Chanida Chanyapate and Jacques-chai Chomthongdi*


Soon after the September coup which ousted multi-millionaire prime minister Thaksin Shinawatra, the military-appointed government announced its intention to pursue a  national economic strategy dubbed the “sufficiency economy”. This concept was first proposed by Thailand’s King Bumiphol in a landmark speech in December 1997, just six months after the start of the catastrophic Asian financial crisis. It was an attempt to set a new economic path for Thailand, breaking from the past policies of hyper-growth and hyper-profits. 1 In the intervening years, no government has seriously taken up the idea — and certainly not Thaksin whose main economic weapon was to flood the villages with cash to increase purchasing power while consolidating his own financial interests at the top. The “coup makers” are now promoting the sufficiency economy not only as a sign of their rejection of Thaksin, but perhaps as a sincere attempt to redress the inequalities and damage of the present system. However, as recent events have shown, any attempts by the government to assert its economic independence will be severely attacked by the markets. Chanida Chanyapate and Jacques-chai Chomthongdi take up the story:

The biggest one-day drop in the 30-year history of the Stock Exchange of Thailand (SET) index made world headlines; indeed, it may have got more air time and newspaper space than the military coup of three months earlier. Analysts, though, were quick to draw a link between the two events and the common verdict was that the newly appointed government had made an unpardonable blunder. When the strong capital control measure that caused the 19.5% market crash on 19 December 2006 was lifted overnight to spare stock market investors, any remaining shreds of the government’s credibility were declared gone forever because of its “flip-flop” policies.

However, ordinary people in the streets in Thailand — the 99-plus per cent of the population that have never directly owned a share in the stock market — hardly knew what happened and cannot help but wonder what the fuss was all about.

The Bank of Thailand’s explanation of the need for capital controls seems straightforward enough for lay people: the baht had appreciated almost 15% against the US dollar throughout 2006, more steeply than the currencies of other similarly open small economies in Asia. Then, during the first week of December, capital inflows suddenly tripled the weekly average, raising serious concerns over currency speculation. Most economists agreed that some kind of intervention by the central bank was justified.

The new measure required 30% of any inward capital transfer of over USD20,000 to be held in reserve for one year, with a 10% penalty for an early exit. This was decidedly stringent.  It was supposed to weed out unruly and undesirable short-term speculative ‘investment’, and the fact that the SET index lost 15 % of its value in one day (rebounding slightly from the low of 19.5%) in one day, with foreign investors being net sellers, should be proof of where the speculative capital was largely parked. So if the measure had at least the desired effect of exposing the threat, why did the Bank of Thailand make an immediate u-turn and let those speculators in the stock market off the hook altogether?

And if, as everyone can see, the fundamentals of the listed companies could not have changed in a single day and most analysts had been saying that the long-term economic outlook remained good, why should the government worry so much  about pacifying investor “overreaction” and the “herd mentality” of global capital to the point of risking its own credibility in executing its important duty of maintaining financial stability?

The Bank of Thailand (BoT) was, according to a Bangkok Post headline, “unrepentant” about the need for capital controls, while criticisms of its audacity to go against the market were everywhere. Investment banker turned politician, Korn Chatikavanij, called it “a monumental error of judgement” (Financial Times, 21 December, 2006) and “a reflection of the drawback of having a technocratic government, one that doesn’t quite grasp the world’s realities and the realities of how market function”(Bangkok Post, 21 December, 2006). Academic Thitinan Pongsudhirak also joined in, lamenting that “The government has lost its way.” (International Herald Tribune, 21 December, 2006).

Although the commentators attacked the move, BoT Governor Tarisa Watanagase probably reflected public opinion better when she asked, “Don’t we want speculators to exit the market?”2

The Governance Issues

While the quick response by M.R. Pridiyathorn Devakula, Deputy Prime Minister and Finance Minister, to exempt stock market investors from the control measure did induce a stock market rebound the next day, there arose the question of the u-turn’s justification.

