Voting for economic policy

 17 jan 2005

The end-of-year tiff between the prime minister and the central bank governor over economic policy was very revealing. The governor said that Thailand’s fundamentals for 2005 are so good that the economy will be fine whatever government is elected. Voters should choose a party which will increase the country’s competitiveness, rather than increasing household debt.

Thaksin replied, very angrily, that “the fundamentals” are not what makes the economy grow, but the economic policies pursued by the executive branch. The central bank governor is just the CFO of Thailand Inc., and his job is to keep the books. The CEO and the board take the decisions which ensure the corporation makes a profit.

The government also issued lots of figures to show that TRT’s policies like OTOP and increasing competitiveness (fashion, Thai restaurants, etc.) are doing just fine. By implication, the country should vote TRT back so they can go on doing more of the same thing. Indeed the party’s campaign program for the looming election is lots and lots more of the same –  new public investment megaprojects; new debt windows; and new “populist projects” ranging from goody bags for infants to employment schemes for the elderly.

In reality, the economic policy of the first Thaksin government had two major strands. First, for the short term, it stimulated consumption to drag the country out of the crisis, especially by transferring excess liquidity in the financial system into personal and household credit. Second, for the longer term, it aimed to develop more internal momentum in the Thai economy and reduce external dependence by raising average incomes, stimulating entrepreneurship, and nurturing international competitiveness in priority sectors.

The first part of the policy was a big success. It might have been risky, and the success might have been lucky, but that should not detract from the achievement. Few people in late 2000 predicted the growth figures achieved over 2002-4.

The second part has been more iffy. Such policies require a long time to be truly effective. But also the government does not seem to have had its heart in it, and has tended always to sacrifice the long-term ideal for short-term gain.

We are now at a critical stage. The first policy strand – the stimulus – is running into big trouble. Such policies only ever work short term. The success depended absolutely on excess liquidity and low interest rates (locally and in the world) which are now disappearing. The oil price, the internal decline of the US economy, and the tsunami will make things worse. For some time, the government has been delaying the bad news (because of the election).

The danger is that we now believe that the economy’s success (and future) rests on the second strand of policy, namely the government’s attempts to raise incomes and stimulate entrepreneurship under schemes like OTOP, and develop competitiveness in export areas like fashion and Thai restaurants.

This is dangerous because it is simply not true. We do not have 6 percent growth because Yasothon housewives are making more baskets, and exports of tom yam kung are soaring.

No, reality is that we have our current growth rate because manufactured exports are doing very well. Export growth accounted for all of total GDP growth in 2002, and two-thirds of it in 2003. For 2004, the figure will certainly again be high. Most of this growth has come from automobiles, computer parts and electrical goods made by multinational companies in Thailand.

Government policies have contributed a bit. But the single most important factor has been Thailand’s price competitiveness which is a result of the collapse of the baht in the crisis, and the subsequent management of the currency to keep the price depressed. The central bank has been responsible for this management and has often had to fight off attempts by Thaksin to make the value of the baht to rise.

Thailand now has a radically divided economy. On one side is the largely-multinational-owned export-production economy which is generating most of the growth. On the other is the internal, domestic economy in which the government is playing two roles. First, it acts as the protector-guardian of the remnants of Thai domestic capitalism by protecting and stimulating domestic investment in the service sector and the small-scale sector (i.e., OTOP). Second, it helps to redistribute income and services to the large proportion of the population which does not benefit directly or even indirectly from the export-led momentum. This large proportion of the population includes most of the farming population, and the huge informal sector in the urban areas.

That is the hard reality of Thaksinomics.

Now let’s get back to the tiff between the governor and Thaksin. The governor was saying two important things. First, the stimulus strand of Thaksinomics has run out of steam. Trying to prolong it by creating yet more debt-driven consumption could, in the situation of tightening liquidity, rising interest rates, and other economic strains, create some kind of mini-crisis, or at least a difficult period of adjustment. Second, to keep the real export motor of the economy humming along, Thailand must be a competitive site for the location of the multinationals which are creating export growth. What those companies want is good pricing, good manpower, and good infrastructure. Keeping the fundamentals right is important because that underlies the good pricing (i.e. the value of the baht), and Thailand’s ability to finance investments in infrastructure. Education is also important, and has been perhaps the single biggest failure of the first Thaksin government.

Anyone casting a vote next month on grounds of economic policy has a difficult choice. Choose TRT in the belief that their economic managers are cleverer than their electoral platform suggests. Or choose other parties, whose platforms reflect much the same thinking as the governor, in the hope they can actually deliver. Both choices seem very risky. So it’s probably a good idea to go down to the wat and light a lot of candles too.