A wealth of private sector banking experience can pay dividends to the central bank, according to outgoing Kasikorn president, Dr Prasarn Trairatvorakul
Dr Prasarn Trairatvorakul, the outgoing president of Kasikorn Bank, is set to bring his wealth of private-sector experience to the task of central banking. Prasarn, 58, was recently chosen among three short-listed candidates to head the Bank of Thailand for the next five years, starting October 1.
As governor, he would play the leading role at the Monetary Policy Committee, which sets interest rates and manages money supply to optimise the country's economic growth and stability.
In former days, the governor was solely in charge of monetary policy, but the 1997 "Tom Yam Kung" crisis led to reform that shifted such a crucial decision - which could make or break the economy - to collective responsibility.
Besides economic growth and stability, Prasarn shares the opinion that a fairer income distribution and a social movement to protect the environment now also figure prominently among the central bank's broader goals. However, he concedes that there are no direct tools that can be used by the central bank to address these national issues.
In fact, fiscal measures such as government spending and tax incentives, as available to the Finance Ministry, are more suitable, and these instruments can be switched on and off whenever appropriate. He cites as an example a government initiative seeking the private sector's support for a big raise in the country's minimum wage, in exchange for an income tax cut
"There would be a multiplier resulting from a possible rise in consumption among the country's low-income earners [if the minimum wage is increased substantially as a way to address the income gap issue, as envisaged by the government]. In other words, there would be an income transfer from such a policy," says Prasarn.
However, such a policy initiative means the government will have to part with an amount of corporate income tax revenue to boost workers' purchasing power. This may boost economic growth in the short and medium terms, depending on the effectiveness of the multipliers, but Prasarn is not sure if it will also help narrow the income gap in the long run.
Having spent many years in the private sector after leaving previous posts at the Securities and Exchange Commission (SEC), Prasarn believes that private-sector experience is highly valuable as far as central banking is concerned.
Alan Greenspan, the previous chairman of the US Federal Reserve, also had a lot of private-sector experience before joining the US central bank, he notes. In addition, the late Joseph Kennedy, a business tycoon, was tapped to be the first chairman of the US's SEC during the 1930s because of his private-sector experience.
Regarding the Bank of Thailand, there is also a need to further promote cross-public-private-sector experiences to better prepare a new generation of competent central bankers, who will need to be abreast of fast-moving markets in Thailand and abroad.
At present, Thailand's central banking system relies on inflation targetting, but some other countries use different principles to manage the monetary policy.
Regarding the US system, it appears that the Fed has relied more on human judgement than other criteria, especially in the past couple of years. Lately, the Fed has also taken two unprecedented actions that are contrary to the principles of sound central banking. First, it has openly purchased government bonds, thus lending money to the government. Second, it has openly bought commercial papers, thus lending money to the private sector.
Both actions are the equivalent of printing money in the hope of averting the worst US economic recession since the 1930s.
But have they worked? So far, the first round of action hasn't, and it looks like the second round is forthcoming.