Elements of Thaksinomics
Like Reaganomics in the 1980s, Thaksinomics is controversial. It is
an eclectic strategy that combines the traditional element of the
EAEM model, emphasizing mass manufacturing spearheaded by foreign
direct investmentdubbed the First Trackand a more domestic focus
on local enterprises leveraging indigenous skills and resources,
known as the Second Track. A distinctive feature of Thaksinomics is
the emphasis given the Second Track.
As in the past, the First Track is oriented towards creating
relatively high paying jobs and earning foreign exchange. The
Second Track on the other hand focuses on activities that will not
come into direct competition with China. A major goal of
Thaksinomics is to pursue both goals in a manner that gradually
shifts the Thai economy from export dependence to greater reliance
on the more controllable domestic market. Thaksin envisions this
process increasing domestic consumption to 60% of Gross Domestic
Product (GDP) from the current level of 55%. Simultaneously the
goal is to reduce exports as a proportion of GDP from 60% to
50%.
The rationale for the two track strategy is straightforward: most
developed countries have a smaller proportion of exports to GDP
than do the East Asian economies. Therefore, they are less
vulnerable to external shocks like the terrorism incident in Bali,
the SARS epidemic, or a slowdown of the U.S. economy.
The idea is to stimulate domestic demand in the short run through
increased government expenditures, while simultaneously searching
for new local industries to develop as part of the diversification
away from EAEM activities. At the same time, domestic market
focused policies can achieve structural change by assisting
business in moving up the value added chain, thus keeping ahead of
direct Chinese competition.
While it might appear that Thaksinomics represents a retreat from
globalization, this is not the case. Although the policies are more
domestically focused, they are not meant to discriminate against
foreign capital. In fact Thailand is still aggressively attempting
to attract foreign direct investment (FDI).
Implementation 1st Stage
Implementation of Thaksinomics has evolved through various stages.
One of the key elements in Thaksinomics is the focus on poverty
alleviation, especially in rural areas. Initial policies were
geared toward providing small fiscal doses aimed at reviving rural
demand and creating housing demand for low-wage government workers,
rejuvenating underdeveloped resources and indigenous skill-rich
small and medium sized enterprises (SMEs) with good growth
potential. Another key element was assisting under-leveraged
households to achieve higher levels of consumption. Implementation
has occurred through a variety of unique projects. The most urgent
policies that the Thaksin government initially implemented were
those aimed at empowering the grassroots.
Farm Assistance
The first programs were focused on the agricultural sector,
starting with a three-year moratorium on farmers' debt payments to
the Bank for Agriculture and Agricultural Cooperatives (BBAC). This
was the initial step in reforming the debt structure and maturity
profile of the agricultural sector to match the crop production
cycle. At the same time, the government is attempting to upgrade
land rights to be used as bank collateral.
Urban Relief
The urban poor also benefit from incentives brought about by the
government. Small loans for street-side vendors are provided
through the Government Savings Bank (GSB).The GSB provided
individuals loans worth 30,000 baht each for a total of 10 billion
baht in 2002.
Retired Civil Servants
A special spending package was also set up for retired civil
servants. Under this program the government will pay an amount
equivalent to 30 times salary to the families of civil servants who
pass away. A new ruling permits retired civil servants to spend
half of that amount before their death. It is estimated that the
total amount of spending power created from this initiative would
be roughly 45 billion baht.
To boost grassroots access to financing, the Thaksin administration
set up a number of new institutions:
The Village Fund
The first was the Village and Urban Revolving Fund. To many, Dr.
Thaksin's election campaign pledge to provide 1 million baht
($24,000) to each of Thailand's 70,000 villages was a populist
handout. It's actually a revolving loan program. The program is
unique in that it specifically targets projects aimed at
stimulating the rural economy. Village leaders and bankers will
identify projects and provide loans at 4% interest (commercial farm
loans cost 5%-8%) to be guaranteed by community groups. The intent
of the $1.6 billion Fund is to enable farmers to increase
productivity, and value added, through developing new activities
such as processing and packaging. The Fund can also be drawn on by
individuals, households or groups to start their own small or
micro-enterprises.
The People's Bank
This newly created bank is another grassroots credit facility set
up to provide credit to micro-enterprises. In addition to providing
financing to groups without access to the formal banking system,
the goal of the Bank is also to promote entrepreneurship among the
poor and the small traditional producers in villages.
The Bank for Small- and Medium-Sized Enterprises (SMEs)
SMEs play a critical role in Thaksinomics and the Bank for
Small-and Medium Sized Enterprises is the financial component of
the Government's overall SME promotion program. SMEs account for
40-50 percent of the Thai economy's GDP, 38 percent of the total
value of exports and 69 percent of the country's jobs. Thaksinomics
singles out SMEs because of their potential to adjust to fast
changing conditions, to reach certain market niches more rapidly
than bigger companies and to innovate in terms of products and
process.
