Cyclists, structuralists, and magicians

8 November 1996

A few days ago, Chang Noi turned on the TV and saw General Chavalit talking about the "multiplier effect". This was extraordinary in many ways. What does the General really know about this economics concept? What does he think his TV audience knows about it?

For the first time, debate over the economy has become part of an election campaign. Every day, one of the parties produces a new expert, a new solution, a new bit of economics jargon.

Of course, it is not difficult to see why. We are sliding rapidly into an economic crisis, and we want to know how to get out of it. But are the various politicians offering us the same solution or different solutions? If they are different, which is the best?

Before we start talking about solutions, we need to know what the problem is. Economists have been debating whether the current slump is cyclical or structural. The two sides take very different views of what we need to do to get out of the slump.

The cyclists point out that the slump is not confined to Thailand. World trade is on a downswing which has affected export-oriented economies. All the tigers are sick. Thailand is more poorly than most, because this international cycle has coincided and reacted with a local cycle. The current-account deficit, investment slowdown, and shake-outs in the property and finance markets are typical of the later phases of the business cycle.

Many cyclists believe our economic managers failed to fix this problem early on for two reasons. First, they were using an outdated set of tools. The nature of the Thai economy, and its relationship to the outside world, have changed radically over the last decade. But our economic managers have still been trying to manage the economy in the old way. They still cling to the idea of a stable baht. They rely too much on monetary policies to fine-tune the economy.

Second, the Banharn government simply mismanaged the economy, which has created a crisis of confidence.

This cyclist diagnosis dictates a particular course of treatment. First, we have to get international and local confidence back, by electing a better government and installing a credible economic team. Second, this team has to sort out the mess left behind by Banharn. Third, it needs to tinker with the way we manage the economy, perhaps by loosening slightly the controls on the currency, and by relying more on fiscal than monetary tools.

This course of medicine will hurry us through the low arc of the business cycle. Within next year, the pendulum should be swinging upwards again. The favourite catchphrase of the cyclists is: Thailand’s fundamentals are still good. The sickness is not really serious.

This analysis is especially appealing to those in the financial industry. They know how important "confidence" is. Over the past few years, they have done very well simply because many overseas investors believed that Thailand was a good place to put their money. They believe that restoring Thailand’s tradition of careful economic management should be enough to bring confidence back and revive investment.

The structuralists take a gloomier view. They agree that we need to get the macro-management back on course, and they have no dispute with the cyclists’ course of treatment. But they think it won’t be enough.

Over the past decade, Thailand’s growth depended on exports by cheap-labour industries. The structuralists argue that this phase has ended. Possibly the current slowdown in international trade is a permanent downshift. Certainly, Thailand faces tougher competition from countries with cheaper labour like China, Vietnam, Indonesia and parts of South Asia.

If we want to go on growing, we need to shift the structure of the economy. We need to move on rapidly from cheap-labour to higher-tech industries. We need to absorb more technology, carry out more research, upgrade labour skills, and create better integration between industries so we cut down imports of components and inputs.

Moreover, the structuralists fear this shift will happen too slowly, and possibly will not happen at all. International exporting is just like any kind of business. The winners are those which are faster, more innovative, more efficient. Thailand needs to concentrate its resources in the sectors with the high capacity for growth. The watchword for the structuralists is "competitiveness".

The problem for the structuralists is how to engineer this shift. Many earlier Asian tiger economies did it by strong government intervention. But Thailand does not have a tradition of such intervention, and does not have the institutions to handle it. "Soft" structuralists believe we can manage the shift through a little bit of government planning, and a lot of private-sector cooperation. They want government to set up industry associations, reinvigorate the Joint Public-Private Consultative Committee, and provide better industrial financing. "Hard" structuralists want much more government intervention in writing plans and providing packages of incentives and favours for the sectors with most potential. This may require a major overhaul of the government’s institutions for economic planning and management. The current set were created over 30 years ago, and are no longer up to today’s task.

The cyclists believe this agenda is not just too much, but also positively dangerous. If government tries to intervene in the economy, it may get things badly wrong. It may end up making things less efficient.

Where do the major parties - Democrat, New Aspiration, and Chat Pattana - stand on all of this?

The Democrats tend towards the cyclist camp. Both Tarrin and Supachai are leading members of the financial community, which mostly prefers the cyclist view. Both have said that they believe the "fundamentals are still good". Between them, they have clearly laid out the agenda for restoring "stability".

Both have also said that there will be a need to restructure the economy in the longer term. The problem with this way of thinking is that the longer term is always the longer term. You never really get round to doing anything about it. The temptation will be to restore macro stability, and then to sit tight. If the structuralists are right, and restructuring in today’s competitive world needs more positive intervention, then we will increasingly lose out to others.

Working out what the New Aspiration Party is promising us is more difficult. But overall the NAP tends towards the structuralist route. While Surasak Nananukul was the assigned head of the NAP Dream Team, he used much of the key vocabulary of the structuralist school. He talked about competitiveness. He wanted to improve government-business cooperation. He said the party would go in for sectoral planning and incentives. He promised to intervene in the financial markets to favour specific sectors. He talked about using tax adjustments to stimulate specific areas of the economy.

Then Amnuay Virawan popped up as the head of the dream team. Although Amnuay has a great reputation as an economics expert, Chang Noi cannot recall anything that Amnuay has said or done which would indicate how he would channel NAP policy-making. Narongchai Akrasenee has now been attached to the team. Although he is also a financial man, he was an economist and planner in his previous life, and his recent statements align him with the soft structuralists.

Overall then the NAP seems to believe that the Thai economy has structural problems which will require more government intervention. But here lies a danger. Historically whenever the Thai economy goes through a bad patch, businesses run to the government and look for favours which will help them to survive. In the past, these phases have resulted in the creation of monopolies and other kinds of institutionalised favours, which later get in the way of economic growth. The Banharn period already saw a growth of cronyism. Any NAP government is likely to have many of the same people and same sources of support as Banharn. Structural interventionism may all too easily collapse into cronyist interventionism.

Finally, the Chat Pattana party offers an altogether different alternative. At every opportunity, Chatichai points out that the economy grew at double-digit rates when he was premier before, and can do so again. Chatichai has not laid out the economic explanation of how he produced the boom growth last time, or how he expects to reproduce it. He has no economists on his team, so presumably he is relying on some mechanism other than economic policy-making. Magic perhaps. Chatichai is a powerful spirit which, when placed in the premiership, will conjure up cheap eggs, multiplying land prices, and all the other good news of economic boom.

It is good that our politicians and parties are now debating economics. Chang Noi has been riffling across the TV channels, hoping to find General Chavalit talking about Laffer curves. But the results to date are rather disappointing. New Aspiration offers a muddled and possibly dangerous view of the need for structural change. The Democrats promise a comforting but perhaps short-sighted version of the cyclical view of the slump. And Chatichai tells us he’s a magician. What is striking is the narrow range of the debate. There is no mention of the really big economic issues of the near future. How we are going to distribute income better. How we are going to protect the environment better. What we think is happening to the labour market with so many foreign workers. What should we do about agriculture. Maybe next time.