chapter five the bank of thailand: the fall of the

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Chapter Five

The Bank of Thailand:

The Fall of the Technocrats and the Economic Meltdown, 1988-1997

Introduction

MR. GOVERNOR, we can afford you to leave us to devote the rest of your fruitful lifeto teaching and inspiring our younger generations to serve this land more capably andwith sincere concern, and to instilling your ideals into them. However, we terribly missyou as a man whom we could humbly emulate. You might ask us too much to be half asbrilliant and capable as you are, but you are not asking us too much to try to serve ournation with deep concern and honesty to the utmost as you have done and willundoubtedly continue to do so…

With sincere respect,THE YOUNG CENTRAL BANKERS1

Two decades after this letter was written in 1972, it became clear that Governor

Puey’s legacy of having served the nation with ‘deep concern and honesty’ had in fact

been too much for the young central bankers to continue. By the 1990s, Puey’s beloved

organisation, the BOT, had turned from a previously impeccably honest technocratic

organisation into one rife with scandal.

The main thesis of this chapter is that the causes of the economic crisis of 1997

can be understood at a deeper level in terms of the deterioration of a macroeconomic

technocratic institution, which was in turn caused by the mismatch between the rules of

the game that governed the relationship between the BOT and the government, and the

changes in the political economy of Thailand during the last four decades.

The Beginning of the End of the Technocrats’ Era

A central feature of the period with which this chapter is concerned is an

accelerated decline of the technocrats’ traditional ethos, prestige and power. The de facto

autonomy of the BOT was further reduced and at the same time the cohesiveness of the

1 This was an open letter, which was addressed to Governor Puey on the day of his resignation from the BOT in1972. It was written in English, most probably by former BOT scholarship students. BOT. Archives. GovernorPuey’s Personal File 3. ¸»·. ËÍ¨´ËÁÒÂàËµØ. ÊèÇ¹µÑÇ¼ÙéÇèÒ¡ÒÃ»ëÇÂ á¿éÁ ó.

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technocrats had completely disappeared, especially within the BOT. The divisiveness

among the BOT’s top technocrats - all among the BOT’s first batch of scholarship

students - was so bad that it prevented the Bank from functioning effectively, and hence

pushed the Thai economy into the abyss.

As noted in the Chapter 4, Governor Nukul Prachuabmoh was the first Governor

ever to be dismissed due to an exchange rate policy conflict with the Finance Minister, in

this case Minister Sommai Hoontrakul. Nukul’s successor, Governor Kamchorn

Sathirakul (1984-1990) was also dismissed - but for different reasons - in 1990 by the

Finance Minister Pramual Saphavasu under Chatichai Choonhavan’s government (1988-

1991). This Minister was the first ‘professional politician’ to assume this post since 1979,

the effect of which will be explained shortly. The issue that triggered Kamchorn’s

dismissal was a conflict concerning interest rate policy, thus representing the first time

that the MOF had ever intervened in this policy area, which had traditionally been the

sole responsibility of the BOT. This amounted to a direct intervention into the BOT’s

monetary policy, which is considered a very serious violation of any central banks’

independent principle. Legally, under Section 14 of the Commercial Banking Act 1962,

the BOT has the authority to determine the interest rate policy but it has to be approved

by the MOF before becoming enforceable. Traditionally, however, the MOF had acted

like a mere ‘rubber stamp’ in this area. The fact that the Minister was a ‘professional

politician’ who chose to intervene into this policy area, and that Chatichai was the first

elected PM within twelve years, is testimony to the rise of elected politicians’ powers in

relation to the decline in technocratic influence.

Finance Minister Pramual took his post in August 1988, but the first conflict with

the BOT became known publicly in March 1989.2 At this time, the economy had turned

from a slump to a fully-fledged boom: the average growth rate was 12% per year during

1988 to 1990. The economic concern of the time was the increasing gap between

domestic savings and investments. Although the Thai economy had been one of the high

saving economies, the unprecedented investment boom led to a deficit, one of the

implications of which was an overheated economy. For example, the rate of credit

2 Bangkok Business, 6 March 1989. ¡ÃØ§à·¾¸ØÃ¡Ô¨, ö ÁÕ¹Ò¤Á òõóò.

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expansion at the time was 28%, while the rate of deposit expansion was only 19% to 20%

per annum.3 The BOT presented a package to tackle the problem, including both short

and long-term measures. One of the short-term measures was the adjustment in interest

rate ceilings. The BOT proposed to adjust both the deposit and loan ceiling rates upward.

In essence, the BOT wanted to increase the one-year-time-deposit-ceiling rate by 1.5%

and the demand-deposit-ceiling rate by 1%, while the loan ceiling would be increased by

1%. The Minister, however, wanted to keep the loan-ceiling rate as it was whilst

abolishing the deposit ceiling rate altogether.4 His intention was to gain political

advantage. On 10th May 1989, the Minister called for a press conference to announce his

decision. The reason cited for abolishing the deposit ceilings while keeping the loan

ceiling was that it would reduce the commercial banks’ interest rate margins in order to

encourage more saving while protecting borrowers at the same time. He further informed

the press that the Thai Bankers' Association (TBA) had initially floated the idea behind

the BOT's proposal and the BOT agreed with it. However, he was not prepared to

approve this deal. As he put it:

Previously the BOT always acquiesced to [demands of] commercial banks while theMOF always acquiesced to the BOT. But, now the MOF will not follow anyone's willeasily. I will let the deposit interest [rates] be decided by free competition while the loanrate will not be allowed to increase. This is because, previously, the commercial banksdid not extend loans to agriculturists at the low rates, only to some groups of people.Proposals by the TBA are always [equivalent to] monopoly at their will.5

On the same day and after the press conference, Governor Kamchorn was called

to a meeting with the Minister, which lasted for four hours. After the meeting, the

Governor told the press that the abolishment of the deposit ceiling had not been the

3 Ibid.4 Bangkok Business, 11 May 1989. ¡ÃØ§à·¾¸ØÃ¡Ô¨, ññ ¾¤. òõóò.5 Ibid., the original read:·Õè¼èÒ¹ÁÒ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·ÂÂÍÁµÒÁ¸¹Ò¤ÒÃ¾Ò³ÔªÂìÁÒµÅÍ´áÅÐ¡ÃÐ·ÃÇ§¡ÒÃ¤ÅÑ§¡çÂÍÁ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·ÂáµèÁÒµÍ¹¹Õé¡ÃÐ·ÃÇ§¡ÒÃ¤ÅÑ§äÁèÂÍÁµÒÁã¨ã¤Ã§èÒÂæ àÃ×èÍ§´Í¡àºÕéÂà§Ô¹½Ò¡¹Ñé¹¼Á¨ÐãËéà»Ô´á¢è§¢Ñ¹¡Ñ¹â´ÂàÊÃÕÊèÇ¹´Í¡àºÕéÂà§Ô¹¡Ùé¹Ñé¹·ÕèäÁèÂÍÁãËé¢Öé¹à¾ÃÒÐ·Õè¼èÒ¹ÁÒ¸¹Ò¤ÒÃ¾Ò³ÔªÂìäÁèä´éÁÕ¡ÒÃ»ÅèÍÂà§Ô¹¡ÙéãËé¡Ñºà¡ÉµÃ¡Ãã¹ÍÑµÃÒ´Í¡àºÕéÂ·ÕèµèÓ¤§ÁÕà¾ÕÂ§¡ÒÃ»ÅèÍÂãËé¤¹äÁè¡Õè¡ÅØèÁà·èÒ¹Ñé¹ ÊèÇ¹ÊÁÒ¤Á¸¹Ò¤ÒÃä·Â¹Ñé¹¾Ç¡¹Õé¨ÐàÊ¹ÍÍÐäÃ¡çà»ç¹¡ÒÃ¼Ù¡¢Ò´

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BOT's proposal.6 Moreover, the following day the Minister further remarked that it was

time for the BOT to switch roles with the Ministry of Finance, and that because this

decision was under his authority, the BOT should accept it.7

Over the following few days, various people commented on this matter. The

boss of the mighty Bangkok Bank argued that this did not follow the previous practice

of interest rate policy setting, and he called for a return to the traditional consultative

approach. The Deputy Governor Chavalit Thanachanan also remarked on the policy,

effectively criticising the MOF for interfering in this policy area. On 15th May 1989, the

Minister held a further press conference, this time severely criticising the commercial

banks as selfish and as guilty of profiteering from the poor, while firmly reiterating his

policy position. On the following morning, the Bangkok Bank's boss went to the

Minister’s house to apologise for his comments and on the same day the Minister also

summoned the Governor to a meeting at his office, which once again lasted for four

hours. The next morning, the Governor informed the press that the abolishment of

deposit ceilings was the right policy and there was no conflict between the two

organisations.8 On 31st May 1989, the BOT formally announced that it had abolished

the one-year-time-deposit ceiling rate whilst keeping the other ceilings in place. It

stressed that there was no policy conflict between the BOT and the MOF.9

On 24th May 1989, the press was called into the BOT for an urgent conference.

The Governor and top executives of the Bank strongly denied an allegation made by the

Minister in the Cabinet's meeting on the previous day that some of the BOT's staff and

executives helped, facilitated, or acted in a way that was beneficial to commercial banks

in order to gain benefits or work with the commercial banking sector after their

6 Ibid.7 Bangkok Business, 12 May 1989. ¡ÃØ§à·¾¸ØÃ¡Ô¨, ñò ¾¤. òõóò.8 “MOF-BOT Diary,” Manager Weekly, 22-28 May 1989, 17. “¤ÅÑ§-¸¹Ò¤ÒÃªÒµÔ » Ô·Ô¹ÃÒÂÇÑ¹,” ¼Ùé¨Ñ´¡ÒÃÃÒÂÊÑ»´ÒËì,òò-òø ¾¤. òõóò, ñ÷.9 “MOF-BOT: Halfway Compromise - the Test of Floating Interest Rates,” Interest, June 1989, 116 . “¤ÅÑ§-áº§¡ìªÒµÔ ¾º¡Ñ¹¤ÃÖè§·Ò§ ªÔÁÅÒ§ ´Í¡àºÕéÂ ÅÍÂµÑÇ,” ´Í¡àºÕéÂ, ÁÔÂ. òõóò, ññö.

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retirement.10 On the same evening the Prime Minister summoned the Finance Minister to

his residence and told him that the conflict with the BOT was bad for the government’s

public image and that he should undertake to resolve it.11

This conflict was significant as it was the first time that the press had been critical

of the BOT’s position. It saw the BOT as too weak to stand up for its principle of

independence from the government. For example, concerning the interest rate policy, one

columnist writes:

The BOT, under the Governor Kamchorn Sathirakul, comes to the point of losing itsdignity and independence which is contradictory to the tradition and principle of theprevious governors…Is it time for the BOT to consider its own role as the nation'scentral bank; to what extent do its policies blow with the political wind? Is it time [forthe BOT] to demand back its dignity and independence?12

Another conflict broke out at the end of 1989, once more concerning interest rate

policy. Since October 1989, the fact that inflation was higher than was considered normal

had been the concern of the day.13 On 9th November 1989 the Minister received a report

from an anti-inflation working group, which was composed of the Secretary General of

the NESDB, the Permanent Secretary of the MOF and the Governor of the BOT. One of

the proposed measures from the working group was to increase the loan rate ceiling, but

the Minister told the press that he would implement this recommendation only as a last

resort.14 From this time onward, he firmly insisted on his position and threatened to 10 “Kamchorn Bursts out ‘May I speak’,” Manager Weekly, 29 May - 4 June 1989, 17. “¡Ó¨ÃàËÅ×ÍÍ´¢Í¼Á¾Ù´ºéÒ§,” ¼Ùé¨Ñ´¡ÒÃÃÒÂÊÑ»´ÒËì, òù ¾¤.-ô ÁÔÂ., òõóò, ñ÷.11 Nation Business, 29 May 1989. à¹ªÑè¹ ØÃ¡Ô¨, òù ¾¤. òõóò.12 “When the BOT Lost its Dignity,” Economic Base, 22-27 May 1989, 8. “àÁ×èÍ¸¹Ò¤ÒÃªÒµÔËÁ´ÈÑ¡´ÔìÈÃÕ,”°Ò¹àÈÃÉ°¡Ô¨, òò-ò÷ ¾¤. òõóò. ø The original read: ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â ã¹ÂØ¤·ÕèÁÕ¼ÙéÇèÒ¡ÒÃª×èÍ ¡Ó¨Ã Ê¶ÔÃ¡ØÅä´éÁÒ¶Ö§¨Ø´·ÕèÊÙàÊÕÂä»áÅéÇ«Öè§ÈÑ¡ÈÔìÈÃÕáÅÐ¤ÇÒÁà»ç¹ÍÔÊÃÐã¹¡ÒÃ·Ó§Ò¹ÍÑ¹à»ç¹¡ÒÃ¼Ô´»ÃÐà¾³ÕáÅÐËÅÑ¡» ÔºÑµÔ·Õè¼èÒ¹ÁÒã¹ÂØ¤¼ÙéÇèÒ¡ÒÃ¤¹¡èÍ¹æ...¶Ö§àÇÅÒËÃ×ÍÂÑ§·Õè¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â¤ÇÃ·º·Ç¹º·ºÒ·¢Í§µ¹àÍ§ã¹°Ò¹Ð¸¹Ò¤ÒÃ¡ÅÒ§¢Í§ªÒµÔÇèÒ·Õè¼èÒ¹ÁÒä´é´Óà¹Ô¹¹âÂºÒÂâÍéÅÁä»µÒÁ¡ÃÐáÊ¡ÒÃàÁ×Í§à¾ÕÂ§ã´ ¶Ö§àÇÅÒáÅéÇËÃ×ÍÂÑ§ ·Õè¨ÐàÃÕÂ¡ÃéÍ§ÈÑ¡ÈÔìÈÃÕáÅÐ¤ÇÒÁà»ç¹ÍÔÊÃÐã¹Í´Õµ¡ÅÑº¤×¹ÁÒ13 Bangkok Business, 25 October 1989. ¡ÃØ§à·¾¸ØÃ¡Ô¨, òõ µ¤. òõóò.14 Matichon, 10 November 1989. ÁµÔª¹, ñð ¾Â. òõóò.

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resign if his policy were to be discarded. His main reason for this was that an increase in

the interest rate would affect everyone, especially the mortgagers.15 On 11th December

1989, the Cabinet took six hours to consider the seven proposed anti-inflation packages

from the working group. The most time consuming was the 2% increase in the loan rate

ceiling, which was one of the measures under the monetary package: the resulting

decision was a classical face-saving exercise. The BOT and the MOF were instructed to

reconsider this measure and bring it back to the Cabinet whenever the MOF saw fit.16 The

press reported that most of the Cabinet’s members agreed with the measure but, because

the resistance from the Minister was so strong that he threatened to resign, they had to

compromise.17 In effect, this meant that the Minister won. After the Cabinet meeting,

only the Finance Minister gave an interview:

I told the meeting that I strongly disagree with the 2% increase in the loan rate measureproposed by the working group since the most affected would be low income earnersand civil servants… Previously, before the MOF did anything it had to ask the BOT, butfrom now on [and] by the authority of the Finance Minister, [if] the BOT wants to doanything, the final authority resides with the Finance Minister, I am the one who makesdecisions.18

By 20th December 1989, the press started to report on the rumoured intended resignation

of the Governor of the BOT as a result of the Cabinet meeting.19 On 24th December, the

Governor denied the rumour and insisted that he had never contemplated resignation.

Moreover, he also tried to play down the conflict by saying that the Minister also agreed

in principle with the upward interest rate adjustment; the only difference of opinion was

15 Frontline, 18 November 1989. á¹ÇË¹éÒ, ñø ¾Â. òõóò.16 Bangkok Business, 12 December 1989. ¡ÃØ§à·¾¸ØÃ¡Ô¨, ñò ¸¤. òõóò.17 Ibid. and Frontline, 12 December 1989. á¹ÇË¹éÒ, ñò ¸¤. òõóò.18 Bangkok Business, 12 December 1989. ¡ÃØ§à·¾¸ØÃ¡Ô¨, ñò ¸¤. òõóò. The original read: ¼Áä´éºÍ¡·Õè»ÃÐªØÁä»ÇèÒ¼ÁäÁèàÍÒ ¼Á¤Ñ´¤éÒ¹àµçÁ·Õè µèÍ¤³Ð·Ó§Ò¹«Öè§àÊ¹ÍãËéÁÕ¡ÒÃ»ÃÑºÍÑµÃÒ´Í¡àºÕéÂà§Ô¹¡Ùé¢Öé¹ä»ÍÕ¡ ò % à¾ÃÒÐ¼Ùé·Õèà´×Í´ÃéÍ¹¨ÃÔ§æ¤×Í¼ÙéÁÕÃÒÂä´é¹éÍÂ áÅÐ¢éÒÃÒª¡ÒÃ»ÃÐ¨Ó... â´ÂÍÓ¹Ò¨¢Í§ÃÑ°Á¹µÃÕ¡ÃÐ·ÃÇ§¡ÒÃ¤ÅÑ§àÁ×èÍ¡èÍ¹¡ÃÐ·ÃÇ§¡ÒÃ¤ÅÑ§¨Ð·ÓÍÐäÃ¡çµéÍ§áº§¡ìªÒµÔ áµèµèÍä»¹Õéâ´ÂÍÓ¹Ò¨¢Í§ÃÁµ.¤ÅÑ§ áº§¡ìªÒµÔ¨Ð·ÓÍÐäÃÍÓ¹Ò¨ÊØ´·éÒÂÍÂÙè·ÕèÃÁµ.¤ÅÑ§ ¼Áà»ç¹¤¹µÑ´ÊÔ¹19 Matichon, 20 December 1989. ÁµÔª¹, òð ¸¤. òõóò.

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over the appropriate timing.20 During this time, the press once again questioned the

dignity and integrity of the BOT and its Governor, arguing that the BOT had lost its

traditional de facto autonomy from the politicians.21

Following the New Year of 1990, the issues of inflation and remedy measures

continued to hit the headlines. On 17th January 1990, the top ten executives of the BOT,

excluding the BOT's Deputy, had a special internal meeting with the Governor. The

discussion was about the relationship between the BOT and the Minister. In essence, the

executives told the Governor that he should play a tougher role with the Minister and

should not let the Minister dictate to the BOT.22 Later, the news of this meeting was

leaked to the press, which gave a further negative image to the Governor, portraying him

as too weak to protect the BOT's independence, which in turn weakened his position

politically.23 On 6th March 1990, the Minister recommended that the Cabinet dismiss the

Governor with immediate effect and appointed the Deputy Governor Mr. Chavalit

Thanachanan to the post. At the time, Deputy Chavalit had only six months left before his

retirement in October.

