Thai Economy and the Role of Central Bank
The macroeconomic policies in Thailand revolve around three primary objectives: fostering stable and sustainable economic growth, enhancing the standard of living, and ensuring equitable income distribution. Merely focusing on economic growth, as measured by GDP, is deemed insufficient. The concern lies in the unequal distribution of benefits, potentially leading to a widening wealth gap and disparate living standards across the nation. To address these challenges, Thailand has established four key organizations: the National Economic and Social Development Council (NESDC), the Ministry of Finance, the Bureau of the Budget, and the Bank of Thailand.
The NESDC plays a crucial role in long-term development, formulating strategic plans for the nation. Meanwhile, the Ministry of Finance and the Bureau of the Budget concentrate on fiscal policy, utilizing tools like taxation and government expenditures to stimulate the country’s economy.
The Bank of Thailand, on the other hand, is primarily focused on monetary policy. Its role in ensuring economic stability encompasses three key principles. Firstly, it prioritizes monetary stability, aiming for macroeconomic and price stability while minimizing exchange rate volatility. The preference for floating exchange rates over fixed ones is driven by the impact of high exchange rate variability on international trade.
Secondly, the Bank emphasizes financial institution stability as a crucial aspect of overall financial stability. Recognizing that financial institutions are pivotal in resource allocation and capital mobilization, the Bank works to maintain a stable financial system and mitigate potential risks. The third ideal centers on financial stability itself, underscoring the importance of a resilient financial system to prevent economic contractions in case of operational failures within financial institutions.
Monetary Policy
Monetary policy encompasses three primary objectives:
1. Price Stability:
– Inflation, or the increase in the price level, erodes the purchasing power of money and raises production costs, posing challenges for businesses. High production costs can undermine a country’s competitiveness, leading to reduced profits, altered production plans, and increased prices for goods and services. Excessive inflation can exacerbate income inequality, disproportionately affecting those with lower incomes. Countries like Venezuela and Zimbabwe faced economic crises due to hyperinflation resulting from central banks over-lending to the government.
2. Deflation:
– Deflation occurs when overall prices in a country decrease, impacting the profitability of businesses. In deflationary situations, firms may lay off workers, leading to a decline in overall income and reduced consumption. Subsidies from the government, such as in the case of Thailand’s monthly inflation rate, can influence energy prices.
3. Financial Stability:
– Financial stability involves maintaining equilibrium in external relations between countries. The “impossible trinity” concept recognizes three objectives that are challenging to achieve simultaneously: independent monetary policy, free capital flows, and fixed exchange rates. A country must prioritize two of these objectives, as setting any interest rate and allowing free capital flows would be incompatible with maintaining a fixed exchange rate.
Price Stability and Economic Growth:
– Price stability serves as a critical foundation for sustainable economic growth. Even a slight price increase can incentivize businesses to expand production, leading to higher employment, increased income, and greater consumption.
Factors Influencing Price Stability:
– Inflation expectations, shaped by the perceptions of consumers and firms, play a significant role. Demand-pull inflationary pressure arises from external factors that increase a country’s demand, often seen during periods of robust economic growth. On the supply side, factors like fertilizer and transportation costs, commodity prices, and exchange rates can contribute to inflationary pressures.
Monetary policy decisions face challenges, notably the “impossible trinity,” where achieving all three objectives— independent monetary policy, free capital flows, and fixed exchange rates—is considered unattainable. Countries must carefully navigate and prioritize these objectives based on their economic circumstances.
Inflation is undesirable for various reasons:
1. Erodes Purchasing Power:
– Rising prices reduce the purchasing power of money, leading to a decline in consumers’ real standard of living.
2. Increased Production Costs:
– Inflation raises the costs of raw materials and labor for businesses, potentially reducing profits and causing changes in production plans.
3. Distorted Price Signals:
– Inflation distorts price signals, making it challenging for businesses and consumers to accurately assess the real value of goods and services, leading to misallocations of resources.
4. Uncertainty and Planning Challenges:
– High and unpredictable inflation rates create uncertainty, making long-term investments and strategic decisions difficult for businesses.
5. Income Inequality:
– If wages lag behind rising prices, individuals with lower incomes experience a decline in real purchasing power, exacerbating income inequality.
6. International Competitiveness:
– Inflation can undermine a country’s global competitiveness by making exports more expensive, potentially reducing demand and impacting trade balances.
