TWO Views

Assessing Thaksinomics

The mission: raise incomes, reduce wasteful expenses and create new opportunities. Mission accomplished

DR KITTI LIMSKUL

Kitti: 'The poor are more prudent in their finances than critics presume'

The Thai economy has recovered gradually from the economic crisis in 1997, thanks to the economic management policy initiated by the government under Prime Minister Thaksin Shinawatra three years ago.

The "dual track" policy recognises the fact that stimulating domestic demand is key to raising income and employment. Policy targets the largest part of the population, that at the grassroots level. In macroeconomic jargon, the income multiplier of households at the grassroots level is empirically larger than those of middle- and high-income households. This reflects the belief that Thailand, even after passing through various phases of economic development, has gone nowhere as far as addressing income inequality.

Three principles underline Thaksinomics and how it is applied to the grass roots: raise incomes; reduce wasteful expenses and thus raise savings; and open up opportunities in the goods, labour and capital markets.

To raise income, the government introduced "village funds" for rural villagers and the urban poor to access the capital market, and a debt suspension for farmers. The One Tambon, One Product programme was launched as a self-help development initiative aimed at strengthening the creativity, participation and natural leadership of people at the grassroots level. The 30-baht health-care programme, for the first time, offers universal health care for the country.

Of course, not all programmes have been completely successful. Efforts to reduce unnecessary or wasteful spending have not shown clear effects, even though farmers joining the debt suspension programme saw significant increases in savings once their consumption patterns moved away from alcohol abuse and gambling.

Critics of Thaksinomics have suggested that income gains from various programmes have led the poor to increase unnecessary spending, say on goods such as pickup trucks, motorcycles and mobile phones. But information collected by the Bank for Agriculture and Agricultural Co-operatives shows otherwise. It seems that the poor are more prudent in their finances than these critics presume.

The other dimension of the dual-track policy aims to achieve external economic balance. This means restructuring the capital account to emphasise long-term capital inflows. It also means ensuring that debt-to-GDP ratios and debt repayments as a share of the government budget remain within acceptable limits, with the public debt properly managed for the years ahead.

Implementation of the dual-track policy is based on the logic of strengthening traded goods and the current account. Programmes include strengthening industrial competitiveness by rationalising import duties and broadening the market space for Thai traded goods and investment through greater co-operation with neighbouring countries. The Economic Co-operation Strategy, where development assistance is offered to Laos, Burma and Cambodia, offers Thailand access to a larger, stronger regional market.

Talks toward bilateral free-trade arrangements have been initiated with a number of countries, including Australia, Japan, the US and China. Critics have questioned whether FTAs are consistent with multilateral arrangements under the World Trade Organisation and whether proper cushions will be present to balance against the potential economic and social impact of such arrangements. But the logic of FTAs is clear, given the need to enlarge foreign markets to sustain growth in the trade and current account.

Thaksinomics, as applied to the capital market, aims to address the problems of market imperfections and asymmetric information that raises risks for borrowers and lenders alike. The debt-ridden rural farmer, the poor urban street vendor or the fledgling entrepreneur all suffer from lack of access to capital at market rates of interest. Most instead must rely on the unorganised money market, paying extraordinarily high interest.

Under Thaksinomics, market risk can be accommodated with proper intervention through legalising assets, rights and subordinate collateral to create a ticket for entry to the capital market. Policy platforms such as housing finance for the poor, small business venture capital funds and the SME Development Bank all reflect this goal.

Indeed, similar concepts were introduced by the last government, with various funds created to rehabilitate farm debt, provide capital for small businesses and offer educational financial aid to the poor. But these policies were too piecemeal, premature and ineffective. They were consistent with the old paradigm of capital accumulation and economic development, set by politicians-cum-bureaucrats and technocrats at the core.

But in the new paradigm of capital accumulation, it is the rural grassroots and urban middle class that dictate social change. In the new capital accumulation regime, politicians are more sensitive to the needs of their clients, serving the role of patrons.

The opposition party has proposed an interesting social agenda to counter the Thaksinomics paradigm. It is an open question, however, whether this alternative model can truly initiate capital accumulation and economic development in today's world of uncertainty and risk, unless the social coalition of politicians and bureaucrats from the old paradigm is uprooted. In any case, the challenge of capital accumulation in economic development is one that will need to be addressed by whatever government is formed following the upcoming elections.

Thai economic development over the next several years will hinge on both internal and external factors. Uncertainties surround market demand for primary commodities, particularly agricultural products and petroleum. Agricultural commodities act according to world demand and supply, while oil prices are volatile based on speculation in futures markets. These are factors that Thailand cannot influence.

The twin deficits of the US economy could affect the global business cycle. On the other side of the world, China faces the need for adjustments given rapid capital accumulation and its incongruities with the current social and political superstructure. Medium-term fears are that overcapitalisation in China and deficits in the US could create a shock wave for the world economy due to massive capital flows.

Internal factors are no less important. To meet global uncertainties, we need transformation in the country's social, political and economic structure. Structural bottlenecks abound, including poverty as a result of legal and income inequalities, an industrial structure dependent on the import of capital goods and raw materials, a fragile energy dependency and high elasticity of energy consumption to GDP.

It is predictable in fact that with rapid GDP growth, income inequalities worsen and the trade and current account deteriorates into deficit. Stagnant structural changes in the legal system, wealth and income distribution, capital import dependencies and an immature financial market are the actual bottlenecks of the Thai economy.

Consensus GDP growth forecasts for 2004 are in the range of 6% to 7%, the near limit to optimal growth rates. Inflation should be manageable if higher oil prices do not translate into cost-push inflation. Yes, the April current account showed deficits due to structural bottlenecks as mentioned. With capacity utilisation at 70% to 75%, external imbalances occur. Still, the current account this year should show a surplus of $8 billion.

For 2005, economic growth is projected at 5.8% or lower, with inflation no more than 2.2% and the current account surplus at $6.4 billion.

The Thai economy can be adjusted toward its optimum path if properly managed. During the cyclical upswing seen in 2003 and this year, fiscal discipline must be strictly followed together with appropriate monetary policy. Interest rates should be used as an instrument to counter upward pressure on prices and the current account. While banks may argue that higher interest rates will affect asset quality and profit margins, the trend toward a global rise in interest rates is undeniable. Policymakers must be realistic and utilise the policy instruments at hand.

Given current global uncertainties, a reduction in corporate taxes or import tariffs for luxury goods is not appropriate at this time, and could hasten further deterioration of the current account.

Instead, an appropriate policy to strengthen the foundations of the microeconomy is needed to achieve macroeconomic balance. This will come through campaigns to boost productivity, new capital investment and improved human resource and product quality management. Economic efficiency matters, and prudent economic management will hinge on fiscal discipline.

The medium-term economic outlook will depend on how the government pursues its policy on poverty eradication. Programmes to remedy income and wealth inequality will be added to the agenda. More importantly, economic choices and social participation will be expanded. This represents the next chapter of the economic foundation of Thaksinomics.

- Dr Kitti Limskul is vice minister for the Prime Minister's Office. He is a former vice minister for finance and a co-founder of the Thai Rak Thai Party.