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New economic model may need a golden egg

February 16, 2001

THE "flying-geese" economic model was pronounced dead in 1997 after the collapse of the Asian miracle. However, the death certificate of this economic paradigm should have been issued earlier. In 1990, a recession began to hit Japan, which has yet to recover from its malaise. The decline of Japan has dragged the other Asian countries down with it.

For several decades, Thailand and other Asian countries took pride in their economic success from linking up with the Japanese regional production network. Flying-geese economic development envisaged a V-shaped technological formation. In this model, as head of a flock of flying geese, Japan played the leading role as the technology designer and delegated work to other countries in the region in different layers according to their level of development. The immediate followers behind Japan would be technologically advanced countries: Taiwan, South Korea, Hong Kong and Singapore. The next layer would be Thailand, Malaysia, the Philippines and Indonesia.

"Together these countries became the surrogates of Japan, building up their manufacturing bases in a network to support the Japanese keiretsu, an integrated web of finance, production, trading and services," says Vichai Punpocha, a former chief of Dresdner Bank. The 1985 Plaza Accord, which resulted in a realignment of the global currencies and a stronger yen, accelerated a relocation of Japanese export-oriented industries to Southeast Asia. Thailand and other countries benefited from this shift, becoming the recipients of a wave of Japanese investment. Economic growth was spectacular, averaging 8 per cent a year. But all these benefits would come at a price.

Through a dollar-peg policy and financial market liberalisation to further facilitate Japanese and other foreign investments and international transactions, Thailand and rest of the region began to feel the pinch from the economic bubble. Since Japan resisted the tough medicine of reforming its banking system and deregulating its domestic market, it continued to struggle to stay above water. The result was a weak yen, which undercut the competitiveness of Asian exports and put pressure on the dollar-peg policy. Asian economic growth could not be sustained.

The explosion took place in Thailand in 1997 after the devaluation of the baht, followed by a dramatic contagion effect, which swept through South Korea, Indonesia, Malaysia and the Philippines. The fall of Asia was tied to the Japanese decline. China did not suffer from the impact because it had not integrated deeply into the Japanese system and still held a shield over its financial markets. Taiwan had successfully broken away from the flying geese pattern by going into high-tech computers and parts. South Korea had also carved out its own stronghold in semiconductors. Hong Kong had snatched away the status of the regional financial centre from Tokyo. Singapore had also redefined its strategy, focusing on IT, foreign exchange and services.

Thailand, Malaysia, Indonesia and the Philippines have not yet been able to break away from the Japanese mould. Interestingly, Pansak Winyaratn, the chief policy advisor to Prime Minister Thaksin Shinawatra, made it clear during his address at the Thai-German Chamber of Commerce on Tuesday that the flying-geese economic model was finished. This implied that the Thai economic policy would no longer cater to being a surrogate to the Japanese keiretsu.

The question is what should be an appropriate economic model for Thailand to pursue? There appears to be two choices: a disruptive technological path or disruptive human vanity.

In disruptive technology, the field is wide open for new players with innovations to challenge the incumbent giants. Microsoft was a disruptive technological player against IBM. Napster, a music file sharing website, has taken on the big entertainment and music groups with a free download service. There is a cost to pay in this disruptive technological path, however, with bankruptcies or layoffs for companies that fail to remain competitive. Microsoft will soon become an incumbent for other disruptive players to challenge.

Then there is disruptive human vanity, in which the human factor plays a key role according to supply and demand.

In this path, which Pansak advocates, Thailand may try to develop its human resources so that they learn to adapt to business and environmental changes, and if there are any failures, the cost would not be too expensive to bear. For Thailand to continue to prosper, its people must learn to adapt local know-how to foreign technology, using available local resources and content. Indigenous products should be developed, produced and marketed by rural or small- and medium-scale enterprises, to meet international standards.

Whether this new economic model is just an ideological exercise remains to be seen. For there is always an ocean-wide gap between ideology and policy, between policy and implementation, and between a target and results. Thailand is in a soul-searching period after the collapse of its modern economic sector. Nobody knows what the phoenix will look like when it eventually rises from the ashes.




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