♠ Posted by Emmanuel in Currencies at 11/25/2010 12:04:00 AMWhat a difference a decade makes! Just a little over ten years ago, Thailand and South Korea were at the IMF poorhouse after exhausting their foreign exchange reserves. Now featuring coffers full of foreign exchange after export-led recoveries in subsequent years, the real problem they face nowadays is coping with the American-led money-for-nothing barrage that threatens to overwhelm their financial systems with an unwelcome influx of hot money.
So, we have Thailand reviving that IPE chestnut of an idea, the Tobin Tax. Nobel Laureate in Economics James Tobin once suggested that a nominal tax be applied to financial transactions to both generate revenue (for socially useful purposes, one would hope) and to throw sand in the wheels of international finance. There was much heated discussion here in London when Lord Turner and Gordon Brown voiced the possibility of implementing this tax. The City being Europe or, in a broader sense, the world's financial centre, nothing came of it. In the context of the once-Asian financial crisis-hit economies of Thailand and South Korea, however, the goal would be to limit a sharp influx on capital that could promote bubbles and increase volatility due to speculative flows:
Thailand's central bank is prepared to use more capital control measures, including a Tobin-style tax on international transactions, but sees no need to impose them now, the central bank chief said on Wednesday. He said inflation was not a concern at the moment, reinforcing expectations the central bank would keep its trend-setting one-day repurchase rate unchanged at 1.75 percent at next Wednesday's policy-setting meeting.There is even talk of pan-regional efforts to limit capital flows through instruments alike the Tobin tax:
In his first interview with foreign news organisations since taking the helm of the central bank on Oct. 1, Prasarn Trairatvorakul said the Thai economy faces "lots of uncertainties" -- from global economic troubles to a national Thai election expected next year. "The best way for us is to have a variety of policy tools and then be able to use a mixture of them in a good proportion, hopefully at good timing," said the 58-year-old former president of Thailand's No. 3 bank, Kasikornbank .
Asked whether the central bank was prepared to impose a one-time inflow tax or a Tobin tax, he said: "In our toolkit, this is one component. To use it or not is another matter." Nobel prize-winning U.S. economist James Tobin first proposed a small levy on currency trading in 1972 to penalise short-term speculation after the United States abandoned the gold standard.
The idea is gaining steam in Asia. South Korean Finance Minister Yoon Jeung-hyun said on Oct. 19 his country was also studying a Tobin-style tax as easy-money policies in the developed world swamp emerging-market economies from Thailand to Brazil with capital searching for higher returns.
Prasarn acknowledged Thailand's interest rates remained low compared with the country's Asian neighbours, especially given projections that growth will reach as much as 8 percent this year. But he said global capital flows presented a "dilemma". This year alone has seen $30 billion in capital inflows into the country, he said, including $18 billion of portfolio flows. "The more you increase the rate the more you attract this capital flow," he said. "It is like giving our benefits to these undeserved investors. Why do you want to do that?"
He said the Bank of Thailand is in regular contact with other regional central banks and "there could be cooperation" in monetary policies if conditions called for it. He said imposing a Tobin-style tax would be relatively easy, requiring just an emergency decree by the Ministry of Finance with Cabinet approval, rather than overhauling tax laws. But Thailand is treading carefully after tough capital controls in late 2006 triggered a record one-day selloff in the stock market. Those have since been lifted.What can I say? All's fair in love and international currency war. Let James Tobin show us the way.
He described as a "problem" the U.S. Federal Reserve's decision this month to embark on another round of "quantitative easing", buying an extra $600 billion of government bonds with freshly printed money. The U.S. measure has deepened fears of heavy capital flows battering emerging Asia.
In October, Thailand imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai debt to try to stem inflows. More recently the central bank imposed a borrowing limit of 90 percent of the purchase price on new condominiums to prevent the market from overheating.
Prasarn said a possible trigger for further controls could be volatility in the baht on trade-weighted terms, but he said its nominal effective exchange rate was "still manageable"...[He also said] "When you have low interest rates for a long time and you also have a huge amount of capital available, it can lead to problems of an asset price bubble," he said. "We have sent that signal. That's an indication of what we want to tell the public."