M.R. Pridiyathorn himself, who was BoT Governor before joining the coup-appointed government, repeatedly emphasized that protecting the country’s exports, which amount to almost 65% of GDP and involves a sizeable workforce, outweighed the adverse impact on the capital markets, which is mainly paper values. However, the fact that the u-turn decision was announced as the consensus of a consultation between the Ministry of Finance, the Securities and Exchange Commission, representatives of both Thai and foreign commercial banks and private securities companies, and “well-known investors”, showed the bias towards the interests of capital. No doubt all of those private banks and companies consulted were share-holders in the 500 or so listed companies in the stock market, even though they represent just 0.2% of all registered companies in the country.

The current BoT governor insisted that “the central bank cannot get involved with politics. Everything we do, we must be able to explain.” Yet the decision to let stock market investors carry on as usual has never been clearly explained, other than by the need to calm the market. But whatever the explanation, without doubt many investors made a windfall on the rapid turnaround after the controls were revoked.

Compared to the bond market, the stock market has far higher daily trading activities and values. Foreign investors account for one third of the value of daily trading and their participation is significant in swaying market trends. The fact that the SET re-bounded 11 per cent the day the controls were lifted and that two weeks after the baht has almost fully regained its strength shows that the speculators continue to play the market and that capital controls are likely to be meaningless if stock market transactions are excluded.

One thing is clear from this debacle. With the expansion of capital markets, such as the bond and futures markets, after the 1997 crisis as part of the financial sector reform prescribed by the IMF and the World Bank, fund managers have increased their influence on the Thai economy to the point where what fund managers want trumps what the BoT wants.3

The Big Picture

Despite the backlash, BoT technocrats had every right to feel jittery about what they saw as an unjustified steep appreciation of the baht currency. They got stung badly by currency speculators when the real estate bubble burst in 1997 and foreign reserves were exhausted in an attempt to prop up the baht. The BoT took the direct blame for the balance of payments crisis that ensued and also for not recognizing the signs of imminent overheating of the economy due to its policies of maintaining high interest rates and a fixed dollar-baht exchange rate.

As a result of the financial crisis, there was wide recognition among technocrats that the herd behaviour of short-term investors had increased the risks of financial market volatility and failure, particularly in emerging markets such as Thailand. Analysis after the financial crisis showed that 95% of foreign exchange transactions around the globe are short-term, leaving less than 5% representing investment in real production and trade of goods and services. Indeed, the vast majority of short-term transactions are speculative by nature as they seek high and quick returns from betting on market movements, be it the stock, bond, futures or currency markets. The scary bit is that, unlike long-term investors in the real sector, stability is not profitable to speculative investors but fluctuations are.

Following the 1997 Asian and 2001 Argentina financial crises, there were calls for a new financial architecture in the United Nations and even within the international financial institutions themselves that, as a rule, preach financial market liberalization. Capital controls that had been practiced by Chile and Malaysia were studied and taken note of. It is no coincidence that the BoT’s effort is similar to the Chilean measure that has been effective in seeing it through the turbulence of the the 1990s, when crises in Mexico, Brazil and Argentina swept the region.

However, enthusiasm for a new financial architecture soon died down as adherence to the belief that financial liberalization is the most efficient way of distributing capital for investment around the globe prevailed. As expected, it was the developed countries, where global capital originates, that won this debate. The herd behaviour of fund managers was blamed on a lack of information within emerging markets themselves. The IMF and the World Bank issued some voluntary codes of good practices on the part of developing country governments and central banks, including things like transparency in monetary and fiscal policies, banking supervision, securities regulation and the cure-all concept of corporate governance. No disclosure of information on the short-term positions of large investment firms, however, was prescribed; it was presumed that, with greater “transparency” they would know best what to do. After that, each country is left to the mercy of the market.