7. Social and Political Consequences:
– Persistent inflation may erode public confidence, leading to demands for higher wages and, in extreme cases, contributing to social unrest and economic instability.
Impact of High Inflation:
1. Reduced Purchasing Power:
– High inflation diminishes consumer purchasing power, leading to decreased spending and hindering economic growth.
2. Uncertainty and Reduced Investment:
– Businesses are hesitant to invest or expand during periods of high and unpredictable inflation, causing a slowdown in capital expenditure and economic growth.
3. Interest Rate Increases:
– Central banks respond with interest rate hikes, raising borrowing costs for businesses and consumers and further dampening economic activity.
4. Distorted Price Signals:
– Rapid inflation distorts price signals, making it challenging for businesses to accurately assess the value of goods and services, resulting in resource misallocations.
5. Impact on Fixed-Income Individuals:
– Fixed-income individuals, like retirees on pensions, face challenges as their purchasing power declines, contributing to social and economic inequality.
6. Reduced International Competitiveness:
– Excessive inflation harms a country’s global competitiveness, making exports more expensive and reducing demand, negatively impacting trade balances.
7. Social and Political Consequences:
– Persistently high inflation erodes public confidence, leading to demands for higher wages and, in extreme cases, contributing to social unrest and economic instability.
summary
In summary, both high inflation and deflation present undesirable economic challenges:
High Inflation:
– Reduced Purchasing Power: Diminished consumer spending and declining economic growth.
– Uncertainty and Reduced Investment: Hesitant businesses, interest rate hikes, and slowed economic activity.
– Distorted Price Signals: Difficulty in assessing the value of goods and services, leading to resource misallocations.
– Impact on Fixed-Income Individuals: Decline in purchasing power contributing to social and economic inequality.
– Reduced International Competitiveness: Harm to global competitiveness and negative effects on trade balances.
– Social and Political Consequences: Public confidence erosion, demands for higher wages, and potential for social unrest.
Deflation:
– Reduced Consumer Spending: Delayed purchases, decreased demand, and hindered economic growth.
– Increased Debt Burden: Challenges in servicing debts due to rising real debt values.
– Deferred Investments: Business hesitancy in investments and expansion.
– Unemployment Risks: Potential for higher unemployment rates due to reduced demand.
– Asset Price Decline: Negative impact on the value of assets, leading to financial instability.
– Interest Rate Challenges: Limited effectiveness of monetary policy tools with near-zero interest rates.
– Negative Feedback Loop: Cycle of falling prices, reduced spending, and economic decline.
– Impact on Wages: Resistance to wage increases, resulting in stagnant or declining real incomes.
Ultimately, policymakers aim to maintain moderate and stable inflation to support sustainable economic growth, avoiding the adverse consequences associated with both high inflation and deflation.
Challenges to Sustained Economic Growth:
1. Demographic Shifts – Aging Population:
– The aging population poses a significant challenge for many industrialized nations as it has the potential to slow down production by reducing the available labor force.
2. Global Productivity Growth Technology Stagnation:
– Some argue that the rate of technical innovation, a crucial contributor to productivity growth, has slowed down. This technology stagnation could impede global productivity growth.
3. Gross Fixed Capital Formation (GFCF) Challenges:
– Difficulties in investing, influenced by factors such as economic instability, geopolitical unrest, shifting trade dynamics, and more, can undermine corporate confidence and hinder investments in tangible capital.
4. Climate Change Impact:
– Climate change poses a threat to economic stability by impacting infrastructure vulnerability. It has the potential to destroy infrastructure, disrupt supply lines, increase corporate expenses, and create other challenges that can impact economic growth.
LONGTERM ECONOMIC 2024
Decoupling of Economic Giants – US and China:
In the realm of global economics, the dynamic between the two major players, the United States and China, is undergoing a significant shift:
– 2017 vs. 2022 Trade Dynamics:
– In 2017, the US accounted for 21.90% of goods purchased from China. However, by 2022, there was a notable 17.10% decrease in US imports from China, indicating a substantial reduction of nearly 5%.
– Mutual Dependence Reduction:
– China is also importing less from the US, suggesting a reduction in their mutual economic dependence. This evolving trend reflects the momentum of decoupling between the two economic powerhouses.
This article is part of an assignment for module 751309 Macroeconomic Theories 2
Faculty of Economics, Chiang Mai University
The article is written by TEETAD VANITPUNSAKUN