Mr. Chavalit recalled that during the period of Governor Kamchorn and Finance

Minister Pramual, the Minister not only intervened into the interest rate policy but also

even in the day to day business of the BOT. For example, the Minister always demanded

reports and even some classified information, e.g. the details of commercial banks'

borrower accounts. The demands were so unusual, both in terms of the amount and

sensitivity of the information he required, that the BOT's staff began to be suspicious of

the motives behind his requests. "Sometimes, we felt that these were deliberately

20 Thai State, 25 December 1989. ä·ÂÃÑ°, òõ ¸¤. òõóò.21 “BOT’s Dignity” Economic Base, 25-31 December 1989, 10.“ÈÑ¡ÈÔìÈÃÕáº§¡ìªÒµÔ” °Ò¹àÈÃÉ°¡Ô¨, òõ-óñ ¸¤. òõóò, ñð. “Shaking the BOT’s Throne: How Much Independence?,” Economic Outlook, 25-31 December 1989, 1. “ÊÑè¹ºÑÅÅÑ§¡ì áº§¡ìªÒµÔ ¤ÇÒÁÍÔÊÃÐá¤èäË¹?,” àÊé¹·Ò§àÈÃÉ¡Ô¨, òõ-óñ ¸¤. òõóò, ñ Matichon, 26 December 1989. ÁµÔª¹, òö ¸¤ òõóò.22 Chavalit Thanachanan, interview by author, 4 June 1998, Bangkok, Thailand. ªÇÅÔµ ¸¹ÐªÒ¹Ñ¹·ì,ÊÑÁÀÒÉ³ìâ´Â¼Ùéà¢ÕÂ¹, ô ÁÔÂ. òõôñ, ¡ÃØ§à·¾Ï. »ÃÐà·Èä·Â.23 “BOT-MOF: Trouble of Organisation or Individual,” Exclusive News, 26 February- 4 March 1990, 34.“áº§¡ìªÒµÔ-¡ÃÐ·ÃÇ§¡ÒÃ¤ÅÑ§ »ÑËÒÍÂÙè·ÕèÍ§¤ì¡ÃËÃ×ÍºØ¤¤Å,” ¢èÒÇ¾ÔàÈÉ, òö ¡¾.-ô ÁÕ¤. òõóó, óô.

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intended to cause trouble to the BOT and hence our dignity was lost completely".24 This

was also the reason that led to the internal meeting between the Governor and the top

executives. Mr. Chavalit views the conflict between the two as stemming originally from

personality clashes and developing into a policy conflict later on. However, the breaking

point was indeed the interest rate policy:

It seemed that both Mr. Pramual and Mr. Kamchorn had agreed that the issue of raisingthe interest rate would not be proposed but, at the Cabinet meeting the Governor didpropose it. This eventually led to the dismissal since Mr. Pramual saw it as a breach oftrust. I was appointed due mainly to the political reason that I had been a Bank's internalstaff member.25

What he meant was that the politicians did not dare to appoint someone other than the

BOT's existing personnel because they wished to avoid the inevitable public criticism

that would arise by appointing one of their own cronies to such an important position.

To sum up, by 1990, the BOT's autonomy and reputation were further reduced to

the point that it had lost its traditional image of dignity and integrity, at least in the eyes

of the press. If one compares the opinions of various columnists toward this dismissal and

that of Governor Nukul's, it is clear that the latter gained enormous sympathy whilst the

former was partly criticised. Even the reactions from the BOT’s personnel were different.

In the case of Nukul’s dismissal, hundreds of the staff lined up in order to give their

moral support and last good wishes, while there was no response from the staff toward

Kamchorn’s dismissal, at least publicly. The politicians in this period were confident in

their newfound power. Never before had a Finance Minister addressed such strong

statements publicly to the technocrats, as the above quotations make clear. Moreover, the

24 Chavalit Thanachanan, interviewed by author, 4 June 1998, Bangkok, Thailand. ªÇÅÔµ ¸¹ÐªÒ¹Ñ¹·ì,ÊÑÁÀÒÉ³ìâ´Â¼Ùéà¢ÕÂ¹, ô ÁÔÂ. òõôñ, ¡ÃØ§à·¾Ï, »ÃÐà·Èä·Â. The original read: ºÒ§¤ÃÑé§¾Ç¡àÃÒÃÙéÊÖ¡ÇèÒ¹Õéà»ç¹¡ÒÃµÑé§ã¨¡ÅÑè¹á¡Åé§ ¨¹¾Ç¡àÃÒËÁ´ÈÑ¡ÈÔìÈÃÕ25 Ibid., the original read:´ÙàËÁ×Í¹ÇèÒ·Ñé§¤Ø³»ÃÐÁÇÅáÅÐ¤Ø³¡Ó¨Ãä´éµ¡Å§¡Ñ¹¡èÍ¹áÅéÇÇèÒ¨ÐäÁèàÊ¹ÍàÃ×èÍ§¡ÒÃ¢Öé¹ÍÑµÃÒ´Í¡àºÕéÂà¢éÒÊÙè·Õè»ÃÐªØÁ¤³ÐÃÑ°Á¹µÃÕáµè·èÒ¹¼ÙéÇèÒ¡çàÊ¹Íã¹·ÕèÊØ´ ÊØ´·éÒÂàÃ×èÍ§¹Õé¡ç¹Óä»ÊÙè¡ÒÃ»Å´¼ÙéÇèÒ¡ÒÃ à¹×èÍ§¨Ò¡¤Ø³»ÃÐÁÇÅÁÍ§ÇèÒà»ç¹¡ÒÃ¼Ô´ÊÑ³Ò¼Á¶Ù¡áµè§µÑé§¡çà¹×èÍ§´éÇÂàËµØ¼Å·Ò§¡ÒÃàÁ×Í§ à¹×èÍ§¨Ò¡¼Áà»ç¹¤¹ã¹

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head of the PM's personal advisory team said: "since those two could not work together

the Governor had to go so that we could do something else which was more fruitful".26

The Rise of the Third Generation of the BOT's Technocrats and the Fall of the BOT

Governor Vijit Supinit came to power in October 1990. In 1961- the first year of

Governor Puey's famous scholarship programme - he was one of the first group of three

students to be awarded the BOT's scholarship, and was sent to study in the UK. By 1990,

most of the Bank's top executives were former BOT scholarship students (for example, in

1990 both of Governor Vijit's Deputies). They also occupied three out of five Assistant

Governors’ posts. Mr. Vijit was promoted from being an Assistant Governor to Deputy

Governor on 4th April 1990. This promotion was secured by politicking through his

connection with the PM's personal advisory team. Throughout the history of the BOT,

there had only ever been one Deputy Governor at a time, but this appointment meant that

for the first time ever, the BOT had two Deputy Governors. In effect, the Bank of

Thailand Act had to be re-interpreted to support this appointment. Former Governor

Chavalit recalled that he wanted to appoint the other Assistant Governor to the post due

to the latter’s seniority. However, Mr. Vijit intervened into the process. As former

Governor Chavalit put it:

Mr. Vijit still had time. I recommended Mr. Paisarn [Kumalavisai] to the FinanceMinister, but Mr. Vijit managed to stop the appointment process for two weeks. Duringthis time, he initiated the re-interpretation of the Bank's Act [to the view] that the BOTlegally can have two Deputy Governor posts. Previously, this had been attempted but itwas not interpreted in this way. [This is because] in English, it [the position in the Act]is singular. However, [the meaning of] the law is slippery [in Thai]. But, Prince Wiwat27

drafted the law first in English and then translated it into Thai, therefore, by itsintention, there should be only one post.28

26 Punsak Winyarat - the head of the PM’s personal advisory team - interviewed by author, 12 May 1998,Bangkok, Thailand. ¾Ñ¹ÈÑ¡ÈÔì ÇÔ³ÃÑµ¹ì, ÊÓÀÒÉ³ìâ´Â¼Ùéà¢ÕÂ¹, ñò ¾¤. òõôñ, ¡ÃØ§à·¾Ï »ÃÐà·Èä·Â.27 The first Governor of the BOT.28 Chavalit Thanachanan, interviewed by author, 4 June 1998, Bangkok, Thailand. ªÇÅÔµ ¸¹ÐªÒ¹Ñ¹·ì,ÊÑÁÀÒÉ³ìâ´Â¼Ùéà¢ÕÂ¹, ô ÁÔÂ. òõôñ, ¡ÃØ§à·¾Ï. »ÃÐà·Èä·Â. The original read: ¤Ø³ÇÔ¨ÔµÃÂÑ§ÁÕàÇÅÒ¼ÁàÊ¹Í¤Ø³ä¾ÈÒÅµèÍ·èÒ¹ÃÑ°Á¹µÃÕ ¤Ø³ÇÔ ÔµÃ¡çÇÔè§â´ÂãËéËÂØ´¡ÃÐºÇ¹¡ÒÃáµè§µÑé§ä»ÊÍ§ÍÒ·ÔµÂìÃÐËÇèÒ§¹Ñé¹ÇÔ¨ÔµÃ¡çÇÔè§ãËéÁÕ¡ÒÃµÕ¤ÇÒÁ¾.Ã.º.¸»·. ÇèÒÊÒÁÒÃ¶µÑé§ÃÍ§¼ÙéÇèÒ¡ÒÃä´éà¡Ô¹Ë¹Öè§¤¹ËÃ×ÍäÁè

143

The legal process for the appointment of a Deputy Governor is that the Finance Minister

must first recommend the name to the Cabinet to be approved. Then, the PM must

forward it to the King for endorsement. Mr. Vijit intervened into the process through the

PM's advisory team. Since the PM is the only one who can forward the name to the King,

Vijit’s intervention meant that the PM stopped this process for two weeks for the law's

interpretation and subsequently demanded that the Finance Minister recommend Mr. Vijit

for the newly created post.29 He had to do this as a stepping stone, from where he could

then claim that he had the 'proper' seniority to be appointed to the Governor’s post.

This connection was used again for Mr. Vijit's governorship. Governor Chavalit

did not recommend him to the Finance Minister before his retirement, but the government

appointed him anyway.30 Looking back, he recalled that:

Mr. Vijit involved himself with politics. He has close relations with military andpoliticians. The former Governors would not do this. He has a belief that close personalrelations between the Governor and politicians would facilitate the BOT's policies whilethe former Governors believed that the BOT had to use reasons and negotiations to pushfor the BOT's policies.31

One of the former BOT students pointed out that Mr. Vijit’s politicking process had

begun even earlier, before his attempts to become Deputy Governor. He was the one ÊÁÑÂ¡èÍ¹¡çÁÕ¡ÒÃµÕ¤ÇÒÁáÅéÇáµèäÁèä´é à¾ÃÒÐÀÒÉÒÍÑ§¡ÄÉÁÑ¹à»ç¹ Singular ¡®ËÁÒÂÁÑ¹ Ôé¹ä´éáµèÁ.¨.ÇÔÇÑ²¹ì·èÒ¹·Ã§ÃèÒ§à»ç¹ÀÒÉÒÍÑ§¡ÄÉ¡èÍ¹áÅéÇ¤èÍÂá»Åà»ç¹ä·Â à¾ÃÒÐ©¹Ñé¹à¨µ¹Ò¤§ãËéÁÕä´éá¤èË¹Öè§29 Sirichai Sakornratanakul, interviewed by author, 16 July 1998, Bangkok, Thailand. Sirichai was one of theformer Bank’s scholarship students, who resigned from a directorship of the Bank in 1993. ÈÔÃÔªÑÂ ÊÒ¤ÃÃÑµ¹¡ØÅÊÑÁÀÒÉ³ìâ´Â¼Ùéà¢ÕÂ¹, ñö ¡¤. òõôñ, ¡ÃØ§à·¾Ï »ÃÐà·Èä·Â.30 Chavalit Thanachanan, interviewed by author, 4 June 1998, Bangkok, Thailand. ªÇÅÔµ ¸¹ÐªÒ¹Ñ¹·ì,ÊÑÁÀÒÉ³ìâ´Â¼Ùéà¢ÕÂ¹, ô ÁÔÂ. òõôñ, ¡ÃØ§à·¾Ï »ÃÐà·Èä·Â.Dr. Virabhongse Ramangkura - Chatichai's second Finance Minister after Mr.Pramual - had been chosen by thePM's personal advisor team. He later named Mr. Vijit to the Cabinet (Dr. Ammar Siamwalla, personalcorrespondence,16th December 2000).31 Chavalit Thanachanan, interviewed by author, 4 June 1998, Bangkok, Thailand. ªÇÅÔµ ¸¹ÐªÒ¹Ñ¹·ì,ÊÑÁÀÒÉ³ìâ´Â¼Ùéà¢ÕÂ¹, ô ÁÔÂ. òõôñ, ¡ÃØ§à·¾Ï »ÃÐà·Èä·Â. The original read: ¤Ø³ÇÔ¨ÔµÃà»ç¹¤¹àÅè¹¡ÒÃàÁ×Í§â´Âä»·ÓµÑÇÊ¹Ô´Ê¹Á¡Ñº·ËÒÃáÅÐ¹Ñ¡¡ÒÃàÁ×Í§ «Öè§¼ÙéÇèÒ·Õè¼èÒ¹ÁÒäÁèÂÍÁ·Ó â´ÂÁÕá¹Ç¤Ô´ÇèÒ

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behind the scenes who initiated the special internal meeting on 7th January 1990 between

Governor Kamchorn and the top ten executives and later leaked the story to the press,

while coordinating with the advisory team to name Mr. Chavalit for the Governor’s post.

This was “a coup in the making”.32 In other words, Mr. Vijit employed the pretext of

conflicts between Governor Kamchorn and Minister Pramual to take action that further

undermined the legitimacy of the Governor and hence gave justification for the Minister

to dismiss him. He also knew that Mr. Chavalit had only six months left before his

retirement and that this appointment could not be seen as a crony’s appointment since

Mr. Chavalit had been a member of staff at the BOT nearly all his life, and had a good

reputation.

From October 1990 till the end of 1995, there was no publicly known serious

policy conflict between Governor Vijit and various Ministers of Finance or the

government. The main policy line of the BOT throughout this time was the ambitious

financial liberalisation and deregulation programme, which had been started six months

earlier by Governor Chavalit. However, Governor Vijit was the one who brought it to the

final conclusion, i.e., the economic abyss in 1997. One of the worst policy

misconfigurations was the introduction of the Bangkok International Banking Financial

Facilities (BIBFs). This issue will be discussed in detail below. It is sufficient here to

point out that if an individual must be singled out as responsible for the great misery of

the nation after 1997, and the destruction of one of the most important national

organisations, i.e., the BOT, then that individual is Governor Vijit. It is most likely that

the main motive behind his pushing for the programme was the desire to secure his

position as the BOT’s Governor. In other words, he sacrificed the BOT’s fifty years of

integrity and dignity for his personal gain by pleasing his political masters with some

questionable practices. These practices deprived the BOT of its credibility and effective

teamwork at a crucial time when they were needed most. The symptoms of the long

running misconfiguration of policy became apparent just after Governor Vijit left office ¤ÇÒÁÊ¹Ô´Ê¹Áâ´ÂÊèÇ¹µÑÇ¨ÐªèÇÂãËé¡ÒÃ¼ÅÑ¡´Ñ¹¹âÂºÒÂ¢Í§¸»·à»ç¹ä»ä´é§èÒÂ¢Öé¹ ÍÑ¹¹ÕéµèÒ§¨Ò¡á¹Ç¤Ô´¢Í§¼ÙéÇèÒ¤¹¡èÍ¹æ·ÕèàËç¹ÇèÒµéÍ§ãªéàËµØ¼ÅáÅÐ¡ÒÃà¨Ã¨Ò¼ÅÑ¡ Ñ¹¹âÂºÒÂà»ç¹ËÅÑ¡

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on 2nd July 1996. Exactly one year later on 2nd July 1997, the baht was forced to float,

precipitating the Asian crisis.

After nearly six years under the leadership of Governor Vijit, the BOT’s

cohesiveness had been washed away. The divisiveness among its top executives was so

bad that it prevented the BOT from functioning effectively. As one of the leading

economists of Thailand, Dr. Ammar Siamwalla, puts it: “each individual [in the BOT’s

staff] is clever but once put together they are stupid”.33 The divisiveness within the BOT

became publicly known at the end of 1995 when Governor Vijit and Finance Minister Dr.

Surakiart Sathirathai accused Deputy Governor Ekamon Kerewat of releasing market

sensitive information to a third party. They dismissed him on 26th December 1995, before

carrying out a formal process of prosecution. Moreover, Deputy Ekamon was forced to

resign from his post as Secretary-General of the Securities and Exchange Committee

(SEC) one day earlier. He had been seconded to the newly created SEC in 1992 for a

term of four years that was due to end in March 1996.34 One cannot know for sure what

the issue of conflict between the Governor and his Deputy really was, but it is certain that

a personal conflict between them lay at the centre. The Deputy later sued the Finance

Minister and the Governor for his dismissal. In his affidavit detailing the reasons for

bringing the libel action against the Minister and the Governor, he writes, “I had intense

conflicts with Mr. Vijit who had always tried to defame me”.35 However, the press

speculated that Vijit’s real motive behind the defamation and subsequent dismissal was to

32 Sirichai Sakornratanakul, interviewed by author, 16 July 1998, Bangkok, Thailand. ÈÔÃÔªÑÂ ÊÒ¤ÃÃÑµ¹¡ØÅÊÑÁÀÒÉ³ìâ´Â¼Ùéà¢ÕÂ¹, ñö ¡¤. òõôñ, ¡ÃØ§à·¾Ï. »ÃÐà·Èä·Â. The original read: ¹Õé¤×Í¡ÒÃÃÑ°»ÃÐËÒÃ33 Dr. Ammar made this remark at the Faculty of Economics, University of Thammasat Annual Symposium of1998. He was also a member of the Sor Por Ror Committee, which investigated the causes of the crisis and whatwent wrong within the Bank during the infamous decision to defend the baht’s value. The original read:.áµèÅÐ¤¹©ÅÒ´ áµèàÁ×èÍÃÇÁ¡Ñ¹áÅéÇ ¡ÅÑºâ§è34 “Critical Situation of Vijit Supanit: When Principle is Melted into Air,” Nation Weekly, 22-28 March 1996,14. “ÊÀÒÇÐÇÔ¡ÄµÔ¢Í§ ÇÔ¨ÔµÃ ÊØ¾Ô¹Ô¨ àÁ×èÍËÅÑ¡¡ÒÃ¡ÅÒÂà»ç¹ÍÒ¡ÒÈ¸ÒµØ,” à¹ªÑè¹ÊØ´ÊÑ»´ÒËì, òò-òø ÁÕ¤. òõóù, ñô35 “Mr. T V Dr. S: From Proxy War to Hot War,” Share News, 23-24 March 1996, 1. “ÁÕÊàµÍÃì·Õ VS ´Ã.àÍÊ¨Ò¡Ê§¤ÃÒÁµÑÇá·¹ ÊÙèÊ§¤ÃÒÁÃéÍ¹,” ¢èÒÇËØé¹, òó-òô ÁÕ¤. òõóù, ñ. The original read:â¨·¡ìÁÕ¤ÇÒÁ¢Ñ´áÂé§ÍÂèÒ§ÃØ¹áÃ§¡Ñº¹ÒÂÇÔ¨ÔµÃ ¼Ùé«Öè§¾ÂÒÂÒÁËÒàËµØ¡ÅÑè¹á¡Åé§·ÓÅÒÂª×èÍàÊÕÂ§¢Í§â¨·¡ìÁÒâ´ÂµÅÍ´

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prevent the Deputy from returning to the BOT and becoming a competitor to his

governorship.36

Worst of all was the Machiavellian approach that the Governor employed during

the whole saga. It has been alleged that he used his personal connection with the Director

of the State Intelligence Unit, asking him to gather the information that led to the

Deputy’s dismissal, i.e., the Governor asked for the service of the intelligence unit to spy

on his own Deputy.37 The Director of the unit himself told the press that the Governor

was indeed the one who had made the request.38 This revelation put the Governor into a

corner: he then had to state publicly on 10th January 1996 the extent to which he had been

involved in this dismissal. By this time, however, the press had become suspicious of

Vijit, and was determined to prove that he was lying on this matter. It was the very first

time that a BOT's Governor had been treated like this by the press. There was also a

distribution of unsolicited leaflets within the BOT criticising the Governor. By March

1996, the MOF was still unable to charge the Deputy formally since the main evidence

against him could not be used in court due to the fact that it had been obtained by a spy.

