My prediction would be that the “domino theory”

I believe the democratic development in the world is moving to the new stage after having a number of countries who give into lip service of democratic regimes. You can see authoritarian regimes are still around everywhere under the name of democracy.

Some elections were being conducted but there are a lot of regimes who are elected constitutionally and legally but it is not democratic in nature. They may wreck election results, they may also create rules that allow authoritarian regimes to survive for decades. My suggestion would be that this is the time when the world are going to change  because the wind of democracy is very strong. 

It is moving rapidly across the globe. In the world today,  we could categorized different countries. Although  everyone pledged democracy as ideal, even communist countries also call themselves democratic countries. Therefore democracy  itself is not merely the saying that we are democratic,  it has to be in essence, not only in forms. There must be substance of democracy.

We can see in the world where particularly in certain areas in the West, democratic root has taken place and has  shown results. There are countries in the world that are half baked democratic and there are others who totally undemocratic. I believe that this is an era where the wind of  democracy is moving across the globe. Therefore you see the evidence today in the rapid change in the globalized world and the world where information passes through everywhere costlessly. You can go through the internet and get information easily.

People are not putting up with authoritarian regimes any longer and you can see clearly as you see today in Tunisia, in Libya, in Bahrain in Yemen, in Sudan,  in Jordan, in many countries and they would spread even more. My prediction would be that the domino theory  will work one more time. You will see that if Libya and Gaddafi gave in, what will happen. Many more countries will take the same idea on the street and will be demands of protesters for changing regimes.

People revolution is name of the game today,  in effort to move to democratic institution to be built more solidly later. Therefore my prediction is that there will be agitation wanting democracy in essence more. Hopefully the transition after people revolutions in many countries are very smooth and truly change in the structure of the society to the democratic society indeed.

Therefore my view is that this is the time of democratic wind blow into the world. Let’s hope that with wisdom, democratic institutions can be built in transition so that democratics in essence could happen. This is my view of what is happening today.


Exchange lotteries into money for the future

Recently, Thailandrsquo;s Juridical Council resolved that the Act allowing two-and three-digit lotteries does not exonerate the previous government. Instead of that Act, this government intends to amend the 1974 Lottery Act and use it. The revised Act will oversee legal lottery ticket distribution, but first it must be approved by the National Legislative Assembly.
The government now reconsidering the Lotteries Act causes many people to worry. If it revives legal lottery sales, many problems may arise which the existing legislation cannot answer. One of the primary concerns is how to prevent the lotteries from misleading people, especially the poor, whose pockets will be even emptier as a result of the lotteries. Thus, the government needs to be very careful as it reconsiders this sensitive issue.

I argue that the government should avoid misleading the public in any form. At the same time, I also understand that restricting the behavior of lottery fans is difficult and takes time. It is impossible to eliminate lotteries in the near future because Thais are by nature risk-takers who hope that by investing a little money, they will have a chance at winning big money. Lotteries represent a hope that is within their reach, and some people see gambling in lotteries as less risky and damaging than other daily activities such as having an accident, experiencing a natural disaster, or encountering a criminal.

Therefore, if the government revives lotteries, I propose that it revises the form that lotteries take. I also advocate that the government refrain from viewing lotteries as government income. Instead, I propose that the government place all lottery income in a long-term trust for the benefit of the people, something that can become a long-term security for the people. In this sense, lottery income can help strengthen the future of our people.

Use lottery money to create future
income.The government can introduce a new form of lotteries, for example, something like lottery-savings, something which will benefit the buyer afterward. But, in this case, the reward is not 100% of the income but for receiving income from lottery will be put as a saving for lottery buyer in the future .

Re-stipulate the distribution of lottery income
. Lottery monies can be divided into 3 types. First, some money will be used as prizes. Second, some money will be returned to each buyer as savings to be used when they retire. The third portion would be sent to the Ministry of Finance, where it would be used to provide welfare for all Thai citizens.

