Trade Investment and Economic Policy in Asia - Case Study Example

Running Header: Trade Investment and Economic Policy in Asia Student’s Name: Name of Institution: Instructor’s Name: Course Code: Date of Submission: Trade Investment and Economic Policy in Asia Introduction There have been numerous claims and observations that the Asian economy has been growing to global standards as a result of the economic reform measures that are being taken by the Asian States. The truth about these claims is however debatable and requires sufficient and relevant evidence to support it. This essay discusses these claims in particular reference to Thailand. It outlines the major economic reform measures that are currently in place in Thailand. This paper further highlights the indicators of globalization in Thailand such as finance, trade and ‘new-economy’ indicators. It also explains the macroeconomic performance of Thailand in the current global crisis. This essay finally discusses whether or not the current Global Financial Crisis (GFC) would affect the economy of Thailand and the prospects for its speedy recovery if the economy would be affected negatively. The economy of Asia is said to comprise of over 46 different states that have over 4 billion people living in them. This translates to about 60% of the world’s total population. China is known to be the largest and most powerful economy in Asia and the second largest in the world. The wealth found within Asian countries varies widely between the different states (Allen 2008). The variation and differences are brought about by the vast size of the Asian continent. The large size definitely translates into huge range of differing cultures, historical ties, government systems and environments (Ammar 1998). In terms of nominal GDP, the largest economies in Asia are China, Japan, India, South Korea, Indonesia and Iran. Wealth that is measured in terms of GDP per capita is mostly concentrated in territories that lie in East Asia. These include South Korea, Japan, Hong Kong, Taiwan and Singapore. Other oil rich states in the middle region are also considered as wealthy. These include countries such as United Arab Emirates, Qatar, Saudi Arabia and Iran (Appleby 2010). Economic surveys carried out in Asian countries reveal that Asia is currently undergoing industrialization and rapid economic growth that are spearheaded by China and India. These two countries are the fastest growing major economies of the world. This industrialization and rapid growth is exceptional of Japan, Singapore, Hong Kong, Taiwan and South Korea which are already industrialized at great levels (Benjamin 2008). The countries in East and South East Asia usually rely on trade and manufacturing for their economic growth and sustenance. Those in the Middle East on the other hand rely more on the production of goods such as oil which is the main commodity. Since the rest of the world has been experiencing large trade surplus and rapid economic growth, Asia has not been left out. It has in fact accumulated over US $ 4 trillion in terms of foreign exchange reserves. This is more than half of the world’s total foreign exchange reserves (Bank of Thailand, Economic Research Department 1998). Thailand is a country that was formerly called Siam. It is today officially referred to as the Kingdom of Thailand which is centrally located in Southeast Asia. It is bordered by Burma, Laos, Cambodia, Malaysia and the Andaman Sea. Thailand is therefore ruled by a King. The economy of Thailand is one of the newly industrialized economies in Asia (Ministry of Finance, Fiscal Policy Office 1999). Thailand is currently heavily dependent on exports. In fact, exports account for over two thirds of Thailand’s Gross Domestic Product (GDP). According to the Ministry of Finance, Fiscal Policy Office (2010), Thailand experienced a Gross Domestic Product growth of 8.0% in 2010. This made Thailand to be one of the fastest growing Asian economies and the fastest growing South East Asian economy. Currently, Thailand has a GDP net worth of 9.5 trillion Baht. This makes Thailand to be classified as the second largest economy in South East Asia. The first is Indonesia. It is the fourth richest country in South East Asia in terms of GDP per capita (Pugel 2007). Some of Thailand’s economic strengths include its automobile industry which produced more than 1.6 million cars in 2010. This was an industry growth of 63% that made Thailand to be ranked 13th in the world among the countries that produce motor vehicles. Tourism is also another stronghold of Thailand since it contributes to over 6% of the country’s GDP. For these reasons, unemployment rates are very low in Thailand. As of 2010 for example, the unemployment rate in Thailand stood at 1.2%. This made Thailand to have one of the lowest unemployment rates in the entire world. In Asia alone, Thailand boasts of having one of the lowest rates of poverty (Bhagwati 2002). During the 1990s, the Thai financial market was envisioned to strengthen by the International Monetary Fund (IMF) if the country pursued trade liberalization. Thailand accepted the May 1990 proposal that had been made by the IMF and it proceeded to lift controls in foreign exchange on current account transactions. This was among the first steps taken by Thailand to ensure its economic recovery. In fact, it marked the start of the continuous steps of economic/financial reform measures that were taken by the country (Chang 2003). Another major economic reform measure that followed saw the abandonment of most restrictions on capital account transactions. This was done in April 1991 and it