However, the Manager of the Stock Exchange of Thailand (SET) began another criminal

prosecution against Ekamon on the same grounds. The press speculated that this was a

proxy war since the Manager was close to the Governor. By November 1996, the public

prosecutor dropped all the charges against the Deputy since the Director of the

Intelligence Unit refused to identify the spy who gathered the information in the first

place and there was therefore no direct witness or evidence that could link the Deputy to

the charges.39

There are two points that can be learned from this saga. First, it is worth noting

that all three of the individuals involved, the Governor, the Deputy and the Manager of

36 Sujit Chaitrakulchai “The Three Factions of Thai Capital Market,” Corporate Thailand, August 1996, 59-60.ÊØ´ ÔµÃ äªÂµÃÐ¡ÙÅªÑÂ “ÊÒÁ¡ê¡µÅÒ´ËØé¹ä·Â,” Corporate Thailand, Ê¤. òõóù, õù-öð.37 Matichon, 6 January 1996. ÁµÔª¹, ö Á¤. òõóù.38 Ibid.39 Manager, 29 November 1996. ¼Ùé Ñ´¡ÒÃ, òù ¾Â. òõóù.

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the SET,40 were former BOT scholarship students. All of them headed various

organisations that governed the nation’s money and capital markets. All of them knew

one another personally. It is thus fair to claim that during the first half of the 1990s the

cohesiveness among the top technocrats, who governed the monetary policy and capital

market of the country, had completely worn away. This statement can also be applied to

the goings-on within the BOT. The other Deputy Governor in post, Mr. Rerngchai

Marakanond, who would eventually succeed Governor Vijit, was sidelined by Governor

Vijit himself. He was delegated only non-strategically important duties, e.g., the general

management and the note printing mill supervision.41 The main policy line of command

was taken care of by an Assistant Governor, Dr. Chaiyawat Wibulswasdi, who was then

appointed to the Deputy’s post after the dismissal of Deputy Ekamon. Again, both Mr.

Rerngchai and Dr. Chaiyawat were former BOT scholarship students. Once Mr.

Rerngchai became the Governor in July 1996, he then delegated less important duties to

Dr. Chaiyawat whilst allowing another Assistant Governor Dr. Siri Ganjarerndee - yet

another former BOT scholarship student - to take care of the policy line of command. To

sum up, it can be said that by the middle of 1996, when the symptoms of the long-

running misconfiguration of policy started to become clear, the BOT was badly divided

internally.

Secondly, the saga also shows the extent to which the top technocrats involved

themselves in party politics. It was pointed out earlier that Governor Vijit came to power

by allying himself with the personal advisory team of PM Chatichai, who was the leader

of the Chart Thai Party in 1990. Dr. Surakiart Sathirathai was formerly one of the

advisory team members and became the Finance Minister (18th July 1995-27th May 1996)

under PM Banharn Silpa-archa, the new leader of the Chart Thai Party. After the general

election on 2nd July 1995, Deputy Ekamon announced to the press his intention to resign

from the Security Exchange Committee (SEC) on 22nd July 1995. This news rocked the

40 The Manager of the SET resigned from the BOT in 1981. See, Puwanat Na-Songknla, “The Bank ofThailand’s Brain Drain: Lost but Sustainable,” Interest, January 1995, Table 3, 87. ÀÙÇ¹Ò¶ ³ Ê§¢ÅÒ, “ÊÁÍ§äËÅáº§¡ìªÒµÔ ÊÙàÊÕÂáµèäÁèàÊÕÂÈÙ¹Âì,” ´Í¡àºÕéÂ, Á¤. òõóø, µÒÃÒ§·Õè ó. ø÷.41 “The Art of Being Deputy Governor of Central Bank,” Corporate Thailand, August 1996, 50-51.“ÈÔÅ»¢Í§¡ÒÃà»ç¹ÃÍ§¼ÙéÇèÒ¡ÒÃ¸¹Ò¤ÒÃ¡ÅÒ§,” Corporate Thailand, Ê¤. òõóù, õð-õñ.

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capital market and sent the SET index down heavily. The press speculated that this was

an attempt to discredit the newly elected government since the Deputy was close to the

previous government from the Democrat Party.42 The Minister had to stop him from

resigning at the time, only to dismiss him in December 1995 with the co-operation and/or

initiation of Governor Vijit.43 Whatever the ‘real facts’, this saga ended the BOT's

reputation of non-partisan technocracy.

Since March 1996, the Governor’s personal integrity had been challenged daily

by the press due to the further revelation that he had received stocks from a financial

company which was a subsidiary company of the Siam City Commercial Bank (SCCB).

Moreover, the company was approved for listing in the SET on 13th January 1993, the

day that the Governor acted as chairman of the SEC. This scandal began in 1990 when he

represented the BOT on the Board of the SCCB since the bank was under the BOT

financial aid programme. As a Board member, he was entitled to buy stocks at the par

value price, which he did, selling them at the end of 1995. Both facts, i.e., possession of

the stocks and the approval of listing, were seen as at least a conflict of interest or

breaking the unwritten code of conduct, and at worst as outright corruption. By 15th

March 1996, he told the press that it was legal for a Governor to hold shares so no laws

had been broken. This generated an outcry from the press. Never before had the BOT's

Governor been questioned by the press concerning undue personal gains.

By the first week of May 1996, the press reported that the Governor had overdraft

facilities with the Bangkok Bank of Commerce (BBC). The first time he took advantage

of this was in August 1990 when he was the BOT's Deputy. The second and the third

times were in May 1992 and November 1995.44 The point of contention was that the BBC

42 Dr. Ammar suggests that while Governor Vijit had a good relationship with the Chart Thai Party, he had arocky relationship with the Democrat's Finance Minister Tarrin Nimmanhaeminda (personal correspondence,16th December 2000).43 See this line of interpretation, for example, “Ekamon: New Species of Guinea Pig,” Manager Weekly, 8-14January 1996, 31. “àÍ¡¡ÁÅ Ë¹ÙÅÍ§ÂÒ¾Ñ¹¸ØìãËÁè,” ¼Ùé¨Ñ¡¡ÒÃÃÒÂÊÑ»´ÒËì, ø-ñô Á¤. òõóù, óñ. and Sujit Chaitrakulchai,“The Three Factions of Thai Capital Market,” Corporate Thailand, August 1996, 54-65. ÊØ´¨ÔµÃ äªÂµÃÐ¡ÙÅªÑÂ,“ÊÒÁ¡ê¡µÅÒ´ËØé¹ä·Â,” Corporate Thailand, Ê¤. òõóù, õô-öõ.44 Rungsan Thanapornpan, “Governor of the Bank of Thailand and [his] borrowing from commercial bank”Financial Crisis and Financial Sector in Thai Economy, (Bangkok: Kobfai Publishing Project, 1998), 257-262.

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had been a troubled bank since 1986. The Managing Director of the BBC was a former

BOT staff member, and in fact he and another former BOT scholarship student were the

ones that the BOT sent to the BBC in 1986 in order to solve the BBC’s problem. From

1992 onward, the bank’s financial status had been increasingly deteriorating mostly due

to corruption and malpractice. For example, during March 1996, it was revealed to the

public that the BBC had extended a 36,000 million baht loan to a group of politicians for

leverage buy-out with grossly undervalued collateral.45 This group was known as the

Group of Sixteen, which was a faction of the main ruling Chart Thai Party, and some of

its members held ministerial posts at the time. While the press took note of the

ineffectiveness of the BOT’s supervision and examination duties, it also speculated on

the close relationship between Governor Vijit and the BBC’s Managing Director.46 Yet

again, this was another case in which the integrity of the Governor was questioned. This

revelation further fuelled the criticism concerning the Governor’s legitimacy to govern.47

The opposition politicians also called for dismissal of the Governor.48 Moreover, during

8th-10th May 1996 there was a no-confidence debate in Parliament, during which the

BBC's problem was singled out by the opposition parties in order to grill the Minister of

Finance, which led to a drop in public confidence and hence a deposit run on the bank. It

was the first time that the public knew of the extent of the BBC’s problems. The failure

of a commercial bank in Thailand always brought heavy criticism of the BOT because it

was thought that there must be something wrong with the BOT's supervision and

examination functions. Unlike this time, however, the integrity of the BOT was not

usually questioned. By 17th May, the MOF had to take control of the BBC. Ten days

later, the Minister of Finance was forced by the PM to resign and after the takeover, the

ÃÑ§ÊÃÃ¤ì ¸¹Ð¾Ã¾Ñ¹¸Øì, “¼ÙéÇèÒ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â¡Ñº¡ÒÃ¡Ùéà§Ô¹¸¹Ò¤ÒÃ¾Ò³ÔªÂì” ÇÔ¡ÄµÔ¡ÒÃ³ì¡ÒÃà§Ô¹áÅÐàÈÃÉ°¡Ô¨¡ÒÃà§Ô¹,(¡ÃØ§à·¾Ï: â¤Ã§¡ÒÃ¨Ñ´¾ÔÁ¾ì¤ºä¿, òõôñ), òõ÷-òöò.45 Matichon, 14 March 1996. ÁµÔª¹, ñô ÁÕ¤. òõóù.46 “Critical Situation of Vijit Supanit: When Principle is Melted into Air,” Nation Weekly, 22-28 March 1996,14. “ÊÀÒÇÐÇÔ¡ÄµÔ¢Í§ ÇÔ¨ÔµÃ ÊØ¾Ô¹Ô¨ àÁ×èÍËÅÑ¡¡ÒÃ¡ÅÒÂà»ç¹ÍÒ¡ÒÈ¸ÒµØ,” à¹ªÑè¹ÊØ´ÊÑ»´ÒËì, òò-òø ÁÕ¤. òõóù, ñô.47 “BBC’s Loans for Takeover: [BBC’s MD] or BOT Responsibility?,” Econnews, 18-31 March 1996, 14-26.“ºÕºÕ«Õ»ÅèÍÂ¡Ùé(à·¤)âÍàÇÍÃì àÊÕèÂµÑéÇ ËÃ×Í áº§¡ìªÒµÚÔ ã¤ÃµéÍ§ÃÑº¼Ô´ªÍº?,” ÍÕ¤Í¹¹ÔÇÂì, ñø-óñ ÁÕ¤. òõóù, ñô-òö.48 Matichon, 14 March 1996. ÁµÔª¹, ñô ÁÕ¤. òõóù.

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BBC’s Managing Director faced several charges of breaking the Commercial Banking

Act.

It was later disclosed that the Governor abused his power in this case. An enquiry

into the matter by Mr. Suthee Singsaneh’s committee, appointed by the MOF on 25 July

1997, confirmed that Governor Vijit abused his power. The committee writes:

The BOT had issued several warnings to the BBC to fix its problems, however the BOThad not enforced strong and effective means which were under its legal authorities. Onthe contrary, the BOT, via the Financial Institution Development Fund (FIDF), injectedmoney into the BBC in order to support its financial status before writing off itsequities… The committee's view is that there may have been an abuse of power ordishonest law enforcement both in the senses of unenforcement and application ofmeasures that deviate from the laws' objectives.49

It was not surprising that by 18th June 1996, when the Cabinet ordered the BOT to

adjust its interest rate policy downward, the cry of the BOT to regain its independent

decision-making powers was falling on deaf ears. All of these scandalous revelations

effectively put the BOT's technocrats on a par with the politicians. This contrasted

sharply with the same intervention in interest rates in 1990, when the press strongly

criticised Finance Minister Pramual while seeing Governor Kamchorn's personality as

too weak to stand for the principle of independence. However, neither Governor

Kamchorn's nor the BOT's integrity, in the sense of honesty and non-partisanship, was

questioned. But this time, the press made no distinction between the BOT's technocrats

and politicians, reporting that all were as corrupt and unethical as one another.50 By this

49 Fact Considering and Recommendations for Improving the System of Examination and Supervision ofFinancial Institution Committee, “Report of the Study” 22 September 1997, Executive Summary, no page.¤³Ð¡ÃÃÁ¡ÒÃ¾Ô¨ÒÃ³Ò¢éÍà·ç¨¨ÃÔ§áÅÐËÒá¹Ç·Ò§á¡éä¢ÃÐººµÃÇ¨ÊÍºáÅÐ¤Çº¤ØÁÊ¶ÒºÑ¹¡ÒÃà§Ô¹, “ÃÒÂ§Ò¹¼Å¡ÒÃÈÖ¡ÉÒ” òò¡Â. òõôð, º·ÊÃØ»¼ÙéºÃÔËÒÃ, äÁèÁÕàÅ¢Ë¹éÒ. The original read:¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Âä´éÍÍ¡Ë¹Ñ§Ê×Íàµ×Í¹ãËé¸¹Ò¤ÒÃ¡ÃØ§à·¾Ï¾Ò³ÔªÂì¡ÒÃ ¨Ó¡Ñ´(ÁËÒª¹) á¡éä¢é»ÑËÒµèÒ§æ ·Õèà¡Ô´¢Öé¹ËÅÒÂ¤ÃÑé§áµèäÁè»ÃÒ¡®ÇèÒä´éÁÕ¡ÒÃ´Óà¹Ô¹¡ÒÃã¹ÅÑ¡É³Ð·Õèà ç´¢Ò´µÒÁ·Õè¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·ÂÁÕÍÓ¹Ò¨µÒÁ¡®ËÁÒÂáµè»ÃÐ¡ÒÃã´ã¹·Ò§µÃ§¢éÒÁ ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Ââ´Â¼èÒ¹¡Í§·Ø¹à¾×èÍ¡ÒÃ¿×é¹¿ÙÏ ä´é¹Óà§Ô¹à¢éÒä»¾ÂØ§°Ò¹Ð·Ò§¡ÒÃà§Ô¹¢Í§¸¹Ò¤ÒÃ¡ÃØ§à·¾Ï¾Ò³ÔªÂì¡ÒÃ ¨Ó¡Ñ´(ÁËÒª¹) â´ÂäÁèÁÕ¡ÒÃÅ´·Ø¹¡èÍ¹... ¤³Ð¡ÃÃÁ¡ÒÃàËç¹ÇèÒ ¹èÒ¨ÐÁÕ¡ÒÃãªéÍÓ¹Ò¨µÒÁ¡®ËÁÒÂã¹ÅÑ¡É³Ð·ÕèºÔ´àº×Í¹(abuse of power) ËÃ×ÍäÁèÊØ¨ÃÔµ ·Ñé§ã¹´éÒ¹¡ÒÃÅÐàÇé¹¡ÒÃãªéÍÓ¹Ò¨ áÅÐã¹ éÒ¹¡ÒÃÊÑè§¡ÒÃ·Õè¼Ô´ä»¨Ò¡à¨µ¹ÒÃÁ³ì¢Í§¡®ËÁÒÂ50 See for example, Rungsan Thanapornpan, “The Politics of Interest Rate Policy,” Manager, 28 June 1996.ÃÑ§ÊÃÃ¤ì ¸¹Ð¾Ã¾Ñ¹¸Øì, “¡ÒÃàÁ×Í§ÇèÒ´éÇÂ¹âÂºÒÂÍÑµÃÒ´Í¡àºÕéÂ”, ¼Ùé¨Ñ´¡ÒÃ, òø ÁÔÂ. òõóù.

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time it was obvious that Governor Vijit had to go. The press was not so concerned with

the issue of the interest rate policy in itself; the focus was instead on the fate of Governor

Vijit. On 25th June, several Ministers aired their dissatisfaction with the Governor in the

Cabinet meeting. Several issues were mentioned, e.g., the BBC’s problems and interest

rate policy.51 While PM Banharn denied a report that the Cabinet proposed to dismiss the

Governor, the fact that the new Minister of Finance confirmed to the press that there was

indeed a complaint made about the Governor in the meeting is testimony to the pressure

that was on him.52 The Minister also commented that it was wrong for high-ranking

personnel of the BOT and MOF to hold shares.53 Moreover, the boss of the mighty

Bangkok Bank also commented that he believed there would be a change in the

Governor’s post.54 It was the first time ever that a commercial banker had made a public

comment regarding a Governor. This was very strong testimony to how bad the

Governor’s credibility was. On 2nd July 1996, Governor Vijit resigned.

It is not surprising that there was a sense of relief in the press following Vijit’s

resignation.55 There was no single article in the press that sympathised with the fact that

the Governor was forced to resign by the politicians. In the wave of speculation over who

would succeed the post, the press reported that several persons, for example the

Permanent Secretary of the MOF at the time, had openly declined to accept the post.56

This was further testimony to the severity of the extent to which the BOT’s reputation

and credibility had suffered during this time. Less than a decade ago, the Governor’s post

would have been highly desirable for any technocrat, since it was the most prestigious

position of all civil servants.

The government promoted Deputy Governor Rerngchai to the Governor’s post on

9th July 1996. On 25th July, at the first official press conference with the new Governor,

51 Business Cycle, 28 June 1996. ÇÑ®¨Ñ¡Ã ØÃ¡Ô¨, òø ÁÔÂ. òõóù.52 Ibid.53 Bangkok Business, 27 June 1996. ¡ÃØ§à·¾¸ØÃ¡Ô¨, ò÷ ÁÔÂ. òõóù.54 Manager, 28 June 1996. ¼Ùé Ñ´¡ÒÃ, òø ÁÔÂ. òõóù.55 “The End of Vijit: After Being Butchered,” Manager Weekly, 8-14 July 1996, 1-4. “»Ô´©Ò¡ÇÔ¨ÔµÃËÅÑ§¶Ù¡ªÓáËÅÐàÅÐ,” ¼Ùé¨é´¡ÒÃÃÒÂÊÑ»´ÒËì, ø-ñô ¡¤. òõóù, ñ-ô.56 Business Cycle, 1 July 1996. ÇÑ®¨Ñ¡Ã ØÃ¡Ô¨, ñ ¡¤. òõóù.

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he announced his four working principles, three of which were good indicators of the

ongoing situation of the BOT. First, he would commit himself to a term of four years.

Secondly, he would lead the BOT by teamwork. And thirdly, he would improve the

internal regulations of the BOT in order to achieve better codes of conduct and

transparency.57 Since there is no legal limit on the term of the Governor, the first

commitment was a way to assure the public that he would not involve himself in party

politics in order to stay in power. The second and the third commitment both implied and

reflected the ongoing perception of the public toward the BOT.

