Credit crunch, did someone use the expression credit crunch?
Tuesday, December 25, 2007
Merry Xmas and A Happy New Year
Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.
Credit crunch, did someone use the expression credit crunch?
Credit crunch, did someone use the expression credit crunch?
Monday, December 24, 2007
A return to democracy? Thailand holds its first post-2006 coup election
Guest post by Manuel Alvarez-Rivera, Puerto Rico, Election Resources on the Internet
Voters in the Kingdom of Thailand went to the polls on Sunday, December 23, 2007 in the first parliamentary election held since the September 2006 military coup that overthrew the elected but increasingly authoritarian and allegedly corrupt government of Prime Minister Thaksin Shinawatra.
Thailand's legislature, the National Assembly is composed of the Senate and the House of Representatives; the latter has 480 members, of which 400 are elected in 157 two- or three-seat constituencies, while the remaining eighty seats are filled in eight electoral regions by party-list proportional representation.
Since a 1932 revolution brought an end to eight hundred years of absolute monarchy, Thailand has suffered numerous coups, and the country has alternated between intervals of at least nominal democratic governance and periods of military rule.
The democratic interludes were often characterized by fractious multi-party politics, weak coalition governments, and the participation of high-profile military figures in prominent leadership roles. However, in the 2001 general election the new Thai Rak Thai (TRT; Thais Love Thais) party of Thaksin Shinawatra, a billionaire telecommunications tycoon, emerged as the dominant political force, displacing the traditional parties on a populist platform of development money for rural villages, debt moratoriums for farmers and low-cost health care. Despite accusations of nepotism and cronyism, Thaksin remained highly popular among the rural poor, particularly in the northern and northeastern parts of the country. As a result, TRT won a large parliamentary majority in the 2005 general election, and Thaksin was able to form the first single-party government in the history of Thailand.
However, Thaksin's triumph proved to be short-lived. His government became even more intolerant of opposition criticism, and a snap legislative election called the following year in the wake of mass protests demanding Thaksin's resignation was boycotted by the opposition parties. The vote was subsequently invalidated by Thailand's Constitutional Court, and a fresh election was slated for October 2006, but the military staged a coup prior to the election and overthrew Thaksin, who was at the time in New York City. Corruption was cited as the reason for the coup, although widespread discontent about Thaksin's heavy-handed suppression of an armed insurgency in Thailand's predominantly Muslim south (the rest of the country is overwhelmingly Buddhist) appears to have been a major contributing factor as well.
The election is being held under a new constitution approved by voters last August - the country's sixteenth since 1932; however, martial law remains in force in 31 of Thailand's 76 provinces. TRT was dissolved after the 2006 coup and party leader Thaksin has remained in exile (for good measure, he was banned from taking part in politics for five years, along with more than a hundred prominent party figures), but a pro-Thaksin party - the People's Power Party (PPP) - has emerged as a major contender in the election. In fact, PPP leader Samak Sundaravej - an old hand in Thai politics - has made no attempt to conceal that 1) he's Thaksin's surrogate; and 2) that he wants to bring Thaksin back. In fact, Thaksin - who faces corruption charges in Thailand - has indicated he will return early next year. Meanwhile, the Democratic Party (PP), the main opposition party during Thaksin's tenure in power, is likely to emerge as the PPP's main challenger under the leadership of Western-educated, 43 year-old Abhisit Vejjajiva.
However, neither party may secure an absolute parliamentary majority, and several smaller parties may hold the balance of power, chiefly among them Chart Thai, led by former Prime Minister Banharn Silpa-Archa (another old-school politician). It's no secret that the military does not wish to see PPP in power, although they have insisted that the outcome of the election will be respected regardless of who wins. Nonetheless, it is anticipated that if no party secures an overall majority, the armed forces will exert pressure over the smaller parties to reach a coalition agreement with the Democrats.
What's less clear is what would happen if PPP wins an absolute majority. There have been rumblings about alleged PPP vote buying - in truth, an endemic problem in Thai electoral politics - and it's quite possible that the vote could be at the very least partially annulled (or PPP forcibly disbanded) on the grounds of electoral irregularities. A further military intervention cannot be ruled out, but if it takes place it may well generate far less public sympathy than the 2006 coup, particularly since the interim government put in place by the armed forces after the coup has proved to be inept, and Thailand's economic growth is now the slowest in the region. Nonetheless, the return road to democracy may turn out to be a rocky one.
Voters in the Kingdom of Thailand went to the polls on Sunday, December 23, 2007 in the first parliamentary election held since the September 2006 military coup that overthrew the elected but increasingly authoritarian and allegedly corrupt government of Prime Minister Thaksin Shinawatra.
Thailand's legislature, the National Assembly is composed of the Senate and the House of Representatives; the latter has 480 members, of which 400 are elected in 157 two- or three-seat constituencies, while the remaining eighty seats are filled in eight electoral regions by party-list proportional representation.
Since a 1932 revolution brought an end to eight hundred years of absolute monarchy, Thailand has suffered numerous coups, and the country has alternated between intervals of at least nominal democratic governance and periods of military rule.
The democratic interludes were often characterized by fractious multi-party politics, weak coalition governments, and the participation of high-profile military figures in prominent leadership roles. However, in the 2001 general election the new Thai Rak Thai (TRT; Thais Love Thais) party of Thaksin Shinawatra, a billionaire telecommunications tycoon, emerged as the dominant political force, displacing the traditional parties on a populist platform of development money for rural villages, debt moratoriums for farmers and low-cost health care. Despite accusations of nepotism and cronyism, Thaksin remained highly popular among the rural poor, particularly in the northern and northeastern parts of the country. As a result, TRT won a large parliamentary majority in the 2005 general election, and Thaksin was able to form the first single-party government in the history of Thailand.
