Professor Bhanupong Nidhiprabha [email protected]

• be moodle code 3527

• similarity

  • forced to open trade
    • 1859 japan (Meiji). Nagasaki is japan's only door to world trade in 1571 castella, tempura (from portugal)

• difference

  • industralization Japan

  • progressive middle class (samurai)

  • Sent 6000~ students

  • emphsize science and engineering

  • initial export raw silk, tea, and marine products, later change to manufactured goods

  • less land supply

  • better monetary system

  • abundant labor

  • unilineal iye system

  • Meiji restoration redistribute income and oppotunity

  • get privite sector to be involved by transfer the factories

  • 1855 siam (King chulalongkorn)

    • Ayutthaya: foreigners accounts for quarter of residents. export forest products
    • red seal ship trade: government trading ships
    • 'Yamada Nagamasa': Japanese who becomes officer in Siam
    • King Prasart Thong 1629-1656 made royal monopoly trade
    • King Narai 1656-1688
    • primary product oriented rice, teak, tin, 'rubber'
    • history
      • old enemy burma disappeared but french was getting aggresvie from east colonial.
    • watershed: Sandwitch's bowring treaty 1855 (King Mongkut): british trade freely; 3% of all things except gold bullion and oppium; siam gov keep the right on prohibit export salt, rice, fish to keep these necessities price low
    • other countries follow the pattern
    • the export item didnt change until 1960 (top 3 : rice, tin, teak)
      • removal forest make rice produce more productive
    • abundant supply of land make industrilzation less attractive
    • low emphasis on infrastructure and edu
    • fatalistic middle class
    • 1850-1950 GNP barely change

• 1950 Siam

  • have high imcome elasticity
  • have export surplus
  • bilateral family system

• Stolper-samuelson thm: rise in the relative eprice of a good lead to rise in return to that factor which used most intensively

• Corn law debate: profit of landlord vs consumers

• factors of growth capital

  • geography, trade
  • institution (rent seeking, corruption, law)
  • natural resource
  • human capital
  • productivity

• comapare the develop history from Japan to other countries
• center-periphery theory: ??
• prince of the front palace??
• corvee?
• tokugawa
• Regent
• samurai level becomes businessman

• homework about questions about the correlation of figures

• growth strategies

  • growth is of political, economic, social transformation
  • rule of 72: growth rate of x percent would double GDP in 72/x years
  • the denmark experience: 2% but steady for 100 years
  • middle income trap

• develop models

  • Alex: state intervention is needed
  • Gershcenlron (Russian): more backwardness needs more intervention
    • apply capital intensive rather than labor intensive
  • Lewis (travelled thailand): dual economy, surplus labor
    • agricultural sector dont maximize profit while industrial sector do
    • Lewis truning point: when a constant low wage rate is no more available, need to go more technology
  • Rosenstein: the big push theory
    • heavy infrastructure is need to get up
    • gov makes crowd in investment
  • Raul Prebisch (latiin american's Keynes)
    • Singer and Prebisch hypothesis: demand elastiticy of income is higher in menufacturing goods than agriculture goods
  • Rostow: 5 stages
    • old, pre-takeoff, takeoff,
  • Akamatsu (flying geese): dynamic(shifting) comparative advantage

• thailand's plan

  1. import institute
  2. ...
  3. sufficient economy

• sources of happiness

  • Richard Layard: once food is guaranteed, happier is not easy
    • trust
    • commuity
    • divorce
    • unemployment
    • religious
    • quality of gov

• why nation fail (Acemoglu)

  • extractive vs inclusive institution

• got pop quiz 1

• taboo book

  • 1984

• homework

  • review question
  • reading: review article of why nation fail
    • Acemoglu and Robinson's view on develpoment:
      1. political and economic development
      2. institution are product of experience and power group's willing
      • exmaple
        • England around Gloorious Revolution 1688
        • North and South America influenced by methods of colonization
        • Russia provides no incentive for communist population so could not long time exist
        • China broden successfully its market economics w/o shake its government; "creative destruction that sustain productivity will not take place"
    • alternative theores that defied by Acemoglu
      1. geography
      • countries in same region could have different result
      2. culture
      • across the boarder made different results (US/mexico, east west germany)
      3. economic ignorance
      • only apply superficial market tools without political side change are shown useless among world bank and IMF examples
    • the point of the reviewer
      • AR approach is hard to go quantative analysis

• multiple exchange rate system: in order to keep price of rice low in Thailand

  • at the same time ppl get incentive to smuggle rice outside thailand

• MV=PT, where M = Money Supply, V= Velocity of circulation, P= Price Level and T = Transactions

  • V increase in hyperinfaltion situations. It then increse money further by anticipation

• in hyperinflation, nominal interest rate doesn't matter.