It was bad timing for Governor Rerngchai to take the post, both due to the fact

that by this time the BOT was at its lowest point of esteem and credibility historically and

was badly divided internally. Moreover, on 29th July 1996, the baht value was attacked in

Hong Kong and Singapore Markets.58 This was the first wave of sustained attack that

eventually forced the currency to be floated on 2nd July 1997, exactly a year after the

resignation of Governor Vijit.

Financial Liberalisation and the Meltdown

The slippery path toward the 1997 financial meltdown began in 1990. With the

world’s highest growth rate, which gave the BOT’s technocrats self-confidence, and the

ideological domination of neoliberalism, they began to draft up a financial liberalisation

programme which eventually led to the worst ever economic crisis in Thailand and also

the starting point of the Asian crisis. As one reads through the blueprint of the

programme, it leaves little doubt that the plan was guided by mainstream economics. The

key words were liberalisation, deregulation and efficiency. The plan argued from the

outset that changes in the international environment would affect the Thai financial

market, hence it was necessary to introduce new measures early on in order to overcome

difficulties of adjustments. The internationalisation of the world capital and financial

markets, i.e. financial globalisation, was singled out as the driving force behind the plan.

Moreover, it anticipated that the formation of the European Single Market and the

57 Thai Financial, 26 July 1996. ä·Âä¿á¹¹ìàªÕÂÇ, òö ¡¤. òõóù.58 Financial Day, 7 August 1996. ä¿á¹¹ìàªÕÂÇà´Âì, ÷ Ê¤. òõóù.

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GATT's negotiation of Trade in Services in 1992 would force the Thai financial market

to open up to foreign players. At this point one might ask: to what extent did the

'international order' account for this deregulation programme? There is no doubt that the

‘international order’, for which one can read ‘the West’, had pushed hard for this world-

wide financial integration by making the East open up its capital accounts and financial

market.59 However, this point is out of the scope of this study, although this is not to deny

the importance of external factors. By implication then, this study takes the external

factors as given. As Robert Wade correctly points out, to treat external factors as given in

any thesis of this nature leaves one open to the counter argument that external factors are

subject to ongoing change. Such change, he states, increases “the probability of any60

country of interest to international investors experiencing a financial crisis” (Wade 2000,

2). Whilst accepting the weakness of this omission in this study, it is still possible to

argue that the focus on the domestic factor enables one to differentiate one country from

another even though they are subjected to the same international context.

It is also difficult to pinpoint the exact instrumental influence of the 'international

order', particularly in the case of Thailand. This is partly because the BOT traditionally

had a close relationship with the IMF,61 for example. A number of its top executives were

trained and/or had working experience with the IMF. Governor Vijit, who was the most

important driving force behind this programme, had worked with the IMF as an alternate

director representing Thailand on its Board before becoming the BOT's Governor.

However, it is fair to claim that the IMF had at least lent its support for this programme

of deregulation.62 For example, Dr. Bundid Nijathaworn was an economist of the IMF's

59 See Wade (2000), for example, who argues that the US persistent trade and budget deficits contributed‘structurally’ to the Asian bubbles and how the US and international institutions such as the IMF and the WorldBank instrumentally induced Asian countries to undertake rapid financial opening and liberalisation.60 Original emphasis.61 Traditionally, the IMF and WB were used by the technocrats to enhance their leverages against the rulingelites in order to achieve policy reforms. See the details of this issue in Chapter 3 and 4.62 Dr. Ammar argues that by the late 1980s, the IMF and WB had little or no leverage against Thailand becauseof the Thai's economic boom, for example, from 1994 onward they suggested that Thailand should make theexchange rate more flexible, but were ignored (personal correspondence, 16th December 2000). Dr. SnohUnakul also agrees that the IMF had less leverage during this time, see his opinion in Chapter 4.

154

Asian Department before being seconded to the BOT on 2nd October 1990 specifically to

lead the team responsible for preparing the deregulation programme .63

On the other hand, it is easy to show that the domestic financial community did

not pressure for the programme, although it nevertheless cannot be claimed that it did not

play a role. It played a rather passive role, instrumentally, mainly acting as a classical

rent-seeking group, i.e., trying to block or water down some measures that had a direct

effect on its performance, such as the adoption of the Bank for International Settlements'

(BIS) capital adequacy ratio,64 or the pressure from the West for more open market

access. It never acted as a policy initiator or presented a whole policy framework to the

authorities. However, it is sufficient to point out here that during the formal meetings

between the BOT and the Thai Bankers' Association (TBA) from 1990 onward, the BOT

was the one who informed the TBA of its policy principles and framework concerning

the deregulation and liberalisation programme. In other words, the BOT used the

meetings as a forum to inform and receive feedback from the TBA. The passive role of

the TBA is not surprising since the deregulation plan as a whole, by its nature, benefits

the financial community at least in the short term. Therefore, the TBA did not oppose or

challenge the overall initiatives of the BOT.

There is therefore no doubt that the main driving force for the programme was the

BOT. Why did the BOT choose to do this? An enquiry committee set up after the 1997

crisis to study the causes of the crisis, which is known in Thai as the ‘Sor-Por-Ror’

committee, answers the question as follows:

The BOT might not have chosen to open up the capital market [capital account] in1990, however it chose to do so. That decision was a consequence of a long runningpolicy which reflected fully preferences of the political actors at the time. Once Mr.Vijit assumed the Governorship, he enthusiastically pursued this policy to the point ofestablishing the Bangkok International Banking Facilities (BIBFs), which was

63 BOT. Archives. “Minutes of Meeting of the Court of Governors 4th /1992, 16th April 1992” Minutes ofMeeting of the Court of Governors. ¸»·. ËÍ¨´ËÁÒÂàËµØ. “ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â ¤ÃÑé§·Õèô/òõóõ ÅÇ. ñö àÁÂ. òõóõ” ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.64 See Chapter 7 for the details.

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supported by the Finance Minister at the time (Mr.Tarrin Nimmanhaeminda) and alsothe Cabinet.65

The liberalisation and deregulation programme was mainly driven by Governor

Vijit, who wanted to secure his position as Governor. As discussed above, Governor Vijit

came to power by allying himself with the personal advisory team of PM Chaitichai. And

one of the major policies of the Chaitichai government was to ‘transform the battle field

[of Indochina] into a market place’. In other words, the Chaitichai government would

support the peace process in Indochina, i.e., the Cambodian conflict, which represented

the first major shift in Thai foreign policy toward Indochina conflict since the late 1970s.

The policy anticipated that after the peace settlement, Thailand would benefit

economically from this newfound market. This policy became one of the most important

political selling points of the government. There is no doubt that the whole deregulation

and liberalisation programme, incorporating the ultimate aim of establishing Thailand as

a funding centre for the region, was partly pushed by Governor Vijit to please his

political masters. This ‘political-pleasing’ went well beyond what a 'proper', i.e. cautious

and vigilant, central banker would do. The BOT even seriously contemplated the so-

called 'internationalisation of baht,' i.e., it would promote the use of baht among the

Indochina countries, ultimately making it the vehicle currency of the area.66 This is a

risky step to take by any central bank, especially among a small economy such as

Thailand’s, since the widespread use of a currency outside its own territory might render

65 Enquiry and Recommendation for Increasing the Effectiveness of the Management of the Nation’s FinancialSystem (Sor Por Ror) Committee, Report on Facts of the Economic Crisis Situation, (Bangkok: TDRI, 1998)21. ¤³Ð¡ÃÃÁ¡ÒÃÈÖ¡ÉÒáÅÐàÊ¹Íá¹ÐÁÒµÃ¡ÒÃà¾ÔèÁ»ÃÐÊÔ·¸ÔÀÒ¾¡ÒÃºÃÔËÒÃ¨Ñ´¡ÒÃÃÐºº¡ÒÃà§Ô¹¢Í§»ÃÐà·È (È»Ã.),ÃÒÂ§Ò¹¼Å¡ÒÃÇÔà¤ÃÒÐËìáÅÐÇÔ¹Ô¨©ÑÂ¢éÍà·ç¨¨ÃÔ§à¡ÕèÂÇ¡ÑºÊ¶Ò¹¡ÒÃ³ìÇÔ¡Äµ·Ò§àÈÃÉ°¡Ô¨ (¡ÃØ§à·¾: TDRI, òõôñ) òñ. Theoriginal read: ¸»·. ÍÒ¨àÅ×Í¡·Õè¨ÐäÁèãËéà»Ô´µÅÒ´à§Ô¹·Ø¹àÊÃÕä éµÑé§áµè ¾.È. òõóó áµè ¸»·. ¡çàÅ×Í¡·Õ¨ÐãËéà»Ô´¡ÒÃµÑ´ÊÔ¹ã¨ãËéà»Ô´ã¹¤ÃÑé§¹Ñé¹¹ÑºÇèÒà»ç¹¼Å¾Ç§¢Í§¹âÂºÒÂ·Õèà»ç¹ÁÒâ´ÂµèÍà¹×èÍ§à»ç¹ÃÐÂÐÂÒÇ¹Ò¹áÅÐÊÐ·éÍ¹¤ÇÒÁµéÍ§¡ÒÃ¢Í§½èÒÂ¡ÒÃàÁ×Í§ã¹¢³Ð¹Ñé¹ÍÂèÒ§àµçÁ·ÕèàÁ×èÍ¹ÒÂÇÔ¨ÔµÃà¢éÒÁÒÃÑºµÓáË¹è§à»ç¹¼ÙéÇèÒ¡ÒÃ¡çÊÒ¹µèÍ¹âÂºÒÂ¹Ñé¹ÍÂèÒ§¢ÐÁÑ¡à¢Áé¹¶Ö§¢Ñé¹à»Ô´ÇÔà·È¸¹¡Ô¨«Öè§¡çä´éÃÑº¡ÒÃÊ¹ÑºÊ¹Ø¹¨Ò¡ÃÑ°Á¹µÃÕÇèÒ¡ÒÃ¡ÃÐ·ÃÇ§¡ÒÃ¤ÅÑ§ã¹ÊÁÑÂ¹Ñé¹ (¹ÒÂ¸ÒÃÔ¹·Ãì ¹ÔÁÁÒ¹àËÁÔ¹·ì)áÅÐ¨Ò¡¤³ÐÃÑ°Á¹µÃÕÍÕ¡ éÇÂ66 BOT. Archives. “Minutes of Meeting of the Court of Governors 11th /91 dated 28th November 1991” Minutesof Meeting of the Court of Governors. ¸»·. ËÍ¨´ËÁÒÂàËµØ. “ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â¤ÃÑé§·Õè ññ/òõóô, ÅÇ. òø ¾Â òõóô” ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.

156

its monetary policy impotent. After an initial step toward this direction, i.e., after

increasing the amount of imports and exports which could be carried out by baht payment

from 100,000 to 500,000,67 this push for the baht's internationalisation was abandoned in

early 1993. The abandonment stemmed from a regional central banker seminar in early

1993, at which the BOT discovered that this was not a proper step to take, especially

considering the fact that Singapore could achieve the status of regional funding centre

without allowing its dollar to be become an international currency.68 To be precise, the

BOT saw both the internationalisation of the baht and the introduction of BIBFs as two

means to achieve the ultimate aim of transforming Thailand into a regional funding

centre. Within this context, the deregulation and liberalisation programme was also a

necessary component of the whole vision. And the most important part of the plan was

exchange control deregulation, both within the current and capital accounts. To be a

financial centre, the free flow of capital with a minimum restriction on exchange control

is the first necessary condition. Why should a Governor of the BOT want to please the

politicians, in spite of the BOT’s traditional ethos of de facto political independence?

This question will be answered in the last section of this chapter.

In essence, the initial programme was composed of four parts. First, financial

deregulation and liberalisation - all the major financial variables were deregulated.

Interest rate ceilings of various types of deposits and loans were gradually lifted between

1989 and June 1992. Relaxation of foreign exchange control was implemented in three

stages from May 1990 to February 1994. By this time, the only remaining restriction on

the capital account concerned transactions by Thai residents for portfolio and property

outward investments, and for outward Foreign Direct Investment in excess of US$ 10

million per individual per year. The scope of commercial banks’ and financial

companies’ activities were expanded. For example, both institutions were allowed to

operate more investment banking activities such as underwriting, dealing and arranging

67 Ibid., 2368 Enquiry and Recommendation for Increasing the Effectiveness of the Management of the Nation’s FinancialSystem (Sor Por Ror) Committee, Report on Facts of the Economic Crisis Situation, (Bangkok: TDRI, 1998)3. ¤³Ð¡ÃÃÁ¡ÒÃÈÖ¡ÉÒáÅÐàÊ¹Íá¹ÐÁÒµÃ¡ÒÃà¾ÔèÁ»ÃÐÊÔ·¸ÔÀÒ¾¡ÒÃºÃÔËÒÃ Ñ´¡ÒÃÃÐºº¡ÒÃà§Ô¹¢Í§»ÃÐà·È (È»Ã.),ÃÒÂ§Ò¹¼Å¡ÒÃÇÔà¤ÃÒÐËìáÅÐÇÔ¹Ô¨©ÑÂ¢éÍà·ç¨¨ÃÔ§à¡ÕèÂÇ¡ÑºÊ¶Ò¹¡ÒÃ³ìÇÔ¡Äµ·Ò§àÈÃÉ°¡Ô¨ (¡ÃØ§à·¾: TDRI òõôñ), ó.

157

for debt instruments. Moreover, commercial banks were allowed to undertake the

business of asset management, such as provident fund management, while financial

companies were permitted to operate foreign exchange business. Concurrently, several

restrictions regarding portfolio management of commercial banks were relaxed. For

example, the requirement that banks wishing to open new branches must hold

government bonds was abolished in 1993, while the definition of agricultural credit,

which commercial banks were required to extend in an amount of no less than 20% of

their deposits, was expanded and renamed as the rural credit requirement.

Secondly, the improvement of supervision and examination of financial

institutions were anticipated. However, the only main improvement in supervision criteria

was the adaptation of the Bank for International Settlements (BIS) capital fund to risk

asset ratio, but this did not redefine the standard of loan classifications, i.e., the

definitions of non-performing loans, and turned out to be grossly inadequate. Even with

this minimal standard, the BIS ratio was heavily negotiated by the TBA. This issue will

be discussed in detail in Chapter 7.

Thirdly, development of financial instruments and services was also needed by

both the financial sector and the BOT since it would help the sector to adjust its liquidity

positions more easily and help the BOT to conduct its monetary policy more effectively.

The promulgation of the Securities and Exchange Act 1992, followed by the

establishment of the Securities and Exchange Commission as an independent agency to

supervise the operation of capital markets, were in this line of development.

Lastly, development of a payment system was also planned. The aim of this plan

was to facilitate the growing volume of transactions more efficiently. The large value

electronic fund transfer network – BAHTNET - was opened in May 1995, for example.

The deregulation and liberalisation programme was conceptualised during the

term of Governor Chavalit, who was in power for only six months. At the end of this

period he was due to retire, and his desire to leave his mark on the financial system led

him to implement the first round of exchange control relaxation in May 1990. However,

this round was more symbolic than substantial. To sign up to Article VIII of the IMF

Charter is an act of committing one’s country to agree that it would not resort to

158

exchange control in its current accounts. However, before May 1990 Thailand was under

this agreement de facto already. The further liberalisation from this point onward, and the

institutionalisation of capital inflows by introducing the BIBFs under Governor Vijit,

were the crucial turning point of the Thai economy.

To a certain extent, the liberalisation plan was coherent. The first component

increased both the scope of banking businesses and the degree of competition, which, in

turn, increased the risk profile of each establishment. This resulted in the further

requirement for more stringent supervision, encompassed in the second component.

However, in practice the first and the third components were accentuated and put into

practice more quickly than the second; this led to the severity of the banking crisis from

1997 onward. The most crucial mistake of the programme was the inconsistency between

the de facto fixed exchange rate regime and the free flow of foreign capital which

followed from the relaxation of exchange controls. This point will be discussed in detail

below.

The Impossible Trinity and the Establishment of the BIBFs

By November 1991, the BOT was ready to push for the ever-increasing

integration between the domestic and the international financial markets. The proposal to

establish the Bangkok International Banking Facilities (BIBFs) was presented to its Court

of Governors at this time.69 The BIBFs were conceptualised as an initial part of the wider

plan to establish Thailand as a regional funding centre in order to exploit the benefits of

the newly found peace in the Indochina countries. In essence, the participating

organisations would only be allowed to conduct their business in foreign currencies, not

in the Thai baht. Three types of business within the scope of the BIBFs would be the Out-

Out, Out-In and Intra-participants transactions. The first Out-Out transactions referred to

financial business that would only be conducted between the non-residents of Thailand.

For example, a BIBFs'-licensed Thai bank was permitted to borrow from other financial

centres, such as London and lend to a third country, such as Vietnam. The Out-In

159

transactions referred to transactions between sources of funds outside Thailand and

borrowers within it. For example, a Thai bank was permitted to borrow from abroad in

order to lend to a Thai company.

The single most important intermediate target of any central bank is the ability to

control the domestic money supply in order to achieve the ultimate objective of any bank,

namely economic stability. The incorporation of an Out-In business has a very significant

implication for the ability of a central bank to control domestic money supply, and hence

any such proposal to allow such business must be justified. For example, some

international financial centres, such as the International Banking Facilities of USA, have

not allowed this type of business in order to prevent their monetary policy from becoming

impotent.

The proposal to introduce Out-In transactions was justified on three grounds.

First, it was claimed that this type of business already existed in practice, but had to be

booked for outside Thailand. Secondly, and in connection with the first point, it was

argued that the transaction would not complicate the monetary policy of the authorities

because Thai non-financial companies had previously borrowed freely from abroad with

no ill effects on domestic monetary policy. Thirdly, the Out-In transaction would attract

foreign institutions to participate in the BIBFs, and hence ensure its success.

With the benefit of hindsight, the second argument was not valid since the BOT

was already faced with difficulties from the influx of foreign capital. Moreover, on page

25 of the same proposal, it was readily admitted that: "under the present exchange rate

system, it is difficult to control money supply due to change in the foreign reserves".70 An

article by Dr. Rungsan Hataiseree cited below serves to clarify this point. It was true that

Thai companies had previously been able to borrow from abroad quite freely, but most of

them, by and large, had to be first grade companies. The Out-In business was bound to

intensify the speed and pace of inflows since it would enable a smaller but equally capital

hungry company to tap foreign capital.

69 BOT. Archives. “Minutes of Meeting of the Court of Governors 11th /91 dated 28th November 1991” Minutesof Meeting of the Court of Governors. ¸»·. ËÍ¨´ËÁÒÂàËµØ. “ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â¤ÃÑé§·Õè ññ/òõóô ÅÇ. òø ¾Â òõóô” ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.70 Ibid.

160

One can find the real reason for allowing Out-In transactions on page 35 of the

proposal, where it is predicted that it would take at least another five years for the

Indochina market to materialise. One can infer from this that the immediate, short-term

objective of the BIBFs was to encourage Out-In business. Furthermore, it was said on

page 27 that one of the main objectives of the facilities was to use it as an instrument to

mobilise foreign capital to finance the anticipated investment and saving gap of the

economy. This leaves little doubt that, at least for the short-term period, the main

objective of introducing the BIBFs was to further encourage capital inflows. In essence,

one can argue that the proposal pays too little attention to the potential effects of the Out-

In transaction on the money supply, which would in turn have major implications for the

ability of the BOT to conduct monetary policy. Why would the BOT, which had been

famous for its conservative ethos, choose to introduce a mechanism that could potentially

undermine its own ability to control the money supply? As argued above, this was part of

the grand vision of the BOT's technocrats who had tried to please their political masters

since 1990.

