Indiscriminate Modernization May Harm Development
Every so often, Thailand has been mocked for having achieved rapid modernization without concomitant development. But the rush to modernize by adopting everything new that comes along continues although its development values are questionable or, in some cases, outright harmful. Take the rush to throw the capital market wide open with the concurrent establishment of the Bangkok International Banking Facilities almost two decades ago.
Large amounts of funds came in as the Thai economy looked sounder than most of the other developing countries. The largest share of the funds went to speculative activities rather than to productive investment, especially for producing goods and services that would earn foreign exchange needed to repay the loans. Many Thais got rich so quickly from playing what was tantamount to a nationwide pyramid scheme with borrowed funds. When loans came due and foreigners who brought in the money started to take their money out of the country, Thailand ran out of foreign exchange. The economic crisis of 1997 ensued.
Currently, many Thais are trying their best to modernize the financial market by promoting trade in derivatives which are the latest financial innovation cooked up by financial wizards in more advanced economies. Considering the harms that derivatives have done to the world economy in general and to financial institutions in particular during the present economic crisis, it should be apparent that the costs of this innovation outweigh its values. For this reason, the derivative market in Thailand should be scrapped rather than promoted.
Another financial innovation that has been talked about often recently (although it emerged over five decades ago) relates to sovereign wealth funds. Many Thais learned about the existence of such funds for the first time when a former prime minister sold his telecommunications company in 2006 to Temasek Holdings, a Singaporean wealth fund. Attention was further kindled by debates about the apparent illegality of the sale and the attempts by the seller to avoid taxes. News about the existence of huge sovereign wealth funds became increasingly prominent when large Wall Street financial institutions in dire straights due partly to bad investment in derivatives approached such funds for rescue. In addition, some governments have raised questions whether some of these funds have made investment with political rather than financial aims.
With Thailand’s international reserves increasing to well over US$100 billion, some Thais have suggested that Thailand also set up a wealth fund to manage at least part of the national reserves held by the Bank of Thailand (BoT). They argue that such a fund would earn a higher rate of return than that received under the traditional management of the central bank. Well intended as such a suggestion may be, Thailand should not do so for two main reasons. First, there is no guarantee that such a fund will earn a higher rate of return than that achieved by the BoT, whose investment is virtually risk-free. On the contrary, such a fund could incur large losses similar to those suffered recently by some wealth funds. Although not viewed strictly as a wealth fund, the Thai state pension fund which had hired a so-called professional manager in the hope that he could manage it better suffered huge losses recently. The event led to his resignation. Second, setting up such a fund will open the doors for political interference, with politicians appointing their cronies to sit on its board and staff to enjoy fat fees and salaries. Worse, the cronies could make decisions to invest state money in enterprises belonging to their friends, creating the risk for huge losses. Thailand has had experiences of this sort with state enterprises before, including in the financial sector. Setting up a wealth fund, therefore, could be harmful although it may be viewed as a step in the modernization of the country’s international reserve management.
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Written by Dr. Sawai Boonma.
First published in Bangkok Post, September 16, 2009
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