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Thai academics differ with IMF's Fischer


March 5, 1999 -- Thanong Khanthong outlines the difference between the IMF-advocated market fundamentalism and the Thai academics' ad hoc non-market principles.

Fundamental differences emerged between the International Monetary Fund's first deputy managing director, Stanley Fischer, and Thai academics during a spirited roundtable discussion on the weekend, with the former arguing in favour of market fundamentalism and the latter advocating non-market principles.

Restoring market confidence lies at the heart of the International Monetary Fund (IMF) programme to revive the moribund Thai economy. All the IMF's reform measures -- macro-economic adjustment, liberalisation, financial and corporate restructuring, structural and legal reform -- are aimed at allowing free market mechanisms to work again and at attracting foreign investment. The quicker investor confidence is restored, the faster the economy will recover. Whatever happens, the market will come right in the end. This is the core of market fundamentalism.

Compared to other countries such as the United States and Japan, Thailand's reforms have been ''going rather fast'', Fischer said.

''I must remind you that no country comes through a credit crunch and restructures its financial system in a few months. When the US went through a credit crunch, it took a couple of years to fix. Japan's been in it for years now. It's not an easy thing to resolve quickly,'' he said.

''It's very hard for everybody in a crisis. It's a matter of personal behaviour. It affects personal lives and countries,'' he added.

Fischer emphasised that Thailand should not slow its reform process because without financial and corporate sector reform there will be no recovery.

Finance Minister Tarrin Nimmanahaeminda, who did not participate in the roundtable discussion, also strongly believes in market fundamentalism, along with other prominent Thais including former prime minister Anand Panyarachun and Thai Farmers Bank (TFB) president Banthoon Lamsam.

Banthoon's willingness to bite the bullet by striving to adhere to free market principles has allowed TFB to survive the crisis better than other commercial banks. Both Tarrin and Banthoon have said that once conditions are right, Thailand's reforms will produce quick results, drawing back large amounts of foreign capital to fuel the country's economic recovery.

However, Virabongsa questioned whether market fundamentalism would work during this critical period. The damage to the Thai financial and corporate sectors was so serious that no reforms would work. They won't attract foreign capital, but will only add to the pain.

The Thai banking system requires Bt1 trillion in recapitalisation to satisfy a tough international standard, he said, which was beyond the capacity of Thai shareholders to come up with. The rules governing Thailand's banks should be relaxed because the government has already guaranteed creditors' debts and public deposits, he added.

''Thailand's fundamentals are no better than those of Malaysia or Singapore, so how can the country afford to have a stronger banking standard,'' he asked. If Thailand continues to adhere to the IMF banking reform programme, the government will eventually have to nationalise all our banks or sell them cheaply to foreigners.

Dr Kosit said the pace of economic reform raised legitimate questions when Thailand's recovery depended on a turnaround in the economies of both Japan and Asia, which was presently doubtful.

''We were told not to wait before implementing the reforms; that the longer you wait, the more you'll harm the economy,'' he said. ''What's so special about completing the reforms by 2000? Will the world end after that time?''

Dr Ammar Siamwalla, an economist of the Thailand Development Research Institute, also questioned the IMF's financial reforms, saying Thailand's financial culture had worked fine for the past 40 years. Suddenly, it became a target to be uprooted.

Fischer admitted that the questions posed by the Thai academics were difficult to answer, particularly for those who didn't have to tackle the economic crisis first-hand. But he argued: ''If the world is hostile should I act differently or should I not? I don't see very much difference in what should be done in either a strong or weak economy. I don't see how it will help Thailand to slow restructuring if the world economy is weaker.''

Fischer believed that Thailand and the region would recover soon, saying most of the growth factors -- openness to world trade, abundant entrepreneurial skill, high savings rate, strong investment in human capital -- were still in place. ''I am willing to bet that Asia will gain the lead in world growth between 2001 and 2010,'' he said.

Fischer said that the next phase of Thailand's recovery would depend on two factors: macro-economics and structural reform. In the macro-economic area, monetary policy has been effective. He said fiscal policy should concentrate on expansion, with one option being to cut taxes.

''Micro-economic policies such as long-term trade and financial sector reform should be continued, now slowed. Corporate debt restructuring should be encouraged,'' he said.

''I'm optimistic that Thailand will recover when I look at your situation compared to what other countries have done under similar circumstances.''



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