• ABC(argentina, brazil, chile) countries encountered hyperinflation

• Thai baht currency

  • stable from 1948-1981
  • 1981-1987 devaluation (policy devaluation to make up trade defecit)
  • 1997 huge devaluation

• C/Y(perpensity of consume) falls when Y raise

  • gov spending multiplier = (1-b)^-1 decrease as well

• export-led growth hypothesis

  • competetion from bigger market available
  • allows scale economies of scale
  • comparative advantage
  • utilize labor surplus

• reading: asia raising thailand by lecturer; about the rapid growh and low inflation rate in 1961-1990 by thailand, 1997 asian financial crisis, 2007 global economic recession

  • stable growth 60-90
    • 7% GDP growth and 2% inflation; no trade-off between growth and inflatin was observed
    • brief periods of oil shocks and currency appreciation dragged the growth
    • trade deficit occured after 1978, a need for adjusting the fixed FOREX rate system

• reading

  • Modern Thai regime
    • Thamon 64-74
    • Pramoj 75-76
    • Tinsulanonda 80-??
    • democracy 90s
      • Hausman: correlation between growth and political change and currency depreciation
  • compare 1997 and 2007
    • 1997 asian financial crisis
      • investment and consumption dive
    • 2007 global ecnomic crisis
      • more fiscal stimulus
    • 2006 coup
    • 2014 coup
  • conclusion
    • export and domestic growth can be employed at the same time
    • fiscal, monetary and exchange rate policy should be consistent
    • automatic fiscal stabilizers: gov expenditure is less elastic to ouput than revenue
    • unstable political situation threatens long term investment

• Macroeconomics perspective on thai econ 1961-1990 (cont)
  • since 1974 thailand's Terms of trade goes down
  • conservative fiscal policy: goes up to35% at 1986 then drop down to 15% level
• no class on Sep 11, makeup course due to announce
• resillience of thai economy 1990-2005
• imbalanced adjusted growth
• trade-off between current account and grwoth exist
  • when rich people spend more on import
• food is still counts major factor in thailand's CPI
• oil price didn't make too much CPI variations
• secondary school enrolment at 1989 is just 28%
• short term loan is highly fluctuate

• root of crisis: too much hot money caused inflation (debt inflaion)
  • capital flows are mainly loans (90-96 at ~60%), compared to ~15% at 1999-2009
  • FDI rising after the crisis because cheaper prices
• the recovery
  • strong recovery after the currency deflation
• lessons from the crisis
  • floating exchange rate
• underground economy
• service sector growth is correelates with menufacturing, but none with agriculture.
• reading: economic crisis and the debt-deflation episode (baht floated from July 1997 and later fell by 56%)
  • origin, background: unsustainable fixed rate regime when realx balance control
    • relaxed foreign capital control from 1990~1995
    • short term loan funded unproductive investment
    • fixed rate cover the risk of exchage rate change for local financial institution
    • inadequate regulations on risk control
    • financial crisis and currency crisis are mutually casuation
    • speculation attack
  • cause of export slowdown 1996 to US japan singapore
    • exchange appreciation relative to yen
    • recession in JP
    • global economic slowdown
  • contration effect of devaluation (in investment and consumption)
  • expectaion of income worse because of uncertainty
  • unfamiliar floating exchange rate for the traders
  • debt deflation in thailand
    • over indebt company faces burden with contracted liquidity, worse if it is in dollar term
  • after crisis development
    • no downward wage rigidity in menufactuing and financial sector
    • decresing interest rate gap from int'l market, increasing FDI, stabling baht, decreasing short term loan suggest the recovery

• about politics
• Capital control relaxation undertaken when bank supervision and financial regulations were not sufficiently stringent led to over- borrowing and inefficient lending (partially result in asset bubble).
• ST loan to federal reserve ratio and import to federal reserve ratio are both important of health of a currency
• capital flow is a function of
  • interest rate difference between countries
  • 14.1 billion bailout from IMF
  • IMF asked the bailed countries to run budget surplus, which reckoned wrong policy by Stiglitz
  • PC curve exist in 1992-2014
• reading
  • File Premature liberalization File
    • trade liberalization - lower tax and tariff since 1980
    • interest rate liberalization
      • financial deepening could be assessed by bank credit to GDP ratio
      • at the stage when bond and equity market also emerge so bank is not that important as before
      • when the rate ceiling is remove, there is no rate immediate surpass that level but since then the rate become more sensitive to foreign rate
      • no new bank before the crisis, though
    • capital account liberalization since 1990 (important role on Bangkok International Banking Facilities)
      • equity maket, mutual fund
      • BIBF established in 1993
        • tax inicitives to attract foreign funds
        • lots of out-in lendings target on thailand's higher investment return, with amount ~15% domestic credit
        • money flow into nontraded sector, which worsen export
      • regulation came too late after the relaxation
      • short term borrowing dominate the scene showed the vulnerability
    • peg exchage rate not sustainable
  • File Macroeconomic policy after July 1997
    • background: 1999 the economy seems out of the bottom from 1997 crisis, but global economic downturn appeared at 2001
    • the stats

