On Monday, Thailand's government announced strict new controls on capital inflows, hoping to stem speculative foreign investment that was driving the value of the Thai currency sharply higher. Foreign investors, to put it mildly, freaked out, instantly fleeing the Thai stock market in droves and sending it into a dramatic tailspin. Markets throughout the region trembled in sympathy, inducing agonizing flashbacks of the Asian financial crisis in the late 1990s.
Which, it must be remembered, started in Thailand.
On Tuesday, Pridiyathorn Devakula, the Thai finance minister, embarrassingly backtracked, and announced that the new controls would be relaxed. But from the unforgiving perspective of the international financial community, the damage has already been done. Thailand is no longer to be trusted.
There are two stories to pay attention to here. Let's call them the micro and the macro narrative. The micro narrative looks at recent events within the context of Thailand's political crisis. The military coup in September was supposed to end a prolonged period of political chaos. Foreign investors, much as they were fond of the gung-ho globalization advocacy of deposed Prime Minister Thaksin Shinawatra, were hopeful that the new regime would usher in a new era of stability. They cheered the appointment of former central bank governor Pridiyathorn as finance minister -- he was well regarded for his efforts in rescuing Thailand from the Asian financial crisis 10 years ago and was seen as a sober technocrat.
But it's hard to argue with the perception that Pridiyathorn and the government massively bungled their attempt to slow down the appreciation of the Thai baht. Surprising the international financial community with "draconian" new capital controls is unwise, whether or not the controls themselves might be justified on economic grounds. But reversing yourself immediately afterward, even if absolutely necessary to prevent the further implosion of the stock market, isn't very effective as an image enhancer either. The foreign investment community is fickle; it exhibits all the composure of a starving cat hopped up on crystal meth. Step on its tail, and it will screech, hightailing it for the nearest exit at the speed of light.
The Thai junta came to power and promptly declared that it was going to make the somewhat nebulous concept of "gross national happiness" a priority over more conventional economic metrics. But nobody's smiling now.
And yet, the much more important story is the macro narrative, against which backdrop the Thai government's errors of implementation are basically irrelevant. Thailand is in a pickle. The ongoing decline in value of the U.S. dollar has spurred investors to move their money out of greenbacks and into currencies that are strengthening in value. Thailand's baht has been a major recipient, and is appreciating much faster than other Asian currencies. But some 60 to 65 percent of Thailand's economy depends on exports, and when the Thai dollar appreciates, those exports become less competitive.
Most observers explain the dollar's decline as an overdue response to unsustainable trade and budget deficits, triggered at long last by slowing U.S. economic growth. But some analysts point the finger for Thailand's problems at China. China, as has been well publicized, does not allow its currency to float freely, and has gone to great efforts to keep it set at what most economists agree is an artificially low level. This gives Chinese exports an advantage not just over U.S. goods, but also over those of its neighbors, like Thailand and Malaysia and Indonesia.
Viewed against the larger tapestry, Thailand's woes are hardly of its own making -- they are the function of an unbalanced global economy that cannot easily be put to rights. On one side it is squeezed by Chinese competition, on the other it is buffeted by the international financial speculation. A legion of economists and politicians in the U.S. will argue that a first step toward rebalancing things would be for China to allow the yuan to swiftly rise in value. But does anyone really imagine that China's government officials will be any more encouraged to allow a sharp upward reevaluation of the yuan after watching what happened in Thailand this week? If anything, the unseemly spectacle of foreign investors wiping out billions of dollars of stock market equity in a manner of hours will only reaffirm China's determination to make changes as slowly as possible. The last thing its leaders will ever do is willingly put the stability of their own economy at the mercy of foreign capital.
The bad start to Thailand's week may not have any serious long-term implications for the rest of the region and the global economy. That, at least, seems to be the consensus of most of the financial press coverage so far. But if the dollar continues to decline, other cracks in the global economy will likely emerge. And if nothing else, the Thai stock market meltdown serves as a fine reminder of why the debate over whether sovereign nations should regulate the flow of foreign capital in and out of a country is one of the defining faultlines of globalization today. The speculators who direct the flows of vast torrents of capital liquidity around the world do not care about gross national happiness, they care only about making bets that will pay off in their own favor. Governments have different priorities.