But the past decade has apparently proven that the Kingdom's public and private sectors are too immature to adjust to the new regime. They still have a long way to go.

Business leaders have acted like spoiled children, always wanting to be protected as if they were still under a fixed exchange-rate regime. They have not learned how to deal efficiently with the real world of currency markets. At the same time, the Bank of Thailand (BOT), like a new intern in an operating room, has been bewildered by the volatility of foreign currencies and reacted with fright to several incidents.

Last year, BOT intervention led to an accounting loss of Bt100 billion. While this benefited exporters, who are still banking on a cheap baht to boost their export income, it meant the central bank needed to issue bonds at an equivalent amount to absorb excess liquidity.

Phatra Securities managing director Supavud Saicheua recently said intervention would only put a burden on the country's economy in the long run and that without intervention the baht could have been stronger, due to capital inflows like the South Korean won, which has risen above the precrisis level. He noted that with huge reserves of nearly US$80 billion (Bt2.76 trillion), Thailand did not need to protect the export sector, which has been the main engine driving the Thai economy over the past decade.

"Bond issues, which must come with attractive rates to draw buyers, will lead to inflation risks," he said.

At this stage, the managed-float system remains the most proper one for the Kingdom, because it can react better than other regimes to currency fluctuations spurred by the amount of capital movement. But the system should be managed without capital-control measures that lead to backward steps that can worsen the economic environment in the long run.

"The managed float is the most appropriate system, because it is flexible and can be adjusted to fit different situations. We cannot resist the amount of capital flows, but we can manage baht swings without pegging the currency to any particular level," said BOT Assistant Governor Nitaya Pibulratanagit.

Former finance minister Tarrin Nimmanahaeminda recently said Thai authorities, during the precrisis period, seemed to be complacent with an exchange regime of the baht fixed de facto to the US dollar.

In fact, there were warning signs the baht should have been adjusted. In 1995, the baht felt the pinch from the flip-flop of international currencies. Early that year, the dollar was equivalent to 80 yen. But in the middle of the year, the dollar rose to ?135, thanks to the Mexican crisis. It swung sharply between ?80 and ?135 in one year, and yet the de facto fixed rate regime remained untouched.

Thailand's financial liberalisation has also been blamed as the cause of a huge amount of capital inflow, particularly when domestic interest rates were high.

But Tarrin said the key factor for the huge amount of short-term capital inflows during the precrisis period was not financial liberalisation, including the Bangkok International Banking Facility (BIBF), but rather "speculative money" itself. He said hot money had flooded into Thailand via all channels, including foreign direct investment and with tax privileges from the Board of Investment.

"The BIBF was not the key problem at the time, but hot money was. There were already controlling mechanisms by the central bank," Tarrin said.

However, the speculative money had caused the central bank desperately to defend the baht at the pegged rate of 25 to the dollar.

For any country, there is an impossible trinity, all of which cannot be adopted at the same time: capital mobility, a fixed exchange rate and a free monetary policy. Only two of the three can be put into practice; otherwise, an economic crisis cannot be avoided, such as the one the Kingdom experienced.

BOT Deputy Governor Atchana Waiquamdee said the two selected conditions must benefit the overall economy. A fixed exchange rate should be adopted in cases where wages and prices are easily adjusted - like those in Hong Kong. The fixed currency also causes a central bank to bear all of the risk of the private sector's transactions, no matter how much the demand and supply of the currency.

"It's difficult to tell which two are good for the country," she said. "If it's difficult to adjust the Thai economy's wages and prices, then we must allow the currency to adjust itself. Under an inflation-targeting framework, the currency should move flexibly."

The point is under which conditions should the baht should "managed"? When, how much, how and for what reason, as well as whether any unfriendly-market measures should be introduced to protect exporters. The BOT earlier tried hard to maintain the stability of the baht in two directions of movement - mostly to weaken the baht when it has become too strong for exporters. Exporters have always been a point of concern, because exports are Thailand's key economic engine.

Chulalongkorn University economist Somphob Manarungsan said the Kingdom should no longer depend on a depreciating baht if it wants to be an open-economy country. The real sector should improve itself and seek advantages from the baht, no matter which direction it moves - depreciating or appreciating - like Japan and South Korea.

"We should plan how to play a game in the financial sector by taking advantage and being less negatively affected," he said.

In addition, the country's financial sector should be seriously reformed, with constant policies introduced in line with the global environment, because that sector is the most important factor in global economic development. The baht should be flexible enough to allow the BOT to handle it efficiently, he said.

"Monetary policy should not subsidise the private sector and become a welfare policy," said Somphob.

He said the BOT should intervene in the foreign-exchange market when it fluctuates too much and should not have introduced last December's capital-control measure. If the private sector can react well to the two-way direction of the baht, a withholding-reserve measure will not be needed.

Finance Minister Chalongphob Sussangkarn has also tried to seek cooperation from East Asian countries - or the Asean + 3 grouping that includes Japan, South Korea and China - in moving towards the creation of "pooled reserves", an emergency fund that members could draw upon in case of massive capital outflows similar to what happened a decade ago. However, large capital inflows have now become a new threat for the region, especially Thailand. Chalongphob conceded there was no clear solution about what to do regarding the baht's appreciation from capital inflows. Meanwhile, policy coordination within East Asia on capital inflows yet to take shape.

Anoma Srisukkasem,

Wichit Chaitrong

The Nation