Q. Dr Supachai, you have a long and impressive career in both the national and international sphere. Which do you consider as being the most challenging?
I think that both my national and international careers have been highly challenging in different ways. When I was working for the government in Thailand, we were faced with more immediate challenges: how to engage in agricultural development; how to achieve agricultural price stability; regional integration; and trying to deal with the financial crisis of 1997/1998. Most of the problems required immediate action and, as you know, politics can sometimes be a very harsh affair. There were not only policy changes, but you also had to face the parliament, dealing with different ideas from different political parties.
Now, with an international institution like UNCTAD, there are of course immediate issues, but there are also a larger number of medium- to long-term issues. With UNCTAD, we deal more with research that helps to explain the globalization process in developing countries. We devote a lot of technical work to helping countries integrate themselves into the global economic system. This is somewhat different from what I used to do with the World Trade Organization (WTO) [he was Director-General, September 2002 to August 2005], which was challenging in a more competitive domain. In WTO, you have countries competing for trade areas; you have constant negotiations going on, such as the Doha Round. There are hundreds of meetings each year involving highly complicated issues, ranging from agriculture to service industries and rule-making exercises.
I would say that I have been fortunate because my career has been enriched by these different experiences. I have benefited from the experiences I gained in Thailand, and I really thought I could harmonize the way we work in UNCTAD with the needs of countries based on my experience in negotiations on rules and regulations at WTO. All of these experiences are somewhat related to each other.
Q. You were the Deputy Prime Minister and the Minister of Commerce of Thailand during the Asian financial crisis of 1997. Could you tell us about that and the financial situation in Asia today?
In 1997, when we entered the financial crisis, it followed a long period of economic growth and stability. It was not the kind of growth you see with budget deficits or public indebtedness, but was based on competitiveness in the export markets. It was growth based partly on our productivity in certain areas, for example in the new manufacturing sector. Thailand in the 1990s was said to be a country with an exceptional growth experience –– a term used by the World Bank. The crisis arose mainly as a result of three factors.
First, we liberalized the financial markets for the private sector –– probably a little too early for our domestic money market –– but we followed the advice of the International Monetary Fund (IMF). We opened up the capital accounts, mainly for the private sector. Instead of the private sector going through exchange controls, they could deal openly on the international market. It was helpful because in this way, the private sector could have at its disposal different kinds of financial services. It was risky because people had access to excessive amounts of capital and loans –– and they abused it. For example, in those days there was a lot of investment in real estate development projects, such as golf courses and resort hotels.
The second factor was the size of the current account deficit, which led to strong speculation on the value of the currency. When we were growing rapidly, we imported a lot of capital goods, and imports were huge, so the trade deficit and current account deficits gave rise to the kind of speculation that ultimately brought down the currency.
The third factor, I would say, was that supervision of the financial system was less intense than we could have expected in a country that was growing rapidly in terms of financial services.
I would not say that it was always due to deficiencies, since the enforcement of financial regulations is not an easy thing to do. For instance, we found out that banks should increase their capital. But if we asked them to do that, and they failed to do so in good time, there was no mechanism to penalize them for failing to follow our instructions. There was perhaps a weakness in enforcing the rules that resulted in many financial institutions lending money for projects that did not create added value, or in not exploring the interest rates, the dollar rates and the baht rate.
Compared to the present financial crisis in macro-economic areas, the situation is not very different. You can see the same lack of governance over financial regulations. In the past few years, financial institutions have been allowed to carry out unlimited financial engineering, being very inventive by venturing into what I call “shadow” financial systems, in securing loans, and in selling all kinds of products such as debt-default swaps –– meant to reduce the debt risk but actually increasing the risk for those institutions that were issuing debt-default swap instruments.
Because we allowed securitization to go too far, it has obscured the origins of loans, obscured the identity of the borrowers – which, in turn, has helped mask the real risk behind the derivatives. If you bind up different borrowers in a deal, and sell the deal to investors around the world, in particular to the hedge funds and the like, the originators of the loans are unidentified. Thus, it obscures the risk factor and, given the liberalization and deregulation of the system in the United States in particular .… Of course, this has served as an example for the rest of the world, because it went a little too far!
I think that liberalization is good in certain areas. However, you must have some sort of tracking mechanism that prevents people from abusing the system. When an investment bank has a leverage ratio of twenty to thirty times its lending value, it becomes a sort of backing exercise. It becomes an unlimited casino activity, and that was actually part of the reason. These things have actually happened before –– eleven years ago!
