The Keynesian and the monetarist views on how to conduct national economic policy in both closed and open economies have inspired the policy-makers in many post-World War II developed and developing countries for more than half a century. Both views support the interventions by the public sector, i.e., the government and the central bank, to plan for and manage the economy in order to take advantage over the growth momentum of, while avoiding the negative impacts of market failure and external shocks from, the economic and business cycles. Many Asian governments have been quite successful in steering their open economies based on managed commercial and industrial policies. Some, such as Japan and South Korea, even went further to integrate financial policy into their overall national economic policy. These policy configurations work effectively insofar as their economic performance, in terms of domestic productivity and export capability, and their financial performance, in terms of domestic rates of return on both riskless and risky assets, are persistently high relative to their trade counterparts and the global market rates, respectively. However, when there exist the imbalances between the two aspects of performance, policy tradeoffs, reprioritizing, and periodic fine-tunings occur.

The economic and financial crises in Asia could also be explained from the perspective of misalignment between the real and financial sectors. In this essay, I would like to present my view on how a small open economy like Thailand can, in the medium to long term, adjust her national economic policy orientation to become more in line with the dynamics in the global financial markets environment, while taking into account the conflicts and complements among policy goals upon domestic affairs as well as the behavior of all market participants. The next section discusses conventional economic and financial policy objectives, which the government and the central bank in general try to achieve, and address some of their discords. Section three outlines the important impetuses that occur in both domestic and international financial economies, which continue to exert strong forces of change on national economic policy. In section four, I propose some rationales and ways in which policy-makers can reorient their policy foci and revise their interventionist roles in the course of major structural transition from the centrally-managed economy into the fully-efficient market economy. Section five concludes this essay.

Policy-making in a closed economy is typically geared toward attaining certain goals of aggregate consumption and production in both real and financial economies. In the real sectors of the economy, the objectives are to secure the satisfactory rates of employment and output growth in the production sector while also having a commensurate stable price level and an equitable income distribution in the consumption sector. These four policy targets (i.e., employment, output, price, and income), despite some tradeoff such as that of the Phillips curve between employment and nominal price level, can be achieved when rational expectations about inflation are dynamically built into the real economy (Friedman, 1967; Lucas, 1976). Output or GNP growth and income distribution objectives, although hard to reconcile in developing and emerging economies, can also be compatible through effective schemes of taxation and some politically initiated fiscal spendings and subsidies.

On the financial side, two aspects of financial stability are sought: 1) interest rate stability and credit availability in financial intermediary sector, and 2) systemic stability and adequate liquidity in financial markets sector. Both financial intermediaries and markets interact in the financial economy the same ways production and consumption sectors do in the real economy. The financial aspects are even more crucial than those in the real economy because of the fluidity of capital flows and the intense competition between intermediaries and markets, which could easily destabilize the overall financial system while also transmitting negative spillovers to the real economy and contagion effects to other countries. With relatively stable levels of interest rates, prudent and reliable financial institutions, and efficient financial markets, production and consumption in the real economy can be effectively managed.

In an open economy, another aspect of financial stability is imperative, i.e., an exchange rate stability. As more countries began to engage in international trade and allow for capital flows, their goals to achieve interest and exchange rates stability seem less feasible, especially with small countries that can by no means affect the world economy. The conducts of fiscal and monetary policy in those countries are therefore more difficult than those in the large and economically strong countries like the U.S., Japan, and Germany. After the inception of the Euromarkets for offshore Eurocurrency deposits and Eurobonds during the1960s and the demise of the Bretton Woods System (i.e., the international regime of fixed exchange-rate parity) in early 1970s, interest rates and foreign exchange started to fluctuate widely on the free-floating basis. To sterilize and immunize the effects of world interest-rate and foreign exchange-rate volatility on their economies, small countries started to implement more active policy programs in order to stabilize their domestic interest and exchange rates. The success of these sterilization programs depends much on the concerted efforts of the governments and the central banks to coordinate their fiscal and monetary policies to achieve the overall economic goals.

