thailand is older: that relatively open capital markets, independentmonetary policy, a fixed exchange rate and a current account deficit ofeight per cent of GDP do not mix" (Na Thalang, 1997, 14).The Validity of the "Triangle of Impossibility" Model As a model for analyzing what happened, rather than as a predictivemodel, there is a relatively strong argument for the Mundell-Fleming model. Otherwise, they will be obsessed by the capital inflow not inflation. New York: McGraw-Hill Publishing Co. With the danger of reserves depletion, the BOT was finally forced to float the baht on July 2, amounting to a de facto devaluation. Na Thalang, J. (1997, Nov. & Corben, R. The Nation, 14(2). Available: http://www.bbl.co.th/research/Aug97topic7.htm McConnell, C.R. Instead of using the foreign savings to finance export-oriented industries, the borrowers recklessly spent the money to speculate in the property and stock markets. Had Thailand's banking systems not stubbornly stuck to the currencypeg system, he conjectures that the BOT might not have had to defend thebaht fiercely by selling out the dollar from its foreign exchange reserves: Thailand's foreign exchange reserves are borrowed because Thailand is a capital deficit country. That quote is attributedto Deputy Treasury Secretary Lawrence Summers, a leading intellect behindU.S. Conflicting policies blamed forcrisis. Thai crisis seen slowing Asian growth: IMF chief speaks. This, in turn, had the effect of many real estate concerns becominginsolvent which produced a negative chain reaction on lending financialinstitutions by boosting their non-performing loans. National Geographic atlas of the worldRevised Sixth Edition. It appears that this model will be used, however, as smaller countriescontinue to develop along traditional capitalist lines. (1997, August21), Reuters Business Report, 7. Capital began to flow the opposite way: out of the country. In his analysis, the financial sector, plagued bythe bust of the commercial property market, "was also developing aninfection. Just what is a monetary policy? stimulated imports beyond what export terms of trade could sustain. Resentment against leaders of the most recent coup, in 1991, sparked demonstrations by a pro-democracy movement. Investments from Japan, Taiwan, and South Korea powered an economic surge during the late 198 s (Thailand's QuikFacts, 1995, 177). At the same time, exports expanded at a high rate. . Thus, a major financial crisisdeveloped. That's why small countries in Europe cannot decide their own exchange regime (Na Thalang, 1997, 16). ProfessorAlfred Steinherr, chief economist and director general of the EuropeanInvestment Bank, argues that the magical triangle is not applicable to allsmall nations: Small and open economies with perfect capital mobility should not have independent monetary policy. 1997, 12). (1997, November 7). Some things 'nearly so.' Other things 'nearly not.' Now find confusion in conclusion long ago concluded. (199 ). This,remember, was at a time when Siam's neighbors (Japan, China, Korea) hadshut the doors to the outside world. But if political leaders want schools to be betterat inculcating new ways of thinking, they may have to rethink theirattachment to those much-vaunted Asian values" (South-East Asia's learning.. And then the triangle developed its third leg, an independentmonetary policy. Because ofthis openness, Siam was the only nation in Southeast Asia to escapecolonial rule: Thailand has not escaped military coupsCmore than a dozen since 1932, when a revolution transformed the government from an absolute to a constitutional monarchy. We are more like jazz players needing freedom and free style to generate our full potential. What conclusions can be drawn? thetrade surplus has evaporated, as stimulated domestic demand has beenpulling in more merchandise imports than the country exports. Now the country needs a bail-out from the International Monetary Fund" (Limthammahisorn, 1997.The Wall Street Journal on Dec. Given internal migration toward population centers where jobs are plentiful, the pressure to build infrastructure added to other, bank-financed speculative building programs that boosted the domestic economy. This hasrendered a current. When it does,the end result is a macroeconomic crisis like the one currently going on inThailand today (Na Thalang, 1997, 14). However, not all economists agree, which is no big surprise. The financial crisis, coupled with the foreign exchange crises,led to a sudden loss of confidence in Thailand's macro-economic conditions. Although turned into a song in the musical, one of King Mongkut's longletters to Ms. Leuenowens, who actually spent more time teaching the kingthan the children, reflects some of the confusion of a thinking person: When I was a boy, world better spot. . That echoes King Mongkut's nineteenth century lament quoted above.And in a 1997 article, showing a neat bit of symmetry, education and changeare again mentioned as a primary cause: "Now there is a feeling thatcontinued success will rely more on qualities such as creativity andindividual initiative. The influx of currency speculators usually has an affect on anation's currency supply since these speculators invest in short-and-longterm changes in the currency markets and make the money supply increase;"as a result, money supply grew by more than 2 per cent a year, anindication that an anti-inflationary policy was doomed to fail"(Limthammahisorn, 1997).Triangle Leg 3: Thailand's Independent Monetary Policy As the Bangkok Bank White Paper points out, what basically hashappened is that the government, seeking political advantage, created anindependent monetary policy that was based on excessive official spending;one in which the government encouraged the country's banks to lendgenerously for private real estate and other spending, following patternsof Japan, Korea, and Malaysia. 8, 1997, featured several in-deptharticles of a "who-won, who-lost" variety. Accordingly, there emerged a runaway trade deficit that grows faster the longer the currency is pegged to a rapidly rising $US (Limthammahisorn, 1997). Asia's financial foibles make Americanway look like a winner: Summers as General MacArthur. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.