Thai Military Government Botches Market Regulations

Military governments are sometimes the only alternative to anarchy. Given their track record with the management of the economies over which they preside, military governments are not necessarily preferable to anarchy. The latest example of this was a decree in Thailand that restricted currency withdrawals. The reward was a 15% drop in the value of the local stock index, the SET, in a single day earlier this week. It’s usually best if the soldiers stick to marching.

The BBC explained the situation in simple English, “The central bank’s plans were aimed at limiting the gains in the baht, which has been one of the best-performing Asian currencies this year and whose strength has been blamed for a drop exports. Foreign investors were told that they would only be able to invest 70% of money brought into the country, and would only be able to recoup the full amount if they left it in the country for a year. This prompted a sell-off in stocks that gave the SET index its worst day in 16 years, and shook markets across Asia.”

Full credit to the finance minister who quickly amended the decree. Foreigners are now allowed to freely trade equities; the restrictions remain in effect, however, for overseas investments in debt. Finance Minister Devakula Pridiyathorn confessed, “There was no point being stubborn about it. If we stuck to what we announced at first, it may have caused more damage. For the country, I am alright with losing a little bit of face.” Fair-minded observers can wonder why he thought the markets would stand for this kind of interference in the first place, but must accept that he did act when he saw his mistake.

Unfortunately, markets have memories. Marco Sucharitkul, president of JP Morgan Securities in Thailand told the press, “It definitely hurts Thailand’s standing with the international investor community. Foreign investors will remain wary of Thai monetary and economic policies for the next few months. It does not help that the government was appointed by military coup makers.” In other words, the government’s credibility as a market-friendly regime is shot.

The problem is the rising baht, and the cause is the flow of capital into Thailand as foreigners try to get in on investments there. This is a sign of economic strength and a vote of confidence in the nation by the world capital markets. The nonsense earlier this week took the baht down to 36.42 per US dollar (12% higher than a year ago), close to the government’s target of 35 baht to the buck. A better approach would be to let the market set the rate, and for the central bank and government to adapt to those conditions rather than to try to dictate terms. That is just one reason why the military shouldn’t get involved in government or economic affairs. After all, is that any sillier than having national defense provide by armed economists? The 1st Monetarist Brigade? The Royal Airborne Supply-Side Battalion? The Philips Curve Assault Corps?

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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