Thus, global finance capital reigned supreme as ever. Recent international business news headlines announced that 2006 was a record year for global debt issuance involving emerging markets by Wall Street banks. A Citigroup manager explained simply that “there is a lot of money flowing around the system seeking yield and investment”. (Bangkok Post, 4 January 2007). An independent economist based in Hong Kong, Andy Xie, echoed the words of the BoT governor almost exactly when he said that small countries have a huge problem now because “the financial markets have become so big and a currency like the baht is so small the market can put it anywhere it wants to.” (Bangkok Post, 25 December 2006)

At the same time, the US has taken the lead in pre-empting capital controls using investment provisions in their bilateral trade agreements. The investment chapter in the between Singapore and the US states that “all transfers relating to a covered [by this agreement] investment must be allowed to be made freely and without any delay into and out of the territory of the agreed parties.” The agreement that the US signed with Chile practically barred the type of capital controls that Chile had earlier used. The options for developing countries’ central banks are being reduced if they want to keep on the good side of the US markets. The BoT is very aware of this; that was why they refused outright to include short-term investment liberalization in the Thailand-US FTA negotiations. This issue became one of the thorniest, contributing to the delay and eventual suspension of negotiations.

What Next?

One measure for the promotion of exchange rate stability, the currency transaction tax (CTT or “Tobin tax”), which was proposed three decades ago by American Nobel Laureate James Tobin, received a great deal of attention following the Asian financial crisis. Civil society groups in Europe and North America have since campaigned successfully to put the CTT on the legislative agenda in France, Belgium and Canada. The Brazilian central bank is already unilaterally taxing trades on their own currency, the real.

In Thailand, civil society groups and progressive academics had also brought up the currency transaction tax proposal with the BoT policy makers but they were too concerned at that time with capital leaving the country to consider any measure other than those which would attract and not deter capital inflows. The situation is now ripe for a rethink. The CTT is a low-cost and more long-term deterrent against currency speculation. There are several models, but the simplest form is a very low tax — 1,000th of a percent — on every currency transaction. A more sophisticated model, which aims to reduce volatility, operates at a low level but then kicks in a much higher rate when a currency rises or falls outside a pre-determined band. Unlike investment in the stock market which earns the state no capital gains tax, the public can benefit from increased state income from such a currency transaction tax, which, in turn, also nets investors buying and selling baht for speculation. The more frequent the currency exchanges occur the more tax short-term investors have to pay.

When the dust settled, it was clear that the recent Bank of Thailand’s bold attempt at indicating to the world that Thailand prefers only more long-term investment capital to prevent market volatility was hammered down and defeated by the volatile market itself. Leading the pack in the financial market, it was also clear, is the voluminous global capital that is growing fast and becoming more and more unconnected to the real fundamentals in the productive sector of the economy anywhere in the world. In order to make the necessary capital controls effective, the government needs more than technocratic competence; it needs political resolve and courage. Furthermore, if the sufficiency economy concept is to bear fruit, it is obvious that Thailand must reduce its dependence on foreign investment and steer a more autonomous economic strategy. Whether this or any future government has the courage to take on the market is questionable, given the speed with which they backed down in this first encounter.


*Chanida Chanyapate is the deputy director of Focus on the Global South and Jacques-chai Chomthongdi is a research associate.



(1) Although the concept of a “sufficiency economy” has captured the imagination of many sectors in Thailand, what it means in practice is still not clear. However, the central idea that a society should grow and produce to the level of “sufficiency” rather than “excess” (which is implicit in the capitalist model of accumulation) signals a major philosophical break from the present system of neo-liberal capitalism, mass consumption and endless growth.

(2) Interestingly most of the senior positions in the Bank of Thailand are filled by women, including the governor Tarisa Watanagase. In a comment which illuminates the gender sub-text of this whole story, the Thitinan Pongsudhirak wrote in the Bangkok Post (27 December 2006) that “the problem for Ms Tarisa… was her lack of stature and prominence… Had MR Pridyathorn been at the BOT’s helm, or even his predecessor MR Chatamongkol Sonakul, their posturing and signals may have had the desired effect with actual recourse to the policy measure.” It is also worth noting that “MR” indicates a royal title, something which Ms Tarisa also lacks.

(3) Unlike 1997, the IMF maintained a very low profile throughout the capital controls crisis, appearing only once in the newspaper as a commentator alongside Moody’s, UBS and one other local securities analyst. “The measures were too strong and far-reaching, and the roll-back of the new controls was welcome” was the statement plus some encouraging words “Thailand’s underlying economic fundamentals remain solid and we believe that growth will remain resilient in the face of the financial market turbulence.” (Bangkok Post, 21 December 2006).