Now let’s fix the economy

25 September 1996

So the economy is in a mess. We all know that. But what to do about it? Or more exactly, how to do something about it. Coming up with textbook solutions for Thailand’s current economic problems is not too difficult. But economic policy-making is the art of the possible. Coming up with solutions which have a chance of being adopted and implemented effectively - that is a bit more difficult, and a lot more useful. So how are we going to find such solutions?

To start with, what sort of a mess is the economy in? Two main problems. First, Thailand has hit the transition from cheap-labour to more sophisticated industry more quickly and more suddenly than expected. Everyone could predict that rising wages and other costs would make Thailand’s textile, shoe and toy industries uncompetitive against neighbours like Vietnam and China. But few expected it to happen so suddenly. Exports of electronic, electrical and other medium hi-tech goods are increasing at leapfrog rates. Yet not fast enough to take up the slack from the slump in the cheap-labour industries. The Asian economies ahead of us (Japan, Korea, Taiwan) went through similar transitions, but at a gentler pace. Now the world moves faster. Thailand doesn’t yet know how to keep up with its own pace.

The second problem is the mess being made of economic management. For many decades, Thailand has been famous for keeping the economy stable by firm, cautious and conservative macro-management. Why has this become so badly unstuck?

Partly because the old techniques for keeping the economy stable no longer work so well as they once did. The international economy has changed, particularly with the rising power of financial institutions. The Thai economy has changed, with growing industrialisation, a more sophisticated financial sector, and more exposure to the outside world. The macro-managers are reluctant to change their techniques because they used to be very effective. But the time has come.

On top of this, the macro-managers have been hobbled by the politicians. Over the last year, the head of the central bank and the finance minister - the two key figures in macro-management - have not had the independence to do the simple things well, let alone respond to the need for inventing new techniques to cope with new situations.

These two problems suggest that the Thai economy needs a firmer grip. We need more coordination and direction to make the necessary transitions in the industrial base. We need to take a new look at how we manage the relationship between the Thai economy and the outside world.

Earlier Asian industrialisers have been through these same growing pains. How did they overcome them? Basically through strong government direction emanating from powerful central institutions, like Japan’s powerful Ministry of Trade and Industry (MITI), and Korea’s Economic Planning Board (EPB). Recognizing the key importance of exports in modern industrialisation, MITI oversaw both trade and industry. Recognizing the need to force the pace of industrial change, Korea’s EPB had wide powers to plan and implement economic policies.

But the MITI/EPB model is unlikely to work in Thailand. The idea has been mooted several times, but never come to anything. Compared to Japan or Korea at a similar development stage, our bureaucrats are weaker and our businessmen are stronger. Japanese and Korean business groups recognised that their governments provided real leadership in economic development. Few Thai businessmen feel the same way. Nobody seriously believes that collapsing together the Industry Ministry, Commerce Ministry and the planning board (NESDB) would create a powerful institution providing effective leadership in the economy.

But what then might work in Thailand? We can get some idea by looking at what has worked in the past. Chang Noi has three simple suggestions.

Suggestion 1. Through the mid-1980s, the Prem government created a formal mechanism through which business could influence policy-making. This JPPCC mechanism generated many of the reforms which paved the way for the take-off in 1986-7. The Chat Thai government of 1988-91 destroyed this mechanism because it got in the way of the cronyism which is the party’s hallmark.

The JPPCC system had three important features. First, all the economic ministers sat on the committee, and the prime minister took the chair. So the mechanism had real authority, and in many ways functioned as an "economic cabinet". Second, business was represented on the JPPCC through the formal business associations— the Thai Chamber of Commerce, the Federation of Thai Industries, and the Thai Bankers Association. These representatives were expected to support reforms which had benefit for their sector as a whole, and hence also for the Thai economy as a whole. This is critically different from Banharn-style cronyism, when the prime minister helped out contractors, importers, property dealers and steel magnates with little concern for the overall impact on the economy. Third, the head of the NESDB acted as the secretary of the JPPCC, and the NESDB as a whole became its informal secretariat. This ensured that JPPCC decisions were worked through into operational plans.

The JPPCC was moderately effective in lobbying for some big changes in economic policy in the mid-1980s. It was even more effective in changing many of the petty details of bureaucratic practice which added to the costs and frustration of businessmen. Many exporters are again complaining of similar frustrations. Partly this may have arisen because changes in the economy have thrown up new problems. Partly it may mean that officials have been rebuilding their toll-gates. A new JPPCC could be effective at this level. It could also help make the government policy-makers more responsive to the rapid changes under way in the economy and the international environment. And that could help us through transitions like the present one.

Suggestion 2. The macro-economy was managed well as long as the managers were left alone. Until recently, the finance minister and central bank governor were usually strong technocrats. The politicians generally left them alone, and even when they didn’t, these technocrats were powerful enough to resist. That has now changed. Fiscal and monetary adjustments now have a big impact on the way top politicians make money for themselves and their cronies.

By late 1994, economists were pointing to the signs of stress in the economy (inflation, rising current account deficit), and urging the government to engineer a "soft landing". But the Banharn government came in (July 1995) with the idea that growth could be boosted back to the "bubble" levels of the late 1980s, which generated easy profits from stocks and real estate. It hung onto this vision until a few months ago.

Some mid-level technocrats in the Bank of Thailand advocated new policies (a wider margin on the baht) and a more careful approach, but they were pushed into the background. Many in the central bank could see that the figures were beginning to look worse and worse, but in public the bank continued to trumpet optimistic forecasts. It is now clear that the central bank was trying to ‘talk up’ the economy rather like hustlers trying to talk up a market in beans.

Regaining independence for the macro-managers will not be easy. The key posts are now so sullied by recent experience that the right people may not want to take them. Now that the Banharn experience has shown how disastrous it is to put weak placemen in the finance ministry, we may see the return of a strong technocrat in this role. But for how long? Memories are short in Thai politics.

One place where reform can make a difference is the Governorship of the Bank of Thailand. The related sackings of Ekamol and Vijit showed that key technocrat posts cannot be independent as long as they are at the mercy of the prime minister. We need to look seriously at other ways of hiring and firing the head of the central bank. A good model is the German Bundesbank system, where the governor is answerable to an independent board.

Suggestion 3. The Thai economy has functioned well in periods when one institution or one individual has provided an overall vision and sense of direction. The eras of Dr Puey at the central bank and Dr Snoh at NESDB are good examples. They had an idea of how all the pieces of the Thai economy fit together, and some vision of where it was all heading. They helped to craft economic policies themselves. They also communicated a vision which helped other policy-makers and business leaders to fall into step.

Right now we cannot find any similar sense of economic leadership from any of the official institutions. Over the last decade, so many of the talented mid-level technocrats have been lured away to the private sector. Over the last year, many of the top-level have gone into forced or voluntary retirement. We need to look in the private sector.

If anyone can play the role now it is Dr Olarn Chaiprawat, head of the Siam Commercial Bank. He has a distinguished background as an academic, a technocrat, and now a banker. He has built up a reputation for insight into the future of the Thai economy. He has used the research section of SCB to come up with outline plans which many think more promising than those coming out of the official planning board.

But he is in the wrong place. Of course SCB is more than just another bank, but it is not about to become the centre of national economic planning. Of course, Olarn has a lot of influence with political figures, but he is identified with the Palang Dharma party. It is good that he is providing some vision for the economy. It would be better if he were in a position to get something done too.

Chang Noi suggests: revive the JPPCC; secure the independence of the central bank; mobilise Olarn. It’s a simple agenda. But it’s practical. It’s got history on it’s side. And it’s a lot more promising than fantasies about Dream Teams.