After the establishment of BIBFs in 1993, the dominant business was indeed the

Out-In transaction. It was not surprising that this led to a further increase in the amount of

capital inflows, which literally flooded the domestic financial market. The volume of net

capital inflows to Thailand rose from an average of about 9% of GDP annually during

1988-1992 to 14% of GDP in 1995. Table 5.1 shows that the amount of inflow increased

significantly from 1993 to 1996.

Table 5.1: Total Net Capital Inflows to Thailand (Billions of US$)

Year 19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

N e t

inflows

6.

6

7.

2

10

.6

8.

1

12

.6

15

.8

22

.8

18

.1

Source: Yos and Pakorn 1998, Table 8, 21-22

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From this time onward, the economy had reached the point of no return. The

grave mistake of the plan was the policy inconsistency between the free flow of capital

and the de facto fixed exchange rate regime. The baht had long ago been pegged to the

US dollar. Even given that the basket pegging system was adopted from 1984 to 1997,

the dollar still commanded a predominant weight in the basket. Therefore, the exchange

risk of foreign borrowing denominated in US dollars before 1996 was negligible. The

exchange rate stability and free flow of capital, together with low interest rates abroad,

gave strong incentives for the corporate sector to build up massive unhedged foreign

debts. The end of 1996 heralded the first time that the BOT had been urged to seriously

consider a more flexible exchange rate regime by a permanent secretary of the MOF

since 1993,71 after capital outflows and speculative attacks to the baht. But the request

was too late, even by this time. After nearly a decade of high capital inflows, which were

accentuated by the BIBFs, the economy was distorted to the extent that it was beyond

minor repair. However, the consequences to the economy still might not have been as bad

as they were after the baht was finally forced to float by speculators on 2nd July 1997, and

Thailand lost virtually all of its international currency reserve. It is clear that the

establishment of the BIBFs was one of the most important turns in the Thai economy.

When the panic of the international financial market set in after the July 1997

flotation of the baht, the outflow of capital brought the whole economy to its knees. This

proves that the technocrats had tried and failed to achieve the 'impossible trinity', namely

to have a free flow of capital and an independent monetary policy under a fixed exchange

rate system. This is not the place to elaborate this doctrine, but it is sufficient to point out

that under a fixed exchange rate and a relatively free flow of capital regime, the domestic

monetary policy is impotent. For example, if an economy is overheated, the most likely

response from a central bank will be a tight monetary policy, which will increase interest

rates in the economy in order to cut spending. But because of the relatively free flow of

capital, the higher interest rates will further induce capital inflows into the economy and

71 Enquiry and Recommendation for Increasing the Effectiveness of the Management of the Nation’s FinancialSystem (Sor Por Ror) Committee, Report on Facts of the Economic Crisis Situation, (Bangkok: TDRI, 1998)81. ¤³Ð¡ÃÃÁ¡ÒÃÈÖ¡ÉÒáÅÐàÊ¹Íá¹ÐÁÒµÃ¡ÒÃà¾ÔèÁ»ÃÐÊÔ·¸ÔÀÒ¾¡ÒÃºÃÔËÒÃ¨Ñ´¡ÒÃÃÐºº¡ÒÃà§Ô¹¢Í§»ÃÐà·È (È»Ã.),ÃÒÂ§Ò¹¼Å¡ÒÃÇÔà¤ÃÒÐËìáÅÐÇÔ¹Ô¨©ÑÂ¢éÍà·ç¨¨ÃÔ§à¡ÕèÂÇ¡ÑºÊ¶Ò¹¡ÒÃ³ìÇÔ¡Äµ·Ò§àÈÃÉ°¡Ô¨ (¡ÃØ§à·¾: TDRI òõôñ), øñ.

162

eventually bring down the interest rates, offsetting the initial tight monetary policy.

Under a flexible exchange rate regime, the adjustment of the exchange rate itself would

prevent the inflows, hence mitigating the downward pressure on the interest rates.

Moreover, the flexible exchange rate regime would imply uncertainty in the exchange

market, thus making demands for foreign funds less attractive to domestic users and

hence reducing the demand for funds in the first place. In other words, the flexible

exchange rate would act as a cushion between the domestic and the international financial

market.

Did some of the best and the brightest economists of Thailand fail to take this

doctrine into consideration? Clearly, the BOT and the MOF had not failed in this aspect.

In November 1991 the BOT presented its study on the incorporation of the BIBFs to its

Court of Governors, not for approval but just for acknowledgement. Within this

document a working group, which had studied the merit of establishing the BIBFs, listed

three main risks associated with the proposed establishment, the most relevant one being:

2) The effect on monetary policy conductsUnder the present setting of the exchange rate system, the authorities have littleflexibility in using the exchange rate as an instrument to insulate the effects of foreigninflows from the domestic financial system. A more effective measure that can insulatethese effects is the rearrangement of the present exchange rate system to a more flexibleexchange rate arrangement. This more flexible arrangement will act as another cushionto insulate the effects on the domestic financial system. The new arrangement will notonly help the authorities to avoid uncertainties of determining the appropriate level ofthe exchange rate which is very difficult to pinpoint in practice, but also be able to letthe exchange rate movement be more flexible. Without taking political constraintsinto consideration72, a more flexible exchange rate system will be an excellentsupportive measure for the ongoing liberalisation efforts of the authorities, especiallythe policy of foreign exchange liberalisation. The Economic Research Department,therefore, recommends that the more flexible exchange rate system should beimplemented concurrently with the process of establishing facilities such as theBIBFs in order to reduce risks that might be incurred to the stability of thedomestic financial system.73

72 My emphasis73. BOT. Archives. “Minutes of Meeting of the Court of Governors 11th /91 dated 28th November 1991”Minutes of Meeting of the Court of Governors. ¸»·. ËÍ¨´ËÁÒÂàËµØ.“ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â ¤ÃÑé§·Õè ññ/òõóô ÅÇ. òø ¾Â òõóô”ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.

163

It is therefore clear that the top executives of the BOT had known of the doctrine of the

'impossible trinity' at least since 1991. They also realised very well that the

implementation of a more flexible exchange rate arrangement might be faced with

political obstructions. This is also true for the top executives in the MOF. The Minister of

Finance sent a letter to the Cabinet dated 28th August 1992. The letter, which asked the

Cabinet to approve the principle of the BIBFs, was essentially a summary of the above

study and concluded that:

[t]o mitigate risks and destabilisation of the domestic monetary system, [due to theeffects of excessive foreign capital inflows on the domestic money supply]…the mostimportant consideration is the rearrangement for a more flexible exchange rate system,which will act as another cushion for the effects on the domestic financial system fromthe foreign inflows.74

Original emphasis, the original read:ò) ¼Å¡ÃÐ·ºµèÍ¡ÒÃ´Óà¹Ô¹¹âÂºÒÂ¡ÒÃà§Ô¹ÀÒÂãµéÃÐººÍÑµÃÒáÅ¡à»ÅÕèÂ¹»Ñ¨ ØºÑ¹ ·Ò§¡ÒÃÁÕ¤ÇÒÁ¤ÅèÍ§µÑÇ (flexibility) ¹éÍÂÁÒ¡ã¹¡ÒÃãªéÍÑµÃÒáÅ¡à»ÅÕèÂ¹à»ç¹à¤Ã×èÍ§Á×Í insulate¼Å¡ÃÐ·º¢Í§à§Ô¹·Ø¹µèÒ§»ÃÐà·ÈµèÍÃÐºº¡ÒÃà§Ô¹ ÇÔ¸Õ¡ÒÃË¹Öè§·ÕèÊÒÁÒÃ¶ insulate¼Å¡ÃÐ·ºµèÍÃÐºº¡ÒÃà§Ô¹ä´éÍÂèÒ§ÁÕ»ÃÐÊÔ·¸ÔÀÒ¾ÁÒ¡¢Õé¹¤×Í¡ÒÃà»ÅÕèÂ¹ÍÑµÃÒáÅ¡à»ÅÕèÂ¹¨Ò¡»Ñ¨ ØºÑ¹ÁÒà»ç¹ÃÐººÍÑµÃÒáÅ¡à»ÅÕèÂ¹·ÕèãËé¤ÇÒÁ¤ÅèÍ§µÑÇÁÒ¡¢Öé¹ (more flexible exchange ratearrangement) «Öè§¨Ðà»ç¹ cushion ÍÕ¡µÑÇË¹Öè§ã¹¡ÒÃ insulate ¼Å¡ÃÐ·ºµèÍÃÐºº¡ÒÃà§Ô¹ã¹»ÃÐà·È ÃÐºº´Ñ§¡ÅèÒÇ¹Í¡¨Ò¡¨ÐªèÇÂËÅÕ¡àÅÕèÂ§¤ÇÒÁäÁèá¹è¹Í¹¢Í§¡ÒÃ¡ÓË¹´ÍÑµÃÒáÅ¡à»ÅÕèÂ¹·ÕèàËÁÒÐÊÁ «Öè§ã¹·Ò§» ÔºÑµÔà»ç¹àÃ×èÍ§·ÕèÂÒ¡ÁÒ¡áÅÐ¨ÐªèÇÂãËéÍÑµÃÒáÅ¡à»ÅÕèÂ¹ÊÒÁÒÃ¶à¤Å×èÍ¹äËÇä´é¤ÅèÍ§µÑÇÁÒ¡¢Öé¹ â´ÂäÁè¤Ô´¢éÍ¨Ó¡Ñ´·Ò§¡ÒÃàÁ×Í§áÅéÇÃÐººÍÑµÃÒáÅ¡à»ÅÕèÂ¹·ÕèÁÕ¤ÇÒÁ¤ÅèÍ§µÑÇ¡ç¨Ðà»ç¹ÁÒµÃ¡ÒÃ·Õè¨Ð support ÁÒµÃÒ¡ÒÃ liberalisation µèÒ§æ·Õè·Ò§¡ÒÃ´Óà¹Ô¹¡ÒÃÍÂÙèà»ç¹ÍÂèÒ§´Õ â´Âà©¾ÒÐÍÂèÒ§ÂÔè§¹âÂºÒÂ·Ò§´éÒ¹ foreign exchange liberalisation½èÒÂÇÔªÒ¡ÒÃÁÕ¤ÇÒÁàËç¹ÇèÒã¹¡ÒÃ´Óà¹Ô¹¡ÒÃ Ñ´µÑé§ facilities áºº BIBF ¢Öé¹ÁÒ·Ò§¡ÒÃ¤ÇÃ¾Ô¨ÒÃ³Ò¹ÓÃÐººÍÑµÃÒáÅ¡à»ÅÕèÂ¹áºº¤ÅèÍ§µÑÇÁÒãªé¤Çº¤Ùèä»´éÇÂ à¾×èÍÅ´¤ÇÒÁàÊÕèÂ§µèÒ§æ·ÕèÍÒ¨à¡Ô´¢Öé¹µèÍàÊ¶ÕÂÃÀÒ¾¢Í§ÃÐºº¡ÒÃà§Ô¹ã¹»ÃÐà·È74 The attachment - The Development of Thailand into a Regional Funding Centre - to the MOF’s letter Ref.0303/38190 dated 28th August 1992. àÍ¡ÊÒÃá¹º¨´ËÁÒÂ·Õè ¡¤. ðóðó/óøñùð ÅÇ. òø Ê¤. òõóõ, àÃ×èÍ§¡ÒÃ¾Ñ²¹Ò»ÃÐà·Èä·ÂãËéà»ç¹ÈÙ¹Âì¡ÅÒ§·Ò§¡ÒÃà§Ô¹ã¹ÀÙÁÔÀÒ¤.The original read:à¾×èÍÅ´¤ÇÒÁàÊÕèÂ§áÅÐ¼Å¡ÃÐ·º·ÕèÍÒ¨à¡Ô´¢Öé¹µèÍàÊ¶ÕÂÃÀÒ¾ÃÐºº¡ÒÃà§Ô¹ã¹»ÃÐà·È...·ÕèÊÓ¤Ñ·ÕèÊØ´¡ç¤×Í¡ÒÃ¾Ô¨ÒÃ³ÒãªéÃÐººÍÑµÃÒáÅ¡à»ÅÕèÂ¹·ÕèãËé¤ÇÒÁ¤ÅèÍ§µÑÇÁÒ¡¢Öé¹à¾×èÍà»ç¹¡Ñ¹ª¹ÍÕ¡µÑÇË¹Öè§ã¹¡ÒÃ»éÍ§¡Ñ¹¼Å¡ÃÐ·ºµèÍÃÐºº¡ÒÃà§Ô¹ã¹»ÃÐà·È¨Ò¡¡ÒÃäËÅà¢éÒ¢Í§·Ø¹¨Ò¡µèÒ§»ÃÐà·È

164

The 'impossible trinity' was also acknowledged in the BOT's economics journal,

which can be accessed by any member of the general public. One can find this

acknowledgement in various articles written by the BOT's staff and top executives. For

example, Mr. Paiboon Kittisrikangwan, Chief of Analysis Section, Banking Department,

who was also the BOT's foreign exchange dealer during the infamous defence of the baht

in 1997, wrote the following in 1994:

It is a well-known fact that it is not possible to simultaneously follow three objectives ofindependent monetary policy, fixed exchange rate, and free capital mobility. A commonproblem faced by many countries in this region has been how to cope with the huge andvolatile movement of foreign capital (Paiboon Mathee and Jaturong 1994, 29).

The implication of this article is clear; a more flexible exchange rate regime was needed.

This was further supported by another empirical study. Using the data from 1980-1992,

Dr. Rungsan Hataiseree, another economist of the Research Department, concluded that:

Policy actions, such as variations in domestic credit and/or domestic rates of interest,may be of some success in offsetting the impacts of foreign capital inflows on domesticmoney market conditions, but they are severely circumscribed by the degree ofopenness of the capital account75…it is well recognised that rapid inflows and/oroutflows of funds could have temporary significant effects on the monetary base, thusobscuring the meaning of monetary aggregates. This problem may be compounded if theexchange rate is irrevocably fixed. Nonetheless, under a relatively flexible exchange ratesystem, the monetary authorities can opt to pursue a discretionary adjustment in thenominal exchange rate in such a way as to mitigate the unfavourable impact arisingfrom rapid inflows of foreign capital (Rungsan 1995, 40).

It is important to note that the data employed came from the period before the

establishment of the BIBFs in 1993. This is testimony to the necessity and urgency of

introducing a more flexible exchange rate concurrently with the introduction of the

BIBFs.

Technically speaking, to sum up the above discussion so far, there were two main

mistakes made by the Bank of Thailand. First, what went wrong was that, in spite of

75 My emphasis.

165

paying lip service to the importance of sequencing,76 the sequence of liberalisation was

implemented incorrectly by the authorities, i.e., the capital account had been opened

before the introduction of a flexible exchange rate system. Secondly, the BOT further

encouraged more capital inflows through the introduction of the BIBFs before

implementing a more flexible exchange rate regime, despite knowing about the doctrine

of the ‘impossible trinity’ and the recommendation of the Research Department, which

had made clear that the regime should be introduced concurrently. Clearly it was not a

matter of inadequate training or technical incompetence per se among the BOT’s

technocrats, since the various quotations mentioned above make it clear that they had

known it all along. Moreover, there was a debate among the BOT’s technocrats regarding

adjustment of the exchange rate system and policies that have implications for monetary

measures. However, those who advocated a more flexible exchange rate system and more

vigilant approach toward monetary measures were silenced.

In 1995, Dr. Chaiyawat Wibulswasdi was a Deputy of Governor Vijit. He served

most of his time in the Research Department and played an important role during the two

baht devaluations in the first half of the 1980s. Moreover, he was entrusted as the

manager of the BOT's Exchange Rate Equalization Fund, which had been the main

instrument of the BOT used to stabilise the exchange rate. His opinion on exchange rate

policy was crucial within the Bank. However, he was trained as a trade economist, not as

a monetary economist. A main concern of any trade economist is the international flow of

goods and services. Undoubtedly, a fixed exchange rate regime facilitates this flow. A

hint of his personal conviction toward this tendency can be seen in the following

quotations:

In terms of sequencing, quite differently from other countries' experiences that a countryshould maintain capital control until the completion of its domestic liberalisationprocess, the process of financial reform in Thailand was undertaken across the boardconcurrently. External deregulation was undertaken more or less in tandem withdomestic liberalisation. For instance, interest rate ceilings were gradually removed from1989 onwards and completely eliminated by 1992, while exchange controls wereprogressively relaxed from 1990 to 1991 and 1993 (Chaiyawat 1995, 2).

76 See the following two quotations.

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Moreover, in 1993 Assistant Governor Dr. Chaiyawat and Dr. Orasa Vongthieres,

economist of the Research Department, wrote:

[t]he sequencing77 of the liberalisation measures is regarded as crucial to the success ofthe programme. Deregulation in the foreign exchange system was carried out firstbecause the system was sufficiently ready for chances…In the future, the foreignexchange system will be made even more flexible to pave the way for thetransformation of the current system into a floating exchange rate regime now that theinterest rate system has been fully floated (Chaiyawat and Orasa 1993, 18).

It is apparent from the second quotation that Dr. Chaiyawat did see some merits of a

more flexible exchange rate regime. However, considering both quotations together, he

did not seem to believe and/or realise that the sequencing of the liberalisation process was

also very important, in spite of paying lip service to the sequencing process. Clearly, he

was confident that capital account liberalisation could be carried out before introducing a

more flexible exchange rate regime without much harm to the economy. This is in

contrast with those who advocated an early introduction of a more flexible regime. For

example, Mr. Sirichai Sakornratanakul was a member of the working group who drafted

up the liberalisation plan. Not only did he advocate the early introduction of a more

flexible regime, but also disagreed with the BIBFs' Out-In transaction. His main concern

was the ability of the BOT to manage monetary supply, since the Out-In transaction

proposal and fixed exchange rate would render the Bank's main function unattainable.

