The problems currently plaguing the world economy and what emerging market countries such as Thailand can do about it are outlined by the head of Thailand's SEC.
The SEC or "Securities and Exchange Commission" is the government organization that controls how securities (shares, bonds, futures) are traded in order to protect investors. The organization creates and enforces regulations.
Thirachai Phuvanatnaranubala, the current head of Thailand's SEC, explains how the global imbalances at the root of the global economic crisis continue to exist. He also outlines why they must end and how they might be ended or "unwound."
Read another insightful Bangkok Post article on the US monetary policy of Quantitative Easing on (here) and another article on the continued rise of the baht (here).
Read previous articles on baht appreciation and the effect of global imbalances on the Thai economy: #1 (09-11-2010), #2 (28-10-2010), #3 (18-10-2010), #4 (13-10-2010), #5 (11-10-2010) and #6 (14-09-2010).
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Trying to reconcile global trade imbalances by Thirachai Phuvanatnaranubala by Secretary-General of the Securities and Exchange Commission
Currency volatility, its causes and effects, and global efforts to correct imbalances have been a major topic of debate this year. Thirachai Phuvanatnaranubala, the secretary-general of the Thai Securities and Exchange Commission, is among those who have been at the heart of the discussions. The following remarks were prepared for the first Pan-Asian Regulatory Summit in Hong Kong on Nov 29.
Emerging markets should boost consumption.
In the past, trade imbalances tended to unwind themselves over time. But today's imbalances have been going on for many years.Why have they not unwound.
Normally an emerging market that first enters globalisation through manufacturing will quickly build up trade surpluses. Its labour costs, starting from a low base, will make its exports especially competitive. Capital investments will quickly increase labour productivity. However, after some time, its currency and its wages will rise, leading to more imports and help unwind the trade imbalances.
But why has this not yet occurred.
There are three reasons.
In many emerging markets, wages are still low, especially in China.
Compared to agricultural and services exports, manufacturing exports tend to give a higher share of profit to the companies more than the workers.
In China, the role of state enterprises is very prominent. Assets of state enterprises are as high as 130% of GDP, compared to 28% in France. The model of an active state commercial role does not promote the opportunity for small businesses and entrepreneurs, which is the usual way to spread income and wealth more widely
As a result, the ratio of private consumption to GDP in China is currently only about 35%, compared to 50-60% in other BRIC (Brazil, Russia, India and China) countries and Korea at the same level of development. There are calls for the Chinese households to save less and spend more. But since savings are done more by companies, through their retained earnings, than by households, this suggestion will not have immediate effect.
What can the advanced markets like the US do to cut down their trade deficits.
The US simply has to consume less, or produce and sell more. There are two channels for the US to adjust, the external and the internal. The external channel is to have a weaker US dollar against all emerging market currencies. It will lower American buying power, and will be less painful. The internal channel is to lower American real wages. The economy will have to slow down, increasing unemployment. Labour flexibility was a key ingredient for recovery in Japan, and the same will have to happen in the United States.
What about the emerging markets? What can they do?
Right now, all the attention is on QE2, the Federal Reserve's second quantitative easing programme. Countries are busy debating whether or not to employ capital controls, and in what form. Capital controls can help individual emerging markets to delay the currency adjustment process, nevertheless they are not a panacea. There are other things that emerging markets can do
First, emerging markets can allow their currencies to strengthen. But this must start with China. No other country can really allow its currency to diverge too far from the yuan because many are part of the same supply chain.
Second, emerging markets should be more aggressive in raising minimum wages, or allow more collective wage bargaining. They can push companies to provide more welfare, especially in healthcare, retirement benefits and redundancy payments. This will reduce the need for households to save.
Finally, emerging markets should open up their financial systems. Today, the big Chinese banks concentrate their lending mainly to state enterprises. There should be more banks that earmark entrepreneurs and small and medium-size businesses, as well as consumer finances. The banking system should help to transfer individuals' future income streams to finance today's purchases of cars, houses and children's education. This is the best way to help to increase domestic consumption.
Emerging markets have to make a choice. They can either help in the adjustment process or they can force all the adjustments onto advanced markets.
The more the adjustments fall on the advanced markets, the more painful it will be for their citizens. Unemployment will remain high for a long time. Frustration will build up. And it can even lead to wars - both the currency kind and the trade kind.