One Tambon Project
This program is nationwide, covering nearly all of Thailand's 7,252
districts. One Tambon is predicated on the idea that every Thai
tambon (sub-district) has a variety of specialized local products.
The key assumption of the project is that each community has a
comparative advantage in one or more of these traditional products.
The project's role is to assist the communities in modernizing the
production and distribution process of these products so that they
can be competitive at the national and international levels. The
government's role is to identify candidate products and then to
assist their development through providing necessary support for
their eventual success.
The program is clearly intended to find new niches in foreign
markets and develop new winners that will provide an alternative to
the foreign direct investment-based and mass produced exports
products that the country has been fast losing to China and other
countries in the region with cheaper labor.
Other programs introduced during this period include:
* Housing projects for state workers and the low income masses
introduced in 2001 and 2002, respectively;
* Various small and medium sized enterprise (SME) development
initiatives introduced since 2001; and
* The comprehensive State-Enterprise Privatization Program started
in 2001.
Clearly, it is a bit early to critically evaluate these initial
attempts. However it is safe to say that these programs, along with
some of the government's other fiscal activities have contributed
to terminating asset deflation, reviving domestic demand and
bringing about positive asset demand and asset price
expectations.[19]
In addition there are some encouraging results stemming from the
One Tambon project. Government figures put total sales of village
enterprises under the program at $558 million in 2002, with an
average profit margin of 26 percent. Their products are also
finding their way to the shelves of luxury shops in Japan, the
United States and Europe, thus enabling the village producers to
earn four or five times more on each item than when sold in the
local market.
Implementation 2nd Stage
The second stage of Thaksinomics is intended to build on the first.
In large part this is a more innovative albeit controversial
stage.
The Capital Creation Scheme
Tentatively scheduled to start in December 2003, the Thai
government plans on introducing a new program to redefine or
reclassify assets so that they carry the underlying legal rights or
documentation necessary for collateralized bank loans. The program
has an ambitious agenda including the reclassification of land
assets, intellectual-property assets, machinery assets, public
pavement and stalls assets and rental-right assets. The basic idea
is to legalize different assets so that the owners can use them
fully to get access to capital. This should be a particular benefit
to poor or low income earners.
The basic idea underlying this program is not new, but instead one
that has been advocated for years by Peruvian economist Hernando de
Soto.[20] What de Soto has found is that most people in the
developing nations hold defective forms of assets such as
proprieties and stalls that lack the documentation or legal status
that give them access to capital. Because the right to these
possessions is not adequately documented, these assets cannot
readily be turned into capital, cannot be traded outside the narrow
local circles where people know and trust each other, and cannot be
used for collateral for a loan. Apparently, the government aims to
have the state-owned banks make available some 200 billion baht to
support the next wave of loans arising from this
asset-reclassification scheme.[21]
The question is whether this program will further help low income
people or saddle them with more debt; and whether the program will
have adverse financial consequences to the country in the long
term. Will it jump start a large segment of the economy, formerly
marginalized, or will it simply create a new round of non
performing loans? If de Soto's examples from Peru and other
countries are any indication, the project should be highly
successful.
By one estimate[22] the Capital Creation Scheme in the next 6-7
years could convert at least US$10 billion of dead capital into
pledgible capital and transfer US$10-15 billion worth of
underground economy activities into the real economy.
Grand Project Schemes
In a break from grassroots-type projects and programs, the Thai
government has been proposing a number of grand projects designed
to create new regional centers of economic activity:[23]
* In January 2003 for example Thaksin announced a 28 billion baht
($650 million) plan to make the northern city of Chaing Mai an
international aviation hub. The initiative aims to upgrade airport
facilities and capacity to promote Chiang Mai as an alternative
site to Bangkok for foreign trade and investment.
* Also in January 2003 Thaksin unveiled a 100 billion baht plan to
transform the resort island of Pyhuket into a laboratory for
high-tech research and development. The software industry is one of
several export businesses the authorities hope will be centered
here.
* In another major initiative, the government has recently
resurrected centuries-old plans for cutting a canal through
Thailand to shorten shipping routes between Europe and East Asia.
The proposed project, including construction of two harbors, a
monorail and a highway across the Isthmus of Kra would cost around
$35 billion.
While EAEM model cannot serve as the sole basis for future growth,
it's not clear that massive expenditures of this nature will
necessarily come up with new services in which the country has a
clear comparative advantage.
The Vayupak Mutual Fund Initiative
While the Capital Creation Scheme is aimed chiefly at reviving dead
capital in the rural sector, a complementary new initiative, the
Vayupak (named after a mythical bird that sometimes lays a golden
eggbut other legends depict the avian creature as half-demon[24] )
introduced late in 2003 is focused on monetizing the dead capital
held by the government. Estimates are that this initiative[25] has
the potential to mobilize an additional several billion $US worth
of excess liquidity from the banking system. In all, it could add
US$7-8 billion or an additional 10% of the market capitalization of
Thailand.