However, Thaksin's triumph proved to be short-lived. His government became even more intolerant of opposition criticism, and a snap legislative election called the following year in the wake of mass protests demanding Thaksin's resignation was boycotted by the opposition parties. The vote was subsequently invalidated by Thailand's Constitutional Court, and a fresh election was slated for October 2006, but the military staged a coup prior to the election and overthrew Thaksin, who was at the time in New York City. Corruption was cited as the reason for the coup, although widespread discontent about Thaksin's heavy-handed suppression of an armed insurgency in Thailand's predominantly Muslim south (the rest of the country is overwhelmingly Buddhist) appears to have been a major contributing factor as well.
The election is being held under a new constitution approved by voters last August - the country's sixteenth since 1932; however, martial law remains in force in 31 of Thailand's 76 provinces. TRT was dissolved after the 2006 coup and party leader Thaksin has remained in exile (for good measure, he was banned from taking part in politics for five years, along with more than a hundred prominent party figures), but a pro-Thaksin party - the People's Power Party (PPP) - has emerged as a major contender in the election. In fact, PPP leader Samak Sundaravej - an old hand in Thai politics - has made no attempt to conceal that 1) he's Thaksin's surrogate; and 2) that he wants to bring Thaksin back. In fact, Thaksin - who faces corruption charges in Thailand - has indicated he will return early next year. Meanwhile, the Democratic Party (PP), the main opposition party during Thaksin's tenure in power, is likely to emerge as the PPP's main challenger under the leadership of Western-educated, 43 year-old Abhisit Vejjajiva.
However, neither party may secure an absolute parliamentary majority, and several smaller parties may hold the balance of power, chiefly among them Chart Thai, led by former Prime Minister Banharn Silpa-Archa (another old-school politician). It's no secret that the military does not wish to see PPP in power, although they have insisted that the outcome of the election will be respected regardless of who wins. Nonetheless, it is anticipated that if no party secures an overall majority, the armed forces will exert pressure over the smaller parties to reach a coalition agreement with the Democrats.
What's less clear is what would happen if PPP wins an absolute majority. There have been rumblings about alleged PPP vote buying - in truth, an endemic problem in Thai electoral politics - and it's quite possible that the vote could be at the very least partially annulled (or PPP forcibly disbanded) on the grounds of electoral irregularities. A further military intervention cannot be ruled out, but if it takes place it may well generate far less public sympathy than the 2006 coup, particularly since the interim government put in place by the armed forces after the coup has proved to be inept, and Thailand's economic growth is now the slowest in the region. Nonetheless, the return road to democracy may turn out to be a rocky one.
Thailand's Economy - At a Crossroads?
Guest post by Claus Vistesen: Copenhagen
As we never tire of pointing out here at this space the analysis and proper understanding of the global economy and more specifically her markets demand a vigorous interaction and -play between the overall broad conceptual analysis and the more nitty-gritty country analysis. Today, and as most people, in the Western World at least, rev up for some of that most scarce and precious quality time with friends and family I feel inclined to wander off over to Thailand for one last spout of economic analysis before closing down for the holidays. Before I start I think it would be only fair to point out that I am not exactly an expert when it comes to Thailand's economy but rather I shall progress in the spirit of traditional writings here at GEM where authors attempt to aspire to the ideal and tradition of the polymath rather than towards the profile of the 'genius savant' in one specialist area.
Yet, and despite my denial of expertise in the area of Thai economics I think it is safe to say that Thailand commands a rather special place in the whole global economic framework for two main reasons. The first is strictly endogeous to political life in Thailand, where the frequency with which governments are toppled by the military only to be subsequently re-inserted (with a quick change of label), is rather high when compared with most other members of the emerging economies leading group.
The lastest example of this tendency was handed to us a little over a year ago when General Sonthi Boonyaratglin ousted prime minister Thaksin Shinawatra and declared that a military junta would stay in power for a year. Such abrupt changes of government (and of course the way of changing them) have a tendency not to go down too well with foreign investors and naturally have tended to affect the ability of Thailand to attract foreign capital inflows, as well as to act as a source of outflows. Of course, many would, at this point in time, simply exclaim that since these things are now a natural part of the political cycle in Thailand they are already well priced-in to current market premiums. I will leave this issue here and simply note that whatever importance we ascribe to the political situation in Thailand, an interventionist military is certainly part of the picture and needs to be taken into account.
The second reason for Thailand's rather special position in the international economic environment is to be found by going back to 1997 and the Asian currency and financial crisis. As I am sure many of our readers remember Thailand acted was one of the principle centres of attention during the boom phase and then one of the victims of the sudden and abrupt retrenchment of private inflows to emerging markets which occured during the Spring and Summer of 1997. This would then translate into a modern day 'once bitten twice shy' mantle and although I am unsure whether this actually applies for Thailand it serves us well always to remember that debating capital flows in the context of Thailand always will tend to have that historical glow around it.
Where now for Thailand?
In order to deliver a reasonable crack at answering this after all very general question I need to invoke the headline of this note. In my opinion and as I will try to argue below Thailand is now at a crossroads. On the one hand Thailand finds itself right smack in the middle of the sweet spot relative to the ongoing demographic transition known as the demographic dividend. As we know this does not by any means constitute free lunches - of which, of course, there are very few, if any - but rather a golden opportunity for Thailand to move now in order to make sure that it does not go down the road of other rapidly ageing emerging economies of which China is perhaps the most important and best known example. However, if Thailand is to get rich before she actually gets old the window is closing fast.
By inspecting the graphs over at the Thailand Economy Watch we can readily see that Thailand with respect to its demographic position is now borderline between two extremes. The fertility rate has been stable at about 1.6 for the past 8 years and coupled with a rapid increase in life expectancy (which of course is a good thing) Thailand is now set to age rather rapidly. However, the effects of the ageing process are likely to be subdued in the interim as Thailand will enjoy something like 15 years of demographic headwind before reaching that ever so important 40 year median age threshold. Now, and although I realize that I have not yet fielded one single economic chart let me be very clear. A great deal of Thailand's economic future rests upon whether the economic growth which is now set to come and continue all things equal will bring Thailand a further notch into the demographic transition bringing TFR below the 1.5 mark. I really hope not and if there ever was an important objective for policy makers in Thailand it would be to make sure that what comes next is accompanied by an effort to keep the fertility rate from falling further, and preferrably, to find ways to nudge it back up to a slightly higher level. This would then bring me back to the present, which is what indeed is set to happen next in the context of the global and thus the Thailand economy?