(Source: Bangkok Post, ON THE RECORD, Trying to reconcile global trade imbalances, 7/12/2010, Thirachai Phuvanatnaranubala, Secretary-General of the Securities and Exchange Commission, link)
Securities and Exchange Commission (SEC) - a government organization that controls how securities (shares, bonds, futures) are traded in order to protect investors (creates and enforces regulations)
baht appreciation - when the value of the baht increases making Thai exports more expensive and less competitive in world markets (this could have a negative effect on the growth of the Thai economy which is driven by revenue from exports, "export driven growth")
reconcile - sort out differences, to find a way to make things that are opposed and conflict (ideas, beliefs, needs) able to exist together
global - throughout the world ทั่วโลก
trade - the buying and selling of goods การค้าขาย
imbalances - when things are not in balance, when one things gets too big and could cause failure
volatility - a measure of risk in financial markets, the degree to which asset prices swing up and down (See The Economist and glossary) อัตราความเสี่ยงต่อการลงทุนทางการเงิน
volatility - changing suddenly and unexpectedly (bad because it makes it difficult to make decisions) ความไม่แน่นอน
efforts - people trying to accomplish something, achieve a goal ความพยายาม
debate - a discussion or formal argument on an issue between people with different views (See Wikipedia)
boost - to increase; to strengthen เพิ่ม; ทำให้มีกำลังมากขึ้น
consumption - money spent by households and families on goods and services การบริโภค (See Wikipedia)
imbalances unwind themselves - when the things that are not in balance, gradually start to come into balance again
build up - gather or create more and more of something over time
trade surplus - when exports are greater than imports
base - a place from where an activity can be planned and started ฐานที่มั่น
competitive - involving competition, people struggling and trying to get the same goods and resources มีการแข่งขัน
capital investments - money invested in businesses, either as loans (debt, liabilities) or as part ownership (stock shares, equity)
productivity - producing more with the same amount of inputs (labour, energy, etc)
currency - a widely used money accepted for exchange of goods in an economy เงินตรา (See Wikipedia)
wages - the amount of money earned per hour by a worker
services - บริการต่างๆ things produced in service industries, not a physical good that can be bought, a waitress and a cook in a restaurant provide a service, technically: a sequence of activities that does not result in ownership of the outcome (See Wikipedia on services and the goods and services continuum)
tend - to be likely to behave or change in a particular way or have a particular characteristic มักจะ
share - to have or use something at the same time as someone else ใช้ร่วมกัน
profit - money that you make from selling goods and services after all your costs have been paid กำไร
role - the function, position or purpose that someone or something has in a situation, organisation, society or relationship บทบาท
state - government รัฐ
enterprises - companies
prominent - well-known, important ที่สำคัญ ที่มีชื่อเสียง
GDP, Gross Domestic Product - a measure of economic activity in a country, the value of the country's output of goods and services. GDP is defined roughly as: GDP = Household Consumption + Business Investment + Change in Inventories + (Government Spending - Taxes) + (Exports - Imports) (See Economist Glossary)
active - working, operating, doing its job
commercial - for business purposes
active state commercial role - when the government owns and runs a lot of businesses in the economy that compete with privately owned companies
promote - help something become more popular, get bigger, grow and develop
opportunity - a situation when it is possible to do something that you want to do (See glossary)
entrepreneurs - a person who runs businesses, especially financially risky businesses เจ้าของกิจการ
spread - to gradually affect or cover a larger area แพร่กระจายไปทั่ว, แพร่หลาย
income - money that people receive from work or some other source, used for household consumption and savings
wealth - how much money and assets a person or country owns
development - the gradual growth, formation and improvement of something
households - families or groups of people living together (economics treats this as a unit that makes decisions)
deficits - when spending is greater than money coming in (must be financed by borrowing and increased debt)
consume - to use a supply of something ใช้จนหมดไป
channels - ways, methods
adjust - to change something slightly, especially to make it more correct, effective, or suitable ปรับ
external - outside
internal - inside ภายใน
buying power - the ability of households to buy things based on how much their money is worth (and an exchange rate that makes imported goods cheap)
nominal - the raw measured numbers or economic statistics before adjusting for price rises (inflation)
real - the numbers after adjusting for inflation (so comparisons with prior periods are possible)
real wages - the money earned by workers adjusted for inflation (so they can be compared with previous years)
unemployment - the percentage of people who want to work but can't find jobs (See Wikipedia) การว่างงาน
flexibility - can change easily and adapt to new situations and conditions as they occur ความยืดหยุ่น
