Response to the Crisis: Thailand's
Strategic Management

M.R. Chatu Mongol Sonakul, Governor,
Central Bank of Thailand

Asia Society New York

October 1, 1998

I have titled my talk here today " In response to crisis: Thailand's Strategic Management " as I am of the opinion that Thailand's problem is not purely or even mainly financial. The problem was a failure of democracy, a failure of government, and a failure of civil society. One thing leading into another and all interlinked.

Some twenty years ago, in the infancy of democracy, a rich person bought votes using his own money and was elected into parliament. During the twenty years, more and more people bought votes using other people's money. Money from their friends, money from their backers and later on proliferately money from the dishonesty from their job in the Government.

The constitution only provided that " the first pass the post shall win the election". Sometimes the first one at other times the first three wins, but it never stipulated how the race should be run and there was no mechanism to control the competition and make the election basically honest.

People who bought their ways into Government expected to be re-paid when they are in the Government and salary could never do this. Parliament is the highest of all activities. When parliament fails, the cabinet fails, the civil service fails and the private sector thereupon fails. This was essentially the state of our affairs in the middle of last year.

The financial bubble in Thailand at its peak last year was indeed not as bad as in many other countries. But the situation was ripe for the hedge funds to launch an attack since we also had a precarious political situation to complement it, whilst other countries in the area seem to be in firm political control. Attacks after attacks were made on our currency without seemingly the political leaders cognizant of what was happening.

Let me however not talk about the financial plight as my aim today is to talk about good governance. Suffice it to say that when some semblance of good governance returned to the country, the Thai economy weathered the storm in a much better position than its counterparts, and is now stabilized and shows signs of returning to growth.

Let me get back to governance.

Of course, all of what I have said was obviously going to be recognized by a lot of people, intellectuals and people who genuinely love their country. Academics, students, and many in all walks of life. And great pressure was put on those in government and especially in Parliament, such that three years ago Parliament had to vote to set up a Constitution Drafting Assembly comprising representatives from the normal people, academia and from the professional. This was despite a constitutional provision that the Constitution can only be amended by members of parliament.

The Constitutional Drafting Assembly, after a year long exercise of compromising among themselves and with those in power, produced what is perhaps a unique mechanism to ensure a fair and clean election. The new Constitution provides that:

Firstly, there shall be a neutral Election Commission appointed by the Senate and proposed by the Constitutional Court, the rectors of state universities and the Supreme Court.

Secondly, voting shall be in secret and vote counting must be done together in one place instead of by individual booths which made it easy for vote purchasing as returns in individual areas could be ascertained.

Thirdly, the Election Commission had the authority not to declare an election result and to require new elections when they were unsure of the legitimacy of any election, making it difficult for people to spend money on an election not knowing that they could ensure any kind of result.

These were the mechanism to ensure a fair, free, and clean election. They are not new in the constitutional mechanisms that exist in the world. What was more important, however, was that the Cabinet could be chosen almost directly by the people. Direct election of a Cabinet is difficult, and the normal alternative is to elect directly a president or a prime minister who thereupon appoints the Cabinet which may or may not be good, but certainly can only be considered very indirectly appointed or chosen by the people.

Here, a unique provision I believe non-existent in the constitution of any other country was made. This was the provision for a party list of candidates to be made and elected upon the vote of the total electorate of the country. This was not new and many constitutions provide for a party list. What I believe is new was that the provision was made that the Cabinet must be appointed from members of parliament. Constituent members had to resign upon appointment and a new election would be held. Party list members had to resign but the next person on the party list would be appointed as members of parliament in their place. This, in effect, would probably mean that the Cabinet will be chosen from the party list in order not to reduce substantially the majority of the winning or governing party, and in effect allows for the indirect election of the Cabinet by the people and places an imperative for the Cabinet member to operate the office properly in order to be reelected.

The provision that a group of 50,000 people could also submit a petition for the removal of the Cabinet member who doesn't behave properly was also instituted, but this again I believe is not a provision unique to Thailand. But it looks as though, with a couple more elections, the member of parliament and the Cabinet would substantially have to behave themselves much more appropriately.

I would love to be able to state that the constitution went on and provided for a mechanism of good government and good corporate governance. Unfortunately, the problem tackled by the constitution were problems of parliament and one year was not enough to produce a constitution that tackled all the problem of the country, and these two important areas were left basically untouched and unaltered.

Those who recognize this problem are working very hard on ways to ensure good corporate governance as well as good governance in government.

Unfortunately too, these are much more difficult areas. Parliament involves less than 600 people, but government is slightly less than 2 millions. Corporate governance would affect practically everybody and certainly something like 200,000-300,000 corporations.

