A dead cat bounces only once

25 June 2001

We approach the fourth anniversary of the day the baht floated and the Thai economy sank. A few days ago, the government released figures on the economy in the first quarter of 2001. Compared to the same quarter last year, the economy grew 1.8 percent. Compared to the last quarter of 2000 (with seasonal adjustment), it shrank –0.2 percent. The ‘recovery’ is over.

None of the sources of growth show any sign of life. Exports shrank. Foreign investors stayed away. Consumers are unemployed, poor, or nervous. The government spent less because the Democrats’ programmes have run out, and the Thaksin programmes have not yet started. Only two things prevented the figures being even worse: finance and agriculture. The financial industry didn’t really grow, but at least it stopped withering away. The worldwide panic over meat helped Thailand sell more fish and chickens. But the prospects are grim. Some like the commerce minister still have delusions about a coming US recovery provoking an export spurt. But truly we are into export-led stagnation.

It’s now clear that the ‘recovery’ of 1998–9 was a ‘dead cat bounce’. Even a dead cat bounces if you drop it from high enough. The Thai economy plunged so steeply in 1997–8, that there had to be some bounce in 1998–9. But unlike a tennis ball, which bounces and bounces and bounces, a dead cat bounces only once.

The Thaksin government is facing up to this and edging into a policy.

The Democrat Cabinet took a conventional market-based approach, heavily influenced by the IMF. It allowed interest rates, asset prices, and the currency value to fall. It believed that when these got low enough, exports would pick up, prospects would improve, and foreign investment would return. It encouraged creditors and debtors to sort out bad debts by negotiation or by bankruptcy procedures. It didn’t work. Prices adjusted, but capital did not respond. Lenders refused to talk. Bankers refused to lend. Capital leaked overseas.

The Thaksin government has a new plan. This begins from the assumption that external factors are not going to be much help, so salvation has to be found within the domestic economy. Saying this in public sends financial analysts into infantile insecurity tantrums about ‘xenophobia’ and ‘nationalism’. But it’s just realism.

Only government spending can bring the dead cat back to life. So the Thaksin cabinet is planning lots. First it has to adjust interest rates so this spending doesn’t just go streaming out of the country. That is done. But it is the next part of the policy which is interesting.

Stimulating consumer demand will only generate economic growth if investors respond. That means Thai investors. In every previous upturn, it has been Thai investors who punt first. Foreign investors pile in when things have some momentum. So how to motivate Thai investors when the immediate prospects are so gloomy?

Here Thaksin has personal insight. He knows that the last thing to excite an entrepreneur is the prospect of a free competitive market. It is monopolies that make millions. Consider his own business career. He got started by marrying a police officer’s daughter, then gaining the exclusive right to sell computer equipment to his father-in-law’s department. He made his fortune by securing four monopolistic concessions for telecommunications services. When CP gained political leverage (during the Chavalit cabinet) and began to undermine Thaksin’s monopolies, Thaksin took politics more seriously, and persuaded CP to become a friend rather than a rival.

Even in the political market, he has shown the same strategy. In the last election, he overturned the economics of politics. He invested so much that most of his political competitors were driven out of the market, and the remainder are now vulnerable to takeover. Monopoly again.

Thaksin understands instinctively that what motivates entrepreneurs is an unfair advantage—an opportunity to make unreasonable profit, to pole-axe the competition, to win. Here he has two devices to bring into play.

The first is the cabinet itself. Huddled in and around the cabinet are some of biggest Thai corporations which survived the crisis. With manufacturing now mostly internationalised, the profit prospects for the next couple of decades lie in the service sector. Here is the opportunity to carve these up. The cabinet gives access to information, power, and the ability to block competition. These advantages will not last for ever. They have to be harvested quickly.

The second device is the Asset Management Corporation (TAMC). It was not chance that TAMC was Thaksin’s very first project (after popping into Starbucks and eating sticky rice with the Assembly of the Poor). The decree is already passed. The drafting was overseen by Mechai Ruchuphan who led the opposition to the bankruptcy bills in 1998. We can be sure that the scheme will be debtor-friendly. The chairman of the policy board is Thanong Bidaya, Thaksin’s old business chum. The TAMC has wide powers of discretion to forgive bad debts, and place the burden either on the banks or the taxpayers (and their children and children’s children). This power can be used with favouritism. TAMC will be in a position to release some business groups from their debt, and place these groups in a position to outpace rivals who are still encumbered.

This is not a market-driven solution. It recognizes that entrepreneurs don’t like competition. They react to the prospect of unfair advantages and abnormal gains. It acknowledges that deep down entrepreneurs love monopolies.

Will it work? In the medium term, there is a risk that the strategy will be undermined by a classic fiscal and balance-of-payments crisis. Thailand has a great propensity to import. If the currency strengthens and oil prices remain high, there will be great pressure on the current account. At the same time, the budget will be strained by stimulus spending.

So it’s a gamble. Either a tigercub revived by sniffing the monopoly meat. Or a dead cat with two broken legs.