key - important คนสำคัญ
ingredient - one of the substances that are combined to make something ส่วนผสม
recovery - when the economy gets better after bad times (more jobs, higher incomes) การฟื้นฟูสภาพ
central bank - a government monetary authority in charge of monetary policy, issues currency, regulates supply of loans and credit, holds the reserves of other banks and foreign currencies (See Wikipedia)
monetary policy - the policy of the central bank in influencing the cost and availability of credit through interest rates and other measures, with the goals of promoting economic growth, full employment, price stability and balanced trade with other countries (See Wikipedia)
quantative easing - the monetary policy that the US central bank (the Fed) started using during the recent severe financial crisis, "describes a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero" (See Wikipedia, an easy whiteboard video)
QE2 - Quantative Easing 2, the monetary policy that many believe the US central bank will follow in the near future (See recent Time magazine article and recent Wall Street Journal article)
employ - to have someone work or do a job for you and pay them for it ว่าจ้าง, จ้าง
capital - money invested in a business (See glossary)
capital controls - restrictions on the flow of investment money (capital) into a country, in order to ensure stability and that large flows don't flow in suddenly creating large amounts of credit and money and then suddenly flow out taking it all away and creating a crisis, Thailand used capital controls in 2007 (See Wikipedia)
delay - to make something happen at a later time than originally planned or expected เลื่อน
adjust (verb) - to change slightly to make better
adjustment (noun) - the action of making an adjustment, modification, alteration การปรับเปลี่ยน
currency adjustment process -
panacea - a medicine or solution that will cure and relieve all problems and suffering
diverge - to move away from
supply chain - the steps in different firms and locations needed to produce a final good from raw materials and intermediate goods, ending with final assembly and distribution of goods in consumer stores (See Wikipedia)
aggressive - forceful, determined, and eager to succeed, done with great energy and intensity (See glossary)
a minimum wage - the lowest pay rate that a company can legally pay workers, legally set by the governent to ensure that people can look after their families, economists claim that minimum wages can create unemployment (See Economist glossary) ค่าแรงขั้นต่ำ
collective - involving all the members of a group โดยรวม ทั้งคณะ (การตัดสินชี้ขาดจากศาล)
wage - an amount of money that you earn for working, usually according to how many hours or days you work each week or month ค่าจ้าง
bargain - try to get a better deal from someone (for example, a better price for something you want to buy) ต่อรอง
collective wage bargaining - workers organizing together in unions to meet with an employer to negotiate pay and work conditions (See Wikipedia)
welfare - help given, especially by the state or an organization, to people who need it; good care and living conditions สวัสดิภาพ
healthcare - the treatment and prevention of diseases and other medical problems
retirement - the time when you stop working, especially because of old age เกษียณอายุ
benefits - money, services, or goods you receive from a government or company programme เงินช่วยเหลือ
concentrate - put everything you have in one small place (example: Thailand's industry is concentrated along the Eastern Seaboard)
lending - giving money to someone who agrees to pay it back in the future การให้ยืม
state enterprises - businesses owned and run by the government
earmark - keep something for a particular purpose
small and medium-size businesses - SMEs
consumer - an individual or family who buys and uses goods and services ผู้บริโภค
consumer finance - bank loans used by consumers to buy things from stores, usually expensive such as automobile, refrigerator, etc
transfer - give from one person or group to another, official arrange for someone else to be the owner of something โอน
future income streams - the money coming into a household or business during time periods in the future
finance - to provide money for some activity or project จัดหาเงินทุนให้
domestic - within the country ภายในประเทศ
citizen - a person who is officially part of a country ประชาชน
frustration - disappointed and sad because you are not getting what you want or need, lack of fulfillment, disappointment, discontentment, dissatisfaction ความไม่พอใจ, ความผิดหวัง
build up - collect, gather together, accumulate เก็บสะสม
currency war - competitive devaluation, when countries that compete in exports try to make their exports cheaper by forcing their exchange rate down
trade war - when countries create trade barriers (tariffs, quotas) to make imports from other countries more difficult, the affected countries retaliate and tit-for-tat and a trade war begins to escalate
retaliate - hurt other people after they hurt you, react and respond to an attack with an attack ตอบโต้, โต้ตอบ
tit-for-tat - when someone attacks you, then you attack them back and the difficult to end cycle repeats itself (See Wikipedia)
escalate - to become much worse or more serious เลวลง ทำให้มากขึ้น ทำให้เลวลง ทำให้เลวร้ายลง ที่เลวร้ายลง
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