Who gained, who lost in the crisis?

28 May 2001

In the mid-1990s, some of Thailand's big business families figured on Fortune's list of the world's richest. Karchanapas. Sophonpanich. Chiaravanont. Not any more. The crisis cut a swathe through the rich. Some big family conglomerates were atomised. Others watched their asset value slide. The impact was felt in the middle class too. Jobs lost. Careers stalled. Incomes cut. But did the crisis hit the rich more than the poor? Has the crisis made Thailand any more equal? The statistical evidence says, no. Over the last four years, the gap between rich and poor grew wider. The Gini coefficient which measures inequality rose from .51 in 1996 to .53 in 2000. The rich suffered less.

The rich-poor gap in Thailand is very wide, even by the standards of developing countries. When international bodies rank countries on this measure, Thailand comes in the top rank alongside Latin American countries that used to be slave societies. Most Asian nations are much more equal.

Ever since such statistics were first collected in the 1960s, the gap has tended to become wider and wider. Economists argued that this was just one of the facts of economic life. As an economy develops, only a few people benefit at first. Later others will catch up. In the early 1990s, some economists were optimistic that Thailand had reached the turning point. The Gini measure of inequality, which had been steadily rising for thirty years, dropped back a bit. But in the last three years, all that gain has been wiped out. Now it seems that the years 1992-96 were exceptional. In the mad conditions of the bubble economy, wealth at last began to trickle down. Urban employment increased. Wages rose. Inequality lessened. But of course, it could not and did not last.

Why should Thailand have this persistent trend of worsening inequality? Some economists blame development policies. The government encourages investment in industry which supports only a small portion of the workforce rather than agriculture which still supports the majority. And the government tends to spend more on hospitals, schools, and roads in provinces which are already richer, probably because these areas have more political pull.

Tax and education also play a role. The Thai government relies on indirect taxes (trade dues, VAT) which weigh heavier on the poor. For a long time, Thailand underinvested in education so many people lacked earning capacity. But it's difficult to believe these factors explain such a trend sustained over 40 years. The tax regime hasn't changed in character. Education has actually spread more widely in recent years.

Recent studies of similar trends in some Latin American countries have suggested a different explanation. First, they note that overall inequality gets worse not because the poor get poorer but because the rich gets richer. The top 10 percent grab an ever larger share of the national income. Second, the widening of the rich-poor gap is not a gradual deterioration, but a series of steps. These step-shifts tend to happen at times of political change. The implication is that the trend in the rich-poor gap is not caused by some economic mechanism, but by politics. At times of political crisis and change, somehow the top 10 percent is able to grab a bigger share.

In Thailand, the top 10 percent take 40 percent of the total income. If we could unpack who are in this "top 10 percent", we'd find mostly the Bangkok rich and middle class. Over the crisis, many businesses have crashed, and many families been ruined. But others have survived and prospered. Perhaps they had a strong cash flow from a nice little monopoly (liquor, mobile phones). They avoided foreign borrowing, or had the inside information to convert their loans in time. They benefitted from the attrition of their competitors. They alone had the cash to buy up collapsed companies and distressed assets on the cheap.

The Latin American studies show one other thing. After an economic liberalisation crisis (like the one Thailand has just gone through), the rich-poor gap tends to get worse. Why this should be so can only be guessed. After such crises, economies become generally weaker and less stable. The poor find this hardest to deal with. The rich get more focused on defending their incomes, their way of life, their share.

The current government came to power on a platform to help the poor. This pitch made good political sense given the increasing sophistication of the electorate. It also made good economic sense - building domestic demand is important because the international economic outlook is not favourable. But this is a government of the rich, by the rich. And when it finds its back up against the economic wall, it will most likely be a government for the rich too. It will reach for the old solutions. Find ways to sell off Thailand's natural and human resources cheap to keep the money flowing in. Pump up tourism. Trawl for foreign investment. Promote labour export, legal or illegal.

The definition of domestic demand will subtly shift. Last year Chang Noi heard a financial analyst talk on the future of the economy. When analysing domestic spending, he talked about levels of stock trading, statistics of car sales, and trends in luxury imports. He was totally focused on the spending of the Bangkok rich and middle class. The top 10 percent. The rest, the other 90 percent, were not important enough to be factored into the account. This financial analyst is now an important economic advisor to the government.

If the top 10 percent manage to grab a slightly larger share of the national cake during an economic crisis or political change, this is not achieved through naked aggression. Rather it results from the mentalities of those who hold power and make policy, and how these mentalities shape instinctive reactions to tough problems in bad times.