Let us begin with a kind of overview of the Thailand economy such as it. As we can see from the two graphs fielded below, Thailand's prosperity has done been on the rise over the past 15-20 years, - a much more modest rise following 1998, but a rise nonetheless - and there is really no reason to believe that this will not continue to be the case in the immediate future. The Asian Crisis as it occured in the 1997-1998 is certainly not absent from the charts and you could even, if you are into such matters, debate whether in fact Thailand suffered an irreversible blow to its growth trend back in 1997? For more on this topic go here.
This could indicate then that if consumer spending and confidence continue to enjoy a rebound, and if the political situation has reached some sort of resolution then the inflation gauge might start to tick upwards as we venture into 2008, especially in the light of the general global tendencies in base commodity and food prices. Finally, we have as I have already hinted above the trade surplus which since Q3 2005 has averaged around 15% of GDP offers Thailand a firm buffer for solid headline growth.
This then serves us to move further into the argument in this note and as such to the more specific point on capital flows which are central for the understanding of the current changes in the global economy and thus also Thailand.
Capital Flows and Thailand - To Receive or to Send?
Starting out with capital flows in the global economy I recently narrated the current economic climate as fairing in uncharted waters given the delicate situation in which we are now finding ourselves. This uncharted waters theme should not however be misinterpreted as lack of oversight which I feel we at GEM have plenty of. Rather, we are simply noting that what happens next will be an important test for many of our theses and arguments. In this way and homing in on what is especially important in the context of Thailand we have the mounting signs and evidence that the structures and chains of Bretton Woods II are slowly but surely being worn thin. These changes however do not seem supportive of those who have spent their time arguing for a process of de-coupling in the traditional sense whereby the US hands over the baton to a train being run by a joint tag-team consisting of Europe and Japan.
Moreso, what we are seeing is a historic process of re-coupling by which the engine locomotive of the global economy is changing from being driven exclusively by the US towards a more diverse crowd of leaders. How far this process will go on is yet to be seen. I for one don't envision for example that the US will revert entirely to growth path where a substantial external deficit is not part of the overall picture. But the main point is that the relative weight will change and perhaps more importantly that the changes we are now seeing are happening at a pace which is quite unprecented. Of course, as Brad Setser is set on hammering home a lot lately, the recent retreat of financing from the external US balance is largely due to an almost effective stoppage of private inflows which of course has the nasty side effect that the US is now ever more so dependant on official foreign government inflows in order to keep the boat floating. As for the general situation, the following wonderful quote from Setser quite eloquently sums up how we are now situated in somewhat of an interim position
Private investors want to finance deficits in countries that don’t want to run deficits. The countries now accumulating reserves the fastest have the least need for reserves. The country with the largest deficit is struggling to attract enough private inflows to match the increased desire of its private sector to buy foreign assets – let alone both the deficit and those outflows. And the country with the strongest traditional aversion to state-ownership is now the country most-reliant on government inflows.
As I mentioned above Brad Setser seems to be focusing quite a lot on the apparent disconnect between private and government/official flows with respect to the financing of the US CA deficit. This rather specific topic should be the center of another note and here we should rather move on to the obvious question. Given that changes are taking place of almost tectonic proportions in the structure of global capital flows what will this mean for Thailand? To deliver a reasonable attempt to answer that question I will need to field some grahps of which some, I am afraid, will be plotting some rather technical stuff. But I will explain as I go along. Let us first inspect the basic graphs plotting the CA balance and financial account as it has evolved on a quarterly basis since 1995. Note that these two are inversely correlated as the former measures the headline balance between flows of funds, goods, and services whereas the latter plots the net change in foreign ownership of domestic financial assets. This basically means that if the financial account is in surplus foreigners are buying domestic financial assets more quickly than domestic agents are buying foreign assets and vice versa of course if we are talking about 'selling.'
As we never tire of pointing out here at this space the analysis and proper understanding of the global economy and more specifically her markets demand a vigorous interaction and -play between the overall broad conceptual analysis and the more nitty-gritty country analysis. Today, and as most people, in the Western World at least, rev up for some of that most scarce and precious quality time with friends and family I feel inclined to wander off over to Thailand for one last spout of economic analysis before closing down for the holidays. Before I start I think it would be only fair to point out that I am not exactly an expert when it comes to Thailand's economy but rather I shall progress in the spirit of traditional writings here at GEM where authors attempt to aspire to the ideal and tradition of the polymath rather than towards the profile of the 'genius savant' in one specialist area.
Yet, and despite my denial of expertise in the area of Thai economics I think it is safe to say that Thailand commands a rather special place in the whole global economic framework for two main reasons. The first is strictly endogeous to political life in Thailand, where the frequency with which governments are toppled by the military only to be subsequently re-inserted (with a quick change of label), is rather high when compared with most other members of the emerging economies leading group.
The lastest example of this tendency was handed to us a little over a year ago when General Sonthi Boonyaratglin ousted prime minister Thaksin Shinawatra and declared that a military junta would stay in power for a year. Such abrupt changes of government (and of course the way of changing them) have a tendency not to go down too well with foreign investors and naturally have tended to affect the ability of Thailand to attract foreign capital inflows, as well as to act as a source of outflows. Of course, many would, at this point in time, simply exclaim that since these things are now a natural part of the political cycle in Thailand they are already well priced-in to current market premiums. I will leave this issue here and simply note that whatever importance we ascribe to the political situation in Thailand, an interventionist military is certainly part of the picture and needs to be taken into account.