When Thailand embarked on a series of National Economic and Social Development Plans during the 1950s, the foci have been placed more on the real sectors than on the financial sectors until more recently. Also in the real sectors, production targets in terms of employment and output levels used to have held higher priority than consumption goals in terms of price stability and income distribution. The private-sector investments have been promoted through many developmental schemes from infant and senile import-substitution industries to export-led ones. Industrial development has become the main artery for national-income earners, especially toward the export markets. Market interventions yielded spectacular payoffs to the country in terms of an annual GDP growth range of 7-10% during the past two decades. However, this accomplishment came at the costs to the consumption sectors when income disparity widened and inflation started to hike. Export earnings that have accumulated as savings in the domestic financial system induced banks and other financial services firms to lend heavily to many non-productive and speculative (or nakedly-hedged) investments in real estate and capital markets. This financial laxity after markets liberalization and institutional complacency has therefore contributed to the destabilization of the country's financial system in the past years.

In essence, the conventional macroeconomic policy direction that stresses high growth and wealth accumulation before welfare distribution puts more burdens on the central bank to keep the balance between the real and financial sector pari passu. It is, however, politically correct to argue that Thailand, during the last two decades, should pursue such a policy direction. Yet, it is not advisable that the government should carry on the same policy in the future without paying serious and adequate attention to what have happened in the financial sectors and the consumption sector of the real economy.

The forces that drive structural changes in financial markets and financial intermediaries come from within and outside the country. In the domestic financial markets, two impetuses are being materialized, i.e., disintermediation and markets liberalization. Disintermediation is the process in which individual fund providers bypass financial intermediaries to supply funds directly to borrowing firms or the production sector. This process is possible as information and communications technologies are spontaneously developed to accommodate market demands. The market for disintermediation is predominantly of commercial papers and other structured short-and medium-term notes issued directly by the borrowers through banks and finance companies. Markets liberalization involves provisions for trading of those direct-financing instruments, other underlying securities and derivative products both on and off the organized exchanges (e.g., over-the-counter (OTC) markets, and on-line computerized trading systems) whereby transactions are subject to self-regulation, private credit-rating, and market discipline, rather than to centralized regulatory agencies, as well as for more foreign ownership and control in domestic financial institutions.

In the international markets, globalization and markets integration are considered the common themes. Globalization of financial markets refers to the coordination and standardization of trading rules and procedures, which allows more volume of trading transactions to be made among different national markets with less spatial and regulatory friction. A good example of globalized markets is the foreign exchange market where transactions are made electronically among international banks, multinational corporations, and individual currency dealers worldwide with a common language of trading protocols. They virtually eliminate time-zone barriers by which continuous currency tradings can be obstructed and distorted. As a result, foreign exchange trading volumes have typically reached over $500 billion per day after 1990 in only three major markets alone (London, New York, and Tokyo). Markets integration, on the other hand, is the harmonization and merger of two or more national markets to overcome the discrepancies in prices and transaction costs. One current example of markets integration, although occurred in the U.S., is the merger between the NASDAQ dealer-type market and the AMEX auction-type market. The market forces in both domestic and international levels not only will drive out market inefficiency through transactions cost-reduction, but also discipline the behavior and expectations of market participants through spatial and intertemporal arbitrage continuous-trading activities.

For domestic financial intermediaries, financial engineering and institutional deregulation have become more prevalent in recent years. In terms of financial engineering, the intermediaries are competing - through the process of dynamic trading of securities and derivatives - against each other based on how well they could offer innovative products and provide unique services to their individual and corporate customers. Coupled with markets liberalization in which foreign banks are allowed to compete vis-a-vis domestic banks, many Thai financial intermediaries are hard pressed to become ever more resilient in financial engineering activities. According to Merton (1992), financial engineering can be undertaken in two modes: 1) underwriting mode and 2) synthesizing mode. The intermediaries provide underwriting services to their clients in order to increase their financial contracts' liquidity and creditworthiness in the markets. Synthesized products (e.g., exotics and boutiques), on the other hand, are specially designed to meet specific purposes of the intermediaries' customers who might want to reduce their financial risks but do not intend to float their contractual claims in the markets. The main benefit of synthetic financial engineering is that it prevents other market participants from free-riding on the information advantages the client firms generate and privately possess. This benefit, of course, has to be weighed against the down-side risks of opacity and illiquidity the synthesized contracts have produced for the holders.

The ongoing waves of financial deregulation in many countries are intended to remove many outdated regulatory burdens that are the sources of inefficiency in domestic financial institutions. In the U.S., for example, the activity firewalls under the Glass-Steagall sections of the Banking Act of 1933 were finally repealed in the new Financial Modernization and Financial Services Competition Act of 1997 to allow commercial and investment banks to combine their operations. This bold move of the U.S. Congress enable American banks to compete on the same level-playing field against foreign universal banks that have long enjoyed the synergy of combined lending/synthesizing and underwriting operations.