The Thai civil service is hierarchical, with little incentive to work well. There are those fortunate few who obtain honour and glory by rising to the top but there are no real incentives for the average civil servant, especially not financial ones. Nor is there any incentives for a government department to do well, except perhaps in order to improve the further job prospects of the director-general.

In the Constitution, another change was also of great interest. Instead of electing representatives who appoint Cabinet members to run the country on the people' behalf, the Constitution provide for the people to run the country directly by proposing the dismissal of not only of ministers of the cabinet, but also to propose legislature by the signature of 50,000 of the population.

This element of direct exercise of authority by the people are now being extended to civil government and the police department look like the first and certainly the most important department to have the people represented directly in the Board operating the department, both at the national and at the local levels. This, if it works, would be a tremendous change to our culture and to the ability to run a proper legal system, so important to the success of business operation.

Other important areas like the Customs are being reformed through using electronic data interchange and computerised operating and information system making it possible to monitor the pace of a persons' work and to pay tax without contact with tax collectors, thereby breaking one of the evil chains of corruption.

In the private sector, new foreclosure and bankruptcy laws are being effected to provide proper rules and regulation and speedy justice. The stock market now require not only independent directors, but also an audit committee to supervise the work of the board of directors of listed companies. The Securities and Exchange Commission has just disbarred 3 different sets of auditors for improper accounting standards or insufficient disclosure. The Bank of Thailand itself, has prosecuted 5 sets of managers and directors of financial institutions for inappropriate behaviour and we intend to do more.

One wishes that the country would institute changes more systematically, more technically correctly and more widespread, but the country is still and looks in the near future, like being run by a coalition of parties. Bringing the structural change that would be widespread and deeply meaningful will be rather difficult. Changes come in fits and spurts but these are changes for the good. There is a new wind of change blowing that come from the need of the time. Thailand has changed a lot in the last 30 years and we are changing our way to fit the modern demands of life.

Ladies and Gentlemen,

I have said what I have said not totally without a purpose. As you all know I am here to go to the IMF Annual Meetings. The IMF needs changes too. There is a new world order. Fifty years ago at Bretton Woods most economic activities occurred in each country, and certainly most financial transactions were made in one country or another. The world today is one single place, including the financial market. In each country, computers take down every detail of every financial transaction undertaken by its financial institutions or major investors. Laws exists for the authority in each country to oversee these transactions, and the authorities could control the transactions if they knew how to operate themselves. Each and every transaction is recorded by price, by volume, and by ownership. And if the authority was competent, a system could be devised whereby an unusual transaction can be detected and appropriate actions taken. This, we have done in the last four months in Thailand. And although the system could be a lot more developed, it is good enough to pick up the unusual items which might not be good for the country or in good faith.

But what about the global financial market. As a much more important market affecting the lives of everybody in the world, here the only information available is the price. We do not know who did it with whom and how much. Your currency, my currency could be bought and sold by anybody else totally out of our control or monitoring. I know this to be a fact because I buy and sell other countries' currencies in Thailand, and I do not declare anything except the price. Anybody who buys and sells the baht in Thailand puts down prices, volume and the name of the purchaser/seller.

For this reason, we do not allow the transmittal of more than 50 million baht to outside of the country without any underlying transactions. Why do we have to do this in Thailand. It is quite obvious. If you cannot monitor, things get out of hand and you don't even know it, and many good or many bad things could happen. Unless a new organization is put up in the world to oversee this. To get us out of this enigma, we have taken destiny into our own hands and have to stop any substantial baht market outside of the country.

Ladies and gentlemen,

In order to find out whether our present monitoring system would have helped if we had it in place two years ago before our currency had to be floated, we tried the system on the data at the time. The answer was surprising to all of us. Of course, it would have worked, but the magnitude of the problem was astounding. For instance, non-resident baht account moved during the one year period prior to the July 1997 float amounted to 800 billion US dollar, some 6 times our GNP at that time. One could say that it was our fault for not putting in a proper monitoring system, but in fact, there was very little one could do even if it was monitored, as the baht could be traded freely outside the country. This is the reason we intend to keep on restricting the baht unless some change is made to the new world order.

I am glad that President Clinton seems to be taking up the challenge. In my own mind, the change needed is quite simple. We need a "world central bank", the function of which is to monitor the financial transactions of the world and supervise it in the same manner that a national central bank supervises the finances of the nation. This world central bank must be put up by those who have the power to make a difference to the world - alone or in conjunction with the rest of the world - but the job must be done.

Thank you.



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