‘Inflation targeting’ has become the cause for much controversy in Thailand. The issue in question is clear. When a country’s central bank functions with the belief that it can control inflation using the monetary lever, and that this should be the prime or sole concern of monetary policy, whom does it really benefit?
The Bank of Thailand was persuaded into launching on this strategy in the aftermath of the 1997 crisis, when obtaining IMF support required the government to adopt a deflationary macroeconomic stance. In the opaque words of the Bank of Thailand, in the inflation targeting framework its Monetary Policy Committee uses the short term interest rate as the instrument and “allows the exchange rate to move in alignment with the ever-changing fundamentals, according to the principle of managed floating.”
The problem is that this has not worked. With the interest rate set at 3 per cent for some time now, Thailand like many other economies has been the recipient of large capital flows from the global system. This has had three consequences. The first is that the Thai baht has appreciated over time.
At around 30 baht to the dollar currently, this appreciation is having adverse effects on the competitiveness of domestic producers. More so because trade is an important target of Thai production, and currency appreciation makes Thai exports more expensive in dollar terms and imports cheaper when valued in domestic currency.
Second, an appreciating currency only encourages more capital inflows, since there are gains to be made from the strong baht. Returns made on baht investments yield more in dollar terms if appreciation has occurred during the life of the investment.
Finally, since the central bank is forced to respond to this situation as part of its “flexible” inflation targeting policy, it is required to buy up foreign exchange to stall excessive baht appreciation. This increase in the assets of the central bank, and therefore in its liabilities, implies some loss of control over money supply, which is what the policy regime is supposed to be avoiding in any case.
As these outcomes unfold, a global recession-induced slowdown in growth, aggravated by the floods of last year, have triggered demands from advisers to the new government of Yingluck Shinwatra that the Bank of Thailand should drop allegiance to inflation targeting It should instead, it is argued, pay more attention to the overvalued exchange rate and cut interest rates. A lower interest rate could not only directly spur investment and consumption demand but also discourage capital flows and facilitate the realisation of a more “competitive” exchange rate.
In this view, it is a myth that a higher interest rate helps serve the anti-inflation objective. What it does is impose burdens on the economically disadvantaged who are the first victims and the worst effected when the economy slows. On the other hand it benefits a few, especially finance capital, which is clearly an “interested” advocate of the policy. This view has gained much traction after the chairman of the Bank of Thailand and former Thaksin Shinwatra adviser, Virabongsa Ramangkura, openly declared his opposition to that policy when he said:
“Central banks should change their ideas. Inflation targeting is no longer effective because inflation has been globalized … Commodity prices are driven by global supply and demand, not policy of a particular country. So monetary policy shouldn’t be used to deal with inflation because we can’t do anything. Monetary policy should be used to support economic growth and reduce unemployment, which we call inclusive growth.”
Note the reference to inclusiveness.
Interestingly, though Ramangkura is the chairman of the central bank, these statements of his are being interpreted as indicative of the unwarranted violation of the independence of the central bank by the gvoernment. Prasarn Trairatvorakul, the governor of the central bank, has declared that the chairman’s statements are unhelpful, simplistic and harmful to the country’s and the bank’s image.
At the same time, however, the IMF, which had a role in pushing through this policy after the 1997 crisis, has emerged as an important player in this debate. Sometime back a so-called IMF-inspired independent evaluation of the inflation targeting policy by Stephen Grenville and Takatoshi Ito had showered much praise on the Bank of Thailand’s conduct of this policy. And in the middle of this controversy, the IMF has come out in support of the Bank of Thailand in a leaked, confidential note.
As political strife in the country and the continuing conflict between the Red Shirts and Yellow Shirts make clear, Thailand is a deeply divided society. Worsening the divide are the sharp differences on how the state should address the presence and consequences of the extreme inequalities in income and wealth in Thai society. Thaksin Shinwatra, the communications magnate, exploited those differences and rose to power by veering in favour of welfare measures that would be considered minimal requirements in an iniquitous society.
The branding of his policies as “populist,” his deposition from power and forced exile, the conflict that ensued and the return to power of a version of his party led by his sister, points to how the elite are unwilling to give in to even a modicum of redistribution. The debate on inflation targeting is only another reflection of this version of class war.