The second reason for Thailand's rather special position in the international economic environment is to be found by going back to 1997 and the Asian currency and financial crisis. As I am sure many of our readers remember Thailand acted was one of the principle centres of attention during the boom phase and then one of the victims of the sudden and abrupt retrenchment of private inflows to emerging markets which occured during the Spring and Summer of 1997. This would then translate into a modern day 'once bitten twice shy' mantle and although I am unsure whether this actually applies for Thailand it serves us well always to remember that debating capital flows in the context of Thailand always will tend to have that historical glow around it.
Where now for Thailand?
In order to deliver a reasonable crack at answering this after all very general question I need to invoke the headline of this note. In my opinion and as I will try to argue below Thailand is now at a crossroads. On the one hand Thailand finds itself right smack in the middle of the sweet spot relative to the ongoing demographic transition known as the demographic dividend. As we know this does not by any means constitute free lunches - of which, of course, there are very few, if any - but rather a golden opportunity for Thailand to move now in order to make sure that it does not go down the road of other rapidly ageing emerging economies of which China is perhaps the most important and best known example. However, if Thailand is to get rich before she actually gets old the window is closing fast.
By inspecting the graphs over at the Thailand Economy Watch we can readily see that Thailand with respect to its demographic position is now borderline between two extremes. The fertility rate has been stable at about 1.6 for the past 8 years and coupled with a rapid increase in life expectancy (which of course is a good thing) Thailand is now set to age rather rapidly. However, the effects of the ageing process are likely to be subdued in the interim as Thailand will enjoy something like 15 years of demographic headwind before reaching that ever so important 40 year median age threshold. Now, and although I realize that I have not yet fielded one single economic chart let me be very clear. A great deal of Thailand's economic future rests upon whether the economic growth which is now set to come and continue all things equal will bring Thailand a further notch into the demographic transition bringing TFR below the 1.5 mark. I really hope not and if there ever was an important objective for policy makers in Thailand it would be to make sure that what comes next is accompanied by an effort to keep the fertility rate from falling further, and preferrably, to find ways to nudge it back up to a slightly higher level. This would then bring me back to the present, which is what indeed is set to happen next in the context of the global and thus the Thailand economy?
Let us begin with a kind of overview of the Thailand economy such as it. As we can see from the two graphs fielded below, Thailand's prosperity has done been on the rise over the past 15-20 years, - a much more modest rise following 1998, but a rise nonetheless - and there is really no reason to believe that this will not continue to be the case in the immediate future. The Asian Crisis as it occured in the 1997-1998 is certainly not absent from the charts and you could even, if you are into such matters, debate whether in fact Thailand suffered an irreversible blow to its growth trend back in 1997? For more on this topic go here.
As for the short term economic data on Thailand, the most recent central bank inflation report (PDF) provides us with ample ammunition to get a more solid grip on the immediate outlook. If we scrutinize the data a bit more closely we see that growth in Thailand seems to have moderated somewhat when it comes to the evolution of headline GDP. This slowdown which must be considered in relative terms has coincided with a subtle but important change with respect to the engine of headline GDP growth. As can readily be seen from the chart the central bank provide (reproduced below) as private consumption and fixed capital formation have waned net exports of goods and services have slowly but surely been taking over as the main engine of economic growth in Thailand.
This is of course an important trend to take into account since it does mean that Thailand is subject to the whims of global markets to a higher degree than had been the case if private consumption had been doing the heavy lifting. Clearly, at this point we should remember that the time-span in question (i.e. Q2 2006 to Q3 2007) is exactly the period where domestic political uncertainty took a hefty leap upwards. So, it is really difficult to discern a notable trend in all this. However if we look at the central bank's private consumption index we can see after a slowdown at the end of 2006 (which would be associated with the political uncertainty) things do now seem to be turning back up again, so we may well be in a recovery phase.
Another notable feature of the recent trends in the Thai economy is the rather subdued rate of inflation which has come down over the course of 2006 and now into 2007/2008 as well. This seems somewhat odd when you look at the figures on the labour market where it quickly becomes clear that Thailand is firing on all cylinders at the moment with a monthly registred unemployment rate below 2% and somthing like 35 million people in work out of 64 million inhabitants. Indeed between the summer of 2005 the summer of 2007, Thailand added the best part of a million new jobs. This is really what the demographic dividend is all about, enabling rapid employment growth without provoking inflation. The demographic dividend isn't a policy, but it does produce an environment which is more favourable to the application of good policy.
This could indicate then that if consumer spending and confidence continue to enjoy a rebound, and if the political situation has reached some sort of resolution then the inflation gauge might start to tick upwards as we venture into 2008, especially in the light of the general global tendencies in base commodity and food prices. Finally, we have as I have already hinted above the trade surplus which since Q3 2005 has averaged around 15% of GDP offers Thailand a firm buffer for solid headline growth.This then serves us to move further into the argument in this note and as such to the more specific point on capital flows which are central for the understanding of the current changes in the global economy and thus also Thailand.
Capital Flows and Thailand - To Receive or to Send?
Starting out with capital flows in the global economy I recently narrated the current economic climate as fairing in uncharted waters given the delicate situation in which we are now finding ourselves. This uncharted waters theme should not however be misinterpreted as lack of oversight which I feel we at GEM have plenty of. Rather, we are simply noting that what happens next will be an important test for many of our theses and arguments. In this way and homing in on what is especially important in the context of Thailand we have the mounting signs and evidence that the structures and chains of Bretton Woods II are slowly but surely being worn thin. These changes however do not seem supportive of those who have spent their time arguing for a process of de-coupling in the traditional sense whereby the US hands over the baton to a train being run by a joint tag-team consisting of Europe and Japan.
