Policy dreams

7 May 1997

Last week, the Bangkok Post ran a discussion on devaluation, framed as an imaginary conversation between an academic economist and a businessman, and signed as "Ivory Tower". Last night, Chang Noi met Professor Tower (a Thai guy) in a dream.

CN: Well, Professor Tower. You say our exports have collapsed because they are over-priced. Costs have gone up, inflation has been too fast, and the baht has soared up with the strong dollar. So we must either devalue the baht, or grind the economy down until the costs are back in line. But devaluation is impossible because Chavalit and Amnuay are not ready to play golf full time. So we just have to grind away.

IT: That’s about it.

CN: I don’t think it’s so simple. We can’t look at the political options only in terms of Chavalit and Amnuay’s career planning. Grinding the economy down is going to hurt a lot of people.

IT: But it’s how we did it in the past.

CN: Yes, we did. But back then most of the people were farmers, and a lot of the rest were migrant workers. When we ground the economy down, the migrant workers went home and ate from the family ricebowl. The family was worse off. But they didn’t complain, at least not where we could hear them. Now things have changed. We have a big white-collar workforce. And we have a lot of urban workers who have been away from the village a long time. They are going to lose their jobs, get poorer. Maybe they are going to complain a lot more than before. If the bad times go on for some years, can we manage it? Chavalit and Amnuay may find their career prospects are not under their own control.

IT: So you think Amnuay should devalue and head off to the golf course now, rather than being forced to do the same thing later?

CN: Maybe. But I don’t think you have really looked at all the options. You set up your discussion between an academic and a businessman. It would have been much more exciting if it was between a financier and an exporter. Like this:

Exporter: In the end, the prosperity of Thailand comes from exports. When exports grow, everything else is fine. Let’s devalue the baht and bring interest rates down. Then exports will boom. Look at 1985-7. It worked then.

Financier: No, no, you can’t do that. I’d be ruined. We owe 80 billion baht to foreigners. If we devalue, the debt will be even higher. Many banks and finance companies are already shaky. Some will go under.

Exporter: So what. Look how the US dealt with its financial crisis a few years back. It let lots of financial companies go under. And now US exports are booming.

Financier: But property and finance companies will have to tell the foreigners they cannot pay back the loans. That will be bad for the country’s image. The foreigners might not lend to us in future.

Exporter: Good. These big foreign loans helped to create the bubble economy. Foreign financiers thought they were clever lending on Thai stocks and property. In fact they were just stupid and greedy. They need to learn. Otherwise they will come back and do it again next time. Foreigners who really are clever and who lent to good Thai companies will not get hurt. They should understand. And they should come back.

CN: The fight now is between the "real economy" and the "finance economy". The current government is too tied up with the "finance economy". Where did Amnuay come from? Where did all his advisers come from? But we are not going to get out of this mess by being nice to bankers. We have to concentrate on exports. And so far this government is not doing that.

IT: But really we are just doing what we have done in the past. And somehow we have always come out the other side. It’s called "muddling through".

CN: But in the past, we have always been helped by some outside force. Something comes along and makes us boom. Last time, it was the rise in the yen. Before that, it was the Vietnam war boom, the Korean war boom, and so on. Are we going to be so lucky this time? Probably our best chance is Detroit. If the dollar goes up too high, the US will be flooded with Hondas and Toyotas. The US car manufacturers will get mad. And they will force Clinton to talk to the Japanese. Then the dollar will fall, and the baht with it. But is that our export policy? Waiting for Detroit?

IT: I hope not. But I still don’t see that you have any solution better than mine.

CN: Okay. Let’s accept your starting point that our exports are too expensive. And let’s rule out devaluation. The government’s current solution is to grind down labour costs by a rather painful process. But labour isn’t the only cost. Can’t we cut some of the exporter’s other costs? The easiest way is to cut his tax bill. There are three ways we can do that very quickly. By abolishing all remaining tariffs on his inputs. By reducing his corporate tax bill to zero. And by sorting out the VAT refunds. We could use the corporate tax cut as an incentive: if you export so much or increase your export so much, then you get the tax break. That makes sure the exporter passes the cut through into his prices.

IT: But with all those tax cuts, we are going to run into a budget deficit.

CN: Maybe, but let me get back to you on that. In fact, I think we should also spend more on infrastructure which will have a rapid impact on exports. And we should aim to have a slight budget deficit. That will stop the economy slowing down too much, and making us all too gloomy. It might even ease interest rates a fraction.

IT: But then you are bound to get inflation, and a rise in the current account deficit. So we are back to square one. Probably worse. Soros will have the baht for breakfast.

CN: Maybe a little bit of inflation. But not too much. This is where the second part of the plan comes in. We must make sure boosting the economy doesn’t end up just boosting luxury consumption - more Benz, more LA trips...

IT: Belt-tightening again. That’s old hat.

CN: Yes, I know. Thai politicians and bureaucrats talk about belt- tightening between sips of Margaux. But I want to really pull in belts by a notch. Increase the excise taxes on all luxuries. Bring back the travel tax. Make big cars pay very big annual road taxes. Invent a big entertainment tax. Perhaps even ratchet VAT up to 10 percent. And put a tax on property so all the money doesn’t end up in concrete again.

IT: But Thais will still want a Benz and a foreign holiday. You won’t stop them. Besides, the smugglers will have a field day.

CN: Some will be deterred by the extra cost. And at the same time the government should encourage people to buy bonds with the money they are not spending. "Don’t wait for SET. Buy a bond. It’s safer." "Buy bonds, not Benz." As for smuggling, just put Seri Temiyavej on the case.

IT: So you think the luxury taxes and the bond issues will balance out the budget deficit.

CN: Yes. This way keeps inflation and the current-account deficit under control, while giving the exporters room to expand. It’s just using taxes to put the resources where they are needed - in the export sector, rather than in condos and car showrooms.

IT: I’m beginning to see your point. But there are two problems. First, the financiers will hate it.

CN: Some yes. But it’s better than the long grind down to an eventual devaluation. Once exports get moving, we can look at changing our exchange rate policy. And once we have that in place, we could reverse out these measures. Go back to a balanced budget. Drop some of the tough taxes.

IT: Second, this is Keynesian. We don’t do Keynesian policies here. It’s just not the Thai way.

CN: But nor is a 5 point export decline the Thai way. Nor the SET index at 600. Nor the social troubles we might face. Nor seven days of golf for Chavalit and Amnuay. The technocrats expect the entrepreneurs to be creative and innovative. But the technocrats themselves just go on doing the same old things. Isn’t it about time they worked a bit harder?