More poverty, more reasons to rethink economic policy

27 November 2000

Between 1996 and 1999 the number of poor increased by 3 million, taking the total up to almost 10 million, one sixth of the population. The number classified as “ultra-poor” increased by 2 million. Almost 1-in-10 of all Thais are classified as ultra-poor by an international standard.

Inequality got worse too. After 1992, inequality had started to lessen, for the first time in 30 years. But over just one year of the crisis, all those gains were wiped out. Inequality is back to 1992 levels.

The rise in poverty is only partly due to the shock of the crisis. Low agricultural prices have played a big part too. Almost all of the new poor are in rural areas. In the Northeast, numbers have increased from 19 to 31 percent of the population. Landless and small farmers have been worst hit. But even those with 20 rai of land have a 1-in-5 chance of being poor.

Early this year the World Bank released a draft version of the World Development Report (WDR) on “Attacking Poverty”. This argued that financial crises worsen poverty and inequality, and that such changes are “sticky” – difficult to reverse. The economy may recover to its old size, but the numbers of poor do not fall back to old levels.

For several reasons. In crises, the poor tend to lose their savings, land and other assets. In the wake of financial liberalisation crises, such as Thailand has just gone through, growth tends to be slower and more volatile. When growth is steady, people can gradually clamber out of poverty. They find it more difficult when the economy yo-yos up and down.

Most of these arguments have been deleted from the final WDR. But they are worth notice. We should not expect these extra three million poor to disappear quickly. Employment has increased, but mostly in agriculture, and agricultural prices are still dropping. Employment in manufacturing has recovered somewhat too, but average wages are still dropping too.

In the past Thai policy-makers concentrated on growth, looked to outside investment for the stimulus, and let growth take care of poverty. Superficially it worked. Rising inequality was rationalised as an acceptable and hopefully short-term cost. Policies to address poverty and distribution were resisted in case they interfered with growth.

But it was not sustainable. Fast growth had huge hidden costs, including massive environmental damage, community breakdown, and social tension. One lesson of the crisis is that the economy was growing too fast for the society to keep up. Many benefits simply flowed out of the country because of heavy reliance on outside capital and expertise. People could not be educated fast enough to contribute and benefit. Institutions could not be built fast enough to protect the environment and cope with social change.

In the near future, the economy will not grow as fast as before. There is too much over-capacity, the government is broke, international confidence will not return, and the debt overhang will not disappear in a puff of smoke. Honest analysts are projecting 2-5 percent a year for the near future. The trick is to see this as a good thing, a chance to let the society catch up, a breathing space for building institutions and repairing damage.

We still need growth. But we need the sort of growth which creates a better society and a better environment. We cannot rely on the stimulus of foreign investment, because other countries are more attractive. Again, the trick is to see this as a good thing. The lack of external stimulus means we will have to pay more attention to developing internal markets. This means that policies to reduce poverty and improve income distribution must be put back on the agenda because they shape domestic demand.

In the past, policy-makers tended to think of growth and distribution as a trade-off. If you went for one, you had to sacrifice the other. But newer analyses show that societies which are more equal tend to have faster growth. Probably this is because they have more consensus, less conflict. So investments in equity can also be investments in growth.

So now is a good time to reorient the way Thai policy-makers look at growth, poverty, and distribution. Resist the temptation to pump up a new bubble. Abandon the bias against policies for equity. Focus on some clear priorities.

First, fiscal reform. For decades, taxes and budget spending have favoured the rich not the poor. Taxes will have toincrease to repay the government’s debt. More public money will probably be spent to bail out the banks. In the short term the rich will profit. In the long term they should be made to pay, through taxes on inheritance, luxuries and large landholdings. This was the bargain which Thirayuth Boonmee demanded in May 1998 in return for the financial bailout legislation. Tarrin agreed in principle, then forgot about it.

Second, agricultural development which favours the farmer, not the agribusiness. One critical issue is land. Over the bubble and the crisis a lot of land changed hands. Many small farmers probably lost. Much probably now belongs to the banks. But we don’t know. There are no good data on land distribution. The last reasonable study was almost 20 years ago. An attempt to update that study is failing because of bureaucratic obstruction. The need for land reform is probably being disguised.

Third, education. Plans for education reform have been laid. But implementation is difficult. In the past, governing parties have treated the education portfolio as coalition fodder, and some education ministers have managed it like a goldmine. Whoever wins this coming election should find an A-class minister for education.

Fourth, environment. A decade ago, Thailand got half way towards establishing institutions to protect the environment. But only half way, and the deterioration is still frightening. The poor suffer most because they depend most on natural resources.

Much has been said about turning crisis into opportunity. Here comes the real challenge for the next government. Will it be prepared to invest in social equity in order to prepare Thailand for the future?