Improving Thailand’s income distribution

1 June 1996

At a recent seminar on the vision of Thailand in the year 2020, some of Thailand’s leading technocrats and businessmen revealed a religious conversion. They now believe that Thailand’s most critical problem is not growth, not stability, not inflation. It’s income distribution.

Narongchai Akarasenee said "we don’t yet qualify to be a developed country because we have low income and high inequality". The head of the Federation of Thai Industries argued we need to raise wages to reduce the income gap. Potipong Lamsam, Sippanonda Ketudhat and M. R. Chatumongkol Sonakul emphasised the need to reduce poverty and inequality.

This was a momentous event, a major change in the mind-set, a breakthrough.

Readers may not think this sounds so revolutionary. But in the past, mentioning distribution to leading technocrats and businessmen meant inviting condescension and contempt. They were interested only in growth and stability. Like the World Bank, they kidded themselves that prosperity would trickle down to everyone. They believed distribution policies would only get in the way of growth.

Distribution is indeed very bad. Government surveys show that virtually all the gains of the last decade’s spectacular growth have gone to just 10 percent of the people. The gap between the income of the top and bottom 10 percents has widened from 17 to 38 times. Thailand now ranks 5th in the world for bad income distribution. Some in the World Bank are now alarmed that Thailand’s inequality is as bad as Brazil.

This evidence has been around for some time. But evidence can be ignored. Protests are more persuasive. This year, labour leaders have become noticeably more outspoken. The farmers’ demonstration was the biggest rural protest in the capital since 1975. The technocrats and business leaders are very sensitive to these signals.

But what can be done about Thailand’s terribly skewed income distribution?

When planners start talking about distribution policies, many people take fright. They think government wants to follow the western pattern of taxing the rich to give to the poor. They don’t like the idea. They don’t want to pay more tax. They don’t trust the government to give to the poor, either because of corruption or inefficiency.

But in a growth economy, there are other ways to approach distribution policies. About two decades ago, governments in Taiwan, Korea, Singapore faced much the same situation of rising inequality as Thailand faces now. It is worth looking at the way they analysed the problem and what they did to solve it.

The widening income gap has two parts: the gap between urban and rural; and the gap between rich and poor in the city.

The urban-rural gap comes down to productivity. Urban workers on average generate more wealth than farmers, and this is reflected in earnings. In Thailand now, this productivity gap is about four times.

To close this gap, governments in Korea and Taiwan resolved to raise rural productivity. They invested heavily in rural infrastructure, especially roads, irrigation, agricultural research, and social services. They gave farmers secure land titles so they would feel confident to invest in improvements. Then they channelled development funds to farming communities through local organizations - rather like Thailand’s tambon scheme but on a massive scale.

Because productivity increases take time, for the short term they raised farmers’ earnings by subsidising prices. For Thailand, new GATT rules make it more difficult to assist farmers through such subsidies. But there are other ways. In the past Thailand’s farmers have responded very fast to market incentives. Government should invest heavily in R&D, infrastructure, and marketing; and provide cheap rural credit linked with technical assistance.

The rich-poor gap in the city has several causes. The rich have assets like land and houses which rise rapidly in value. The rich have education and skills which earn them rising salaries. The rich are protected from the dangers and disasters of urban life by company welfare schemes, insurance policies, family supports. The poor have no assets, limited education, and poor defences against risk.

To close the urban rich-poor gap, other Asian governments invested in education and social services. In their cities, just as in Bangkok today, earning power is linked to education level. With the economy upgrading to higher technologies demanding ever more skilled and educated workers, the rewards for education rapidly increase. These governments concentrated on providing secondary education for all, increasing tertiary education as fast as possible, and offering on-the-job training and night classes for those already in work.

Providing secondary education did not mean simply building schools. These countries forced families to send children to secondary education, gave loans and subsidies to poor families who could not afford it, and raised teachers’ salaries so enough good people stuck to the profession.

All these countries expanded urban social services. But Singapore also changed the whole concept. As urban incomes rose, the Singapore government forced urban workers and employers to pay more and more of the increase into a central fund. Out of this fund, government provided everything from housing to medical care to pensions. The scheme drastically reduced the risks and insecurities of urban life.

What about Thailand? Are these schemes relevant?

There is a danger that the technocrats’ new concern about inequality will result in a few quick fixes and showcase schemes. That has happened before. The kind of policies just summarised require a bigger commitment, a long-term view, a real concern.

The delicious thing about most of these distribution policies is that they contribute to growth too. Higher agricultural productivity will increase growth. More education and skill training will raise the capacity to absorb high technology. Social service funds of the Singapore style increase the savings (which Thailand lacks) and provide government with a powerful tool for managing the macroeconomy (which Thailand needs).

Chang Noi says: convert this new concern into policies of education, agricultural development, and urban social services.