However, his concern failed to make an impression. "Dr. Chaiyawat commanded respect

from everybody and hence there was no healthy debate within the BOT at the time. My

concern was put aside as a theoretical possibility".78 He therefore had to put his

frustration onto paper.79 For example, in a paper presented at the SEACEN-IMF Seminar

77 Original emphasis.78 Sirichai Sakornratanakul, interviewed by author, 16 July 1998, Bangkok, Thailand. ÈÔÃÔªÑÂ ÊÒ¤ÃÃÑµ¹¡ØÅÊÑÁÀÒÉ³ìâ´Â¼Ùéà¢ÕÂ¹, ñö ¡¤. òõôñ, ¡ÃØ§à·¾Ï. The original read: ·Ø¡¤¹ã¹µÍ¹¹Ñé¹ÂÍÁÃÑº´êÍ¡àµÍÃìªÑÂÇÑ²¹ìÁÑ¹¨Ö§äÁèÁÕ¡ÒÃ¶¡à¶ÕÂ§ÍÂèÒ§ healthy ¢éÍ¤Ô´¢Í§¼Áà¾ÕÂ§áµè¶Ù¡ÁÍ§ÇèÒÁÕ¤ÇÒÁà»ç¹ä»ä´é·Ò§·ÄÉ®Õ79 As a result of his frustration, he also wrote a series of articles published in a popular banking magazine whichindirectly criticised the Bank's regional financial centre plan. See Sirichai Sakornratanakul, “Bangkok: Being

167

in 1992, Sirichai Sakornratanakul and Pichit Patrawimolpon argued for a more flexible

regime. After describing the experience of Thailand's exchange rate policy, the authors

concluded that:

[t]here is no room, however, for complacency. Globalisation and financial liberalisationthat have taken place over the past decade have not only led to rapid and significantamount of capital flows into and out of the country but also rendered many of theconventional monetary instruments virtually ineffective. Exchange control, interest rateceilings, and credit rationing are just some of the examples of this development.Meanwhile, the outstanding credit rating of Thailand may or should perhaps lessen theauthorities' worry over baht convertibility in the next decade. The conventional primaryobjective of maintaining international confidence in the baht value may thus be put on aslightly lower priority compared with the real need for new and more effective monetaryinstruments that will ensure the long lasting prospects of the Thai economy over thelonger term. The question regarding short-term speculative capital flows will thus haveto be addressed soon. In this regard, an even more flexible exchange rate regime alongthe line of a managed float system should perhaps be seriously considered (Sirichai andPichit, 1992, 19-20)

It was unfortunate that this more vigilant approach toward financial liberalisation

lost ground in the BOT. One thing is clear from this internal debate: the structure of the

BOT did not allow the potentially beneficial idea to be translated into the BOT's policy.

Why is this the case and why was the change of an exchange rate policy so difficult and

contentious an issue? These questions will be answered in the last section of this chapter.

The next section will describe the further resistance to such a change that eventually

brought the economy to the point of meltdown.

The Bifurcation between Macro and Micro Economic Policy, and The End of The

Gang of Four

the Regional Financial Centre,” Banking and Finance, February 1991, 155-157. ÈÔÃÔªÑÂ ÊÒ¤ÃÃÑµ¹¡ØÅ,“¡ÃØ§à·¾¡Ñº¡ÒÃà»ç¹ÈÙ¹Âì¡ÒÃà§Ô¹ã¹ÀÙÁÔÀÒ¤,” ¡ÒÃà§Ô¹¡ÒÃ¸¹Ò¤ÒÃ , ¡ØÁÀÒ¾Ñ¹¸ì òõóô, ñõõ-ñõ÷.Sirichai Sakornratanakul, “Bangkok: Being the Regional Financial Centre,” Banking and Finance, March 1991,163-166. ÈÔÃÔªÑÂ ÊÒ¤ÃÃÑµ¹¡ØÅ, “¡ÃØ§à·¾¡Ñº¡ÒÃà»ç¹ÈÙ¹Âì¡ÒÃà§Ô¹ã¹ÀÙÁÔÀÒ¤,” ¡ÒÃà§Ô¹¡ÒÃ¸¹Ò¤ÒÃ, ÁÕ¹Ò¤Á òõóô , ñöó-ñöö.Sirichai Sakornratanakul, “Bangkok: Being the Regional Financial Centre,” Banking and Finance, April 1991,164-166. ÈÔÃÔªÑÂ ÊÒ¤ÃÃÑµ¹¡ØÅ, “¡ÃØ§à·¾¡Ñº¡ÒÃà»ç¹ÈÙ¹Âì¡ÒÃà§Ô¹ã¹ÀÙÁÔÀÒ¤,” ¡ÒÃà§Ô¹¡ÒÃ¸¹Ò¤ÒÃ, àÁÉÒÂ¹ òõóô, ñöô-ñöö.

168

In Chapter Two, this study claimed that by the 1990s, the so-called bifurcation

between macro and micro economic policy was no longer an accurate description of

policy processes of the state. One of the theses of this study is that the four

macroeconomic agencies (the Gang of Four) that are responsible for the macroeconomic

policy formulation were anything but cohesive, which partly brought about the economic

crisis in 1997. The effective policy coordination, especially between fiscal and monetary

policies, which had been chiefly responsible for the high economic growth within a stable

economy for more than 30 years, was at its lowest point by the 1990s. As argued in

Chapter 4, by 1975 the macroeconomic technocrats, the most cohesive group of all the

state’s economic personnel, began to split. The first half of the 1980s, amidst the difficult

economic restructuring, left the technocrats deeply divided. Within this context, the

further deterioration of both cohesiveness and the traditional ethos of integrity, caused by

the changing incentive structure of the economy in 1990s, left the macro agencies

nonfunctional.80 The rules of the game governing the coordination, both informal and

formal, were still largely in place, but by this time the professional politicians were not

prepared to act merely as a rubber stamp as they once had. The deterioration of the

technocratic institutions and the increasing assertiveness of the politicians left the state

without effective tools to formulate the right policies for the economy. The result was the

1997 crisis.

To substantiate the above claim, it is necessary to look at the macroeconomic

policy coordination during 1994-1996. From 1990 to 1995, the average growth rate of the

economy was 8.6% per year, while the inflation rate was also at a low level up to the end

of 1993, then climbing. In the same time frame, the current account deficit declined from

about 8% of the GDP to the lowest point in 1993 and climbed up again to 8.2% in 1995.

However, the deficits were more than offset by capital inflows, which resulted in

increasing foreign debt. Higher inflation and the deficit were clear signs that by 1994, the

economy was overheated. The Sor Por Ror Committee points out that the authorities had

80 More discussion will follow.

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five options to follow in order to cut down the aggregated demand.81 Two of them were

the tight monetary and fiscal policies.

The Committee's judgement is that the balanced fiscal policy proposed by the four

agencies was not enough to cool down the economy, and that a more appropriate policy

would have been a fiscal surplus policy. However, on 18th January 1995, when the

agencies met for formulating the 1996 fiscal policy, the meeting had concluded that a

balanced budget would be used. Governor Vijit, who represented the BOT in the meeting,

neither pushed for the surplus policy nor objected to the balanced policy. In the following

year, the meeting also reached the same conclusion without any opposition from the

BOT.82 It is important to note that under the fixed foreign exchange rate regime and free

flow of capital, the fiscal policy tended to be more effective in aggregate demand

management than the monetary policy. Since the BOT chose to use the fixed rate regime,

then, it should have pushed for a fiscal surplus policy. Although the fiscal policy was not

under the authority of the BOT, the BOT traditionally had a large influence in it.83 Why

didn’t the BOT push for the surplus policy? At least two explanations can be offered

here. First, the BOT may have seen the balance policy as appropriate. But this is unlikely,

since the BOT itself employed a tight monetary policy in both years,84 which indicated

that it was concerned about the overheated economy. Why did the BOT choose to employ

a less effective measure? The second explanation may be that because the BOT had lost

its previous influence in fiscal policy setting, it did not even try to push for the surplus

policy. If this was in fact the case, then one can conclude that the degree of policy

coordination between the Gang of Four was at a minimum.

81 Enquiry and Recommendation for Increasing the Effectiveness of the Management of the Nation’s FinancialSystem (Sor Por Ror) Committee, Report on Facts of the Economic Crisis Situation, (Bangkok: TDRI, 1998)12. ¤³Ð¡ÃÃÁ¡ÒÃÈÖ¡ÉÒáÅÐàÊ¹Íá¹ÐÁÒµÃ¡ÒÃà¾ÔèÁ»ÃÐÊÔ·¸ÔÀÒ¾¡ÒÃºÃÔËÒÃ¨Ñ´¡ÒÃÃÐºº¡ÒÃà§Ô¹¢Í§»ÃÐà·È (È»Ã.),ÃÒÂ§Ò¹¼Å¡ÒÃÇÔà¤ÃÒÐËìáÅÐÇÔ¹Ô¨©ÑÂ¢éÍà·ç¨¨ÃÔ§à¡ÕèÂÇ¡ÑºÊ¶Ò¹¡ÒÃ³ìÇÔ¡Äµ·Ò§àÈÃÉ°¡Ô¨ (¡ÃØ§à·¾: TDRI, òõôñ) ñò.82 Ibid., 13.83 For example, during the time of Governor Puey, the BOT virtually had the veto power of determining theupper limit on government spending.84 Enquiry and Recommendation for Increasing the Effectiveness of the Management of the Nation’s FinancialSystem (Sor Por Ror) Committee, Report on Facts of the Economic Crisis Situation, (Bangkok: TDRI, 1998)13. ¤³Ð¡ÃÃÁ¡ÒÃÈÖ¡ÉÒáÅÐàÊ¹Íá¹ÐÁÒµÃ¡ÒÃà¾ÔèÁ»ÃÐÊÔ·¸ÔÀÒ¾¡ÒÃºÃÔËÒÃ¨Ñ´¡ÒÃÃÐºº¡ÒÃà§Ô¹¢Í§»ÃÐà·È (È»Ã.),ÃÒÂ§Ò¹¼Å¡ÒÃÇÔà¤ÃÒÐËìáÅÐÇÔ¹Ô¨©ÑÂ¢éÍà·ç¨¨ÃÔ§à¡ÕèÂÇ¡ÑºÊ¶Ò¹¡ÒÃ³ìÇÔ¡Äµ·Ò§àÈÃÉ°¡Ô¨ (¡ÃØ§à·¾: TDRI, òõôñ) ñó.

170

The second interpretation is more likely because even the politicians and the

Fiscal Policy Office (FPO) opposed the tight monetary policy used by the BOT: as

discussed above, by June 1996 the tight monetary policy was openly opposed by the

politicians, which partly led to the forced resignation of Governor Vijit. The important

point to note here is that the FPO, a member of the Gang of Four, gave some very odd

reasons for supporting the politicians’ opposition to the high interest rate policy. It

claimed that a high interest rate would cause higher inflation and also less exports.85

Rungsan Thanapornpan observes that since 1992, the FPO and the BOT have raced

against one another to have a leading role in monetary policy setting. Moreover, their

respective influences depended on what political party was in power or who was the

Minister of Finance. For example, during 1992-1995, when the Democrat Party was in

power, the FPO had the upper hand, while during Finance Minister Dr. Surakiart

Sathirathai’s term in office (July 1995-May 1996), the BOT had a leading role due to the

close personal relation between the Minister and Governor Vijit.86 Indeed, as Dr. Ammar

points out “[t]he fiscal policy side of the technocracy has clearly disintegrated. The

degree of cooperation between the four key agencies is now minimal” (Ammar 1997a,

71). He argues that most of the technocrats in the Gang of Four have become highly

politicised, in particular the Budget Bureau - its former Director has always been known

as 'Banharn's boy'.87

Two points can be drawn from the discussion so far. First, by the first half of the

1990s, the cohesiveness between macroeconomic technocratic organisations, i.e. the

Gang of Four, had deteriorated to the extent that it prevented effective policy

coordination. The divisiveness showed itself clearly both within and between

organisations. By 1996, the best organisation among them, the BOT, was badly divided

and deprived of its long established credibility and reputation of integrity and honesty.

This had a profound implication, since the BOT’s de facto autonomy had previously 85 Rungsan Thanapornpan, “Politics of Interest Rate Policy”, Financial Crisis and Financial Sector in ThaiEconomy, (Bangkok: Kobfai Publishing Project, 1998), 214. ÃÑ§ÊÃÃ¤ì ¸¹Ð¾Ã¾Ñ¹¸Øì,“¡ÒÃàÁ×Í§ÇèÒ´éÇÂ¹âÂºÒÂÍÑµÃÒ´Í¡àºÕéÂ” ÇÔ¡ÄµÔ¡ÒÃ³ì¡ÒÃà§Ô¹áÅÐàÈÃÉ°¡Ô¨¡ÒÃà§Ô¹, (¡ÃØ§à·¾Ï: â¤Ã§¡ÒÃ¨Ñ´¾ÔÁ¾ì¤ºä¿, òõôñ),òñô.86 Ibid., 212-213.

171

always been protected by its credibility and good reputation. The case of interest rate

policy intervention discussed above is testimony to the importance of the BOT's

credibility and reputation.

Secondly, the internal debate within the BOT concerning the measures leading to

the introduction of the BIBFs proved that the structure of the BOT did not enable

potentially beneficial ideas to be implemented, nor did it prevent potentially dangerous

decision-making. A lethal combination of these two related points led to the ill-fated

attempt by the BOT to defend the impossible trinity, to which we now turn.

The Last Defence

By the second half of 1996 symptoms of the bubble economy, which were by and

large the result of the accumulative capital inflows, started to show up. Three major

attacks to the baht value, which had been de facto fixed with the US dollar since 1984,

occurred during November 1996 to May 1997. The BOT finally accepted the inevitable

by floating the currency on 2nd July 1997. And as a result, Thailand lost almost all of her

international reserves, i.e., at the end of December 1996 the total reserves were 38.7

billion US dollars while on 2nd July 1997, the net reserves were 2.8 billion dollars.88 On

the financial institution front, 10 financial companies were ordered to increase their

capital immediately on 3rd March 1997. By 27th June 1997, 16 financial companies had

been suspended from operation. By June 1997, the Financial Institution Development

Fund (FIDF), which is the financial arm of the BOT, injected about 288.9 billion baht

into 57 financial companies in order to kept them afloat, compared with 132.3 billion

baht into 30 companies in March 1997.89 In other words, the economy was going to be

faced with both currency and banking crises.

From the second half of 1996 to July 1997, the exchange rate regime policy was

discussed from time to time among the technocrats. The speculation about change in the

87 Banharn was a former PM (Dr. Ammar Siamwalla, personal correspondence, 16th December 2000).88 Enquiry and Recommendation for Increasing the Effectiveness of the Management of the Nation’s FinancialSystem (Sor Por Ror) Committee, Report on Facts of the Economic Crisis Situation, (Bangkok: TDRI, 1998)49, 75. ¤³Ð¡ÃÃÁ¡ÒÃÈÖ¡ÉÒáÅÐàÊ¹Íá¹ÐÁÒµÃ¡ÒÃà¾ÔèÁ»ÃÐÊÔ·¸ÔÀÒ¾¡ÒÃºÃÔËÒÃ¨Ñ´¡ÒÃÃÐºº¡ÒÃà§Ô¹¢Í§»ÃÐà·È (È»Ã.),ÃÒÂ§Ò¹¼Å¡ÒÃÇÔà¤ÃÒÐËìáÅÐÇÔ¹Ô¨©ÑÂ¢éÍà·ç¨¨ÃÔ§à¡ÕèÂÇ¡ÑºÊ¶Ò¹¡ÒÃ³ìÇÔ¡Äµ·Ò§àÈÃÉ°¡Ô¨ (¡ÃØ§à·¾: TDRI, òõôñ) ôù, ÷õ.89 Ibid., 138.

172

regime and/or devaluation sometimes surfaced to the public domain, especially during the

speculative attacks on the baht value. However, the technocrats had not dared to bite the

bullet, especially those in the BOT. Effectively, they spent the international reserves to

buy time, wishfully thinking that they could override the speculative storms. Why did the

BOT consistently insist on its fixed exchange rate policy for so long? To understand this,

the BOT's exchange rate policy since 1993 has to be considered.

It was not until April 1996 that the BOT considered the more flexible exchange

rate regime which had been recommended by the Economic Research Department back

in 1993, when the BIBFs were first introduced. The BOT’s consideration was prompted

by the IMF, who had urged the BOT to consider a more flexible regime since at least

1994.90 By June 1996, when it was the last chance for Governor Vijit to attend the BOT's

Monetary Policy Committee before his forced resignation, the committee concluded that:

"to employ a [new] exchange rate measure, the timing must be appropriate".91 The Sor

Por Ror Committee saw this as a sign of Governor Vijit’s changing view toward the

policy, i.e. the Governor had started to see the need for a more flexible regime. One can

either agree or disagree with this interpretation, but one thing is certain: Governor Vijit

had not seriously considered the merit of the new policy before this time. It might be fair

to claim that if a more flexible regime was implemented in June 1996, Thailand might

have been able to lessen the impact of the crisis in comparison with what actually

happened, since it could have prevented the massive loss of the international reserves.

However, even if this measure had been in place, the crisis was unlikely to have been

averted. By the middle of 1996, massive damage had been done to the economy, due

mostly to the influx of capital since the early 1990s. For example, by this time the boom

of the property market was over and was going to turn itself into a non-performing loan

of the financial sector. Moreover, prior to May 1997, when the baht was severely

attacked, the more flexible regime under consideration was no more than 0.15 baht

trading band, which was not flexible enough to prevent the crisis.92 It is therefore fair to

90 Ibid., 17.91 Ibid., 18. The original read: ¡ÒÃãªéÁÒµÃ¡ÒÃÍÑµÃÒáÅ¡à»ÅÕèÂ¹¨Óà»ç¹µéÍ§ÍÒÈÑÂªèÇ§àÇÅÒ·ÕèàËÁÒÐÊÁ92 Ibid., 20.

173

claim that Governor Vijit was the one who led the economy to its final conclusion, i.e.

the 1997 economic crisis.

Soon after Vijit’s resignation, the economic downturn became unquestionably

obvious. From this time onward, a wider trading band of the baht was contemplated from

time to time, although it never materialised. It must be noted that the pushing for a wider

band came first from the Permanent Secretary of the MOF at the time,93 not from the

BOT initiative. Moreover, it is clear that the BOT's political masters played a rather

passive role throughout this time.94 Therefore, the BOT's technocrats were the ones who

were mainly responsible for the national crisis.

As late as the first half of June 1997, the Minister of Finance was still leaving the

decision of exchange rate policy in the hands of the BOT's technocrats, by which time the

fixed exchange rate regime was in effect no longer capable of being defended. By May

1997, the heaviest attack to the currency occurred. The pressure to the currency had built

up since the beginning of the month; however the heaviest attacks occurred during 8th to

14th May 1997. The BOT spent more than 10 billion US dollars to defend the baht in one

single day, the 14th May. At the end of this day, the level of the international reserves,

which was 24.3 billion US dollars at the beginning of the month, was reduced to 2.5

billion US dollars.95 In the evening, the Bank's top technocrats agreed to carry out further

research to discover whether the exchange rate regime needed to be changed.96 The

following day, the BOT imposed a two-tier market of the baht between Thailand and the

rest of the world in order to prevent a further attack. This was in effect a form of

exchange control, which had been abandoned by the BOT since 1990. It can therefore be

concluded that the BOT had no choice but to change the regime after 14th May 1997,

since there were no more reserves left to defend the currency. After this saga, the

technocrats reported to the Minister of Finance, in around the second week of June 1997,

telling him that there were some options to choose from. But the Minister still told

Governor Rerngchai that he had "the last word".97 A few days later, the Minister resigned

93 Ibid., 19.94 Ibid., 71-72.95 Ibid., 53-64.96 Ibid., 64.97 Ibid., 71.

174

due to other issues of party politics. Finally, on 21st June the BOT's technocrats decided

to change to a floating exchange regime, which was officially implemented on 2nd July

1997.98

Why did the BOT, under the leadership of both Governor Vijit and Governor

Rerngchai, choose to defend the fixed exchange regime to the extent of sacrificing nearly

all of its reserves? This question has to be answered in relation to both Governors. First,

under the leadership of Governor Vijit, the crucial point was the decision to establish the

BIBFs without concurrently introducing a more flexible regime in 1993. As argued

previously, the early introduction of a flexible regime might have been able to deter the

capital influx in the first place and enable the BOT to pursue a tight monetary policy

more successfully. Since this recommendation of the BOT’s Research Department was

not implemented, the economy had to suffer the consequences. Therefore, it is proper to

ask why Governor Vijit ignored the recommendation. First, as discussed above, Deputy

Chaiyawat held strong convictions towards a fixed exchange rate policy, which were

crucial within the BOT, and he was the Governor’s right hand man. Chaiyawat was

therefore not convinced that there was an urgent need for a more flexible regime.