Assign financial institutes as hosts.
The new-form of lotteries would be based on the concept of helping lottery players increase their savings. This would mean that government financial institutes such as the Government Savings Bank would manage the lottery-savings. Lottery retailers may be allowed to take the lotteries winnings from the financial institute and distribute them, provided the retailers will properly collect the buyersrsquo; information and honestly manage the saving accounts for them.

Decrease the values of the top prizes but increase the number of prizes
so there will be more winners. If the government wants to retain lotteries, it should considering the values of the prizes. Rather than letting lotteries gain increasingly higher top prize values, thereby attracting new lottery players, it should adjust the values of the prizes, so more people will win something, even if the amount is rather moderate. This would decrease the hyper attention that the huge prize money attracts.

We must bring this proposed Act into the National Legislative Assembly for debate before any further decisions are made. The government itself should study how to prevent the grievous consequences that lotteries have and how to stipulate reformat lotteries to decrease and eventually end all types of gambling.

What is new about the new Constitution?

The first referendum vote in the Thai political history will take place shortly amidst the social equivocation as to whether to accept or reject the draft. Before voting in the referendum, which in my view is a highly important channel to usher the country back into normalcy, the public should refrain from letting themselves be influenced by feelings or prevailing trends. Rather, they should have enough opportunity to carefully consider the substance of the draft constitution by themselves.

As an economist, I have compared the 1997 Constitution with the 2007 draft, particularly where related to policy thinking and economic issues. I hope my comparative analysis provides the public with better information for making their voting decisions.

The concept behind both 1997 and 2007 Constitutions has not changed; namely, the emphasis on liberal market economy, market mechanisms, and state responsibility in providing public welfare.

Such a line of thinking resonates with the concept of lsquo;social liberalismrsquo;, whose major tenet involves the provision of equal economic opportunities for all and allowing for the free functions of market mechanismsmdash;with the state exerting minimal control. Examples include the provision of laws against market monopoly, the setting up of oversight bodies, and the setting of minimum wage, among others. The state also has the responsibility in providing education, public healthcare, and other public services on an equal basis using the national tax base.

If we consider the similarities between the two charters, we will find that all the provisions on the economy in the 1997 version remain intact in the 2007 draft, be it the regulatory oversight to ensure a liberal economy with check-and-balance mechanisms; the promotion of equitable income distribution; the provision of state subsidies for education and healthcare; and the decentralization of fiscal authorities to local administrations.

The added substance in the new charter is mostly about minor additions, such as the stipulation concerning the methods of income distribution through the protection, promotion, and expansion of career opportunities, and the detailed provision enabling the poor and the disabled to have access to educational subsidies.

The new constitution has three new major additions:
The first one involves the provision that a treaty or an agreement which provides for a change in the Thai territories or the jurisdiction of the State, or which have impacts on economic or social security, and result in trade, investment, or budgetary commitments, must be approved by the National Assembly and must be open to public participation. The details of such agreements must be made publicly available. In addition, organic laws concerning compensation policy for those adversely affected by such agreements have been added.

Another addition involves clarifying the rules of budgetary procedures while making them more transparent and subject to better oversight with a view to improving economic stability. For these purposes, there is a proposal that the national budget bill must include detailed information on state revenues and fiscal status in the past year. There is also a provision requiring the promulgation of fiscal and monetary laws to serve as framework for public expenditures, and demanding that explanation be presented to the National Assembly on the revenues that will not be returned to the state coffer or non-budget.

The last addition concerns state enterprise reform. A clause stipulates that the state must provide basic essential infrastructure that is not monopolized by the private sector, and that the state cannot own more than 51 per cent of the basic networks of infrastructure essential to the peoplersquo;s lives or national security.

When considering only the economic provisions, I am of the view that the 2007 draft charter is an effort to correct the loopholes of the previous constitution that were responsible for several economic problems in the past administration, such as free trade agreement negotiation, state enterprise reforms, lack of transparency in public finance and budgetary procedures, income distribution, and educational subsidies.

