Time is running out for Thai industry

March 16, 2001

AFTER fumbling his way over the past three weeks, Dr Somkid Jatusripitak has begun to find some clues in the dark labyrinth of the Finance Ministry. On Wednesday the finance minister signalled that he was contemplating immediate measures to jump-start the moribund economy. The stimulus measures would go directly to boost the export, tourism and real estate industries. Simultaneously, Somkid would be erecting a Chinese wall to curb the influx of luxury imports.

This signal is critical, coming at a time when both the US and Japanese economies are showing worrying signs of excessive weakness. Over the past three years the Thai crisis has been spared the wrath of total damnation because of the buying power of the US and Japan, which suck in almost 50 per cent of Thai exports. If buying orders from these two markets were to recede, the Thai economy would be hard hit and its recovery delayed further.

Therefore, Somkid is really in a desperate situation to stimulate domestic consumption, otherwise the economy will slip into a recession. His most important task now is to jump-start growth. He is beginning to get things right, but he will certainly need a larger, even more effective, stimulus package that must be pushed out as quickly as possible to achieve a modest economic growth rate.

For Thailand, a modest growth rate is 4 per cent, which barely ensures a normal business environment. A growth rate below 4 per cent will not only complicate the bad debts and banking problems, but also deter fresh loans from being released to small and medium businesses which Somkid really would like to see.

The problem with Somkid is that he has to work within the broad framework of the Thai Rak Thai-led government's 10 policy priorities. These policies do not address the immediate need of stimulating domestic consumption. The Thai Asset Management Corporation will not add new money to the economy. Nor will debt suspension, the village fund programme, universal health care coverage, the SME Bank and the People's Bank. The timing of their implementation is also in doubt.

Thai Rak Thai's policy platform is a work of genius marketing that helped the party to win the landslide election. Some of the policy measures are sound, with implications for social development and income distribution. But the whole platform, which addresses the long-term structural problems of Thailand, is not an answer to the present economic quagmire.

Advisors to the Thai Rak Thai Party, including Somkid, have got it all wrong. They believe that the party's economic programme, which aims to inject money to the grass-roots level and increase the purchasing power of rural people, is a remedy for the Thai economic problems. This is not going to happen.

Just take a look at Thai Rak Thai's main constituency, which is the rural or farm sector. Agriculture accounts for about 12 per cent of gross domestic product (GDP). Yet this sector puts food on the table for 30-40 million Thais out of the total population of 62 million. This implies that most Thais' living standards are quite low. Any policy to help these folks is highly commendable, yet the farm sector is not the driving machine of Thai economic growth.

Ploughing money into the rural sector may win votes but it won't result in high economic growth. Rural folks do not pay taxes. Traditionally, they depend on government subsidies in different forms. Simply put, how can an economic growth of a minimum 4 to 5 per cent be sustained if all Thai Rak Thai's measures are diverted to a sector that accounts for only 12 per cent of the GDP? The mathematics do not add up. Thai Rak Thai's efforts to create a taxable base through small- and medium-scale enterprises will not happen overnight, or in time to come to the rescue.

It is the modern industrial and business sector that pays most of the taxes. The modern sector accounts for almost 90 per cent of GDP. Big companies pay 95 per cent of all tax revenues collected by the government. The problem with the Thai economy at this point is that these companies are mostly insolvent due to their indebtedness. Painful corporate restructuring is inevitable to prevent Thailand from facing a Japanese-style recession. Widespread business insolvency has already created the present condition of "liquidity trap", where banks are hoarding money they do not want and cannot lend out, and where interest rates approaching zero won't kick-start the economy.

So instead of monitoring the public sector's spending on infrastructure so that every baht helps stimulate the economy and is not wasted, Somkid and the Thai Rak Thai government are doing the opposite. They are attempting to scale down infrastructure spending in the 2001 fiscal budget so that they will get at least Bt40 billion to finance their populist programmes. This policy reversal will hurt the economy, robbing industries and businesses of a chance to reduce their excess capacity or create more jobs.

It's time for Somkid to step back and redefine the government's approach to economic stimulus. Time is running short. The danger is clear and present. Thailand is already slipping into another round of crisis, as feared by Prime Minister Thaksin Shinawatra.

BY THANONG KHANTHOG