Tarrin plans to stimulate the economy

1 March 1999

To stimulate the economy, Tarrin Nimmanhaeminda does not intend to reduce VAT or income taxes. Instead he wants to borrow US$ 1.45 billion and spend it directly in the localities on schemes which will create jobs and increase income in the quickest time possible, and improve local infrastructure for the long term. It is a return to the "tambon fund" or ngoen phan of 1975.

A finance ministry study has come out against reducing VAT. It argues that the impact will be slow, the revenue lost will be impossible to replace, the reduction may not get passed along to consumers, and the cut will be difficult for the government to reverse out when things get better. The only tax change Tarrin wants is a cut in corporate tax. This will not have much impact as a short-term stimulus, because so many companies are showing losses and not paying taxes anyway. It will simply bring Thailand into line with other countries in the region. At present Thailand has higher corporate taxes than neighbouring countries. A cut will improve the incentives for foreign investors to choose Thailand.

But the major part of the plan is the ngoen phan tarrin. This is a laundry list of schemes to spend money directly in the localities. Subsidies will be paid to schools for lunches and student uniforms. The current scheme for helping very old people in the villages will be extended by increasing the number from 300,000 to 400,000 and the monthly payment from 200 to 300 baht. Grants will be given to local hospitals to improve waste-disposal systems. And as in Kukrit’s scheme from 1975, grants will be made directly to localities to install water supplies, dig ponds and other activities. Most of the money should be spent on labour and local resources so it goes directly into the local economy.

This scheme finally acknowledges that Thailand’s age of export-led growth is over. To get out of this crisis, the government must look to the domestic economy. Academics have been saying this for over a year. It has taken Tarrin and his cabinet colleagues a long time to come round to this view. But late is better than never.

Tarrin hopes the scheme will kill many birds with a single stone. It cannot be criticised for favouring the rich. It should reach down to the poor. It can replace the social safety-net schemes planned by the World Bank and ADB which have proved to be badly designed and clumsy to implement. The money pushed into the local economy should rapidly circulate back in consumer spending to create a multiplier effect. The scheme can be activated quickly; Tarrin hopes to have it up and running by April.

The money will come in loans from the World Bank, ADB and Japanese Exim Bank. Part of this falls under the Miyazawa Plan. Tarrin is off to Tokyo. The fact that he is travelling there with Stanley Fischer of the IMF is richly symbolic. At the beginning of the crisis, the US and the IMF insisted on throttling the Thai economy and keeping Japan out of any role in crisis management. Now that this plan has proved such a disaster on a world scale, the strategy and the politics have turned through a full 180 degrees. It looks as if the IMF is now helping Thailand to ask Japan for help with a Keynesian stimulus.

The problem with the plan is implementation. The government is not used to spending huge sums of money in the localities. Very easily, lots of this money could be siphoned off in the usual ways, and then the plan will be a massive failure – both economically and politically. Tarrin does not want to use the usual government spending channels, which are slow and have too many stages where leakage can occur. He does not want to use the oboto (tambon councils) because they too have gained a reputation for spectacular greed. Nor does he want to use the government savings bank whose inexperience is gumming up the social safety-net scheme. Instead he hopes to channel the funds directly to local units of line ministries (such as the public health and public welfare departments). He will set up a special taskforce of "good men" to oversee the scheme. And he is toying with employing a small army of unemployed graduates to act as barefoot monitors.

This organisation looks makeshift and hence dangerous. Moreover, there’s a problem of timing. If Tarrin can gear up the scheme by April, it will just begin when the rains are starting. It’s difficult if not impossible to dig ponds and build other infrastructure schemes during the rains. Besides, the farmers who have been fretting over the lack of work and money during the dry season, will now put their first priority on their own rice crop. Still it may provide employment for the landless returned from the cities. In reality, the scheme may not be as quick as hoped. The big impact may be delayed until next year.

Also like Kukrit’s scheme, this ngoen phan tarrin will be open to the criticism that it is short-term. It pushes some money into the rural economy for a short time. But it does little or nothing to improve productivity and increase rural incomes over a longer period. It will be like a summer shower that fills up the pond but then dries up in no time. But Tarrin has, by necessity, become so focused on the short term that any longer perspective has disappeared. In a drought, even a shower is welcome.

Will it work? The idea is to put money in the pockets of people who will spend most of it quickly, rather than storing it away, so the economy gets a quick boost. The idea is right, and the scheme has some vision. The problem is that the Thai government in the past has no experience with this sort of Keynesian strategy and this sort of stimulus-spending. The scheme cuts across ingrained bureaucratic attitudes about conserving money and not wasting it on the poor. It must negotiate a way through the minefields of bureaucratic corruption and contractor gangs. And if the Japanese economy slumps further or China devalues, then the impact will be wiped out.

This is a move into uncharted territory. It’s late. It’s risky. But it’s a lot better than blundering further down roads that lead nowhere.