GROWTH at any cost?

DR SANSERN SAMALAPA

Sansern: Policy dictated by a need to manage the 'political business cycle'

There is no question that economic growth is the core target for the current government's policy framework. From a political standpoint, the government can make the claim that it has engineered high growth during its tenure.

Yet there is another side. The question whether the growth is sustainable still remains. Because these policies do have side effects, as the government's push for high growth has been at any cost, without regard for the consequences.

The main evidence is income distribution. Economic gains over the past three years have been strongest in just two sectors _ telecommunications and automobiles. Both have gained from the fact that, since this government came to office, domestic consumption was concentrated in those two sectors only, not the agricultural sector where the most of population is working.

What has the government actually done over the past three years? The answer is actually, very little. There has not been any improvement in the fundamentals of the economy. Rather, what has been accomplished has only been as a result of shifting funds from one place to another.

Take the Vayupak Fund, the 100-billion-baht fund created to hold securities previously owned by the Finance Ministry. The government, in creating this fund, has basically transferred public wealth to the unitholders, as well as raising concerns that the fund is being manipulated to prop up the stock market.

Or take the village investment funds, a key policy tool to channel funds to villagers, or the asset conversion scheme, which seeks to allow the poor to convert land rights to capital. Both policies have contributed to a steady rise in household debt, from 68,000 baht per household when the government took power to 110,000 baht in the first quarter of this year. Although household income has also increased, the fact is that debt levels are rising even faster. Household debt has almost doubled over the past three years.

Economic policies under the current government have not led to improvement in the country's economic fundamentals. Consider that Thailand's dependence on the import of capital goods and raw materials is as high as ever. The trade account in April suffered a deficit for the second consecutive month, with raw material import values up 24% from the year before and capital goods imports up 29%.

Yes, high oil prices have contributed to the trade deficit, but less than one would think. Oil prices rose by just 4.7% in April compared with the year before, while volume shipments rose significantly by 63%, an indication that the government's measures to save energy have failed.

The high dependence on imports speaks directly to the government's failures to strengthen the domestic manufacturing sector. If true economic reform had been undertaken, imports would not have had to be so high, as the economy would be able to depend on local materials.

Domestic consumption alone is not enough to generate sustainable growth . What is equally needed is to strengthen the economy's basic foundation.

But under the current government, economic policy has been carried out with an eye toward managing the "political business cycle". With three years of its term past, and elections due by early next year, policy has already shifted with an eye toward gaining political favour.

For instance, economic growth in the first quarter of 2004 was driven mainly by heavy lending by state-owned banks, with 94 billion baht extended in the first two months of the year, accounting for more than 10% of quarterly GDP. So, it is not surprising that the economy grew at rate of 6.5% in the quarter.

This huge amount of lending is just one example of the political influence on economic policies under this government. Coming into the election period, the government clearly is seeking to foster more economic growth to curry votes. But what will be a growing concern is if the current account continues to weaken from high imports, spurred on by high investment.

In the worst case, a weaker current account will lead to further weakening in the baht. The Stock Exchange of Thailand will certainly be affected, as investors look to the baht as a key factor in determining their investment strategy. Furthermore, with income from abroad declining, coupled with foreign interest rates and currencies strengthening, Thai interest rates will eventually be forced to rise, affecting people with high debt.

Rising inflation is another concern. In April, food-related prices rose 6.2% from the year before, directly affecting consumer purchasing power and standards of living.

The government has recognised that some of its populist policies have led to problems. For instance, under the government's policy to refinance debt owed by the poor, data show that some 45 billion baht represented debt borrowed from the village fund project. This is very high because it is more than half of the original project size (70 billion baht). But the solution offered by the government is to shift the debt to state-owned banks. This does not address the problem _ it only helps to buy some time.

Other high-profile policies have had similarly mixed results. The 30-baht national health-care programme, for instance, while perhaps successful from a marketing perspective, has been marked by flaws and financial troubles. Changes are certainly needed, and the government would be wise to consider changing the terms to limit free service only to the poor while forcing high-income people to pay for health care.

The recent aborted proposal to finance an investment in the Liverpool football club through a national lottery is another example of an ill-considered project. If funds can be raised to purchase a football team, why not do so for more critical needs, such as purchasing school clothes to help poor students? I would not oppose this concept if members of the cabinet used their own money to purchase shares for public distribution. But it seems clear that this policy is only aimed at gaining political favour, rather than representing any objective to strengthen the economy.

- Dr Sansern Samalapa, a former World Bank economist, is a Democrat party list MP and vice-chairman of the House of Representatives Finance Committee.