With regard to our exchange rate policy, the Bank of Thailand has used the managed floating approach for some time now. Our principle is to let the exchange rate reflect the fundamentals of the economy relative to our trading partners and competitors. In the short run, international price competitiveness depends on 2 things: 1. the appreciation of the Thai baht vis-à-vis a basket of currencies of our trading partners and competitors; and 2. the increase in production cost of a Thai company relative to that of our trading partners and competitors. For example, given the same appreciation path of two competing currencies vis-à-vis the US dollar, if production cost of a Thai company rises beyond that of its foreign competitors, then it loses price competitiveness. Generally, production cost rises with inflation. And so, keeping inflation low helps to lower relative cost increase for Thai exporters and boosts their price competitiveness. The exchange rate that the Bank of Thailand manages is that which represents price competitiveness; it is called the real effective exchange rate. Let me give you a specific example: It is well known that even though the baht has gained against the US dollar, it has been appreciating in line with regional currencies. From the beginning of 2007 to early March 2008, the real effective exchange rate of China has  BIS Review 33/2008  3  appreciated by roughly 8 per cent while India has gained by 5.4 per cent.
In Thailand, there is an acute problem of skill mismatch; that is, skills produced through formal schooling are found to be different from those which firms find useful. Ladies and Gentlemen, Japan’s direct investment here has contributed to skill improvement for Thai businesses and workforce, mostly through learning by doing, training and other knowledge transfers. But beyond that, to reduce mismatch in demand and production of skills, Japanese firms can play a direct and beneficial role. The solution is to break down the barrier between work and school early on. Firms can get involved in training vocational students while potential workers can get a glimpse of what’s really needed out there in the real world. If done well, I think it gives incentive for firms to invest in training these students because it gives them the opportunity to identify and select the best workers before they enter the workforce. To the students, there are potential gains as an incentive as well. With the opportunity to be trained by the best and getting to know its corporate culture first-hand, student trainees are more likely to compete for limited hires by improving their performance. This sort of apprenticeship program has long been practiced in Germany, and has been shown to reduce skill mismatch in the workplace as well as improve firms’ profitability. Practiced here, it could also reinforce mutual understanding between Thai workers and the ways Japanese firms do business. That said, human capital development takes vast and continuous effort over a long period of time.