Moreso, what we are seeing is a historic process of re-coupling by which the engine locomotive of the global economy is changing from being driven exclusively by the US towards a more diverse crowd of leaders. How far this process will go on is yet to be seen. I for one don't envision for example that the US will revert entirely to growth path where a substantial external deficit is not part of the overall picture. But the main point is that the relative weight will change and perhaps more importantly that the changes we are now seeing are happening at a pace which is quite unprecented. Of course, as Brad Setser is set on hammering home a lot lately, the recent retreat of financing from the external US balance is largely due to an almost effective stoppage of private inflows which of course has the nasty side effect that the US is now ever more so dependant on official foreign government inflows in order to keep the boat floating. As for the general situation, the following wonderful quote from Setser quite eloquently sums up how we are now situated in somewhat of an interim position
Private investors want to finance deficits in countries that don’t want to run deficits. The countries now accumulating reserves the fastest have the least need for reserves. The country with the largest deficit is struggling to attract enough private inflows to match the increased desire of its private sector to buy foreign assets – let alone both the deficit and those outflows. And the country with the strongest traditional aversion to state-ownership is now the country most-reliant on government inflows.
As I mentioned above Brad Setser seems to be focusing quite a lot on the apparent disconnect between private and government/official flows with respect to the financing of the US CA deficit. This rather specific topic should be the center of another note and here we should rather move on to the obvious question. Given that changes are taking place of almost tectonic proportions in the structure of global capital flows what will this mean for Thailand? To deliver a reasonable attempt to answer that question I will need to field some grahps of which some, I am afraid, will be plotting some rather technical stuff. But I will explain as I go along. Let us first inspect the basic graphs plotting the CA balance and financial account as it has evolved on a quarterly basis since 1995. Note that these two are inversely correlated as the former measures the headline balance between flows of funds, goods, and services whereas the latter plots the net change in foreign ownership of domestic financial assets. This basically means that if the financial account is in surplus foreigners are buying domestic financial assets more quickly than domestic agents are buying foreign assets and vice versa of course if we are talking about 'selling.'
Once again, we can easily see when the Asian Crisis occured in the beginning of 1997. Other things to note is the fact that volatility seems to have returned to the overall CA balance in the recent years which is something I will talk a bit further about below. Secondly, and following from this point we see that foreign investors seems to have once more become rather fond of putting their funds in Thailand over the last couple of years as compared with the relative stagnation in the years following the currency crisis. This is can be further substantiated by a chart showing the flows of net portfolio investments.
As can be seen particularly well on this graph volatility has indeed returned with a venegance since 2004 and as I hinted this is bound to bring forth that 'once bitten twice shy' mantle. However, and as a testament to the new situation in the global economy the Thailand response to all this was essentially turned upside down when it came the 18th of December 2006. As Edward wrote just as the news was coming in off the wire, the measures to control capital were not designed to stem a potential rapid fall in the value of the Bhat as was the case in 1997. Quite the contrary;
So now we have capital controls, not to stem an outflow of foreign exchange, but to stop an outflow of domestic currency. Oh how the world has changed. Of course, it should escape no-one's notice that with fertility now well below replacement (somewhere in the 1.6 tfr range) Thailand is now right in the middle of that Demographic Dividend/Demographic Transition process I keep talking about.
Indeed, the world seems to have changed and Thailand now must decide how to position itself in this new situation. And this my dear reader brings me back to where I started and how Thailand now seems to be set a crossroads and while it may not be a question of losing your horse or your head, it does seem as if whatever road Thailand chooses it is a choice of some importance. In this way, Thailand seems to be faced with, at least, two interconnected choices moving forward from here. The first issue as I have hinted above is whether Thailand will be able to get the demographic house in order or not. There are of course many unknowns here either way but one thing seems fairly certain at this point. With life expectancy shooting upwards and fertility lingering at a TFR of 1.6 the next 12-15 years of economic development will be very important. If evidence from other countries is something to go by Thailand faces the imminent risk of tumbling down into the sub 1.5 TFR region which essentially constitutes something of a fertility trap. I strongly advise policy makers and others to strive so that this does not come to pass.
The second challenge which stands before Thailand relates to the whole changing structure of the international economic system and essentially the point that what we considered yesterday to be a distinction between developing and developed countries today is nothing but another anachronism ready for the big historical bin. In short, which strategy should Thailand deploy in an environment where liquidity is aflush and where the global search for yield is on? There is no straightforward question to this answer and in particular when we are talking about Thailand you cannot but expect that the old 'once bitten twice shy' dictum to be high on agenda. However, as I have also tried to argue above the times have changed immensely from 1997 and now Thailand is busy keeping money from pouring instead of pouring out. Consequently, it was only back in the beginning of December that we learned how authorities in Thailand were considering lifting capital control following today's elections (23rd of December). This then trickled down onto the jungle drums where echoes of double digit % Bhat appreciation were flying all over the place. Indeed, the Bhat has been on an upwards path as of late against the USD and now as the new government readies itself to take office we shall see what happens.
However, what would my view be on this then? Well, I certainly don't want to come off as being complacent towards allowing money to come in too quickly since when this happens there is always the risk that those very same funds may leave just as swiftly again. Nobody would know this better than those interested in Thailand's economy. However, perhaps we should also take heart of the fact, and as Edward so eloquently emphasised in the context of India recently, that the sands and seeds of time cannot be made to run backwards. At the end of the day you could then ask the most prominent question of whether in fact Thailand has a choice or not? Of course it does, Thailand like India, Brazil, and Turkey cannot just with a simple stroke of a magic wand absorb the procedes of a full scale of re-balancing/re-coupling of the global train. However, trying to stem the tide by building barriers is not likely to do any good either.
Conclusively, I want to finish off by adding that I see a whole lot of potential for Thailand's economy going forward. It is going to be a bumpy ride for sure and wills and wit will be tested but so it is with history and the future. Both of them are very much with us in the present. The last thing I would like to emphasise is the danger that Thailand follows the path of China not, of course, with the one-child policy per se but rather with respect to the path of growth where I clearly see an important link between the two; demographics and growth path that is. Export dependancy it seems, and not as per usual like all good things, will come to those who wait. Let that be a subtle reminder for Thailand as the country equips itself for a new year with new challenges.