Q: If I understand correctly, you are asking for more supervision of financial institutions. Who do you see exercising this supervision? The central banks? Governments?
Towards the end of the Asian financial crisis, we agreed to revise commercial banking laws and laws on supervision, and some countries began to separate the supervisory activities into one independent authority separate from the central bank. There have been different ways of trying to keep abreast with the specialization of each financial market. You need tailor-made supervisory systems.
The Basel International Rules –– often called Basel 1 and Basel 2, which came out of the Bank for International Settlements –– have a sort of requirement that we call capital equity ratio for commercial banks. Basel 1 was improved and became Basel 2. It provided more details on different bank loans, and a different ratio that banks have to provide as a capital base to cover their lending activities.
When I say that we need more supervision, it does not mean we have to introduce excessive regulation of the financial system. I think we have to look at WTO to find the kinds of rules and regulations that would help bring about a sufficient level of transparency. First, we need transparency; second, we need to prevent excessive leverage; and, third, we need to have a better credit rating system. As you may know, financial institutions have been employing the credit-rating agencies to rate themselves. You can see for yourself that this leads to a conflict of interest.
Fourth, there must be more international governance, because these days you do not depend only on financial systems inside your own country. Everything has become globalized. You need international governance so that: (a) you can exchange information; (b) you can have the same standards; and (c) you can conduct key review processes that put pressure on financial institutions.
Q: This seems to be an impossible task due to the complexity of the financial markets.
Well, it is not impossible! We have to try to build towards this process. At the same time, we have agreed to reform the IMF and the World Bank. They were created in the 1940s, and now we are in the new millennium; there are different things that financial institutions can do nowadays. For instance, the IMF could be in charge of re-engineering the new financial architecture, taking into account the risks coming from different activities, including, of course, securitizing and the shadow financial system.
Q. Do you think that the financial crisis the world is facing today can be compared to that of the 1930s? And if so, how long do you think it will take to recover?
To a certain extent, the Great Depression did have the effect of a very deep and long-lasting downturn that hit the global economy. If we compare it to the present crisis, this crisis is more serious. If you look at the size of the problem, many countries have financial systems whose total assets are larger than the domestic product of the country itself. Look at Iceland and some other countries, such as Greece and Hungary. There are countries with very sizeable financial systems that have collapsed through their involvement in the money market –– easy lending and a lot of liquidity leads to excessive borrowing.
Thus, globalization is actually what distinguishes the present crisis from the Great Depression of the 1930s, since the involvement of the global financial system is much greater today. In the 1930s the problem was more limited to the United States. Today, all national systems are involved.
For example, the fact that the United States has had a long period of growth with a lot of liquidity was mainly because Asian people had saved a lot of money and channelled their excess savings into the American financial markets, into the government bond market and things like that. This is another factor that did not exist in the 1930s. Now we also have securitization and derivatives, so I would say that the complexity and the impact of this financial crisis will be much more profound and more complex than eighty years ago. That’s why most economists have been saying it’s very difficult to assess the dimensions of the crisis. It will affect the national economies of the whole world –– but to what extent we don’t yet know.
In Asia the financial situation is quite sound, but we do not know what the impact of the crisis will be on trade. The Asian economies are mainly export-oriented: when the global economy shrinks, exports go down. Asia could be badly hit!
Because of the impact on trading and on the real sector, the downturn in the latter could be much more severe and devastating than in the past, hitting more retail industries but also all kinds of manufacturing sectors in Asia. It might affect the steel industry, the airline industry. No one will be left untouched.
What I call “collateral damage” will be serious. As the United States or Europe begins to emerge from the crisis, I am concerned that the rest of the world will be just beginning to fall into it. It will take some time before they can dig themselves out of the pit, because they have very small margins for manoeuvre, particularly in Africa or Latin America. In Africa, they have very few commodities to export. They were already hit last year by the food crisis, and now it’s the financial crisis. It will be devastating for them.
In Latin America, with the problem of limited growth and employment opportunities, there will be a lot of unemployment. I think the impact on employment could be quite severe and countries could take a long time to recover.
Q: So we do not yet see light at the end of the tunnel?
