Thailand’s attempt at capital controls

Larry Elliott, writing in The Guardian’s Comment is Free area, on Thailand’s capital controls and its subsequent capitulation:

A financial U-turn

Thailand’s use of capital controls was intended to penalise short-term investors – but the market reaction was swift and brutal.

December 20, 2006 07:04 PM

It’s not often I feel sorry for military regimes, but I must confess to a twinge of sympathy for the government of Thailand.

Faced with speculative flows of “hot money” into the country, which were driving up the value of the baht and making the country’s exports uncompetitive, Bangkok responded by slapping on capital controls. These were designed to penalise investors that left their money in Thailand for less than a year.

Not a bad idea, you might think. Thailand, like a great many other Asian countries, is highly dependent on export-led growth, and the last thing it needs is to hand a competitive advantage to China, a country that has kept its own currency artificially low.

The market reaction, however, to the capital controls in Thailand was swift and brutal. International investors turned a blind eye when the military took power in Thailand in September; speculators don’t really care what sort of business they do business with so long as there is money to be made. But make life more difficult for Wall Street banks or the City of London’s hedge funds and you will turn yourself into a pariah state.

Such was the wave of selling on the Bangkok stock exchange yesterday that following the 15% drop in share values, the Thai government announced a U-turn, exempting investors in stocks from the controls.

What does this tell us? Three things. First, that there is often a clear contradiction between what is good for the real economy of a country and what is good for global financial markets. Second, that the power of markets is now so enormous that governments struggle to find ways of controlling them. You can see what James Carville, the former aide to Bill Clinton, meant when he said that he would like to be reincarnated as the bond market, since then he would wield more power than he would at the White House.

Finally, this state of affairs is highly unstable and will end – eventually – in an almighty financial crash, affecting developed as well as developing countries. All the time crises are confined to emerging markets such as Thailand, calls for controls on capital will be brushed aside. When the crisis spreads to Europe and North America, as it did after 1929, it will be a different story.


  • The point Marc makes that there is a “clear contradiction between what is good for the real economy” and “what is good for financial markets” reminded me of a site about the economic writing of Henry George. He wrote a book titled “Progress and Poverty” in 1879 that was a bestseller in its day. It’s now available online at:

  • I should correct my previous post. The point and quotes were from the original article by Larry Elliott, and not from Marc Lee who posted the article.

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