The misdiagnosis resulted in last Tuesday's 15-per-cent fall of the stock market - the single biggest one-day loss for the 31-year-old bourse. The bad medicine was the imposition of a 30-per-cent reserve on all foreign capital inflows, including those for investment in the stock market and foreign direct investment. Unless these capital inflows stayed in Thailand for over a year, they would be subject to an effective 10-per-cent tax or penalty, since only two-thirds of the 30-per-cent reserve would be returned if the funds were here less than a year.

The intention was good, because the baht had faced increasingly strong upward pressure and speculation had it that the unit would be driven up to the low 30s against the dollar soon. Since the beginning of this year, the baht has already appreciated 16 per cent against the weakening US dollar - making Thai exports more and more expensive for foreign buyers.

If the baht were to appreciate significantly further, Thai exporters would be hit hard and the economy would then be affected, since exports currently account for 60 per cent of the country's GDP. Therefore, the government's rationale for the harsh action against undesirable foreign-capital inflows was to save the export machinery first. But it underestimated the huge negative impact on the capital market, resulting in the Bt820-billion loss of market capitalisation in one day.

In other words, the government acted like someone trying to kill a bunch of mosquitoes by torching the whole house. Even though the finance minister admitted his blunder by reversing the capital-control policy late on Tuesday, the damage was done in terms of the country's international credibility.

While the objective of protecting exporters was fine, the means wasn't. For the past 3-4 years, during which MR Pridiyathorn was governor of the Bank of Thailand, the baht had been kept relatively weak vis-a-vis other regional currencies. That worked well for exporters, resulting in double-digit growth rates. However, the improving fundamentals of the Thai economy also meant the value of the Thai unit was supposed to rise in tandem. And, more importantly, the US dollar had been heading downwards, resulting in inevitable pressure for other units, including the baht, to rise. Such double effects were hard to counter in the currency market. As a result, an optimum policy for the export machinery was to allow the currency to appreciate in an orderly manner while exporters themselves managed to boost their efficiency and competitiveness so they could continue to sell at a profit despite the baht's steady appreciation. Yet, that wasn't the case for the past few years, as many exporters preferred to sell on the cheap, thus overly relying on the currency weakness, which could not last forever. When the baht started to appreciate from over 40 per dollar, they cried loudly they wouldn't be able to compete abroad. And when it reached Bt36 per dollar this week, they said it should be weaker at at Bt38, and so forth.

As for the government, any capital-control measures should be the last resort. Prior to doing so, it ought to consider other options, such as interest-rate cuts to stem the baht's appreciation, or other measures that would help boost the long-term competitiveness of Thai exporters. For instance, the long-delayed restructuring of import tariffs should be speeded up, since about 42 per cent of exporters need to import raw materials for re-export shipments. Such a tariff restructuring would lead to lower costs, allowing exporters to manage the stronger baht with more leeway.

Secondly, the government needs to come up with a comprehensive sectoral competitiveness strategy for exports, since it no longer suffices to manage export earnings broadly amid increased competition in the global market.

Thirdly, the government needs to speed up its research and development policy to provide attractive financial and other incentives for exporters to invest in this crucial area, or else they will not be competitive in the long run.

In fact, any prolonged use of the exchange-rate policy to aid exporters tends to be counter-productive because exporters continue to sell on the cheap with little or no regard to improving fundamental strengths, especially in terms of productivity and innovation via R&D. In the end, international competitiveness lies in better productivity and innovation, not currency weakness.

 Nophakhun Limsamarnphun

 nop1122@yahoo.com