Money talks....very loudly

4 January 1997

Hardly a day passes without a finance or broking company talking about the Thai economy. Financial outfits in Bangkok, Hong Kong and Singapore voiced public criticism on Amnuay’s economic package. Almost every finance house has offered its predictions for the Thai economy in 1997. The group of "concerned citizens" which asked us all to tighten our belts was studded with financial figures. Finance is shouting so loudly about the Thai economy that nobody else is getting heard.

Of course there are short-term local reasons for this. The financial industry is being badly hurt. A lot of this noise is a squeal of pain. But there is also the side-effect of a much larger and more frightening global trend: the growth in the size and power of international finance.

Over the last two decades, more and more money has been flowing across international borders. By 1992, the total size of international finance was estimated to be 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. Governments are watching this monster grow with some horror, but they don’t yet know how to get together and tame it.

International finance is growing so fast partly because of new communications technology, but mainly because of the efforts of the IMF and World Bank. Finance, they claim, lubricates the world economy, allowing it to run smoother and faster. Finance oils the transactions between buyer and seller, saver and investor. Financial liberalisation stimulates the world economy, particularly by allowing savings to flow to wherever investment is most needed and most profitable. The IMF and World Bank have encouraged many countries (including Thailand) to open up their stock exchanges, currency markets and banking systems to allow finance to flow more freely around the world.

Merchant banks and broking houses from the old financial centres of New York and London have been the driving forces behind this enthusiasm for financial liberalisation. They needed new markets to counterbalance the stagnation at home. In the 1980s, they became enthusiastic about "emerging markets" where growth rates could be spectacular. In the late 1980s, they became rhapsodic about Asia. In the early 1990s, they discovered Thailand.

But after two decades of growth in international finance, many economists are pointing out that the reality has been rather different from the theory. Only a small part of the money which flows round the world is "investment capital", in the sense of money invested in a productive enterprise. Most of it is speculative, short-term and predatory. It seeks out assets which are undervalued, and which can be bought and sold at a profit. These assets could be currency holdings bought and sold in the space of a few seconds. Or they might be stocks held for a few hours, loans offered for a few days, property held for a few months. International firms have the technology to spot these opportunities, and turn a profit on the deal. Like all speculative markets, the world of international finance is driven by herd instincts, and prone to fads and panics. The growth of international finance has made the world economy less stable.

Particularly for developing countries. Rapid economic growth always runs the risk of becoming unstable. The unpredictable flows of international money increase these risks. And developing countries usually don’t have such good tools for controlling instability. All too easily, developing economies can be seduced by international money, persuaded to have a really good fling, and then dumped the morning after with a splitting headache.

That’s what happened to us.

From 1985 to 1992, most of the money which flowed into Thailand was direct investment by foreign firms setting up factories and subsidiaries. But after the 1991-2 crisis, this flow fell off. At the same time, Thailand’s financial market was liberalised, chiefly by making the baht convertible and setting up offshore banking. Foreign banks and broking houses scrambled to get established in Bangkok. They jostled with one another to find partners, recruit staff, build business volume, and carve out a reputation. They brought with them tons of money. Foreign portfolio investments zoomed up from virtually nothing to 122 billion baht in 1993. The inflow of bank loans went from a zero average before 1992 to 350 billion baht in 1994.

There was a frenzy to stuff this money into the local market. The foreign firms and their local partners competed to develop the biggest stock and loan portfolios. Employees of finance and broking firms were incentivised to lend and invest as much as possible. Reputations, dividends, bonuses, careers depended on volume.

Inevitably, this flood of money was not used very wisely. Too much went into the real estate sector. A lot more went into swelling the size of the local finance industry. Much was simply stuffed into the stockmarket. Some went into manufacturing ventures which would have looked less attractive in less frenzied times. This period gave us one third more condos, offices and shopping malls than we need; scads of finance houses; ridiculous p/e ratios on the stockmarket (an average over 30 at one point); some overweight and undercompetitive industries; and a habit of living beyond our means, saving less than we invest, consuming more than we earn.

Then it was over. This was not just because Thailand woke up to reality. Again it was a broader global trend. International finance got over its fad for "emerging markets", and for Asia. The Mexican peso crisis made international finance firms rather thoughtful about the kind of dangerous instability they themselves could create in "emerging markets". The Nick Leeson affair made western finance houses more wary of sending bright young things out east with lots of money to play with. The strengthening of currencies and stock markets in the west persuaded a lot of money to return to base.

The Thai government tried to stem this backflow. It pushed up interest rates. It launched schemes to jazz up the stock market. It published relentlessly good news about Thailand’s economic future. But to little avail. The foreign money sneaked away. Some foreign banks and broking houses broke off their local ventures. Others just pulled their money out. The local financial firms were often left with the problem - falling business turnover, slumping assets, bloated overheads, and a terrible morning-after feeling.

Much of the international money has now retreated, and is patting itself on the back for its good sense in leaving. Kleinwort Benson, for instance, now writes scathingly about Thailand with phrases like "the decade of easy money", the "manic honeymoon", the "asset bubble [which] had to burst". Amongst all this, there is no trace of admission that companies like Kleinwort Benson might have some responsibility for the "bubble", the "easy money" and the "manic honeymoon".

The local financial industry is more confused. After all, it does not have the option to retreat and has been left to sort out the wreckage. On the one hand, it is still publishing hopefully optimistic predictions about coming economic trends in the hope of luring its international friends to return. On the other it is demanding government take drastic action to avert a crisis.

We should always remember that international finance has no conscience about its past actions, no commitment to the economies it visits, no concern for the societies it passes through.

We cannot avoid these financial flows. This is the way the economic world is today. Maybe in the future we live with less of them, and learn how to manage them better. And certainly we should support regional and international plans to control or counter their destabilising effects.

We should also listen to the financiers with only one ear. The financial lobby has a very clear agenda: ease interest rates and improve liquidity; boost demand in the property market; cut the current account deficit; enact firm, penitential policies (budget cuts, tax hikes) to revive international confidence. Of course we need to restore financial stability, and in part that means cleaning up the stock and property markets. But we should not be deluded into thinking that what is good for finance is good for all. We should not let the financial lobby’s monopoly of comment persuade us that finance’s wish-list is the only economic agenda.

There are many other key economic issues on the table: the impact of the slump on employment and particularly on policies towards foreign labour; the increasingly critical trade-offs between growth and environmental damage; the question of distribution and social inequality; the need to achieve greater industrial integration and higher productivity; and the role of agriculture. For the finance lobby, many of these issues are secondary or irrelevant. For the rest of us and for the longer term, they are vital.