I agree with the above additions, particularly the legislative clauses supervising the process of entering into international treaties and agreements and requiring better transparency and oversight for national budgetary procedures. The principle that bars private sector monopoly of basic infrastructure is also a positive addition.

Nevertheless, there remain some other economic issues that should also be incorporated into the new charter, such as the stipulation that contract-making between the pubic and private sectors be more transparent and subject to more scrutiny, and that consumer protection and compensation be more efficient, etc.

The inadequacy of national budget for public welfare remains another issue that has not been tackled in the new draft charter. Although the provision of free compulsory education is based on a good principle, it may cause serious budgetary implications. My view is that people who can afford to pay for the education should be allowed to contribute to the national budget. This involves finding ways to expand the tax base to alleviate the budgetary burden of state welfare provision.

However, a more important issue is that emphasis should be given not only to the constitutionrsquo;s substantive provisions, but also to whether the government seriously implements and concretizes the principles enshrined in the charter. It is crucial not to repeat the past mistakes whereby the constitution is not much more than letters on a piece of paper.

Economy Complexity and the Wealth of Nations

Some of us may have heard that countries specializing in production will benefit and be wealthy from trade. However, latest research on the complexity of the economy gives us a different view.

In this research conducted by Ricardo Hausmann, Professor in the Practice of Economic Development, and Director of the Harvard Center for International Development, he and CID Research Fellow, César Hidalgo, (author of “The Complexity of the Economy and the Wealth of Nations,” Harvard Magazine, March – April 2010) built on their previous research in which they had mapped out “product space” by depicting clusters of product groups according to their relatedness. (I wrote an article on this topic, entitled, “The Concept of Monkeys Jumping … An Application for Setting National Development Direction,” published in Bangkok Biz, Jan 10, 2007).

In their new research, Hausmann and Hidalgo use an analytical tool, the Network Science Method, in order to explore the linkage network of complex systems, and analyze the variety and rarity of export products. This better reflects the picture of the economy than does a consideration only of gross domestic product or GDP in which economic structure is not demonstrated.

They explain that most rich countries have complex economies and produce highly complex products. In other words, at the corporate sector level is specialized, but at the country level it is diversified.

The question is how the complexity of an economy is connected to the wealth of nations? Both researchers answered that different countries have different capabilities and different products require different sets of capabilities. Therefore, the country which has more capabilities not only produces a wider range of products but also products that very few countries can produce.

The data has shown that most rich countries will accumulate new capabilities and unite these with original capabilities they have and this enables them to produce highly complex products over time. After that, they will start developing new products to enhance those capabilities  that they have accumulated. However, building up new capabilities   in relatively poor countries where there is less complexity and obviously lower or fewer capabilities  will not improve their production of complex products because added capabilities might not support existing capabilities.

This research can be applied to Thailand’s case where Thailand wants to be more developed and to prosper more than in the past, thus to pay attention in promoting appropriate industries is very important.

I think that Thailand’s strengths are not clear. The government should conduct serious research on this to discover which industry can be number one in the world and which industry can have the most linkage effects. Then research and development in that industry can be promoted and accelerated in order to lift Thai industry up to produce more complex goods, which the country will benefit more from, thus also adding new capabilities to the country. Moreover, the government should further push “cluster creation” to create linkage and exploit it in order to develop other industries, not to just target one industry.

In this free trade era in which competition is very aggressive, free trade can either represent opportunities or threats to a country. If we do not drive our country strategically, but let things happen by chance, Thailand will not benefit from this wide open opportunity and might be exploited by others too.

Should the 30% Reserve Measure be cancelled or not?

Should the 30% Reserve Measure be cancelled or not?
Should the 30% reserve requirement be scrapped?

Since the Bank of Thailand (BoT) announced the 30% foreign reserve requirement on 18 December 2006, the policy measure has divided the public opinion as to whether it should remain or be scrapped.