encouraged investors to consider Thailand as a suitable investment destination. In February 1994, the third major economic reform measure taken by Thailand saw outward direct investments being given more freedom of trade. This meant that investors who wanted to engage in direct trade with the outside world now had more freedom and fewer restrictions in doing so. Travel expenditures were also greatly reduced and travel restrictions were now very few. There were numerous additional channels of cross-border payments that were created to facilitate cross-border transactions. All these major changes facilitated free trade which was a major contributor to economic growth and stability (Thailand Development Research Institute TDRI 1999). According to data collected from the Ministry of Finance resource center in Thailand, another major economic reform measure was the establishment of the Bangkok International Banking Facilities (BIBF) in March 1993. The main aim of developing the Bangkok International Banking Facilities was to promote the development of an international financial centre. The Bangkok International Banking Facilities transactions were granted some tax privileges so that they could compete effectively with other financial centres. Examples of these tax privileges included the reduction of corporate income tax, withholding tax on interest income and exemption from special business task. In January 1995, the economic reform measures were taken a step further when the government gave permission to the Bangkok International Banking Facilities to open up more branches in the upcountry provinces. This ensured that its services would reach all the regions within the country, regardless of their remoteness (Brakman 2006). There were further measures taken to reform the economy in Thailand. According to the Thailand Development Research Institute (TDRI) (1999), interest rate ceilings were gradually removed to encourage the mobilization of savings. This move was also meant to make the financial system in Thailand more dynamic. In June 1989, Thailand experienced the abolishment of interest rate ceilings that were charged on long-term deposits. Later in January 1992, short-term deposits and savings also had the interest ceilings abolished for them. Interest rate ceilings for loan rates were abolished in June 1992 (Smith 2009). Commercial banks were soon given more flexibility in the sense that the central bank loosened the requirement of the government bond holding which was a prerequisite for the commercial banks when opening up new branches (Sheng 1996). A report (Nukul Commission Report 1998) shows that commercial banks were no longer obligated to extend credit services to rural borrowers or those in the remote areas. This was left to the discretion of the banks, which meant that they had the freedom to cover more relevant geographical areas and related occupations. The government then gave permission to the commercial banks to conduct new businesses. These included businesses such as acting as securities custodians and registrars, managing of mutual funds, conducting financial feasibility studies, underwriting and dealing, financial consulting and selling public sector debt instruments. Security and finance companies were also given the same freedom in a bid to promote the growth and sustenance of the economy (Eugene 2007). The government also formulated a number of new organizations and frameworks. An example of this included the Securities and Exchange Act that was passed in May 1992. This Act gave qualified limited companies permission to access direct finance by allowing them to issue debt instruments and common stocks. Through the Act, the Securities and Exchange Commission (SEC). This commission was an independent agency that was charged with the responsibility of supervising capital market activities that were related to derivatives, bonds and equities (Ministry of Finance, Fiscal Policy Office 1999). All the steps mentioned above are financial liberalization measures that were taken to ensure economic growth. These steps were however not taken in moderation and they soon led to the flooding of capital into the Thai market between 1990 and 1996. This situation ended up leading to the current account deficits, speculation and fuelling investment spending to a very great extent. The excessive and imprudent credit extension meant that there was too much risk taking which led to the deterioration of asset quality. External outstanding debt expanded from US $ 29 billion to US $ 94 billion. This was between 1990 and 1997. Foreign debts soon mounted to all time highs and there was a surge in the private short-term portion that led to increased vulnerability (Ministry of Finance, Fiscal Policy Office 1999). Thailand was in a major currency and financial crisis since 1997. According to the report by (Ministry of Finance, Kingdom of Thailand 1999), the government sought to resolve the crisis by taking a systematic approach. This was done through the designing and implementation of policies that were meant to facilitate the economic recovery process. These strategies, policies and approaches were also meant to lay a new foundation for future economic growth and sustenance. The Ministry of Finance broke down the economic recovery process into three processes. These were stabilization, stimulation and structural reforms. The government prioritized on stabilizing the currency situation and the financial system. Emphasis was placed on rebuilding the international reserves that were depleted so as to restore confidence in the currency (Ministry of Finance, Fiscal Policy Office 