Furthermore, his conviction surely gave rise to doubts in the Governor toward the

recommendation to move to a more flexible regime. Secondly, the exchange rate policy

adjustment had been the single most sensitive of all monetary-side policy issues due to

previous political experiences.99 With the heavy political cost of exchange rate

adjustment in 1984, and with the experiences of Governor Kamchorn’s dismissal still

fresh in his mind, the newly appointed thirteenth Governor, who had taken the post by

politicking, was clearly not prepared to risk his job security unnecessarily since the

economy was in very good shape in 1993. Moreover, the establishment of the BIBFs was

in itself an act of political pleasing by the Governor toward his political masters. Why

raise an unnecessary and potentially politically costly issue?100

98 Ibid., 74-75.99 See the discussions of exchange rate policy conflict and their political consequences in Chapters 3 and 4.100 By law, the initiative to change or adjust the exchange rate system must be recommended by the Governor,to which the Finance Minister has to react, see more details in Chapter 4.

175

Why had the BOT resisted changing the exchange rate policy under the leadership

of Governor Rerngchai? There are several related answers to this question. By the time

Governor Rerngchai took the post, the bubble economy was about to burst. In other

words, it was unrealistic by this time to expect the BOT to be able to override the

incoming economic crisis. As argued above, even if the exchange regime had been

adjusted as early as the second half of 1996, the crisis was still unavoidable. Having said

that, the BOT should at least have been able to guide the economy to a better landing

ground. The fact was that the BOT failed miserably to do this and accentuated the crisis

by gambling out the international reserves. This was partly a result of the lack of good

leadership on the part of Governor Rerngchai. Faced with both the looming currency and

banking crises, he did not dare to bite the bullet by changing the exchange regime. The

hesitation to do so was due to several factors. Personally, Governor Rerngchai had been

assigned only a second grade job for several years during his time as joint-Deputy

Governor. In effect, he was deprived of the relevant experience of running a

macroeconomic policy.101 More importantly, the organisation that he inherited from

Governor Vijit was deprived of cohesiveness and credibility at a time when they were

most needed. Neither was the divisiveness reduced during the term of Governor

Rerngchai. Dr. Chaiyawat, the right hand man of the previous Governor, was assigned

less responsibility. The Sor Por Ror Committee claims that Dr. Chaiyawat, as a result of

being 'pushed to the side', did not fully devote himself to the common good, i.e., he was

doing his job only ‘out of duty’ in spite of the fact that his opinion toward the policy was

decisive within the BOT.102 Moreover, the flow of ideas and information among the

BOT's top technocrats were affected by the conflict between Governor Vijit and Deputy

Ekamon in 1995. From this time up until 1997, there was less expression of opinions and

exchange of ideas among the BOT's top technocrats. In effect, the method of spying that

was used during the conflict had demoralised the technocrats.103 Therefore, opinions in

favour of a flexible exchange rate regime were not effectively communicated.

101 His career path followed the banking and financial institution supervision, which was responsible forbanking sector policy, not for the macroeconomic policy. And traditionally, this career path is not the breedingground of a Governor.102 Ibid., 85-93.103 Ibid., 24.

176

A further incentive to prolong the status quo came from the fact that an

adjustment to the exchange rate regime had always been a potential political explosive.

The Governor might have feared that even if he tried to adjust the regime early on it

would have faced opposition from the politicians, especially at this time since the effects

to the economy would be explosive. This is due to the fact that the business community

had accumulated massive unhedged foreign debts. The political repercussions might then

have deprived him of the Governor’s post, even if he could have done it. All of this

shows why the Governor did not want to give up his defence of the baht without a fight.

To sum up, this thesis claims that the decision to defend the exchange rate regime

without due regard to the cost of the action was mainly the result of the slowly

disintegrating technocratic institution. In other words, the tradition of integrity and the

ethos of devotion to public interest among the Gang of Four in general and the BOT in

particular had gradually deteriorated to the extent that it prevented the technocrats from

functioning effectively. The next section will try to explain this phenomenon.

The Obsolete Organisation and Incentive Structures

In October 1969 at the Faculty of Commerce and Accountancy, Thammasat

University, Dr. Puey gave a lecture entitled The Art and Science of Being a Governor. He

stated that one important function of a Governor was macroeconomic policy coordination

between the BOT and the government. It was a duty of the Governor to persuade the

government to conduct a proper policy. In doing so, the Governor and the BOT’s

executives must have credibility in the sense that they are:

[n]ot seeking their own interests or the BOT’s interests but seeking the nation’sinterests. The Governor and the BOT’s executives must be courageous enough tospeak up [with the opposite opinion]. If something is not good, [it is] necessary to sayso. If [they] do not have courage, [they] should not assume the posts since [they] donot do [their] duties… It must be understood that between the BOT and thegovernment, the government has the highest responsibilities. The BOT is only anorganisation of the government. In the case that the government chooses to conductthe policy that the BOT’s Governor does not agree with and has already opposed, if heis still unable to persuade [the government] and if the policy is very important

177

involving a matter of principle or a resulting disaster, there is another way foropposing which is a resignation by the Governor.104

Obviously, Governor Vijit practiced a different kind of ‘art of being a Governor’.

A thesis of this study is that the high degree of de facto autonomy of the BOT, which had

been protected by Governor Puey’s practice of his art, reached its lowest point during the

term of Governor Vijit. By practicing a different kind of art, i.e. practicing Machiavellian

politics, he sacrificed the autonomy of the BOT for his personal gains. As a result, during

his term the BOT was subject to ‘implicit interventions’ by the politicians. As Dr. Ammar

argues “instead of submitting to explicit orders from the Minister [of Finance], the

Governor would anticipate the Minister’s desires and follow the current political line”

(Ammar 1997a, 71). A clear example of this implicit intervention was the push for the

regional financial centre by introducing the BIBFs without implementing a more flexible

exchange rate regime. There are a number of factors that explain the deterioration of the

technocratic institutions and the fall of the BOT, which eventually brought down the

economy.

The Economic Boom and The Brain Drain

The first factor to be questioned is that of the quality of the BOT’s staff. Was it

the case that the BOT ceased to invest in its programme of human resource development?

This did not seem to be the case since the BOT still continued to do so by providing

various categories of scholarship for its personnel and prospective staff, i.e., the tradition

which had started with Governor Puey was still intact. For example, in 1987 the Bank 104 BOT, Cremation Book of Phao Boribhand Yuttakit (Bangkok: BOT, 1970), 106-107. ¸»·,Ë¹Ñ§Ê×ÍÍ¹ØÊÃ³ìã¹¡ÒÃ¾ÃÐÃÒª·Ò¹à¾ÅÔ§È¾ ¾ÅàÍ¡ àÀÒ ºÃÔÀÑ³±ìÂØ·¸¡Ô¨ (¾ÃÐºÃÔÀÑ³±ìÂØ·¸¡Ô¨) (¡ÃØ§à·¾Ï: ¸»·, òõñó), ñðö-ñð÷. The original read:äÁèä´éàËç¹»ÃÐâÂª¹ì¢Í§ÊèÇ¹µÑÇ äÁèä´éàËç¹á¡è»ÃÐâÂª¹ì¢Í§¸¹Ò¤ÒÃªÒµÔ áµèàËç¹»ÃÐâÂª¹ì¢Í§á¼è¹´Ô¹¼ÙéÇèÒ¡ÒÃáÅÐ¼ÙéãË èã¹¸¹Ò¤ÒÃªÒµÔ¨ÐµéÍ§ÁÕ¤ÇÒÁ¡ÅéÒËÒ¾ÍÊÁ¤ÇÃ ¤×ÍµéÍ§ÊÒÁÒÃ¶¾Ù´¢Ñ´ä é ¶éÒÍÐäÃäÁè´ÕáÅéÇ ¨Óà»ç¹¨ÐµéÍ§¾Ù´ä é¶ÑÒäÁèÁÕ¤ÇÒÁ¡ÅéÒáÅéÇÍÂèÒà»ç¹´Õ¡ÇèÒ à¾ÃÒÐàËµØÇèÒäÁèä´é·ÓË¹éÒ·Õè……………………... ¢ÍãËéà¢éÒã¨ãËéªÑ´ÇèÒ ÃÐËÇèÒ§ÃÑ°ºÒÅ¡Ñº¸¹Ò¤ÒÃªÒµÔ¹Ñé¹ÃÑ°ºÒÅ¹Ñé¹ÁÕ¤ÇÒÁÃÑº¼Ô´ªÍº¢Ñé¹ÊØ§ÊØ´ ¸¹Ò¤ÒÃªÒµÔà»ç¹à¾ÕÂ§Ë¹èÇÂ§Ò¹Ë¹èÇÂË¹Öè§¢Í§ÃÑ°ºÒÅã¹¡Ã³Õ·ÕèÃÑ°ºÒÅà´Ô¹¹âÂºÒÂ«Öè§¼ÙéÇèÒ¡ÒÃ¸¹Ò¤ÒÃªÒµÔäÁèàËç¹´éÇÂáÅÐ¤Ñ´¤éÒ¹áÅéÇ áÅéÇÂÑ§äÁèÊÒÁÒÃ¶à¡ÅÕéÂ¡ÅèÍÁä´é

178

anticipated recruiting 78 staff with foreign bachelor degrees or higher within the next five

years by partly providing scholarships.105 The issue at point is whether it could

successfully retain those staff even if it continued to invest in this programme?

Admittedly, the BOT was less successful in this case as shown in the following table:

Table 5.2: Number of scholarships given by the BOTduring 1960 to December 1994

Categories given to Totals

Stillstudying

Current

Staff

Resign/Death

Selecting

Process

1) Thai high school graduates 82 33 30 14 52) Persons who concurrentlystudied in higher educationalinstitutions in Western countries

56 21 15 6 14

3) Bachelor degree graduatesfrom Thai institutions

24 9 8 4 3

4)The BOT's staff: for studyingabroad

45 6 26 8 5

5)The BOT's staff: for studying indomestic institutions

44 8 24 4 8

6)The BOT's staff who werefunded from other institutions andstudying abroad

13 15 6 1

7) Foreign countries graduateswho were funded for othercourses by the BOT

2 2

Totals 266a

92 109 39 35

Source: Adapted from: Puwanat 1995,Table 1106

Note a)= The discrepancy between the totals 266 and the sum from column 3 to 6 is due to some doublecounting in Category 6.

¶éÒà»ç¹¹âÂºÒÂ·ÕèÊÓ¤ÑÁÒ¡¶Ö§¢¹Ò´à¡ÕèÂÇ¡ÑºËÅÑ¡¡ÒÃËÃ×Í¤ÇÒÁËÒÂ¹Ð ¼ÙéÇèÒ¡ÒÃ¸¹Ò¤ÒÃªÒµÔ¡çÁÕ·Ò§ÍÍ¡ÍÕ¡·Ò§Ë¹Öè§·Õè¨Ð¤Ñ´¤éÒ¹¤×ÍÅÒÍÍ¡105 BOT. Archives. “Minutes of Meeting of the Court of Governors 6th /1988 dated 29th June 1988”. Minutes ofMeeting of the Court of Governors. ¸»·. ËÍ¨´ËÁÒÂàËµØ. “ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â ¤ÃÑé§·Õèö/òõóñ ÅÇ. òù ÁÔÂ. òõóñ” ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.106 Puwanat Na Songknla “Bank of Thailand’s Brain Drain: Lose but Sustainable” Interest, January 1995, 83.ÀÙÇ¹Ò¶ ³ Ê§¢ÅÒ, “ÊÁÍ§äËÅ áº§¡ìªÒµÔ ÊÙàÊÕÂáµèäÁèàÊÕÂÈÙ¹Âì” ´Í¡àºÕéÂ, Á¤. òõóø, øó.

179

Table 5.2 shows that the BOT had lost 26.35% of its returning scholarship

students (39/(109+39)) by the end of 1994. Moreover, the heaviest loss ratio (column 5/

column 4) occurred in the first three categories, ranking from 43%, 40% and 50%

respectively, which is far higher than the 4th 5th and 6th category.107 All the first three

categories are arguably comprised of higher calibre staff than the rest due to the higher

qualifying criteria and/or more competitive examination. And as mentioned previously,

nearly all the important executive posts were occupied by those from the first categories

by 1990. Table 5.3 shows the breakdown of the timing that the resignations occurred.

Table 5.3 Timing of Resignations

Categories 1980-

1987

1988-

1994

Total

Resignations

1) Thai high school graduates 6 7 13a

2) Persons who concurrentlystudied in higher educationalinstitutions in Westerncountries

2 4 6

3) Bachelor degree graduatesfrom Thai institutions

2 2 4

Totals 10 13 23

Source: Calculated from: Puwanat 1995, Table 2 and 3108

Note a)=Excluding one death from Table 4.2

It is clear from Table 5.3 that the trend of resignation increases after 1987. The

BOT lost only 10 former students in 17 years of the first period, while losing 13 students

within 7 years during the second period. Two technocrats of the first category who

resigned from the BOT during the early 1990s did so as a direct result of Governor Vijit’s

purge, namely Pisit Leeatham and Sirichai Sakornratanakul.109 These figures, however,

concern mainly the BOT's elite staff. Table 5.4 covers the overall workforce, which

further confirms the increasing trend of resignations.

107 The loss ratio for the seventh category is 100% but, since the total number is only 2, it is therefore not animportant category.108 Ibid., 86-88.109 Dr. Ammar Siamwalla, personal correspondence, 16th December 2000.

180

Table 5.4 Education Level and Turnover Rate of the BOT’s Labour Force (%)

Year 1986 1987 1988 1989 1990 1991 1992 1993 1994

Edu. 44.8 45.1 52 53 54 57 54.3 56.4 67.8

TOR 0.6 0.3 0.01 1.9a 1.9 1.7 2.3b 2.29 1.38

Source: Various publications of The BOTNote: Edu.= Bachelor Degree or higher level of education.

a) The 10 year average of the BOT before 1989 was 0.32%.b) An early retirement programme was introduced this year.

Table 5.4 shows the quality of the BOT’s labour force gradually improving due to

the higher level of education. However, the jump of the turnover rate (TOR) after 1989

reflects the increasing difficulties the BOT faced in retaining its staff, especially at the

higher end of the work force. The reasons for this increasing trend will be discussed

shortly. From 1989 onward, the BOT started to lose its personnel or had some difficulties

in recruiting new staff at the level of assistant junior management upwards. More

specifically, the BOT lost bachelor or higher degree staff, especially the ones from the

main Departments, e.g., the Banking Examination and Supervision Department, the IT

Department and the Economics Research Department. By training, they were

accountants, economists and IT specialists. Moreover, they were mostly young staff who

had worked for the BOT for no more than 3 years.110 From 1990 to the middle of 1992,

the BOT lost 79 staff from those three Departments. 6 had Bachelor degrees and 13

Masters degrees, all from abroad.111 However, these numbers did not represent a serious

loss due to the following figures. In 1991, for example, the total number of employees

was 4,262,112 of whom 1,961 (46%) and 384 (9%) were Bachelor and Higher Degree

graduates respectively. About 200 (5%) of these had foreign Bachelor or Higher Degrees. 110 BOT. Archives. “Minutes of Meeting of the Court of Governors 6th /1991 dated 24 October 1991 and3rd/1990 dated 29th March 1990”. Minutes of Meeting of the Court of Governors. ¸»·. ËÍ¨´ËÁÒÂàËµØ.“ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â ¤ÃÑé§·Õè ö/òõóô ÅÇ. òô µ¤. òõóô áÅÐ ¤ÃÑé§·Õè ó/òõóó ÅÇ. òùÁÕ¤. òõóó” ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.111 BOT. Archives. “Minutes of Meeting of the Court of Governors 6th /1992 dated 25 June 1992”. Minutes ofMeeting of the Court of Governors. ¸»·. ËÍ¨´ËÁÒÂàËµØ. “ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â ¤ÃÑé§·Õèö/òõóõ ÅÇ. òõ ÁÔÂ. òõóõ” ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.

181

113 The jump in the turnover rate of the BOT’s employees was due to the economic boom

which had begun in 1987. The tight labour market in the private sector pulled workers

away from the civil service, especially at the higher end of the workforce. However, the

BOT was in a much better position to resist the trend since its Court of Governors had the

authority to determine its structure of pay, which was independent from the rest of the

civil service. Moreover, the BOT also had its own resources, i.e. it was not subject to

levels of fiscal expenditure of the state. For example, in April 1992 the BOT’s starting

salary for a newly graduated Bachelor Degree - which had previously been the highest,

compared to the large commercial banks - was ranked the fourth. Hence the BOT

proposed a new rate, which would keep the BOT as the highest payer in order to prevent

further loss of its staff.114 In other words, the BOT could afford to adjust its position in

the tight labour market. Since the start of the economic boom in 1987, the BOT had

adjusted its wage structure four times - in 1987, 1990, 1992 and 1993 - while the civil

service sector adjusted its pay scale in 1989, 1990, 1992 and 1995. 115

To what extent did the loss of the BOT’s staff lead to the declined autonomy of

the BOT? It seems fair to conclude that to a certain degree, the loss of staff and the

timing of their resignations did affect the Bank’s de facto autonomy. This was because

the staff lost were either highly qualified or held strategic posts. However, it cannot be

concluded that the loss of such staff led to a serious decline in the BOT’s degree of

autonomy. Figures above show that only a few resigned. And those left were still able to

recommend good policies, for example, that the BOT should concurrently implement a

112 Excluding the Note Printing Mill's staff113 BOT. Archives. “Minutes of Meeting of the Court of Governors 6th /1991 dated 24 October 1991”. Minutesof Meeting of the Court of Governors. ¸»·. ËÍ¨´ËÁÒÂàËµØ. “ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â¤ÃÑé§·Õè ö/òõóô ÅÇ. òô µ¤. òõóô” ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.114 BOT. Archives. “Minutes of Meeting of the Court of Governors 6th /1992 dated 25 June 1992”. Minutes ofMeeting of the Court of Governors. ¸»·. ËÍ¨´ËÁÒÂàËµØ. “ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â ¤ÃÑé§·Õèö/òõóõ ÅÇ. òõ ÁÔÂ. òõóõ” ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.115 BOT. Archives. “Minutes of Meeting of the Court of Governors 8th /1987 dated 26 August 1987, 3rd/1990dated 29 March 1990, 6th/1992 dated 25 June 1992, 3rd/1993 dated 25 March 1993”. Minutes of Meeting of theCourt of Governors. ¸»·. ËÍ¨´ËÁÒÂàËµØ. “ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â ¤ÃÑé§·Õè ø/òõóð ÅÇ.òö Ê¤. òõóð ó/òõóó ÅÇ. òù ÁÕ¤. òõóó ö/òõóõ ÅÇ. òõ ÁÔÂ. òõóõ ó/òõóö ÅÇ. òõ ÁÕ¤. òõóö”ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.