Different opinions regarding this policy measure have again flared up when a group of manufacturers and exporters demands that the 30% reserve requirement be continued to prevent excessive capital inflow and to rein in the Baht appreciation. Those working in the money and capital markets, on the other hand, want the policy abolished in order to regain investor confidence and boost foreign investment.

My opinion is that this measure should not have been imposed in the first place. But now that it had already been in place, revoking it in a sudden manner may not be productive. I think the measure should be done away with in an appropriate timeframe. But in the short run, canceling or keeping it has both good and bad consequences. Amidst the debates about this policy, I have some reservations for the unreasonable claims made by those demanding for its abolition.

1. The claim about the measure’s lack of efficiency.

Those wanting to do away with the foreign reserve requirement claim that the measure cannot effectively control foreign capital inflow, which results in the continuous appreciation of the Baht currency, and later the costly intervention by the Bank of Thailand.

The above claim does not seem to hold water because it must not be forgotten that the Baht’s quick appreciation in 2006 was caused by the quick capital inflow associated with bond market speculation. That massive speculation necessitated the use of foreign reserve requirement policy in December of that year. At present, the policy still applies to capitals in the bond market and property funds.

In addition, if the foreign reserve requirement policy does not have any effect in preventing the foreign capital inflow or stabilizing the Baht, whether or not it is cancelled or continued would not make any much difference in term of achieving the Baht’s stability. Therefore, the claim that this policy measure is not efficient in monitoring the Baht’s value is not the actual reason behind the demand to discontinue it.

Moreover, the fact that the Bank of Thailand intervened and lost as much as 200 billions in two years to save the economy means that canceling the measure will not recoup the lost already incurred anyway. On the contrary, canceling the measure might make the BoT lose even more. The reason for this is that, f the measure is abolished while the BoT still intervenes in the Baht currency, the rising Baht will require that the Bot use the Baht to intervene more to offset the increasing risk of loss. The strong Baht will also decrease the value of US dollars in the reserve in Baht terms.

2. The claim about investors’ confidence.

Those wanting the foreign reserve requirement measure scrapped believe that the measure has a negative psychological effect that shakes investors’ confidence in the Thai economy and make them shy away from investing in Thailand. They claim that these investors are afraid that a part of their capital will be deducted for the reserve requirement, or that the government will announce further foreign capital control measures.

If one considers the claim that some investors do not realize that the BoT has abolished most reserve requirement measures, except those for the capitals in bond markets and property funds, one will find that this is unlikely the case. This is because most foreign investors are financial institutions specializing in investment that must have done extensive research or had channels of information on Thailand before making their investment decisions.

As for the claim that canceling the measure will increase investor confidence and that keeping it will create concerns that more measures will come out or that the measure will be enforced more stringently, the analytical theory about investors’ speculative behaviors indicates that the announcement of the 30% reserve requirement measure has already damaged the credibility of Thailand’s policy-makers. Most investors, therefore, do not think there will be more measures coming out even if the Baht currency suffers from severe fluctuation. As a result, even if this measure is cancelled, investor confidence may improve only slightly rather than significantly.

In addition, impacts from the Sub-prime crisis in the U.S. have eroded the confidence of investors all over the world as they expect a recession and massive fluctuation in the world economy. Therefore, canceling the reserve requirement measure with the hope that it will stimulate more foreign direct investment is not a realistic expectation. This is because investors will mostly likely slow down their investment and focus on short-term rather than long-term investment. Moreover, discontinuing the reserve requirement measure without a fall-back policy will generate high risks as this will deprive Thailand of the tools against currency exchange fluctuation—a hazard to those involved in international trade.

In my view, public sector investment and spending should be an important tool for stimulating the Thai economy, while currency exchange policy should aim at preserving stability rather than attracting foreign investment. Therefore, keeping the 30% reserve requirement is likely to add safety to the Thai economy.
However, the foreign reserve requirement measure alone is not adequate in preserving currency value stability and other measures are needed. In my view, the BoT should use other measures that cost less than the Baht currency intervention, such as lowering the interest rates, supporting Thai investment overseas, expediting overseas debt repayment, and supporting the import of capital machinery, among other measures.