Thailand's Demographic Window of Opportunity
This post is really a supplement to Claus's post Thailand at the Crossroads, and a complement to Manuel's election coverage. Now Claus points out that Thailand is in the middle of its ongoing Demographic Transition, and at the high point of that favourable moment when what has become known to economists as the Demographic Dividend process is at its height.
The demographic transition is - in simple language - a movement upwards in population median ages. Societies (one after another) move steadily from being high fertility, low life expectancy, low median age ones (think Niger, or Mali, or Uganda right now), to low fertility, high life expectancy, high median age ones (think Germany, Japan and Italy) in a more or less steady and ongoing fashion. We know of course what the starting point of this transition is (the above mentioned high fertility societies have a median age in the 17/18 range) but we don't know where the end point is, since while Germany, Japan and Italy currently have a median age of 43 things clearly are not set to stop at this point, and we won't really know what the ceiling is in this process till we reach it. So on this count we have to watch and wait. But observing the evolution of these three "elderly" societies we can identify some of the processes which are at work as population median ages rise, so while we are waiting for the final readout there is still plenty of work to be done - in terms of policy measures to be adopted - in the meantime. Thailand is one of those fortunate countries who, having arrived on the developing economy scene rather later than others, can learn somewhat from those who have gone before. If she is ready willing and able to listen that is.
Median Ages
Now Claus and I do put quite a lot of store by the median age reading of a society, and we do this for all sorts of reasons. Basically median ages serve as a very convenient proxy for all kinds of economically important phenomena like saving and borrowing, fixed capital formation, construction activity and export dependence, productivity, and ultimately labour and consumer supply.
The movement up through the various median age levels involves a constant change in population structure, and at one point these changes are very favourable to economic development. These positive changes provide the background to what is known as the demographic dividend process. At the end of the day the transition from being a very low median age to being a very high one involves a shift in the dependent population, from having a very high proportion of young dependent population to having a very high proportion of elderly dependent. In the middle lie the most favourable years, which come in two stages. In the first stage there is simply an increase in the volume of people available for the transition to work in an expanding market economy. This could be thought of as the accumulation of inputs phase - during which time, as we can see in the chart below, the rate of population inctrease continues to be large - and at this point a societies ability to incorporate ever more people into relatively low-value economic activities at a rapid rate produces a growth spurt - like the one we are seeing now in many of the emerging economies. This is why, for example, Thailand can easily contemplate annual growth rates of 7 or 8 percent at this point without setting off the inflation alarms, something which, unfortunately, is not possible in Eastern Europe.
But the dividend doesn't end just when the steady downward movement in fertility starts to make itself felt by reducing the inflow of young workers at the labour market entry point, since there is a second dividend phase were the accumulation of quantity is followed by the accumulation of quality, and this is made possible by the steadily growing share of workers in the 25 to 50 age group, and by the rising human capital quality of the new young labour market entrants. This is when you could expect a productivity driven "TFP revolution" and a steady shift through the value sectors towards the more productive and higher value ones.
Of course there is nothing automatic about any of this, demography just provides an environment, then it is down to policy to benefit from or fritter the potential which exists.
Thailand at this precise point in time is, as Claus indicates, at the crossroads. Labour supply means it is possible to obtain quite strong GDP growth simply by increasing employment, without necessarily achieving large scale productivity gains. But Thailand now needs to move on to the second stage, and rapidly so, since the low fertility environment means that this flow of labour is steadily going to dry up (of course migration from Malaysia and Myanmar can help offset this to some extent) and that growth will now need to become more productivity "intensive" if living standards are to continue to rise.
Why is this such an important moment. Well let's look at Thailand's median age.
As we can see, Thailand's median age has been rising quite rapidly since 1990. It is now in the early 30s - which is definitely a very favourable point - but by 2020 (according to the UN median forecast) it can have risen to 37. And this estimate is very likely rather conservative, since it anticipates a rebound in fertility from the current, below replacement level, of 1.6 TFR.
This forecast may well be overly optimistic when you think of what has happened in other developed Asian societies like Japan, Singapore, South Korea, Hong Kong, Taiwan, where fertility has fallen to the 1.2-1.3 range (and of China, where things may well be heading rapidly in this direction). Increasing education among women and rising living standards may well lead to increasing birth postponement (women having children at later ages) and we already have extensive evidence of the impact of this process on the TFR readout over extended periods of time.
Also life expectancy has been rising, and may well continue to rise more rapidly than the median forecast anticipates.
What all of this means is that if the upside risk to the Thai median age forecast turns out to be the case, then Thai median age could easily be brushing up against the watershed median age of 40 by the time we get to 2020. This age is important, since it seems to mark the frontier between an internal consumption driven society to an export dependent one. If Thailand hasn't made the leap from being a developing to a developed economy by this point her future could become very complicated. So the years to come are critical, which is why we are speaking of "crossroads".
Nowhere is this situation clearer than in the evolution of the 15 to 19 age group (see chart below). Thailand has a "loval peak" in this population around 2012. So during the next few years there will be a growing number of young people entering the labour market. So this is a very good time to get the labour intensive part of the development operation done. Post 2012 Thailand can move progressively towards greater dependence on productivity and TFP (if all goes well that is).
Fortunately, as I indicate in this post on India here, the global environment is likely to be very favourable. In addition Thailand's more recent and measured entry into the low fertility club (unlike, for example, Eastern Europe) means that she is capable (as Claus noted) to run quite rapid growth rates without hitting the solid wall of substantial wage inflation. So she has the wind behind her. Much more than she did in 1998. If we just briefly look at the chart for gross fixed capital formation for a moment.