On the international level, financial intermediaries have evolved in such a way that they become either multinational or transnational institutions (Michalet, 1984). Multinational financial institutions engage themselves in both retail and financial services in the host-countries' financial systems. They are also subject to both home- and host-countries' financial regulations depending upon their scope of activities. Transnational financial institutions, on the other hand, do not operate in specific host-countries markets, but establish their international financial centers to conduct wholesale banking and offshore financing activities in the countries where there is the least or no financial regulation, such as the Bahamas and Cayman Island. Their sources of funds are mostly Euromarket-based. As Andrew Crockett (1997), the general manager of the Bank for International Settlements (BIS), opines, the kinds of non-market force appropriate to governing these new institutional arrangements are "regulatory replications" that could mimic the market mechanism to discipline the intermediaries in light of pervasive financial innovation and engineering. Thus, economics of regulation and regulatory replications are becoming the highly active areas of current and future research in financial and international economics, both in academic and professional spheres.

Based on all the above immediate and potential impetuses, conducting conventional economic policy will be more costly and less effective to accomplish some or all of the desirable economic goals. The behavior of market participants has changed from having limited choices of saving and investment to dealing with wider investment alternatives vertically (across products and locations) and horizontally (over time and maturities), or the combinations of both. The behavior of financial intermediaries also changes from being functionally constrained in terms of activity firewalls and branching limitations to becoming more flexible in financial innovation and more specialized in financial engineering.

Given the fact that international economic terrain is changing very rapidly and that domestic market participants are also quickly responding and adapting to those changes, national economic policy also needs reorientation and, if necessary, reform. The primary question that comes to my mind is whether Thailand should be bothered adjusting her national economic policy direction at all. If so, my secondary question is which policy goals should be reprioritized and how? If not, what would be the counter-arguments against it? The keys to address such questions, I believe, lie in the evaluation of domestic market participants, whose preference might have changed from passive saving behavior to active investing behavior due to 1) their increased wealth during the past years of economic growth, 2) their optimistic and rational expectations about the strength of the country's economic fundamentals fueled by the revolutionary advances in information and communication technology, and 3) the liberalization of domestic financial markets, which allow these changes in consumer/investor behavior to flourish.

There are several arguments for economic policy reforms in less developed countries; most of which deal with commercial policy in order to change the terms of trade using optimal tariffs (Stolper and Samuelson, 1941) or non-tariff measures (Ray, 1988) and industrial or strategic trade policy to target for and subsidize the winning industries (Krugman, 1986,1993). The effects and benefits of such policy reforms are attributed toward the production sector of the real economy. My argument for policy reorientation, however, is geared towards the consumption and financial economies. In spite of the recent structural adjustments in Thailand, which make it unrealistic to claim that Thai citizens would become more optimistic about the country's prospect, it is still valid to conjecture that, with the right incentives coupled with awareness of undistorted information, the trends toward optimism are quite promising. By contrast, the arguments against any policy reorientation are that of 1) the political and institutional status-quos, which are always the case when confronting reforms, 2) the strong interests of industrial lobbyists and business pressure groups that try to preserve their rent-generating turfs and rent-seeking privileges, and 3) the socio-psychological challenges whereby the likelihood that the Thai people could successfully make their transition from a passive saving society to an active investing society is minimal.

If my logical argument above sounds convincing enough, then it is quite appropriate for Thailand to consider refocusing her economic objectives in response to the dynamism in domestic and international financial markets environment and the changing preferences in the Thai society. Two medium- to long-term policy goals that should be focused in order to materialize this optimism are: 1) human capital development to provide greater opportunities for Thai consumers and investors to become more sophisticated and better-informed, which as a result would help promote price stability and sustain economic growth; and 2) financial infrastructural development to allow intermediaries to perform efficient economic functions by completing and perfecting the markets, which in turn would enable Thailand to achieve the goal of systemic stability.

What I mean by development of human capital and distribution of opportunities is that, instead of overwhelmingly committing national resources to accumulating wealth and physical capital in the production sector and focusing on income distribution, Thailand can reallocate her domestic resources to enhancing human capital and refocus on opportunity distribution. I had seen such a tendency toward this goal in the Chuan administration during his first premiership, but unfortunately the momentum was not carried on in the later governments. Investment in human capital includes more and equitable accesses for Thai citizenry to: 1) advanced knowledge and technologies; 2) productive activities and economic decision-makings; 3) political activities and public choices; and 4) social activities and collective consumption alternatives and protections.