182

more flexible exchange rate regime with the introduction of the BIBFs. This shows that

there were sufficient high quality staff remaining. Thus the fact that the most sensible

policy, recommended by them, was not implemented cannot be attributed to a loss of

autonomy caused by poor quality staff. It does, of course, point to a loss of autonomy, but

clearly the reasons are to be found elsewhere.

This conclusion cannot be applied to the rest of the Gang of Four macroeconomic

technocratic organisations. The BOT was in a better position to counter the loss trend

since it had its own power and resources to adjust its pay packages. The rest of the Gang

of Four were civil service organisations and therefore their structure of pay packages was

the same as the other civil service organisations. The information concerning the loss

figures of these organisations are not available, but the following differential in

remuneration between the public and private sector confirms the widely perceived 'brain

drain' problem at the time.

Table 5.5 Monthly Differential Salary between Civil Service and Private Sector in1991 (%)Diff. Grade

3

Grade

4

Grade

5

Grade

6

Grade

7

Grade

8

Grade

9

G

10

P25th

a

-18 9 19 56 104 160 213 272

P50th

a

16 27 47 94 160 240 315 407

P75th

a

49 48 78 135 219 318 412 544

P25th

b

36 29 51 94 168 245 326 425

P50th

b

52 50 78 127 213 311 405 525

183

P75th

b

83 82 123 183 283 401 513 655

Source: A comparison of Compensation between Civil Service Sector and Private Sector, 1991 the Officeof Civil Commission (CSC), adapted from Napaporn 1996, Table 2.4, 13.Notes: 1) The salary in the civil service sector is calculated from the midpoint of each Grade Level.

2) The salary and benefits in the private sector are grouped by percentile.3) Grade Levels 3, 4 and 5 require qualification of Bachelor, Master and Doctoral degree

graduates respectively, while Grade Level 10 is posts of Director General and posts requiring Ministeriallevel senior advisor or consultant.

a) Calculated from private sector monthly salary only.b) Calculated from private sector monthly salary plus other monetary benefits.

Clearly, by 1991 the civil service sector suffered lower remuneration than its

private counterpart. By this time civil servants were being dubbed the ‘new poor’. For an

extreme example, a mid-Grade 10 civil servant received between 425% to 655% less in

his or her monthly monetary salary than his/her private sector counterpart. Table 5.5

shows that the higher the staff were in the civil service, the more they suffered from the

income difference. By and large, senior civil servants tend to have higher educational

qualifications and longer working time within the sector than junior civil servants. With

this evidence, it is not surprising that the rest of the macroeconomic technocratic

organisations were demoralised and politicised before the BOT.

The Structure of Power within the BOT and the Power Relation between the

BOT and the MOF

It was mentioned briefly in Chapter 4 that it is possible for a Governor to act as a

dictator within the structure of the BOT. This fact explains, for example, why Governor

Vijit as an individual could do so much damage to the BOT as a whole. To understand

this fact one must first understand the institutional blueprint of the BOT, which is laid

down in the Act of The Bank of Thailand BE 2485 (1942). Secondly, one also has to

understand the structure of power relations between the BOT and the MOF. This section

will try to explain two related points. First, how is it possible for a Governor to be a

dictator within the BOT? Are there, for example, no mechanisms within the BOT to

balance the power of a Governor? Secondly, why, since the early 1990s, had the BOT

been subjected to ‘implicit intervention’ by the politicians?

184

It should be pointed out that since the BOT was established, the fundamental

power relations both within the BOT and between the BOT and the MOF remain largely

unchanged in terms of law.116 Indeed, a thesis of this study is that the failure to adjust

these fundamental relations to match the changes in the economic and political 'realities'

partly accounted for what occurred in 1997.

The fundamental power structure within the BOT was designed in a way that

entrusts most, if not all, of the decision-making in the hands of the Governor. The Court

of Governors was not designed to balance the power of the Governor in economic policy

making. Moreover, in practice the appointment of the members of the Court had been

traditionally carried out such that it helped to facilitate or coordinate the BOT's policy,

rather than balancing the power of a Governor in economic policy making. In other

words, the Governor is accountable to no one but the Minister of Finance. This can be

clearly seen from Section 14 to 20 of the Act, which lays down the basic power structure,

both within the BOT and between the BOT and the MOF. Section 15 stipulates that the

Court of Governors (COG) is composed of at least 5 members,117 excluding the Governor

and the Deputy Governor who automatically sit as the Chairman and the Deputy

Chairman of the COG. The main responsibility of the COG is to supervise the BOT's

activities in general. Specifically, the COG has final say on all of the following 6 points,

which are determined by Section 5 of the BOT's 1942 Secondary Registration:118

1. The founding and extermination of the Bank’s branches and representatives.

2. Determining the conditions and scope of business that is allowed by the

BOT’s Secondary Registration.

3. Determining the BOT’s discount and rediscount rate.

4. Facilitating the flow of credit.

116 To be precise, the check and balance of power between the BOT and the MOF, especially regarding theformal power of employing certain monetary measures and banking supervision power, has been changed fromtime to time, largely due to the changes in the Commercial Banking and the Financial Company Acts. Thedetails of these changes will be the subject of Chapter 7. However, they represent specific changes in an overallframework which remains largely unchanged.117 This was the only change occurring in 1944, which in effect makes no difference to the power structurewithin the BOT. The same Section in 1942 stipulated that the COG must have three members.118 See the reasons why this Secondary Registration was not included into the main Act in Chapter 3.

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5. Approval of the BOT’s profit and loss account, balance account and the

BOT’s annual report.

6. Approval of the BOT’s internal regulations.

Aside from the above 6 specific authorities, the Governor can make any decision without

even informing the COG. Moreover, the COG has no authority to set the meeting

agendas. It is clear that the above 6 authorities involve very little macroeconomic and

commercial banking policy. Arguably, the third authority might affect the effectiveness

of some of the BOT’s monetary measures, but this function of the BOT has traditionally

been kept at the very minimum and hence has had little effect on the BOT’s policy.

Section 20 of the Act also entrusts the COG to determine the pay scale of the BOT’s

employees, including the authority to approve recruitment and dismissal of the BOT’s

staff. Again, this authority is not related to the BOT’s economic policy responsibilities.

Not only are most of the COG’s duties not involved in the economic policy

making, but Section 17 also further concentrates the decision making power within the

hands of a Governor. It stipulates that, if a BOT policy is outvoted by the majority of the

members of the COG, then the Governor still has the right to refer the case to the

Minister of Finance to make a final decision. Moreover, Section 18 gives the Governor

the right to implement some measures independently which would normally require the

prior approval of the COG before being given the green light, although he still has to seek

the COG’s approval once such measures are in place. Therefore, it is fair to conclude that

there is little limitation within the BOT on the Governor making decisions about

economic policy.119 It is not surprising that if one reads through the monthly Minutes of

the COG Meetings, during 1959 to 1993 at least, one will find that most of the meetings

concentrated on routine agendas, for example, on approval of the BOT’s newly recruited

staff. The odd economic policy issue showed up occasionally, but only for the COG

119 As mentioned previously, certain measures have to be approved by the MOF.

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acknowledgement, not their approval. Unsurprisingly, not one single agenda item was

subjected to the call for a vote during this period.120

Furthermore, the members of the COG had been traditionally appointed mostly

from senior bureaucratic posts. The high ranking bureaucrats or technocrats were mostly

appointed from the posts of Secretary General of the Cabinet, Director of the Office of

Fiscal Policy, Secretary General of the Council of the State and Secretary General of the

National Economic and Social Development Board. It might be fair to claim that those

posts were selected on the grounds that they facilitated the work of the BOT. For

example, the Secretary General of the Council of the State is the one who oversees all of

the government's registration drafting processes, while the Secretary General of the

Cabinet is the one who prepares agendas for Cabinet meetings. Having members of the

COG who had served in these posts would help the BOT in the process of pushing for

new laws or regulations, for example. The COG meeting is clearly not a place to discuss

economic policy. For example, during the few months before the baht's flotation in July

1997, a member of the COG had to go public with his opinions concerning the exchange

rate policy, as they conflicted with those of the BOT and there was no room for him to

express himself in the COG.121 Therefore, both by the institutional design and in practice,

the COG does not function as a check on the Governor’s economic policy-making power.

These facts explain why an individual who assumes the Governor’s post can have so

much influence on the BOT: the fate of the BOT is very much a function of the

leadership and personality of its Governor. The very different kinds of ‘Art of Being a

Governor’ practiced by Governor Puey and Governor Vijit, which gave rise to very

different performances and varying reputations of the BOT, are confirmation of this

120 BOT. Archives. Minutes of Meeting of the Court of Governors 1959-1993. ¸»·. ËÍ¨´ËÁÒÂàËµØ.“ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â µÑé§áµè»Õ·Õè òõðò-òõóö,”ÃÒÂ§Ò¹¡ÒÃ»ÃÐªØÁ¤³Ð¡ÃÃÁ¡ÒÃ¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â.121 Rangsan Thanapornpan, "The Process of Decision making in the Bank of Thailand" Financial Crisis andFinancial Sector in Thai Economy (Bangkok: Kobfai Publishing Project,1998) 197-203. ÃÑ§ÊÃÃ¤ì ¸¹Ð¾Ã¾Ñ¹¸ìØ,“¡ÃÐºÇ¹¡ÒÃµÑ¹ÊÔ¹ã¨ã¹¸¹Ò¤ÒÃáËè§»ÃÐà·Èä·Â” ÇÔ¡ÄµÔ¡ÒÃ³ì¡ÒÃà§Ô¹áÅÐàÈÃÉ°¡Ô¨¡ÒÃà§Ô¹ (¡ÃØ§à·¾Ï: â¤Ã§¡ÒÃ¨Ñ´¾ÔÁ¾ì¤ºä¿,òõôñ), ñù÷-òðó.

187

statement. In other words, the power structure within the BOT allows a Governor to

practice tyranny or heroism as he chooses or according to his abilities.

The next factor to be considered is the power relationship between the BOT and

the MOF. Section 14 stipulates that the Finance Minister has both the duty and the

authority to supervise the BOT’s general conduct.122 Section 19 determines that the

appointment or dismissal of a Governor or his Deputy must be done by the King upon the

recommendation of the Cabinet, while members of the COG are appointed or dismissed

by the Cabinet upon the recommendation of the Finance Minister. And since the BOT is

under the supervision of the MOF, the Finance Minister is the one who traditionally

nominates or proposes a dismissal to the Cabinet. However, the Act does not specify the

length of the term of a Governor or any conditions under which the Governor might be

dismissed. 123 In effect, the Minister has a right to dismiss a Governor at any time and for

whatever reasons he sees fit, providing that the Cabinet approves it, de jure speaking.

Therefore, the Governor is accountable to no one but the Finance Minister.

To sum up, the BOT’s decision making process is on the one hand very much

concentrated in the hands of the Governor, to the extent that he can be a dictator within

the BOT. On the other hand, the Governor is de jure subject to the pleasures of the

Finance Minister. As argued in Chapter 4, this structure of power was designed during

the period in which there was a clear gap of leadership between the BOT’s Governor and

the BOT’s staff, and cohesion of the top technocrats among the BOT and the MOF was

high, namely during the post-World War Two period. By 1985, the technocratic

cohesiveness had withered away, as argued in Chapter 4. Yet this framework of power

structures both within the BOT and between the BOT and the MOF has never been

changed de jure, since 1942. From 1942 to 1997 Thailand changed beyond recognition,

both economically and politically. These changes made this basic framework of power

relations redundant, which in turn gave rise to a set of changed incentive structures. Some

consequences of this redundant institution can be singled out. First, it gave an incentive to

the BOT's top technocrats to 'rat race' to power. The rise to power of Governor Vijit and

his conflict with Deputy Ekamon were cases in point. Dr. Ammar points out that: 122 See the meaning of this provision, according to the first Governor who drafted the Act, in Chapter 3.

188

[i]n terms of intrinsic ability, the Governor is now only the first among equals; interms of legally vested powers, however, he is very much at the top. As aconsequence, the prize of governorship and the fight for it among the top managementbecame a very important backdrop that undermined effective teamwork [in the BOT](Ammar 1997, 70).

Secondly, since the Governor is de jure subject to the pleasures of the Finance

Minister, he has only one choice if he wishes to cling to the post, which is to please the

Minister. Dr. Ammar defines this pleasing as ‘implicit intervention’. Clearly, the

introduction of the BIBFs without concurrently adjusting the exchange rate regime is a

case of such implicit intervention. This de jure dependence on the Minister of Finance

had not been a problem in the past, for example during the term of Governor Puey. His

unquestionable integrity and the BOT's moral authority had protected him from both

implicit and explicit intervention. Perhaps Governor Puey knew all along that, due to the

design of the power structure, only the integrity and credibility of the BOT could protect

it from interventions. He could afford to behave honestly and with credibility because the

power structure within the BOT allowed him to. Secondly, the cohesiveness among the

Gang of Four’s technocrats also functioned as a second protective shield from

intervention by the military-cum-politicians.

By 1990, the cohesiveness among the technocrats was a thing of the past.

Moreover, the transition of the polity from a 'bureaucratic polity' to an elected regime,

which had started in October 1973, was further consolidated by the Chatichai

Choonhavan Government. By 1990, the technocrats could easily anticipate that their

traditional allies, i.e., the military, would become increasingly irrelevant. Their next

political masters would be elected politicians. The coup d'état in 1991, and its aftermath

in May 1992 in which ‘people power’ denied the military its hold on power, were just

brief interruptions in the long running trend of consolidation. It was therefore logical for

the technocrats who wished to assume or cling on to power to begin pleasing their elected

political masters. Meanwhile, they failed to reap the benefits in their incomes of the

bubble digit growth rate which began in 1987, as the information in Table 4.5 confirms: 123 Again see Chapter 3; the specified term of a Governor was deleted from the draft of Prince Wiwat.

189

they were dubbed as a class of ‘new poor’ by the press.124 Faced with this double

transition, while the rules of the game are determined by laws which have remained

unchanged, the technocrats had every incentive to practice a new kind of ‘Art of Being a

Governor’.

Conclusion

This chapter argues that one aspect of the 1997 economic crisis can be understood

by looking at the evolution of the technocratic institutions concerned with

macroeconomic policy. The chapter asks one important question: why did the

macroeconomic technocrats, who had been well known for their cohesiveness and

traditions of conservatism, integrity and honesty, implement an imprudent capital account

deregulation, to the extent of deliberately stimulating capital inflows into the economy

without due consideration? This chapter found that this imprudent policy line was largely

a result of the 'implicit intervention' in the BOT by Chatichai Choonhavan's Government,

which intervened from 1990 onwards. In other words, the degree of the BOT's de facto

autonomy declined rapidly between 1990 and 1997. The implicit intervention was

possible due to the significant deterioration of the technocratic institutions, namely the

tradition of integrity and honest, and the cohesiveness among the macroeconomic

technocrats. The most vivid representative of such a technocratic institution was the

BOT. It was transformed from an impeccably honest and credible organisation during the

1960s to a scandal-prone organisation during the 1990s. In turn, this deterioration of the

BOT's values can be explained by a mismatch between the rules of the game that

governed the relationship between the BOT and the government, and the changes in the

political economy of Thailand since 1942.

One such change was the level of leverage that the technocrats derived from

having access to their big brothers in international organisations, e.g. the IMF and WB.

From the late 1980s to 1996, the boom of the economy had rendered insignificant not

only the leverage of the technocrats, but also that of the IMF itself. Another change was

in the political regime, which had switched from semi-democracy to electoral politics 124 As mentioned previously, this statement is more relevant to the rest of the Gang of Four than the Bank’s

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from 1988 and which was directly linked to the rise of ‘implicit intervention’. The rise of

Chatichai’s government destroyed the balance of power between the two contending

forces of military and elected politicians, which had enabled PM Prem to insulate the

technocrats. The elected politicians had every reason for reducing the technocrats’

influences since the latter were the ones who prevented them from making deals in mega-

projects during the Prem period, for example. The whole programme of financial

deregulation and liberalisation was in itself an act of political pleasing, i.e., ‘implicit

interventions’ which supported Chatichai’s policy of transforming the battlefield of

Indochina into a marketplace. The programme was started by Governor Chavalit and led

to its de facto conclusion by Governor Vijit with strong support from every single

government from 1990 onward. The most inconsistent element of the programme - the

BIBFs - was ironically approved by the Anand II government (10 June-23 Sept 1992) just

two weeks before the end of its power and without concurrently adjusting the exchange

rate regime, which had been strongly recommended to the Governor by the BOT’s

Research Department. BIBFs began their life in early Chuan I government (Sept 1992-

July 1995). The approval by Anand II government was ironic in the sense that an

authoritarian regime such as this is supposed to insulate the technocrats from making

decisions based on political factors, but the BOT’s Governor of the time failed to stress

the importance of adjusting the exchange rate regime to the Cabinet precisely because he

knew such adjustments had potentially high political costs. It can clearly be concluded,

then, that even the authoritarian regime of Anand II government implicitly intervened in

the BOT’s decision-making process. Having said that, this thesis accepts that the

technocrats’ autonomy under the Anand I and II governments was better insulated than

under Chatichai’s or the following elected governments during 1992-1997. This is due to

the fact that there was no case of explicit intervention into the BOT’s monetary policy

during Anand’s governments, while Chatichai’s and Banharn’s governments not only

gave rise to the ‘implicit intervention’ but also intervened in the BOT’s interest rate

policy explicitly in 1989-1990 and 1996 respectively. Also significant was the case of

replacing the existing business taxation with the new value added taxing system by

technocrats.

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Anand I government, while Chatichai’s government had no real commitment to this

system due to vested business interests.125 Although this thesis argued in Chapters 3 and

4 that an authoritarian regime does not always lead to a better insulated technocrats’

autonomy, such as in the case of Thanin’s and Kriangsak’s government, the Anand’s

governments show that there was a positive correlation between an authoritarian regime

and the degree of technocrats’ autonomy. In this light, it can therefore be concluded that

the democratisation process since1988 has reduced the technocrats’ autonomy.

125 Rangsan Thanapornpan, “Chatichai’s government and the 1992 budget”, in The Public Economyand the Role of the Thai Government, (Bangkok: Kobfai Publishing Project, 1995), 21. ÃÑ§ÊÃÃ¤ì ¸¹Ð¾Ã¾Ñ¹¸Øì“ÃÑ°ºÒÅªÒµÔªÒÂ¡Ñº§º»ÃÐÁÒ³»Õ òõóõ” ã¹àÈÃÉ°¡Ô¨¡ÒÃ¤ÅÑ§¡Ñºº·ºÒ·ÃÑ°ºÒÅä·Â, (¡ÃØ§à·¾Ï, â¤Ã§¡ÒÃ¨Ñ´¾ÔÁ¾ì¤ºä¿,òõóø,), òñ .

chapter five the bank of thailand: the fall of the

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