Now it is very easy to see the massive distortion in investment which took place during the boom of the mid 1990s, how the correction was more or less inevitable, and how Thai Gross Fixed Capital Formation is now on a much lower and more sustainable level. So to some extent the "correction" worked. Also it should be noted that in the mid 1990s Thai median age was somewhere in the mid 20s (like Venezuela, or Ecuador right now, and these are hardly shining examples of political and economic stability). So Thailand was the victim of the Asian financial markets telling themselves the wrong story. Ideas and perpsectives do matter, since they serve to orient behaviour and expectations (those famous compasses and charts that Claus goes on about). Our apparent obsession with median ages isn't simply an obsession, and it isn't all rigmarole and obfuscation, it is part of a search for the "grail" of growth theory, then underlying mechanism.
Finally, just to illustrate what we are talking about, I present my habitual "exhibit A", Thailands population pyramids. These show the age structure transition which is taking place before our eyes clearly enough I think.
OK, that's it. Have a nice xmas everyone, and good luck Thailand, you will need it.
Bibliographic References
Here are some links to economic literature on the demographic dividend.
The Economics of Demographics, special issue of the IMF's Finance and Development Magazine, September 2006.
Especially Booms Busts and Echoes, by David E. Bloom and David Canning
Bloom, David E., and David Canning, 2004, "Global Demographic Change: Dimensions and Economic Significance," in Global Demographic Change: Economic Impacts and Policy Challenges, proceedings of a symposium, sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26–28, pp. 9–56.
Lee, Ronald, 2003, "The Demographic Transition: Three Centuries of Fundamental Change," Journal of Economic Perspectives, Vol. 17 (Fall), pp. 167–90.
National Research Council, 1986, Population Growth and Economic Development: Policy Questions (Washington: National Academies Press).
Bloom, David E., David Canning, and Bryan Graham, 2003, "Longevity and Life-Cycle Savings," Scandinavian Journal of Economics 105, pp. 319–38.
Bloom, David E., David Canning, and Pia Malaney, 2000, "Demographic Change and Economic Growth in Asia," Population and Development Review, 26, pp. 257–90
Bloom, David E., David Canning, and Jaypee Sevilla, 2002, The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change (Santa Monica, California: RAND).
Bloom, David E., and Jeffrey G. Williamson, 1998, "Demographic Transitions and Economic Miracles in Emerging Asia," World Bank Economic Review, 12, pp. 419–56.
Mason, Andrew, 2001, Population Change and Economic Development in East Asia: Challenges Met, Opportunities Seized (California: Stanford University Press).
Mason, Andrew, 2005, Demographic Dividends: The Past, the Present, and the Future, Working Paper, Department of Economics, Population Studies Program, University of Hawaii at Manoa
Pyramid Supplement
The demographic transition is - in simple language - a movement upwards in population median ages. Societies (one after another) move steadily from being high fertility, low life expectancy, low median age ones (think Niger, or Mali, or Uganda right now), to low fertility, high life expectancy, high median age ones (think Germany, Japan and Italy) in a more or less steady and ongoing fashion. We know of course what the starting point of this transition is (the above mentioned high fertility societies have a median age in the 17/18 range) but we don't know where the end point is, since while Germany, Japan and Italy currently have a median age of 43 things clearly are not set to stop at this point, and we won't really know what the ceiling is in this process till we reach it. So on this count we have to watch and wait. But observing the evolution of these three "elderly" societies we can identify some of the processes which are at work as population median ages rise, so while we are waiting for the final readout there is still plenty of work to be done - in terms of policy measures to be adopted - in the meantime. Thailand is one of those fortunate countries who, having arrived on the developing economy scene rather later than others, can learn somewhat from those who have gone before. If she is ready willing and able to listen that is.
Median Ages
Now Claus and I do put quite a lot of store by the median age reading of a society, and we do this for all sorts of reasons. Basically median ages serve as a very convenient proxy for all kinds of economically important phenomena like saving and borrowing, fixed capital formation, construction activity and export dependence, productivity, and ultimately labour and consumer supply.
The movement up through the various median age levels involves a constant change in population structure, and at one point these changes are very favourable to economic development. These positive changes provide the background to what is known as the demographic dividend process. At the end of the day the transition from being a very low median age to being a very high one involves a shift in the dependent population, from having a very high proportion of young dependent population to having a very high proportion of elderly dependent. In the middle lie the most favourable years, which come in two stages. In the first stage there is simply an increase in the volume of people available for the transition to work in an expanding market economy. This could be thought of as the accumulation of inputs phase - during which time, as we can see in the chart below, the rate of population inctrease continues to be large - and at this point a societies ability to incorporate ever more people into relatively low-value economic activities at a rapid rate produces a growth spurt - like the one we are seeing now in many of the emerging economies. This is why, for example, Thailand can easily contemplate annual growth rates of 7 or 8 percent at this point without setting off the inflation alarms, something which, unfortunately, is not possible in Eastern Europe.
But the dividend doesn't end just when the steady downward movement in fertility starts to make itself felt by reducing the inflow of young workers at the labour market entry point, since there is a second dividend phase were the accumulation of quantity is followed by the accumulation of quality, and this is made possible by the steadily growing share of workers in the 25 to 50 age group, and by the rising human capital quality of the new young labour market entrants. This is when you could expect a productivity driven "TFP revolution" and a steady shift through the value sectors towards the more productive and higher value ones.
Of course there is nothing automatic about any of this, demography just provides an environment, then it is down to policy to benefit from or fritter the potential which exists.
Thailand at this precise point in time is, as Claus indicates, at the crossroads. Labour supply means it is possible to obtain quite strong GDP growth simply by increasing employment, without necessarily achieving large scale productivity gains. But Thailand now needs to move on to the second stage, and rapidly so, since the low fertility environment means that this flow of labour is steadily going to dry up (of course migration from Malaysia and Myanmar can help offset this to some extent) and that growth will now need to become more productivity "intensive" if living standards are to continue to rise.
Why is this such an important moment. Well let's look at Thailand's median age.
As we can see, Thailand's median age has been rising quite rapidly since 1990. It is now in the early 30s - which is definitely a very favourable point - but by 2020 (according to the UN median forecast) it can have risen to 37. And this estimate is very likely rather conservative, since it anticipates a rebound in fertility from the current, below replacement level, of 1.6 TFR.