Increase in human-capital opportunities would yield many favorable results to the Thai economy. First, improved knowledge-based domestic conditions and continued transfer of new technologies would increase the number of highly-skilled Thai workforces. As a consequence, employment growth target could be reached since market demand for high-technology and service-oriented human resources is almost insatiable. Second, better access to economic decision-makings for Thai citizenry would improve labor-management relations thereby raising productivity, increasing the number of risk-taking entrepreneurs who could spin-off to set up their own small businesses, and resulting in more ethical corporate management practices. Third, ameliorated environment for voicing public-policy concerns with less friction and censorship would increase direct political participation by Thai voters and accountability of Thai politicians, which altogether make the policy outcomes more responsive to citizen demands. And fourth, more externally-motivated social networking activities would improve collective bargaining power of Thai consumers, which could lead to an improvement in consumer protections and choices both in terms of prices and quality of the products and services in the markets.

The implications of human-capital development are very important to Thailand in that there will be more sophisticated and knowledgeable consumers who can rationally map out risk-return payoffs from spatial and intertemporal consumption opportunities, and better-informed investors who can make prudent investment decisions based upon market prices and market signals as well as take proactive responses to promptly correct market distortions.

The policy goals of human-capital development and opportunity distribution would not be truly effective unless there is also a simultaneous improvement in the infrastructure of the Thai financial system. Financial infrastructure, as Merton and Bodie (1993) put it, consists of the legal and accounting procedures, the organization of trading and clearing facilities, and the regulatory structures that govern the relations among the users of the financial system. The objectives of financial infrastructural development are to help complete and perfect the markets. By completing the markets, I mean a better allocation of risk-bearing opportunities among the Thai market participants through the optimal holdings of the so-called Arrow-Debreu state contingent claims (Arrow, 1964 and Debreu, 1959), i.e., the securities that have their underlying and derivative quantity equal to the number of contingencies (states of nature) in the entire markets so that every risk dimension can be mapped onto its corresponding return. With domestic markets approaching completion, transaction costs and risks are substantially reduced, which after all would benefit both consumers and investors as well as the firms in various industries. In terms of perfecting the markets, I refer to a reduction in information gaps between the better-informed agents and the less-informed principals in the markets through signaling, screening, and disclosure to resolve the problems of adverse selection and moral hazard. Once the markets are nearly perfect, information and agency costs decrease, which in turn stimulate more economic transactions based upon rational expectations of the Thai investors.

Financial markets can be made more complete by two methods: 1) financial engineering to unbundle and reallocate economic and financial risks for different risk preferences of market participants; and 2) financial innovation to efficiently share and redistribute those risks within and across the markets. Without adequate and appropriate financial regulation and supervision, financial engineering activities would prove to create more harm than good in the sense that most synthetic financial contracts are opaque and illiquid, which in effect increase systemic risk. Financial innovation cannot be efficiently spiraled down to the markets unless there exist appropriate trading and clearing organizations (i.e., market microstructure) to support it. Both methods for market completion are therefore vital to and necessary for the health and stability of domestic financial system. They would readily support the trends in disintermediation and liberalization in the financial markets as well as those that currently occur in financial intermediaries.

Amidst the changing international financial scenes and their impacts on domestic economic activities, Thailand should consider reorienting her economic policy objectives. The past four decades have witnessed the commitment of national economic and social policy to economic development and growth in the production sector of Thailand's real economy with impressive performance. But such a track record has been achieved at the expense of the country's consumption and financial sectors in which income disparity and financial vulnerability still persist. The thrusts for structural change shook the country unprecedentedly during 1997, which exposed Thailand to a great economic difficulty, as a result of financial and currency crises. It is now an appropriate time for the policy-makers to ponder as to whether or not Thailand should adapt herself in order to reemerge as a more competitive country in the global marketplace.

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* Worapot Ongkrutaraksa is a lecturer in Finance and Strategic Management at Maejo University's Faculty of Agricultural Business, Chiang Mai, Thailand. He used to conduct his post-graduate research in financial economics at Kent State University and international political economy at Harvard University through the Fulbright sponsorship between 1995 and 1998.

E-mail: worapot@starmail.com