Financial Policy in Postwar Thailand: External Equilibrium and Domestic Development

Abstract

Thailand, perhaps more than any other country, has been able to achieve rapid and substantial growth without inflation since World War II. Blessed with huge rice crops in a world hungry for rice, Thailand's astute money managers were able to restore order quickly-and with less inflation, as measured by wholesale prices, than the United States had for the two decades following the war. Of course, the strong preferences of the Thai people for their own consumer products, and later on the receipt of foreign aid, were also helpful in maintaining convertibility and a stable price level. Taking as a frame of reference the relationship between equilibrium in the balance of payments and domestic economic growth, this article will examine the role of financial policy in Thailand since World War II. Certain of the financial problems which Thailand has faced during the last twenty years are those which perplex many other underdeveloped countries today. They may be considered in terms of three highly interrelated areas: government expenditures and revenues, the monetary system, and the balance of payments. One such problem is that of obtaining the revenues with which to finance the governmental expenditures determined by the political leadership. The major sources are taxes, public bonds, foreign, loans and grants, and domestic credit creation-the naive version of which is printing paper currency, the sophisticated variant being government borrowing directly or indirectly from the central bank. It is hard to make extensive use of the credit-creation mechanism without generating domestic inflation. The establishment of an effective monetary system has both narrow and broad dimensions. In the narrow sense there are two problems: (1) developing a unified, efficient, and elastic money supply; and (2) controlling the money supply as an instrument of monetary policy. Both are prime functions of the central bank. Many underdeveloped countries today have solved at least the first problem reasonably well. For Thailand in the postwar years, however, a major objective of economic policy was to put the currency system in order once more. The broad dimension of an effective monetary system is the development