This forecast may well be overly optimistic when you think of what has happened in other developed Asian societies like Japan, Singapore, South Korea, Hong Kong, Taiwan, where fertility has fallen to the 1.2-1.3 range (and of China, where things may well be heading rapidly in this direction). Increasing education among women and rising living standards may well lead to increasing birth postponement (women having children at later ages) and we already have extensive evidence of the impact of this process on the TFR readout over extended periods of time.
Also life expectancy has been rising, and may well continue to rise more rapidly than the median forecast anticipates.
What all of this means is that if the upside risk to the Thai median age forecast turns out to be the case, then Thai median age could easily be brushing up against the watershed median age of 40 by the time we get to 2020. This age is important, since it seems to mark the frontier between an internal consumption driven society to an export dependent one. If Thailand hasn't made the leap from being a developing to a developed economy by this point her future could become very complicated. So the years to come are critical, which is why we are speaking of "crossroads".
Nowhere is this situation clearer than in the evolution of the 15 to 19 age group (see chart below). Thailand has a "loval peak" in this population around 2012. So during the next few years there will be a growing number of young people entering the labour market. So this is a very good time to get the labour intensive part of the development operation done. Post 2012 Thailand can move progressively towards greater dependence on productivity and TFP (if all goes well that is).
Fortunately, as I indicate in this post on India here, the global environment is likely to be very favourable. In addition Thailand's more recent and measured entry into the low fertility club (unlike, for example, Eastern Europe) means that she is capable (as Claus noted) to run quite rapid growth rates without hitting the solid wall of substantial wage inflation. So she has the wind behind her. Much more than she did in 1998. If we just briefly look at the chart for gross fixed capital formation for a moment.
Now it is very easy to see the massive distortion in investment which took place during the boom of the mid 1990s, how the correction was more or less inevitable, and how Thai Gross Fixed Capital Formation is now on a much lower and more sustainable level. So to some extent the "correction" worked. Also it should be noted that in the mid 1990s Thai median age was somewhere in the mid 20s (like Venezuela, or Ecuador right now, and these are hardly shining examples of political and economic stability). So Thailand was the victim of the Asian financial markets telling themselves the wrong story. Ideas and perpsectives do matter, since they serve to orient behaviour and expectations (those famous compasses and charts that Claus goes on about). Our apparent obsession with median ages isn't simply an obsession, and it isn't all rigmarole and obfuscation, it is part of a search for the "grail" of growth theory, then underlying mechanism.
Finally, just to illustrate what we are talking about, I present my habitual "exhibit A", Thailands population pyramids. These show the age structure transition which is taking place before our eyes clearly enough I think.
OK, that's it. Have a nice xmas everyone, and good luck Thailand, you will need it.
Bibliographic References
Here are some links to economic literature on the demographic dividend.
The Economics of Demographics, special issue of the IMF's Finance and Development Magazine, September 2006.
Especially Booms Busts and Echoes, by David E. Bloom and David Canning
Bloom, David E., and David Canning, 2004, "Global Demographic Change: Dimensions and Economic Significance," in Global Demographic Change: Economic Impacts and Policy Challenges, proceedings of a symposium, sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26–28, pp. 9–56.
Lee, Ronald, 2003, "The Demographic Transition: Three Centuries of Fundamental Change," Journal of Economic Perspectives, Vol. 17 (Fall), pp. 167–90.
National Research Council, 1986, Population Growth and Economic Development: Policy Questions (Washington: National Academies Press).
Bloom, David E., David Canning, and Bryan Graham, 2003, "Longevity and Life-Cycle Savings," Scandinavian Journal of Economics 105, pp. 319–38.
Bloom, David E., David Canning, and Pia Malaney, 2000, "Demographic Change and Economic Growth in Asia," Population and Development Review, 26, pp. 257–90
Bloom, David E., David Canning, and Jaypee Sevilla, 2002, The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change (Santa Monica, California: RAND).
Bloom, David E., and Jeffrey G. Williamson, 1998, "Demographic Transitions and Economic Miracles in Emerging Asia," World Bank Economic Review, 12, pp. 419–56.
Mason, Andrew, 2001, Population Change and Economic Development in East Asia: Challenges Met, Opportunities Seized (California: Stanford University Press).
Mason, Andrew, 2005, Demographic Dividends: The Past, the Present, and the Future, Working Paper, Department of Economics, Population Studies Program, University of Hawaii at Manoa
Pyramid Supplement
Sunday, December 23, 2007
Friday, December 21, 2007
Thai Capital Flows
Here is the latest release press from the Bank of Thailand on capital flows:
Mrs. Suchada Kirakul, Assistant Governor, Financial Markets Operations Group, Bank of Thailand, disclosed details about the further relaxation of measures to manage capital flows as follows:
The Bank of Thailand (BOT) has introduced an unremunerated reserve requirement (URR) on short-term capital inflows since 18 December 2006 as a temporary measure to regulate short-term capital inflows, prevent speculation on the Thai baht, and avoid excessive volatility and appreciation of the Thai baht, which are not consistent with Thailand's underlying economic fundamentals. This measure has resulted in improved exchange rate stability, with the baht movements more in line with other regional currencies. Meanwhile, the real and export sectors have been able to better adapt to the exchange rate changes, through diversification of export markets and hedging of foreign exchange risk.
The BOT has been mindful of adverse effects that this measure had on the financial transactions of domestic private sector and foreign investors. This has led to gradual relaxation of the measure in order to increase flexibility in conducting business, such as (1) providing a fully hedge option as an alternative to the reserve requirement, particularly for loans and for investment in fixed income securities and mutual fund units, and (2) waiving the reserve requirement on investments in equity-like securities, namely, warrants and exchange traded fund (ETF) units. In addition, regulations on foreign currency deposit and transfer have been relaxed to increase the flexibility for Thai businesses in managing their foreign currencies and investment abroad, which should lead to more balanced capital flows in the longer term.
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