Day to day down the road to nowhere

15 July 1996

With a government that operates "day to day", you cannot hope to achieve sustainable economic growth.

The release of a few bad figures about the economy has been followed quickly by cries of recession and a barrage of criticism of government economic policies. This economic crisis has coincided with a growing political crisis. This is not a matter of chance. There is growing doubt that this government has what it takes to manage Thailand’s economy.

Over the last decade, Thailand has grown at breakneck speed. Only a handful of other countries have ever experienced such a headlong spurt. This frantic pace has brought massive social problems, new political pressures, and complex issues of economic management. Like anything put together in a tearing hurry, Thailand’s new export-oriented urban economy is a very fragile thing.

Thai technocrats know it needs special tending. In the early 1990s, they began talking a lot about "sustainability". The economic think-tank, TDRI, ran conferences on sustainable growth. The NESDB made sustainability one of the key themes of both the 7th (1992-6) and 8th (1997-2001) plans. It would take care and understanding, the technocrats said, to make this fragile machine more robust, and to keep it running smoothly.

In the past, the economy might have trundled along nicely on automatic pilot, with just an occasional tap on the manual controls. No longer. The government needs to have a real understanding of how the economy functions; and some vision of how it must be managed for future success. It also needs some commitment to confront the new social issues and political pressures thrown up by rapid change. Muddling ahead is less and less likely to work.

There is no sign that this government has the understanding or the vision. In one of the first Cabinet meetings of this government, Banharn revealed that he had no idea what inflation was. Neither he nor any other senior member of the government has shown any vision or leadership on economic issues. The Chart Thai party has no economic experts.

Usually much of economic policy-making is handled in the background by the NESDB, Finance Ministry, and Bank of Thailand. Banharn has disrupted this process. He has appointed Finance Ministers who lack the skills required, and who are absolutely dependent on the prime minister’s support. He has embroiled the Bank of Thailand in Chart Thai’s web of factionalism and corruption. The head of NESDB has quit, denying any political pressure just too loudly to be convincing.

Now the people with the vision and skills to occupy the critical posts simply won’t accept them. They cannot work under these conditions. They don’t want to be associated with Banharn.

The bad trade figures are signals that Thailand’s cheap-labour industries are losing competitiveness. Over the last few weeks, the government has come out with two major policy responses: forcing interest rates down, and legalising employment of foreign workers in 39 provinces.

These policies are designed to help businesses survive recession, by reducing the costs of capital and labour. There is nothing wrong with policies which help businesses to get by. But on their own, these measures are not enough. And in the long term, they could be very damaging.

The interest rate adjustment needs thinking through, as it will impact on macro policy. The Bank of Thailand keeps the value of the baht stable, then uses interest rates to regulate aggregate demand for controlling inflation. The Bank has been talking of easing up its control on the value of the baht, which would in turn allow more flexibility on interest policy. But at present there is no sign of coordination between the policies on the baht and on interest rates. The result could be very messy.

Lowering interest rates will have little impact on export competitiveness because interest costs are a small part of overall production costs. Lower interest rates could still be used as a policy tool for moving Thai firms along the road to greater international competitiveness. But this does not appear to be part of this government’s thinking. Banharn admitted he was lowering interest rates to help the real estate sector. If the government focuses its attention on helping real-estate speculators and stock-exchange margin traders, then this is not sound policy. These businesses have no long-term benefit for the economy. They are positively bad because they keep capital tied up in relatively unproductive sectors.

Similarly, the legalisation on foreign workers has large implications which need to be thought through. How is the society to handle these new members. What is being done to prevent social tensions and crime. What is the impact on Thailand’s own workforce.

And again, the policy does nothing to improve Thailand’s long-term international competitiveness. It just helps the cheap-labour sweatshops to keep going a bit longer. It needs to be complemented with serious policies to develop specific industries and to improve labour skills so Thailand can move up the technological ladder.

The government has no vision of Thailand’s economic future and no skill in economic management. It has disrupted the traditional process of policy-making. It is promoting policies which buy short-term survival at the expense of long-term growth.

This Banharn cabinet has been dubbed the "government day to day", because of its short-term focus on its own survival. Its economic management fits this myopic mould.

Thailand’s young urban economy is like a sensitive sports car. With the right driver and maintenance team, it can go very fast. But with a driver too short to reach the pedals, and mechanics who use hammer and monkey wrench, it’s likely to go nowhere.

Chang Noi asks: how much longer must we go day to day down the path to nowhere?