Not yet, although people are saying that by the end of 2009 we should see the first signs. Perhaps this is too optimistic. In the last quarter of 2008 in Asia, we saw recession in Singapore, Japan, Hong Kong, Taiwan and the Republic of Korea. Yet we still see some positive growth. China is experiencing much slower growth than before; India is still going strong, and so is South-East Asia, but as new data come in for January 2009, we are seeing a larger drop in Asian exports.
That, I think, is a negative omen. It might be that recovery will be slow in coming, but I still hope that all the different stimulus measures being implemented in Asia and elsewhere should help push the economy in the right direction. I believe that the second half of 2009 will witness a bit of recovery in Asia, although there will not be full recovery until the second half of 2010.
Q: What about Europe?
Europe has very rigid policies in certain areas that will not help it recover quickly, particularly in the area of labour laws. I fear that unemployment rates in Europe will be quite substantial, because the unemployment rate was already significant even when Europe was growing normally –– which is around 1 to 2%.
I think that the whole Eurozone has now gone into negative growth, and I believe that unemployment will become a very significant issue. Because there is a lack of real coherence; each major economy is trying to pull itself out of recession through its own efforts. There needs to be better coordination here if all the major economies are to emerge from the crisis.
Europe has been hit by the globalized financial trading crisis originating in the United States, and it has also been hit by its own problems, because in certain parts of Europe there were bubbles in real estate investment, just as in the United States. I think Europe will have to cope with a much more severe kind of recession.
Q: I’m Norwegian myself. How do you see the Norwegian economy?
The Norwegian economy is based mainly on oil and gas, and I think this provides some safety cushions. However, oil prices dropped from US$ 147 to US$ 40 per barrel, so maybe Norway will suffer more from this. It does not mean that you are losing income; it means that the rents that you should have gained are not there anymore, but that is not the same thing as saying you will have a bad year. I do not think the financial system in the Scandinavian countries will be so badly hit.
You used to have your own problems in the past, and now you have learned your lesson. You could be a model for the United States, Europe and the rest of the world on how to resolve the crisis. I do not think your part of Europe will be so badly affected, with the exception of Iceland and the new Baltic States.
Of course, you will suffer a bit because of the drop in trade with Europe. These days I think the Euro will deteriorate a little bit because of a lack of trust in the stimulus measures, and strangely, people have more confidence in the US currency. So it depends on how Norway will deal with it. I think Norway will keep an eye on the Euro-Kronor exchange rate in order not to lose competitiveness.
Q. Trust is a major issue when it comes to financial transactions. What can be done to re-establish trust?
Trust in the financial market is a delicate business. It’s very difficult to gain and very easy to lose, so I do not believe we will gain trust rapidly. You can see how much money is being poured into rescue operations, and governments have to keep coming back again and again with more. In the United States, such operations are now exceeding $2 trillion; in Europe, $2 trillion. The US could even reach a $3 trillion deficit over the next four to five years. Compare this with what is being invested in Asia, where only about one-tenth of that amount is involved. Regaining trust in the financial system does not depend on stimulus measures alone. It may rely more on the crafting of new financial architecture, so that people can look forward with a little more confidence in the new system. It may come from the fact that when you reach the end of the arrangements for the Doha Round, you will know that countries will be reducing their tariffs and impediments. Maybe this will bring more trust. If we see more stability in oil prices and stock markets around the world, it may restore confidence in the financial system. The stock markets in Asia have been badly hit, not because of any fault of their own. The fact is rather that people just liquidate their stocks and take cash instead, because they have already lost almost 40 to 60% of their wealth. If the stock exchange starts to stabilize, and normal amounts are charged for housing and asset prices, this can only be the result of a natural improvement. People will then begin to see the bottom of the assets that have been blown away in huge amounts.
When people start to see assets down to leverage, when they start to pay back loans and their debts decline, then you will see confidence returning. This does not come from financial rescue operations; it takes time. Asia was helped tremendously by the Y2K threat (at the turn of the millennium, people thought something terrible was going to happen to their computer systems). There was huge investment in the IT industries, and that helped create buoyancy and build confidence.
We stabilized our currency very quickly with contractual policies that I would not recommend now. I think it is better to have a gradual recovery using the kind of elements I have been talking about. You have to create an atmosphere of confidence.
Q. Today we see that many European countries are trying out similar measures to “boost” their economy –– through tax cuts or lowering interest rates or increasing the money supply. Do you think this will have any effect? If not, what should countries do to improve their economies?
