Taking sides in the Battle of the Baht

31 May 1997

Why did our neighbours help defend the baht against international speculators? It was the first time such co-operation had been tried. A small but important bit of economic history.

Last week, two leading international magazines, The Economist and the Far Eastern Economic Review, gave two very different interpretations of the event.

The Review argued that the neighbours helped Thailand only in order to save themselves. If the baht went down, other countries would suffer. Capital would scud out of Kuala Lumpur, Manila and Jakarta. Interest rates would rise, and growth rates slow. The Philippine peso might be scythed down too. A lot of the panicky money would wash up in secure Singapore, pushing up the Singapore dollar, wrecking the island’s export recovery, and provoking another boom-bust property cycle. The regional co-operation was purely and simply based on "self interest".

This argument is nothing more than that old chestnut, the domino theory, now translated from ideological warfare to the currency market. Ah, the 1990s!

But why dominoes should fall in this way is no more obvious than in the old cold war version. The Review helpfully provided a mechanism: the international money men cannot tell the Asian economies apart. To the world’s financial wizards, all Asian economies look alike. If one is weak, they all must be weak. So if one falls, the money men will attack the others.

The Economist took an exactly opposite line. The problem is that the international money men can tell the Asian economies apart. And that is precisely why they are picking on Thailand. The Economist also had a very different explanation of regional co-operation. It’s not a matter of self-interest. Rather it’s reluctant, grudging, and one-time-only.

According to the Economist, "central bankers and finance ministers elsewhere privately resent putting their credibility at stake" to help Thailand. They were not saving themselves. Just the opposite. They were putting themselves at risk. And they hated it. The clear implication is that they may not do so again.

The Economist went on to point out that Thailand is in a much shakier situation than its neighbours. The property-finance crisis is deeper. The structural problems over exports are worse. The currency management is less acceptable. The implication is: the Asian economies really are different, and Thailand’s problem is that the others look more attractive right now.

So which of these two versions are we supposed to believe?

Really it doesn’t matter. The difference between the two arguments is less enlightening than the similarity. Both found the co-operation by central banks across the region profoundly shocking. Asian countries are supposed to bicker and compete. The idea of the Monetary Authority of Singapore coming to the rescue of Thailand was simply gob-smacking. Surely Singapore is supposed to undermine Thailand at every juncture. Some devious explanation needed to be found for this abnormal exercise in regional co-operation. The alternative was simply too awful to contemplate.

The Economist went a little further. It accused Thailand of "crowing about a victory over the speculators". The magazine singled out Amnuay: "It is as if a little guy, having survived one round with the big bullies, was dancing around with his fists up, saying, go on, hit me again."

Crowing hardly seems the right description of the mood. Hunkered-down would be better. But this passage is the give-away. Surely little, messy old Thailand can’t get away with this? Surely an Asian country cannot defy big international money just by playing dirty in the baht market, and calling on help from some friends?

The battle over the baht has high stakes. If the speculators win, they will make lots of money. That money does not come out of thin air. It comes from us. If the baht is brought down by speculation, the recession will be deeper and longer. "The major issue for Thailand," as Professor Lawrence Klein in Bangkok said last week, "is to try to avoid the crisis in the first place."

Just ten weeks earlier, Michael Camdessus, the head of the IMF, had joined the ASEAN financial ministers at a meeting in Phuket. He urged them to co-operate in the face of "financial turmoil". He offered to provide technical support.

Around the world, there is growing concern about the power of international finance. By 1992, the total size of international finance was estimated at US$ 43,000 billion. This monster is now doubling in size every 5-7 years, and is totally out of control. Huge sums of money skid around the fibre-optic highways of the world with no serious regulation. Even the IMF, the high priest of financial liberalization, is becoming concerned. It will not benefit the world economy to have a peso crisis one year, a baht crisis the next, and who knows what crisis later.

It is tempting to suggest that the magazines would prefer a crisis. It makes better reading. It sells more copies. But there is a little bit more to it than that.

"I have to write bad news about Thailand," one financial journalist for a Europe-based paper told Chang Noi recently, "that’s the only stuff my editor will publish." He was joking. A bit. But the kind of joke that has a bottom-layer of truth. The editors know their readers.

Over the last few years, the west has been falling out of love with Asia. In the US, dumping on China has become a major industry. In the London financial markets, distrust of Asia began from the Barings crash. Now it’s become an epidemic. In Thailand, many western financial interests got in late, when the cycle was already turning down. Then they punted too hard, and now are getting hurt. The acidity of the financial press has been squeezed out of some very sour grapes.

Do we need to explain away the regional co-operation over the baht? Maybe the growing concern over the power of international finance is enough.