Who gets hurt when the Thai economy slows down?

13 January 1997

Who gets hurt when the Thai economy slows down? The poor.

Can anything be done about that? Yes, if the government wants to.

Does this government want to? Not sure it’s on their list of priorities.

Thailand is a very unequal society with a large number of poor people. It’s easy to forget this fact while we concentrate on bailing out the bankers, stock traders and real-estate punters who hold the economy to ransom. But even by the latest, most optimistic estimates, Thailand still has 6 million people below the poverty line.

The fruits of Thailand’s 10-year boom were very unequally shared out. The national income doubled between the early-80s and the early-90s. But half of all the extra wealth went to just ten percent of the people. Their incomes tripled in a decade. At the bottom of the heap, the gains were meagre. The poorest ten percent got better-off at just one percent a year. There was no boom at the bottom.

Until the mid-1990s. From 1992 on, trickledown began to work. The most recent (1994) data show that the poor began to get a bit larger share of the national cake.

Partly this was because incomes at the top-end stopped growing so fast. The property boom flattened out. Salary inflation eased. Business profit growth slowed down.

But also, incomes at the bottom end got a lift. Agricultural prices improved. More and more people participated in higher-income employment. From 1992 to 1994, incomes of the bottom fifth of the population grew at over 10 percent a year.

In these two years, the number below the poverty line dropped sharply - from roughly 8 to 6 million by the official figure. The most dramatic change came in the poorest region, the rural northeast.

But an economic slowdown can easily reverse this favourable trend. In the last slowdown of the early 1980s, some 4 million people dropped back down below the poverty line. All of these unlucky people were in the villages. Most were in the rural northeast.

How can the impact be so severe?

First, because the poor are least well-equipped to defend themselves. This is true in most societies, but especially here where the poor - both peasants and urban workers - have been consistently denied the right to organise politically.

Second, because the belt-tightening policies used to combat a slowdown are very blunt. The effects tend to cascade down on the poor.

In this slowdown, the impact will be mixed. Strong international demand should boost agricultural prices. As long as the weather is kind, farm incomes should provide some relief. But not a lot. Agriculture has long since ceased to be the main income support of most of the people in the villages. Some three-fifths of their incomes comes from other sources, especially migrant labour in the cities. This portion will be severely at risk in the downturn.

The major impact of this slowdown on the poor will come through employment. Over the last ten years, some 4 million people have been transferred from the villages to urban jobs. Many of these work in the cheap-labour industries which are suffering from the export slump. At the height, almost a million people were employed in garment manufacture.

The reduction in employment will not be so visible. The well-publicised layoffs in the Eden Group are the exception. Most garment workers are employed on putting-out and subcontract schemes. Some work from their rural homes. Others are migrants who come and go with the ebb and flow of demand. With the slowdown, they will fade back into the rural workforce. But the loss of income will hurt.

Other new recruits to the city work in the informal sector of small-scale industries, commerce and services - vending on the sideroad, selling noodles, making sweets. These businesses will be especially vulnerable to the downturn.

What can be done? The government is moving quickly to stabilise the country’s shaky finances. It would be a pity if policy-making stopped there.

First, we need to minimise the impact of the finance-driven policy of belt-tightening. The financiers have successfully demanded the government cut the budget to ward off inflation. But this cut will tend to slow the economy further, with the hardest impact felt at the lower end of the social scale. We must make sure the budget cuts fall on unproductive items like arms buying and satellites. We must maintain the spending which will directly stimulate the economy - as most infrastructure projects do. And we should choose the projects which will have the most rapid impact - roads rather than airports.

Second, we should select the budget projects which are more likely to create employment. Again infrastructure is better than arms-spending, because building things generates jobs. But further, we should consider the indirect effects on employment. Building feeder roads which stimulate the local economy may be more fruitful than prestige highway projects on the Suphanburi model.

Third, we should focus industrial promotion efforts on the small and medium scale sectors. Large-scale industry is already set to grow strongly with many automotive and electronic projects. But these factories will need fewer workers than the labour-intensive industries they replace. On average, small and medium scale industries generate more employment in relation to investment. They are more likely to mop up those no longer required in textiles and other sunset industries. We should provide special assistance to smaller industries in the rural areas.

Fourth, we should prevent the informal sector being trampled by modernisation. We should preserve the public spaces where vending and petty industries are carried on, even if the results look terribly ‘un-modern’. We should not subsidise the expansion of the shopping malls which compete the informal sector out of markets. More gai yang (northeastern fried chicken), less fast food.

The Thai economy and society have become much more complex. Before, Thailand’s blunt belt-tightening policies worked because the rural sector took much of the strain. Those pushed out of employment simply melted back into the rural economy. That no longer works. The rural sector is now a much smaller fraction of the whole economy and cannot take the strain. Too many people now rely wholly or partly on urban-generated incomes.

Thai policy-making needs to become more complex and more subtle. Making more use of fiscal policy should not mean simply cutting government spending. Our policy-makers should be aware that belt-tightening hurts most those who already have the slimmest waists. Fiscal policies can and should be tuned to meet social goals.

But what are the social goals of this government?

Banharn’s cabinet was nicknamed the rattaban pu rap mao, the contractors’ government, because so many of the ministers (including Banharn) had a background as contractors, and because so many of their policies seemed aimed at supporting their colleagues. On the same model, the current cabinet could go down as the rattaban nak karn ngoen, the financiers’ government. But at this stage we can still hope for something better.