1999). These measures included appropriate fiscal and monetary policies which have yielded visible results. The net international reserves increased and the currency has regained and maintained its stability. Macroeconomic stability and recovery efforts have been successful because of these policies. The financial sector has also undergone major restructuring by the government in a bid to address the financial crisis. The ailing financial institutions have benefitted from government intervention to help rescue them from the situation that they were in. Other measures taken included the strengthening of prudential and supervisory guidelines, the provision of a recapitalization scheme that was meant to strengthening the ailing financial institutions and handling the issue of non-performing loans (NPLs). The financial system has been able to restore the confidence in the people and the currency is now much more reliable than it used to be. There are major issues that need to be addressed in regard to the current economic reform measures that are currently in place. One of these issues is Thai’s macroeconomic performance in the current global crisis. Thailand has a macroeconomic framework and policies that are concerned with the country’s economic performance and outlook. The macroeconomic framework and policies have been effective in ensuring macroeconomic growth and stability but there have been issues that need to be addressed due to the sharp economic downturn and the financial and currency crises that have been common since 1997. The country needs to address the net international reserves that were depleted because of unsuccessfully and inadequately defending the Thai baht. The systemic problems in the financial sector should also be addressed. Another issue that needs to be addressed in regard to macroeconomic performance is the serious shortage in liquidity that has been faced by the real sector. Even though Thailand faced major macroeconomic problems in 1997 that have affected its economy to date, it has taken systematic problem solving approaches that have seen it steadily progress in resolving the macroeconomic problems that it faced (Nukul Commission Report 1998). Trade is another issue that needs to be addressed in Thailand. The country has entered into numerous free trade agreements with other countries such as Australia and the United States of America. These free trade agreements allow traders to trade their goods and services freely across national boundaries without the interference of the respective governments (Cai 2008). Importers and exporters in these countries engage in free trade of both goods and services. These free trade agreement need to be done in moderation so as to avoid a repeat of the situation that occurred between 1990 and 1996 (Pugel 2003). Finance is also another issue that needs to be addressed. Thailand needs to restore the glory of its currency by ensuring that it takes measures to strengthen the baht over the other internationally recognized and powerful currencies. The international reserves also need to be strengthened so that Thailand can have financial security (Ministry of Finance, Fiscal Policy Office 1999). The global financial crisis that is being experienced currently may not have very severe impacts on Thailand. In my opinion, Thailand has undertaken a lot of measures to ensure that its economic situation is stabilized. The strength of the Thai baht has also stabilized over the past few years (Bransetter 2008). The government has also taken effective measures to raise the people’s standards of living by stabilizing agricultural resources, industrial and power production. Several sectors of the economy such as infrastructure, education and agriculture among others have already been strengthened to such an extent that they can face the current global financial crisis for sometime without being greatly affected. The country has already attained a very high degree of economic stability that can see it through the global economic crisis. It is still undertaking more measures to stimulate the economy of the country. Conclusion The Thai government has continued to pursue policies of economic diversification through its increased agricultural production and industrial development. The first economic development plan by the Thai government began in 1961 and the government has continually committed itself to ensure that the economic growth remains a continuous trend (Brandt 2008). It has been able to do this by using various economic reform measures, key among them the promotion of the private sector development through policies that assist and foster it. There followed policies on exchange liberalization and foreign trade which have seen foreign exchange control remain nominal. These reforms have been responsible for laying the foundation for economic growth in Thailand. Despite all these, there have been many problems facing the Thai economy. There are widespread social ills that are caused by the crisis and the government needs to do more to ensure that the situation is controlled. References Allen, F 2008, China's financial system: Past, present and future, Cambridge, Cambridge University Press. Ammar, S & Orapin, S 1998, Responding to the Thai Economic Crisis. Bangkok: United Nations Development Programme. Appleby, J 2010. The relentless revolution: a history of capitalism, New York, W.W. Norton & Company. 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Thailand Development Research Institute (TDRI) 1999, Social impacts of the Asian economic crisis in Thailand, Indonesia, Malaysia, and the Philippines, Bangkok, TDRI. Read More