Inevitably, countries are supporting their economies by engaging in what they call Keynesian demand management –– trying to boost people’s purchasing power. I think this is a minimum requirement and there is no way out of it. Beyond that, there must be something to help secure future job creation, because we are losing jobs very quickly now. If you give money to people, creating demand can help bring more.
For example, for countries that need to deal with environmental degradation, you can invest more in equipment to clean the air; encourage investments in new types of automobiles that use less petrol, or in renewable energy; or train more scientists, etc. With new job creation we can have more inclusive growth.
Talking about inclusive growth, the stimulus programmes of most countries are helping small and medium enterprises (SMEs) in agriculture. This is essential, because they really must be helped. Now they are reducing taxes for these businesses, and I think the key for these people is to maintain their investment –– meaning that the flows from the financial system are kept intact. If commercial banks cannot lend, then the publicly owned banks must come in and replace them by channelling money to SMEs. This is what should be encouraged by the government –– and here I see something that is not being done as much as it should. Normally, reduced taxes and subsidies for these people send a constant flow of money and lending into the system to keep it alive, as they need current expenditures to be financed before the demand can generate income for them.
This is very difficult. Giving new capital to the banks is what they are trying to do in the United States, and then they ask banks to sign a contract that they will relend the money to the real sector. I would rather concentrate on SMEs and let the government banks participate more and more.
Q: Is liberalism, as we know it, dead?
Not so! It’s also not true that we have seen the end of history. Of course, the system that functions best is the market system. You cannot go back to the market-led system, but what we have been saying at UNCTAD is that we need the State to play a different role.
We call it an enabling State –– enabling the State and the market. At the same time, the market framework should be strengthened –– good competition laws, a good system of consumer protection, good standardization and so on. At the same time, you need to strengthen the role of the government. You cannot leave the market alone. Markets are very good at enhancing efficiency, but markets are at a loss when we take into consideration what we call externalities –– things that you cannot measure. When you drive a car you create a lot of pollution; markets cannot take care of that. That’s common goods, and you need governments that subsidize the environmental sector. So there must be a blend, especially for the poor countries.
If I may digress into the area of food security, for people in Africa to depend on the food market alone is not a viable policy. We need to devise a long-term policy for them to be supported and financed, and we need a long-term development strategy. They must have their own water management system, their own irrigation and communication systems, so that agricultural production can be enhanced.
So it’s a blend of government strategy and market mechanisms in all areas.
Q. I heard that the head economist at UNCTAD had warned on several occasions, years ago, that we were heading directly for a tremendous financial crisis. Why do you think that nobody listened to him?
Well, it is not UNCTAD’s job expressly to sound the alarm for the crisis. We raised concern about the dichotomy between the financial system and the trading system. In effect, we were saying that it’s not right to have complete, comprehensive, non-discriminatory rules and regulations for the trading system, and not to have the same arrangement for the financial system as well. As I have said from the start, financial growth can have a lot of impact on trade flows in the real economy. I think it is a flaw in the global system that we have trade rules but no financial rules. This is the alarm we have been sounding for many years – to avoid too much liberalization. As I told you earlier, we have learned from the Asian crisis that deregulation and liberalization can lead to disaster.
UNCTAD may have been branded as the UN think tank and research organization. In the past, its views have been perceived to be so unconventional that people are sometimes sceptical about its work. However, most of our work has eventually proved to be more correct than others’ – for example, what we did on debt relief for countries.
It was mainly UNCTAD work that led to the introduction of the issue of policy space, meaning that poor countries should not be tied down by all kinds of restrictions through international involvement or international agreements, and that they need to have their own priorities. They should have some space of their own. The treatment of poor countries, especially in trade, cannot be held to one standard. This has been one of our warnings: you cannot have homogenous solutions for everybody. UNCTAD did a lot of work in the area of commodities, issuing warnings about the lack of diversification.
The voice of UNCTAD is a voice that should be listened to.
Q. What would you consider as your main achievements during your years as the Director-General of WTO?
Well, three years is not a long time. I think we were successful in enabling developing countries to assume a more active role in their trade negotiations. In the trade negotiation exercise we achieved at least 60% of the Doha Round. This is my colleague Pascal Lamy’s assessment of the situation. Of course, the remaining 40% will be challenging, but at least we have laid the groundwork.
In addition, I brought the research angle to WTO. Although some people may not think it’s very important, I certainly did. I also strengthened technical assistance to poor countries, so this is complementary to the work of UNCTAD.