      • manufactured output v-shaped

      • BOT rate hike to 23.4 to avoid capital flight

      • consumption and investment contracted while export expand (due to the currency depreciation)

    • exchange rate policy
    • fiscal policy: gov expenditure cut much at the crisis and didnt increase much before Takshin
    • monetary policy
      • put focus on GDP and unemploument not inflation
      • unable to control long term rate
    • conclusion:
      • inflation inertia exist while labor market is quite flexiable, philip curve exist
      • BOT's rate hike to protect baht when US rate drop is a bad policy in that it fail when currency should not be that strong

• Dec 2003 avian influenza, recovery at ~2004
  • gov tried to cover up initially
• Dec 2004 tsunami
• 2005 oil shock: biggest impact in economic terms among the three
  • subsidy in diesel could be seen as beef for the election
• no coup between 1991 and 2005
• 2006 coup
  • defense budget rise while health and agriculture budget drop
• 2014 coup
• after coup the consumption drops, possibly caused by lower life time expectation
• health capital (grossman1972)
  • endowed but could be made better or worse by own effort
• reading
  • Buffeting by the unholy trinity
    • fixed price and cover up scandal is costly; transparancy is the way to go in order to build consumer confidence and private-public sector cooperation
  • FileThe Thai economy after the 2006 coup
    • touriam industry(~6% GDP) hit
    • boom from 1990-1996 bust from 1997-2006
    • after the coup consumption and investment drop
    • capital control
      • tried, panicked, reverted
      • BOT tried to control the appreciating baht
      • lead to gap between onshore and offshore exchange rate
      • tried to issue bonds in order to sterize

• trasmit channel: trade and financial capital
• cause: under market value rate of subprime mortgage loan
• CDO(Colletral ...) is like sausage:
  • bad things mixed together
  • looks OK from the outside
  • hard to displine
• CDS(credit degault swap) is usually sold with CDO
• asset boom often comes after credit boom
• Thailnd's exposure to CDO is little (~100M baht)
• Thailand showed a stable gap between lending and saving, imply a robust banking sector
• export had a v shape recovery because booming asia(escipecially China)
• Minsky meltdown: the point that divide finicial robust and fragility;
  • displacement: new things emerge
  • boom
  • euphoria
  • profit taking (for specific party)
  • panic
• reading
  • The world has not learned the lessons of the financial crisis
    • finicial crisis will return cuz hard to judge the risk
    • the improvement in the system
      • more equity needed
      • regulated pay policy
      • safer derivative market
    • some bad
      • stagnation fed populism
      • property related loaned still preferred by policy makers
      • euro structure cannot heko much to the troubling country

• 2007-2013 seen a decoupling theory when China leads another regional economic role
• export and import stagnated
• Austrian Business Cycle Theory
  • views business cycles as the consequence of excessive growth in bank credit, due to artificially low interest rates set by a central bank
  • could explain the thai economy around 2007
• business sentiment generally not great since 2007
  • rule of laws correlated to sentiment
• durable consumption is more related to expected life time income
• BOT's credit channel tool more efficient than rate channel
• in mundell fleming model

not repay the debt in 3 monthes

is a term in economics literature, proposed by Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza in a series of papers to refer to a situation in which "most countries are not able to borrow abroad in their domestic currency."

consumption is positive correlated with real income

is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. Bank assets fall because of the defaults and because the value of their collateral falls, leading to a surge in bank insolvencies, a reduction in lending and by extension, a reduction in spending: the credit cycle is the cause of the economic cycle.

the possession of assets in excess of liabilities; ability to pay one's debts.

• 1992 election Chuan Leekpai, a leader of the Democrat Party, became prime minister at the head of a five-party coalition.
• Chuan dissolved parliament in May 1995
• Banharn Silpa-archa, Chart Thai Party won the largest number of parliamentary seats in the subsequent election.
• 1996, Chavalit Youngchaiyudh formed a coalition government and became prime minister. - Chuan Leekpai became PM again in 1997 crisis.
• 2001 Thaksin Shinawatra Thai Rak Thai Party (TRT)
• 2005 Thai Rak Thai Party won majority
• 2006 coup Sonthi Boonyaratglin after protest organised by People's Alliance for Democracy (PAD), a large group of middle class Thais and a coalition of anti-Thaksin protesters led by Sonthi Limthongkul. boycotted and annoyed invalid election
• 2008 People's Power Party (PPP), or Thaksin's proxy party won election again
  • Samak Sundaravej, Somchai Wongsawat, PPP dissolved, Abhisit Vejjajiva
• 2009 to 2010 protests continue
• 2011 (flood) election, Chalerm Yubamrung
• 2013 Yinluck
• 2014 coup Prayut Chan-o-cha