Renewing our thoughts kriengsak chareonwongsak : Still Hope for Bangkok and Thailand

Professor Kriengsak Chareonwongsak Visiting Fellow, June 2007 – June 2008
Professor Kriengsak Chareonwongsak is President of the Institute of Future Studies for Development in Thailand and Chairman of Success Group of Companies in Thailand.
He is a Visiting Fellow of the Oxford Internet Institute conducting research on Internet Filtering in Thailand.
He is also a Senior Fellow at Harvard University’s Center of Business and Government and an Associate, Weatherhead Center for International Affairs, Harvard University.

Professor Kriengsak Chareonwongsak has taught at universities overseas and in Thailand on economics, public policy and development issues.
His academic analyses and proposals are popularly read, having been published in 150 books for public readership and in over 3000 articles on a variety of topics, with his perspectives often highlighted in interviews carried by a wide variety of media sources in Thailand and overseas.
He has presented over 200 academic papers at international conferences, and has given over 2200 lectures in fifty countries.

Professor Kriengsak Chareonwongsak obtained first class honors and a PhD in Economics from Monash University, Australia, 1981 and a Masters of Public Administration from Harvard University.
He is a Research Professor at Regent University, USA and an Adjunct Professor at many universities both in Thailand and overseas.
Prior to Thailand’s recent parliamentary dissolution, Professor Kriengsak Chareonwongsak was an elected Member of Parliament.
Currently he is on the Executive Board of the Democrat Party, Thailand, having also held fifty positions as an active participant in various organizations and committees at national level.
Professor Kriengsak Chareonwongsak was a member of Thailand’s National Committee for International Economic Policy.
Professor Kriengsak Chareonwongsak was also Chairman of the Education, Religion, Arts and Culture Commission, Vice Chairman of the Economic, Commerce and Industry Commission of the National Economic and Social Advisory Council, and Advisor to the Senate Foreign Affairs Commission and Privatization Commission.

The Institute of Deposit Protection Act: The next step in strengthening Thai financial sector credibility

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard University’s Center for Business and Government
               Thailand’s financial and banking system may be considered, in my opinion, one of the best innovations in our economic history. In fact, I metaphorically compare it to magic; the initial value of banknotes and coins created by the government is increased many times in demand deposit and savings accounts through our financial system.

               Banks or financial institutes manage to do such wondrous things because when they receive deposits, they reserve the bare minimum amount of deposits – as required by law – and lend the rest to debtors, who re-deposit their loans into the banks again, this time with added interest charges. In other words, banks hold less cash reserves than the value of their accounts, which they must repay when depositors want to withdraw.

               For this reason, the most important factor in maintaining this fragile financial system is to strengthen the credibility of the private sector in regards to Thailand’s financial system. Just imagine if there were a rumor about one bank’s bankruptcy. If depositors believed this rumor were true, all would rush to the bank to withdraw the total amount of their accounts. Eventually, the bankruptcy rumor would come true and become a self-fulfilling prophecy.

               Don’t scoff yet. This same depositor panic took place in the 1930s in the United States, causing the Great Depression that plummeted the USA and Canada into economic despair for some ten years. History repeated itself in Thailand in 1997, when financial and economic crisis shook our society.

               Therefore, to strengthen depositor confidence, the American government initiated deposit insurance in 1933 and established the Federal Deposit Insurance Corporation to administrate the system. Milton Friedman, a Nobel Prize economist, rightly observed that private sector confidence toward the banking system dramatically increases after the adoption of deposit insurance. The proof is found in a significant decrease in the number of bank suspensions after the adoption of deposit insurance.

