Thais facing prospect of 'lost decade'

Jan 10, 2000 -- Hope or despair, Thailand faces a stark reality in the new decade. The economic crisis has all but wiped out the gains of the early 1990s. If it is a lost decade, can we regain it through reform of our flawed systems? Today The Nation begins a series of articles on the subject.

THAILAND enters the new century with a sense of uncertainty as half of all Thais will suffer over the next 10 years from the collapse of the economic bubble.

Despite signs of a nascent recovery, Finance Minister Tarrin Nimmanahaeminda admitted last year: ''I'm afraid that at least 50 per cent of the Thai people will continue to suffer economically over the next decade.''

Underlying Tarrin's message was a potential ''lost decade'' for Thailand if it failed to implement credible financial and institutional reforms, improve productivity and regain the confidence of international investors and financial markets. At that time, the reform flag that he had been waving zealously had already fallen to the ground amid complacency and a lack of political leadership.

It normally takes a decade to restore a sick financial system, economists say. The conventional wisdom is that without a sound financial system a country will not achieve a sustainable economic recovery and vice versa.

However, that view has been increasingly subject to doubt. In fact, crisis-hit countries in Asia, including Thailand, have managed recoveries despite disappointing progress in their financial and institutional reforms.

Paul Krugman, the famed economist from the Massachusetts Institute of Technology, has argued that the Thai and other troubled Asian economies have not reformed their ailing financial systems but have merely learned to adapt to them.

He doubts that Thailand and Asia will have a bright future given that growth has been fuelled largely by massive infusions of foreign capital rather than by productivity gains. Moreover, the entrepreneurs who played a key role in creating a modern Thai economy were ''decapitated'' by the financial crisis, he points out.

Although Thailand embraces democracy and capitalism, it has failed to build, or has ignored, the institutions and frameworks -- commercial law, the judicial system and the bankruptcy process -- that accompany economic development.

After three years of financial excesses, the worst is probably over for Thailand. But is Thailand on the right path? Have we learned from our mistakes? Are we going to face a lost or a regained decade?

Catch-up game

To answer these questions, it is necessary to take a hard look at past mistakes. In any county, the wealth and security of its people lie at the heart of development. For Thailand, the goal was not just poverty reduction but went so far as to embrace a game of catch-up with the high living standards of the West. The yardstick was gross domestic product (GDP), or the combined output of goods and services.

Before the crisis, Thailand and the emerging countries of Asia looked to Japan as a role model. For Japan, through industrialisation, was the first Asian country to have caught up with the West's living standard. Like flying geese, South Korea, Taiwan, Hong Kong and Singapore followed its lead. Then came Thailand and other Southeast Asian countries, which formed another flock that aspired to economic-tiger status by following the Japanese model -- manufacture and export.

It looked as if Thailand was on the way to narrowing the living-standard gap with the West. The catch-up game looked good from the start, so much so that it was called ''the Asian miracle''. But Thailand and other Asean countries did not realise that they were overstretching themselves.

The economic achievements of Thailand and other Asean nations, between 1970 and 1996, have no parallel. Singapore joined the ranks of the rich industrial countries, while Indonesia, Malaysia and Thailand saw their real per-capita incomes rise more than three-fold. (See table.) All were characterised by openness to the world economy, strong investment, high domestic savings, a young dedicated workforce and sound macro-economic policy.

Two economists with the International Monetary Fund, Flemming Larsen and Jahangir Aziz, painted a blissful picture of Asean and its potential to bridge the GDP gap with the West in an article published in 1997.

They predicted:

''By the turn of the century this group will have more than doubled its share of world output and income since 1975 to reach almost 6 per cent, which will approximately match its share of world population. This would give Asean an economic weight about half way between that of Germany and Japan. Over the same period, Asean's share of world trade will have increased three and a half times to about 8 per cent, a share corresponding to that of Japan today.

''Asean's share of total foreign direct investment received by developing countries is estimated to average about 25 per cent in the 1990s compared with just a trickle in the early 1970s. By the year 2000, these countries are expected to account for over 8 per cent of global saving and investment, almost four times their total in 1975. And per-capita GDP in purchasing-power-parity terms will have increased from less than US$1,000 to almost $10,000 in just one generation.''

It turned out to be a gross overstatement.