               However, economic principles dictate that fully insuring all deposits relieves depositors of any personal responsibility over their own investment decisions, allowing them to engage in risky behavior called “moral hazard,” such as investing all their assets in the financial institute with the highest returns without considering its stability. Thus, the U.S. government does not insure the full amount of deposits. In 1934, it initially insured only 5,000 dollars per deposit account; however, this has been increased to 100,000 dollars now, in accordance with America’s economic growth.

               The first chapter of Thai deposit insurance history was written during 1997’s economic crisis, when the government of that time put forward a resolution to fully insure (blanket guarantee) all depositors and creditors of financial institutes. This was done in August 1997 to pull investor confidence in Thailand’s financial sector back from the brink of panic. The Financial Institution Development Fund (FIDF) was also established at that time to administrate it.

               After the crisis had abated, the government canceled the insurance for the creditors, in accordance with international custom and aimed at establishing a permanent deposit insurance organization. To fulfill this intention, the government put forward its Institute of Deposit Protection Act.

               According to this act, the Institute of Deposit Protection (IDP) would be established. It would be government-owned but neither a bureaucracy nor a state enterprise. Its board would be derived from the Ministry of Treasury, the Bank of Thailand, and from Thailand’s pool of financial, treasury and legal experts. Unlike current deposit insurance, only the first million baht of deposit would be protected under the provisions of the Act. During the initial period, all member banks and financial institutes would be required to render regular payments to the Deposit Protection Fund at a flat rate of 0.4 percent of the total value of their deposit accounts. After the system had been well established, the payment system would be changed to a risk premium rate, which would be set by credit rating companies and would vary according to each bank’s credibility.
               The Institute of Deposit Protection Act was approved by Cabinet on November 30, 2004, and was sent to State Council for consideration. Nearly three years later, on August 28, 2007, Cabinet approved the draft Act and sent it to the National Legislative Assembly for debate and approval.

               However, the State Council has advised that the liability of the Ministry of Treasury, guarantor of all deposits in financial institutions, be reduced to comply with stipulations in the Public Debt Management Act (PDMA). Yet, if the government insists that the Ministry of Treasury be IDP’s guarantor, the PDMA must be revised.

               I agree with the general principle of this draft act. For example, limiting insurance to the first million baht per deposit account will discipline the financial behavior of people with investment assets, who do not diversify their portfolios. They should bear
the cost of their own risks. Full insurance would only create a moral hazard in the private sector, when investors maximize their own benefit without weighing their own risks. This would force the government to bear the full weight of their investment decisions.

               I also agree that IDP’s board should be derived from various organizations and that less stable financial institutions should pay higher risk premiums. These two steps would decrease the moral hazard of financial institutes and banks. In my opinion, preparing the financial sector for risk premiums is IDP’s first priority.
               However, this move could cause some negative effects.  The higher the risk premiums, the higher the costs that financial institutions would bear for deposits. This may become an incentive for financial institutes and banks to raise funds from other sources. A decrease in the demand for deposit services could lead to a larger gap in interest rates between deposit rates and loan rates and, finally, depositors may suffer from falling deposit interest rates.
               Most importantly, I disagree with the move to place the Ministry of Treasury as IDP’s guarantor. This would only signal  to the financial sector that it is still protected by the government. It proclaims that if an institute becomes bankrupt, it will be rescued by the government, the common practice in pre-1997 economic crisis days.

               Making the Ministry of Treasury IDP’s guarantor will not decrease the risky behavior of financial institutes, especially that of big banks, who perceive themselves as “too big to fall.” Therefore, this move goes against the original intention of the draft that aims at decreasing risky behavior within the financial sector. In my opinion, the government should not be the guarantor. Financial institutes and banks should take the responsibility for their own risky behaviour on themselves, while the government plays the role of an auditor who stabilizes the IDP and guarantees repayment of private sector deposits should a bank go belly up.

               I hope this act will fulfill its original mandate: to strengthen the confidence in Thailand’s financial sector and to decrease risky behavior in all sectors. This will prevent our beloved country from facing the trauma of economic crisis again.
Bangkok Post 28/10/2007